American Superconductor Management Discusses Q2 2012 Results - Earnings Call Transcript

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American Superconductor (NASDAQ:AMSC) Q2 2012 Earnings Call November 6, 2012 10:00 AM ET


Jason Fredette - Managing Director of Corporate Communications

Daniel Patrick McGahn - Chief Executive Officer, President and Director

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


Aaron Chew - Maxim Group LLC, Research Division

Benjamin Schuman - Pacific Crest Securities, Inc., 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 morning, AMSC 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 Jason Fredette.

Jason Fredette

Thank you, Toya, and welcome, everyone, to our Q2 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 in subsequent reports that we 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'd also like to note that we'll 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, 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 non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning 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, Jason, and good morning, everyone. As we've done on the past several calls, I'm going to start this morning's discussion with a quick update on the legal front. Dave Henry will then review our financial results for the second fiscal quarter, and after that, we'll take some time to update you on the business and the state of our core markets. We'll then open up the call to your questions.

Let's begin with a recap of our litigation against our former customer, Sinovel.

Sinovel was formerly China's largest wind turbine manufacturer and AMSC's largest customer. That all changed last year when they breached multiple contracts with our company and stole AMSC intellectual property. Since that time, AMSC has been pressing a series of legal cases against Sinovel. In total, these cases, all of which are being waged in Chinese courts, amount to about $1.2 billion. Furthest along is arbitration where we're seeking payment for approximately $70 million in past wind turbine component shipments and enforcement of our existing contracts with Sinovel, which amount to more than $700 million.

In August, we took part in another hearing with the Beijing Arbitration Commission. Both sides have now presented all of their evidence and we're awaiting a date for what we hope will be the final hearing to complete the proceedings.

In addition to arbitration, we also have filed 3 civil suits with courts in Beijing and Hainan, a southern province in China. We continue to await a court date on the largest of these cases, a trade secret infringement suit filed with the Beijing Higher Court, with claims exceeding $450 million.

There has been some activity on our other 2 cases. Both of these are copyright infringement suits, one that was filed with Beijing No.1 Intermediate Court and the other with Hainan No.1 Intermediate Court. Sinovel filed jurisdiction opposition motions on both cases, saying that they belong in arbitration rather than in the courts. Of course, because this matter deals with intellectual property theft and infringement rather than contractual matters, we strongly disagree. More importantly, the Beijing Intermediate Court and the Beijing higher court disagree as well. They rejected Sinovel's motion, prompting Sinovel to appeal to China's Supreme People's Court.

On October 26, the Supreme Court held a hearing on this matter with AMSC and Sinovel. While a judgment has not yet been rendered, we believe the decision of the lower courts will be upheld. This would then enable us to begin presenting our evidence of Sinovel's intellectual property theft and illegal usage to the courts.

We believe an affirmative ruling by the Supreme Court on our case in Beijing would then prompt the Supreme Court to overturn the dismissal of our smallest civil case in Hainan.

Time will tell, but we're pleased to see the litigation moving along. As a reminder, the vast majority of the expenses related to our litigation against Sinovel are already behind us. Future legal fees will primarily be on contingency and will be tied to proceeds from either a judgment or a settlement. Now let's move on to Dave for our financial review. Dave?

David A. Henry

Thanks, Dan, and good morning, everyone. AMSC generated $20.9 million in revenue for the second quarter of fiscal 2012, roughly on par with the $20.8 million that we generated for the second quarter of fiscal 2011.

Our grid revenues grew by 21% year-over-year to $8.9 million, thanks to increased debar shipments. This offsets an 11% decline in our wind revenues due to lower shipments of our wind turbine electrical control systems. Our backlog on September 30 was approximately $257 million, which compares with $269 million, as of June 30.

Our gross margin for the second fiscal quarter was 2.3%, which compares with a negative 5.5% for the year-ago quarter. Note that gross margin in both periods was favorably impacted by settlements of adverse purchase commitment liabilities with several vendors. Excluding these settlements, gross margin was a negative 2.5% in the second quarter of fiscal 2012, which compares with a negative 9.8% in the year-ago quarter.

