Business Context and Reporting Period
Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended September 30, 2008 (Fiscal 2008 Q2)
Business Overview: AMSC is an energy technologies company operating in two segments: AMSC Power Systems (wind energy and grid reliability solutions) and AMSC Superconductors (high-temperature superconductor wires and coils). The company serves the wind energy and power transmission/distribution markets.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2008 |
6 Months Ended Sept 30, 2008 |
3 Months Ended Sept 30, 2007 |
6 Months Ended Sept 30, 2007 |
|---|---|---|---|---|
| Revenues | $40,375 | $80,192 | $21,623 | $41,392 |
| Costs of Revenue | $29,670 | $57,866 | $16,004 | $32,191 |
| Gross Margin | 26.5% | 27.8% | 26.0% | 22.2% |
| Operating Loss | $(3,813) | $(6,501) | $(7,189) | $(15,919) |
| Net Loss | $(4,068) | $(10,171) | $(6,673) | $(16,326) |
| Net Loss Per Share (Basic/Diluted) | $(0.10) | $(0.24) | $(0.17) | $(0.44) |
| Cash & Equivalents | $55,794 (as of Sept 30, 2008) | |||
| Marketable Securities | ||||
| Total Liquidity (Cash, Securities, Restricted) | $128,888 | |||
| Net Cash Provided by Operating Activities | $3,520 (6 months) | $(11,461) (6 months) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 87% year-over-year for the quarter and 94% for the six-month period. This was driven primarily by the Power Systems segment, which grew 85% (quarter) and 113% (six months) due to higher sales of wind electrical systems and core components, particularly in the Asia-Pacific region.
- Profitability Improvement: Operating loss narrowed significantly from $(7.2) million to $(3.8) million for the quarter, and from $(15.9) million to $(6.5) million for the six-month period. Gross margins improved to 26.5% and 27.8% respectively, aided by a favorable product mix and the absence of a $0.9 million inventory write-off recorded in the prior year.
- Segment Performance: AMSC Power Systems generated operating income of $5.5 million for the quarter, compared to $0.8 million in the prior year. AMSC Superconductors continued to incur operating losses of $(5.9) million, primarily due to depreciation on new 2G production equipment.
- Customer Concentration: Sales to Sinovel Wind Co., Ltd. represented 65% of total revenues for the six months ended September 30, 2008, up from 52% in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue incurring operating losses through the quarter ending December 31, 2008, but anticipates achieving profitable results in the quarter ending March 31, 2009.
- Liquidity: The company holds $128.9 million in cash, cash equivalents, marketable securities, and restricted cash. Management believes this is sufficient to fund operations for the next several years.
- Capital Expenditures: Approximately $14.5 million has been invested in the 344 superconductors production line. An additional $28.0 million to $35.0 million is estimated to be required to achieve full commercial manufacturing capacity (9 million meters/year).
- Key Risks:
- Customer Concentration: Heavy reliance on Sinovel (65% of revenue); cancellation of orders would have a serious negative impact.
- Government Funding: A portion of Superconductors revenue and R&D offsets depend on U.S. government contracts (e.g., Project HYDRA), which are subject to appropriation and termination.
- Commercialization: HTS products are in early commercialization stages; widespread market acceptance is not guaranteed.
- Performance Bonds: $7.3 million of cash is restricted as collateral for performance bonds, limiting working capital availability.
Investor Verification Checklist
- Sinovel Dependency: Verify the stability of the relationship with Sinovel Wind Co., Ltd., which accounts for the majority of revenue and backlog.
- Government Contract Funding: Monitor the status of U.S. government funding for the HYDRA and other Superconductors projects, as these are critical to the segment's revenue recognition.
- 2G Wire Scaling: Assess progress and capital requirements for scaling 344 superconductor production to the estimated $28M-$35M needed for commercial viability.
- Restructuring Costs: Track remaining cash disbursements related to the Fiscal 2007 restructuring plan (facility closure in Westborough, MA), with a remaining liability of approximately $3.3 million.
- Restricted Cash: Review the terms of performance bonds requiring $7.3 million in restricted cash and the potential impact on liquidity if bonds are called.