R&D and SG&A expenses for the second fiscal quarter were $15.4 million, down significantly from $24.8 million in the second quarter of fiscal 2011, and also down from $17.7 million for the first quarter of fiscal 2012. Note that in the year-ago quarter, SG&A expenses included approximately $3.3 million in Sinovel litigation costs. These expenses were down to approximately $300,000 in the second quarter of fiscal 2012. We now expect less than $68 million in R&D and SG&A expenses in fiscal 2012, down from our prior forecast of approximately $70 million.

In the second fiscal quarter, we incurred $2.9 million in interest expense associated with our debt financings. $2.2 million of this is noncash interest, in line with accounting rules under U.S. GAAP that results from the requirement to discount the debt for accounting purposes and then amortize the debt discount into the P&L in future periods.

We also recorded a $3.3 million noncash benefit in the second fiscal quarter for 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, as it did in the first quarter, the mark-to-market impact will be unfavorable. If our stock price decreases, as it did in the second quarter, the impact will be favorable.

Other expenses of $1.3 million in the second quarter were related primarily to foreign exchange translation losses and losses at Tres Amigas and Blade Dynamics in which we have minority interests.

Our net loss for the second fiscal quarter of 2012 was $15.9 million or $0.31 per share. This is a substantial improvement from a net loss of $51.7 million or $1.02 per share in the year-ago quarter. The year-ago quarter included $28.2 million of non-recurring charges for the write-off of the advance payment to The Switch, Sinovel litigation expenses and restructuring and impairment charges. We also reduced our non-GAAP net loss to $15.2 million, or $0.29 per share, for the second quarter of fiscal 2012 from $22.1 million, or $0.44 per share, for the second quarter of fiscal 2011.

As of September 30, 2012, we had approximately $73 million in cash, cash equivalents, marketable securities and restricted cash. This is up from $66 million, as of March 31, 2012, as a result of the financings that we completed in April and June of this year.

As of September 30, we also had approximately $12 million in adverse purchase commitment liabilities. As a reminder, these purchase commitment liabilities stem from vendor orders that we placed in anticipation of contracted shipments to Sinovel prior to their contractual breaches last year. They initially amounted to more than $40 million. Over the past 18 months, our team has worked diligently with our vendors to clean up these liabilities. That work should all but be completed this current quarter as we expect to pay off or settle most of the remaining $12 million balance. Much of the remaining payments will come from our restricted cash.

In addition, we entered into an agreement with one of the vendors that allows us to repay our liability with approximately 765,000 shares of common stock, cash, or a combination of both stock and cash. We intend to file a registration statement with the SEC to register these shares for resale. So we've made great progress in meeting our vendor commitments and we have done this without any resolution of the situation with Sinovel.

Factoring these payments in, we expect to end our third fiscal quarter with more than $52 million in cash, cash equivalents, marketable securities and restricted cash.

In terms of the rest of our outlook, we continue to expect a stronger second half of the fiscal year. For Q3, we expect to grow our revenues and cut our non-GAAP net loss, both quarter-over-quarter and year-over-year. Revenues are expected to exceed $26 million. And all of this revenue is expected to come from scheduled deliveries in our existing backlog.

We expect that our net loss for the third quarter of fiscal 2012 will be less than $19 million or $0.36 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 third fiscal quarter, which excludes mark-to-market adjustments and other noncash items, is expected to be less than $14 million or $0.26 per share.

Finally, for full year fiscal 2012, we continue to expect that our capital expenditures will be less than $3 million. And now, I'll hand things back over to Dan. Dan?

Daniel Patrick McGahn

Thanks, Dave. While macro conditions have proven challenging of late, particularly in the wind power sector, I continue to be encouraged by our team's execution, and I'm pleased that we once again meet our financial objectives in the second fiscal quarter.

We cut our net loss and cash usage significantly year-over-year. We also reduced our adverse purchase commitments by over 30%, with most of the remainder to be settled this quarter as Dave just mentioned a couple of minutes ago. And as expected, our top line remained roughly flat year-over-year as a decline in revenues from our Windtec Solutions was offset by higher revenues from our Gridtec Solutions.

Our Windtec Solutions include both products and services for wind turbine manufacturers. The products are a set of power electronics and controls that act as the brain of the wind turbine. We call our fully integrated set of products ECS or electrical control systems. And our services include proprietary wind turbine designs, certification support, as well as on-site training for manufacturing, testing, quality assurance, commissioning and supply chain management. These services allow manufacturers to rapidly introduce new wind turbines or upgrade existing turbine platforms to gain competitive advantage and market share.

2012 has proven to be a time of great change in the wind industry as a whole. In China, which has installed nearly half of the world's wind turbines in recent years, the government has greatly increased its oversight of projects in the sector in order to resolve grid-related issues. In fact, virtually all wind farm projects now must get formal approval from the central government before beginning construction.

Ultimately, this is a change for the better, one that will ease grid interconnection issues and make projects more predictable. But looking at the here and now, the abrupt change in policy has hit all wind turbine manufacturers in China hard.

As a reminder, our customers in China include: JINGCHENG New Energy, or JCNE; Shenyang Blower Works, or SBW; Dongfang Turbine Company; and XJ Group. Both JCNE and SBW are taking a vertical approach to the market, not only manufacturing wind turbines but also developing wind farms.

XJ Group is a large, well-respected player in the T&D market. And they are wholly owned by State Grid, which controls about 90% of China's electricity network. And Dongfang has been a leader in China's power generation market and a leading producer of wind turbines. We continue to work closely with these companies as they implement their respective strategies and navigate through the industry-wide changes taking place today.

Our strategy is to enable each of them to field highly reliable, multi-megawatt wind turbines, systems above and beyond the 1.5-megawatt turbines that have dominated the Chinese market. And we also want to ensure that these turbines are best in class when it comes to both power quality and grid compatibility.

JCNE is a good example. Early last year, JCNE licensed multiple wind turbine platforms from AMSC, ranging from 2 megawatts to 5 megawatts. Their initial focus has been on our 2-megawatt wind turbine, featuring a full conversion drivetrain. These differ from many wind turbines in China that are called doubly fed machines. In doubly fed turbines, only some of the power passes through the converter system. In JCNE's turbine, all of the power produced flows through the power converter system, ensuring very high power quality and a greater ability to support the transmission grid.

We are looking for JCNE to continue building its order book for this 2-megawatt turbine. And JCNE plans to showcase the 3-megawatt turbine that we licensed to them at this month's China Wind Power conference in Beijing. From a financial perspective, JCNE contributed more than 25% of AMSC revenues in the second fiscal quarter.

Similar to China, India's wind power market has been undergoing significant changes in 2012. In recent years, this market replied upon a tax credit system that provided tax breaks on wind projects, regardless of the performance of those projects. Now the world's third largest wind power market behind China and the U.S., India is transitioning to a generation-based incentive for wind power that rewards project developers for maximizing their power output and lowering the cost of energy.

Again, this is clearly a change for the better. And it favors AMSC, given the strong performance and competitiveness of our turbines. But it has also temporarily dampened installation. Industry analysts believe India's installations in 2012 could be down by 20% or more from 2011 before beginning to rebound.

In the midst of this challenging environment, Inox, our wind turbine manufacturing partner in India, has performed extremely well. They recently produced their 100th 2-megawatt wind turbine and are now among the top wind turbine manufacturers in India. Similar to JCNE and SBW, Inox is taking a vertical approach by not only manufacturing wind turbines, but also developing and operating wind farms, providing a nice built-in channel to market.

In comparison with China and India, the wind market in South Korea remains stable. We generated about 10% of our Q2 revenues from this market, working with companies like Hyundai Heavy Industries and Doosan Heavy Industries, both well-recognized multibillion-dollar corporations. Both Doosan and Hyundai Heavy were awarded projects for onshore wind farms in Korea in recent months. They are also well-positioned for the gigawatt scale offshore wind projects that are currently being planned in Korea, and they have an eye to expand into Europe and China.

So in terms of our wind business as a whole, we are supporting our partners strongly. And we are expecting to increase ECS shipments in the second half of our fiscal year based on our existing backlog and ongoing conversations with our customers regarding their growth plans.

Performance in our grid segment was solid in the second fiscal quarter, as we generated 20% year-over-year increase in revenues. Driving this growth was our D-VAR product line, which helps to stabilize voltage for electric utilities, renewable energy power plants and industrial operations. In Q2, Australia was again a key market for us on the D-VAR front, contributing nearly 20% of our total revenues. Our sales team also continues to make good headway with D-VAR bookings. In fact, we are now nearly fully booked for this product line through the end of fiscal year 2012.

The second fiscal quarter was an eventful time for our wire and cable business as well. For those that are new to AMSC, we are the world's leading producer of high temperature superconductor wire. This wire is being used to develop and manufacture a wide array of systems, from power cables and surge suppressors for the electric utility industry, to generators for wind turbines, to motors and defense systems for naval ships.

On recent calls, I've spent a good deal of time discussing the progress we have made in boosting our superconductor wire production and yield while also streamlining our costs. We have been shipping industry-leading volumes of superconductor wire to customers around the world. This wire has been offered in a range of 70 amps to 100 amps, or about 100x the amount of power that a copper wire of the same dimensions can carry. That's a huge performance advantage over conventional conductors. And that advantage just got a whole lot bigger.

While our manufacturing personnel here in Massachusetts were increasing our production and yield, our R&D staff were focused on boosting wire performance while also maintaining our industry-leading capacity. That's no small feat. However, the team effort led to a breakthrough. AMSC is now offering wire with demonstrated performance up to 200 amps, effectively doubling our wire performance. This puts us right on track with the goals that the U.S. Department of Energy set for high temperature superconductor wires years ago. And it is worth noting that we accomplished this recent jump in performance at the same time that government support for wire development was withdrawn.

What does the boost in performance mean for the customer? Most importantly, lower system cost. This will happen in 2 ways. First, manufacturers will be able to spend less on superconductor wire. And they will also save on other raw materials by making their systems even more power dense and compact. And what does this mean for AMSC? Well, we've certainly never been in a stronger competitive position in terms of wire production, pricing and performance. And this breakthrough should help to broaden our addressable market.

The 2 biggest factors that have been inhibiting market growth for superconductors are cost and customer adoption. We believe the availability of our new wire will help manufacturers continue to lower the cost of superconductor power cables, fault current limiters, motors, generators and defense systems. And as that is taking place, we will continue to move through the customer adoption cycle and do all that we can to accelerate it. And I will discuss in just a minute the impact of last week's super storm and how it may play an important role in this.

Remember that we are dealing with some of the most risk-averse customers in the world, most notably electric utilities and the U.S. Navy. However, with successful Navy motor and degaussing systems tests now complete and successful superconductor power cable installations now behind us in countries like the United States, Korea and China, comfort and interest continues growing worldwide.

The latest example of this is Power Grid Corporation of India, or Power Grid for short. Power Grid is one of India's largest companies and is responsible for about half of the country's transmission operation and infrastructure. At Power Grid's annual general meeting, which was held in September, the company's chairman discussed how superconductor cable systems, and I quote, "Offer very high power carrying capacity at lower voltage, besides extremely low losses, for effectively addressing right-of-way issues." In fact, the chairman included superconductor cables as 1 of the 2 technology leadership areas that Power Grid is exploring, with ultrahigh-voltage AC overhead power lines being the other area of interest. Comments like this are exciting because they demonstrate that superconductor cable technology is now a part of Power Grid's plans to upgrade India's electrical network.

And as Hurricane Sandy reminded us yet again, we need to make significant investments to not just replace but also upgrade our electrical grid right here in the U.S. Those of you who didn't see it in person here on the East Coast have probably seen wall-to-wall coverage of sparking power lines, exploding substations and widespread blackouts. Incidents like these, as well as national security concerns, continue to reinforce the fact that our infrastructure is antiquated and is in desperate need of upgrade. New solutions are available and action is required.

Utilizing underground superconductor power cables in urban and metropolitan areas will enable us to continue increasing power flows, and it will keep those power flows out of harm's way. And bolstering the grid with D-VAR systems, fault current limiters and fault-current-limiting cable systems will enhance network reliability and resiliency.

In fact, we've been working with ConEd in New York to demonstrate one of these fault-current-limiting cable systems. FCL cables can be used to connect multiple substations together. So if one goes down, the others can pick up the slack and help keep the lights on for everyone. Other utilities have expressed an interest in the same type of solution, this same network approach to power. New policy and additional funding can help to speed the adoption cycle and we're continuing to work alongside American utilities in Washington to advance this issue and to solve this critical problem.

So in summary, AMSC is meeting its core objectives. Our revenue stream remains geographically diverse, with key contributions coming from Australia, China, India, Korea, the United Kingdom and the United States. We're positioned for a stronger second half of the fiscal year and we are encouraged about our long-term business prospects. We are committed to reducing our cash usage and enhancing our financial performance. And we'll continue to closely monitor our core markets and our spending to ensure that happens. Now Toya, would you please open the call to questions from our audience?

Question-and-Answer Session


[Operator Instructions] And we'll move first to the side of Aaron Chew with Maxim Group.

Aaron Chew - Maxim Group LLC, Research Division

But I'm wondering if I could drill down a little bit further, if I could ask you to. Any way you can highlight how much of the 2 big contracts you have, the Shenyang Blower Works and the JCNE/other, that you have booked to date? Even maybe roughly?

Daniel Patrick McGahn

Booked to date.

Aaron Chew - Maxim Group LLC, Research Division

Both contracts were signed a couple of years ago, and I'm sure some periods you book, some relative to other periods you don't, but little by little you've been eating away...

Daniel Patrick McGahn

Yes, we don't have all that in front of us. And generally, we don't comment too much on the granularity of the backlog. What we've been focused on really is to make sure that the revenues that we're delivering quarter-to-quarter have this diversification that we've been focused on. I think -- and the good news is we look at the mix between China, which obviously JCNE is a contributor and as we mentioned in the remarks that JCNE was about 25%, we see it also from Inox, which is a major contributor as well to revenues, and we see quarter-to-quarter, the Koreans being able to contribute. And on the grid side, we see good business in Australia, the U.K. and the U.S. So really what we're focused on more so than the longer-term backlog is really the near term here quarter-to-quarter to make sure that our revenues continue to feel that diversified and that we do things to make sure that we're fostering additional diversification in revenues where possible.

David A. Henry

Aaron, one extra little bit of color. I mean, you can go back in our 10-Q filings and see the 10% customers, and JCNE has hit there a couple of times over the past several quarters, so you can get some kind of inkling from that. SBW has not been a 10% customer recently.

Aaron Chew - Maxim Group LLC, Research Division

Okay, that's helpful. Just sometimes it's a range in the filing, so just figured I'd ask. A couple of clarifications for my follow-up, if that's possible. One, first and foremost is, I just want to clarify a comment you made earlier in the prepared remarks about being fully booked for D-VAR. A, obviously, that's good news. But on the other hand, I just want to make sure I understand what that means. When you say fully booked, are you referring to fully booking out your capacity to produce D-VAR products? And does that in turn sort of suggest a $30 million, $40 million peak capacity in that segment? Or am I not thinking about that properly?

Daniel Patrick McGahn

I think the way to think about it is we're trying to highlight that one of the niceties of the quarter, and as we look out going forward, is strengthening in the Gridtec Solutions business. We feel that we're in a very good position, particularly with the changes that we see going on in the U.S. We've talked about the storms a bit and how that changes the way utilities think about protecting their grids and increasing capacity of the grids that we feel really good about the grid segment. When we talk about fully booked out, what we mean is when we look at our sales team, their attention now is turning more and more to 2013. When we say fully booked out, we mean when we look at our original manufacturing plans for the year and what we had anticipated to make and sell. I would not ask you to try to correlate that at all to capacity. That's not explicitly what we're trying to say here. What we're trying to say is our selling activities now are going out further in time, which leads us to believe that we have very good prospects going forward on the grid side of the business. Even though when we look at the U.S. with the PTC as being perhaps a negative drag on that market, we still see growing revenues we mentioned in Australia, we see them in the U.K. and we see prospects being, we think, quite good in Europe as we go through the next several quarters. So I think the point I really want to try to get across is we really like our Gridtec business. We like the fact that we have the 2 businesses to be able to have natural diversification, and this really is a strength and an asset to the company.

Aaron Chew - Maxim Group LLC, Research Division

Thanks for clarifying that, I just want to make sure. So there's no reason to assume you couldn't do $50 million revenue just based on manufacturing capabilities, obviously, not necessarily your order book?

Daniel Patrick McGahn

I think the thing to be careful about is when we think about the timing for long lead-like items, it's not a business that's a quick turn business. These are usually 6-month-out, kind of, order cycle. And I think what you're hearing, as we hit the half-year mark, that we're really focused now in generating orders in 2013.

David A. Henry

One thing also, Aaron, is that the D-VAR business, it's an assembled product and its cost is primarily labor and material. And so, if we get to the point where we feel we're capacity-constrained and the only way to deal with that is to add people, and then if we need extra space to go look for space. So it's not a capital-intensive capacity increase if we found ourselves in that enviable position.


We'll move next to the site of Ben Schuman with Pacific Crest Securities.

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

Dave, can you talk about how much overhead and underutilization is dragging on gross margins at this point? Maybe just qualitatively if you don't want to quantify it specifically?

David A. Henry

Yes, I won't quantify it for you. But qualitatively, I mean, do remember we had, for example, an infrastructure in China that supported -- or China and around the world, $400 million of annual revenue. And now, we're on a path to somewhere north of $100 million. So yes, there is some excess capacity there. But remember that it's also -- the capital investment associated with that capacity was not that large on the wind business side in particular. There's not a huge difference between gross margin and contribution margin. I mean, there is a difference, but it's not huge. So there is some impact obviously. Now as we look forward to the second half of the year, we've talked before about the in-sourcing of the production of electrical control systems. That activity will be getting underway in earnest now here this quarter and ramping up as we go through the rest of this fiscal year. So we should start to see some incremental gross margin benefit from that activity.

Daniel Patrick McGahn

A key way to think of it, Ben, is you had a big factory making a lot of parts for core components and we've gone through a transition of going to the ECS, which has more content per turbine and will occupy some of those fixed costs. But in the gap there, you are exposed from a fixed cost basis. We recognize that. We've spent a lot of effort over the past quarters really focused on tuning our operating expenses. And as we said in the last call, and I think we'll continue to make sure that we make this a focus of the company, is really to continue to improve gross margin. The hope and our belief is, going forward, we will see improvement there. But it's really part of management's directive is to get those gross margins in line with what we really think the business can get to be. We haven't talked quantitatively about where those are. But there are opportunities, particularly with the main initiative, as Dave talked in great detail about, which is bringing in-house the manufacturer of the ECS.

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

Okay, great. That's very helpful. And then Dan, do you have any early high level views on the wind opportunity in 2013 in the markets you serve? And do you think that the U.S. potentially falling off a cliff here, could cause any problems in the supply chain with vendors looking to these other markets to sell their products?

Daniel Patrick McGahn

I think explicitly with the U.S. when we look at our market, it's really focused on the D-VAR product directly for our revenue. And we've been on an effort to diversify those revenues, I mentioned Europe and other places that we can go to with that product. I think what you're after is from a cost standpoint is as the U.S. market wanes a bit here in 2013, will that put pressure on manufacturers to drive pricing down in other geographies? I think the fact that we start in some of these low-cost manufacturing geographies like India, like China, they've already done a good job at driving prices down already. I think that we understand greatly that in China, it's a unique market. It's a bit of a protected market in many ways for the home team. We see a bit of that in India. That's happened. And we think Inox has benefited and will continue to benefit from it. I mean, it's interesting in the prepared comments we talk about Inox now being a top player in India, and that didn't take so long. So we feel very bullish about Inox and their prospects. And then we see Korea really being this window to the world, be able to develop it, deliver it in Korea, but then be able to expand globally. And that adds additional, perhaps, pricing pressure. But these are all things that we think that are going to benefit us. The move to the larger turbines, the move to more novel drivetrain technology should mean that our partners are more able to gain market share and are ultimately more competitive in the marketplace. I think looking at other markets, that there still remains many opportunities out there, not only in Europe, but potentially in South America as well, as we've talked about. So what we're trying to focus is where the growth is as opposed to being worried about the American market, where the growth certainly isn't, and be able to make hay in these local markets where we have a demonstrated track record of being able to do that, and we have some major activities across the company focused specifically on making that happen. But at the end of the day, the devil is in the detail and delivery of those revenues. So I look forward to being able to report back to you in future quarters, that we continue to expand the diversification of our revenues, particularly in the wind segment as you're getting at here.


[Operator Instructions] We'll move next to the site of JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

My first question is regarding your liquidity situation. Say, if you couldn't get any cash settlement from the legal proceeding against Sinovel or it may not be just simply on time, what are you going to do? Are you going to think about another round of restructuring or some potentially some divestiture?

Daniel Patrick McGahn

Yes, let me kind of tee it up and Dave can talk a little bit. On our cash position specifically, we believe we have sufficient cash for at least the next 12 months, and cash will remain a key focus of the management team. On the revenues, I keep talking about diversification and we've been able to demonstrate that. That diversification gives us stability, but also greater chances for growth. And we see contributions coming not only from Asia, but Australia, Europe, North America. We've positioned ourselves with our product line for a stronger second half of the fiscal year and we're encouraged about our long-term prospects for the business. We believe we've done an awful lot to be able to change the cost basis and cost structure of the company. We're now working very aggressively with our partners on the wind side, as well as developers and utilities and industrial customers for D-VAR. So we feel very comfortable about where the business stands today, and that we will be able to grow revenues here in the near term. Ultimately, JinMing, that's our focus and that's what we want to be able to do, is to be able to drive that growth.

David A. Henry

Yes, just to emphasize what Dan said. I mean, we are focused on our cost structure and looking at the markets, discussing with our customers and trying to be as close to that situation as possible so that we can adjust our expenses as we feel we need to, and we will continue to do that. But we only spent in the quarter, JinMing, about $300,000 on the litigation, so we feel like the lion's share of all those expenses are behind us. We see that as an independent piece of the value of the company. It's not distracting management and it's not something that we need or hold out hope that somehow it's going to change our business prospects. We see it as an independent event. The management is focused on operating the current business with the current partners to make them as successful as possible. And if we're able to do that, they're able to gain market share, you're going to see our revenue growth happen. We think we're in a very good position because the new technology on the drivetrain, on the turbine side, on connection of D-VAR and the new markets, really puts our company in an interesting position to be prepared to grow.

Daniel Patrick McGahn

And in terms of the balance sheet and the liabilities and liquidity and such, our -- we have a couple of debt arrangements. We will begin to make principal payments on the term loan this quarter. That's factored into our forecast. We also have a convertible note outstanding that is payable in either cash or stock. For right now, the holder of the notes is not requesting any amortization payments at this time, they've been deferring them. I won't go into their motivations on this call. I mean, their motivations are their own. But they do view that note as more of a -- as an equity investment, if you will. And I think all things being equal, I think their preference would be to take cash versus stock in settlement of those notes. To reiterate, we believe we, from a liquidity standpoint, we have enough cash to get us through at least the next 12 months. And we will be, obviously, closely monitoring our expenses.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Switch gear to your superconducting wire business. I remember you lowered the price recently. And I just want to understand why you did that. Is that just to prevent competitors get into the market? Or you've cut cost enough to look for -- in order to do so?

Daniel Patrick McGahn

To be a little bit more clear, when we talk about price, there's a couple of different ways that you can price a conductor. Don't think of it just as a per unit price. When we price the product, we price it for value, which is the overall carrying capacity of that conductor. So the fact that you've been able to double performance, as long as you're not cutting the price per unit by half, you actually are able to make a better business. So we're able to pass on to our customers and our partners what will be a lower system cost solution. It doesn't mean that we're cutting our prices because the product has improved. It just means that we're able to help a cable installation perhaps use less wire, which means lower cost, and also the balance of plant and all the other systems costs will scale on that as well, which means the rest of the material cost will come down. At the end of the day, what we're talking about are the things that LS Cable has talked to us about, Nexans has talked to us about, NKT Cable has talked to us about, Southwire has talked to us about, which is getting in this is price performance regime that really makes the system cost-competitive as a total solution. We talked a little bit in the prepared remarks about meeting the DOE objectives. The DOE objective is really to get to a certain cost-performance structure to be competitive with other alternatives. We think this is a big step for the company. It's really a testament to the effort of the manufacturing and specifically the R&D team here in Massachusetts to bring not only the capacity online, to bring the yields higher and higher, but also, in parallel, to be able to improve the product. We think, overall, that improves our prospects for wider commercial adoption for superconductor cables. We talked as well about fault current limiters. We talked about navy systems and wind systems as well. So it helps all of the different superconductor applications and helps to start to really transition our thinking more to full system costs and to be competitive in that regime.


And we move next to the site of Pavel Molchanov with Raymond James.

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

Just one question from me. You've obviously made a point of highlighting the difficulties facing wind industry players in China. You're suing Sinovel for pretty hefty amounts. And given the challenges they're facing in the business, what do you think, realistically, that you can collect even if you win any of these cases without effectively putting Sinovel out of business?

Daniel Patrick McGahn

Well, I think -- and I've said this in the past. We've won simply by standing up, defending our IP, being able to continue the sanctity of the IP for the other partners to make sure that they're able to operate in the business. To speak specifically about Sinovel, yes, they've lost share. Yes, they've been highly challenged in overseas markets. Some have written that, that may be in part due to the complaints that we filed. We've been focused all along on a positive outcome. We still believe, and I firmly sit here talking to you today, that there will be a positive outcome for the company. We don't give it any handicap on time or amount or anything like that. We know that Sinovel's cash balance is still quite large. They have the ability to take on additional debt, which they've already been able to secure with banks. They have the full faith and credit of the Chinese Central Bank behind them to be able to develop capacity technology and overseas operations. So we don't see a liquidity constraint on them to be able to settle with us or to be able to deal with a judgment coming down from the courts. I think the challenge everybody wants to know in China is how long is this going to take and is the process tracking as planned? In any legal proceeding in any country, things take time. I think the good thing is that as we've had these battles, in large part, we've kind of won all the way along. Now, at the end of the day, it's going to be up to the Chinese courts to be able to make a decision that, upon looking at the evidence and the facts, seems very clear to us that the case is compelling, the evidence is overwhelming, and that somehow we believe that rationality and justice will prevail in China.


[Operator Instructions] We'll move next to the site of Aaron Chew with Maxim Group for a follow-up question.

Aaron Chew - Maxim Group LLC, Research Division

Just a quick follow-up, if I may. Given the changing business dynamics since Sinovel got extracted from the revenue. Wondering if there are seasonal dynamics we should take into account? In other words, you had a pretty sizeable jump in quarterly revenue in the last fiscal fourth quarter. Was that just really something contract timing-oriented? Or is that something seasonal we should expect somewhat going forward...

Daniel Patrick McGahn

I'll talk at a high level. I think one of the things that we're trying to make sure is we're trying to preserve the sanctity of what our partners have requested us or required us to do. So we want to make sure that if they need timing to move, either earlier or later, that we're flexible enough to be able to allow them to do that. That inherently adds some additional lumpiness quarter-to-quarter. It doesn't necessarily reflect upon the overall market. It may be as simple as a construction cycle has changed somewhat because of weather, there may be other issues that are kind of beyond overall market dynamics. Dave, if you want to talk about inherent seasonality in the business?

David A. Henry

Yes. I mean, it's really hard to discern a seasonal pattern. And I mean, just at a high level, I would say, first quarter is probably a seasonally lower quarter. Things that affect -- when our backlog ages and when we ship things. I mean, in the wind business, a lot of the installations occur in the months when there's good weather. So that -- so obviously, shipments sort of ahead of that. That's one thing to expect. And on the grid side and on the wind side as well, a lot of things have -- they kind of depend on government subsidies or tax breaks. You see on the grid side here, I think we are seeing some benefit here in the U.S. as the Production Tax Credit is expiring, things are -- people are trying to get projects in that might qualify before the end of the year. So...

Aaron Chew - Maxim Group LLC, Research Division

So the take away really is, it's still more a representation of lumpiness than there's anything to really read through into...

Daniel Patrick McGahn

And the fourth quarter there'll be a pull of the new year and new budgetary dollars available. So each quarter has its own kind of pulls on it. I think the one that Dave highlighted is that, historically if you go back to the first quarter of our fiscal year is usually the lighter of the 4. But that's really the only inherent seasonality I think that the data at least lends us to believe.


And there are no further questions on queue. I'd now like to turn the program back over to Mr. McGahn for any closing remarks.

Daniel Patrick McGahn

Thank you. I think we're able to get results here on another quarter that was successful when we compare what our core financial results we had planned on happening, we were able to deliver against those. I think it's really been a testament to the team. It has been a challenging time for the company, as we've had to shrink headcount and increase responsibilities of many of the employees within the company. We have a major initiative through the company about 1-AMSC [ph]. And I think the thing that I feel strongest about right now are our people. We've been able to, time and time again, be able to stand beside our customer, solve specific issues either in the field or with their own customers, to be able to help them to be in a position to grow their business. And I think that's really a testament to the people that have been with this company, not only in past months, but over the past many years. So I think that that's, as I sit here today, what makes me have the most pride and the hope for our company in the future.

So I want to say thank you to everybody for your attention -- for your questions. And we look forward to getting back to you to talk about the third quarter here in the coming months. Thank you.


This concludes today's conference. You may disconnect at this time, and enjoy the rest of your day.

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