American Superconductor Corporation — Q3 FY2010 Form 10-Q
Reporting period: Three and nine months ended December 31, 2010; fiscal year ends March 31. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
AMSC supplies wind-turbine electrical systems and designs, as well as grid products and superconducting technologies. It reports two segments: AMSC Power Systems and AMSC Superconductors. Power Systems generated nearly all revenue in the period.
Financial performance and position
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue, 2010 (2009) | $114.2 million ($80.7 million) | $312.9 million ($228.3 million) |
| Operating income, 2010 (2009) | $21.5 million ($10.4 million) | $53.5 million ($27.2 million) |
| Net income, 2010 (2009) | $16.0 million ($5.2 million) | $35.2 million ($11.3 million) |
| Diluted EPS, 2010 (2009) | $0.33 ($0.11) | $0.75 ($0.25) |
| Gross margin, 2010 (2009) | 40.7% (37.5%) | 40.5% (35.8%) |
- Revenue increased 42% for the quarter and 37% for the nine-month period. Power Systems revenue was $112.1 million and $305.6 million, respectively; Superconductors revenue declined to $2.1 million and $7.4 million.
- Power Systems operating income rose to $31.8 million for the quarter and $84.2 million for nine months. Superconductors reported operating losses of $6.9 million and $19.3 million, respectively.
- Cash and cash equivalents were $169.0 million at December 31, 2010; marketable securities were $86.1 million and restricted cash $5.4 million. Combined, these totaled $260.5 million, versus $155.1 million at March 31, 2010. Current assets were $450.5 million and current liabilities $120.3 million.
- Nine-month operating cash flow was negative $16.3 million, compared with negative $1.1 million in 2009. Investing cash flow was negative $65.1 million; financing cash flow was positive $162.6 million. Cash ended the period at $169.0 million.
- The balance sheet lists no debt line; the filing text does not provide a clear total for interest-bearing debt. Total liabilities were $140.5 million.
Material changes and notable items
- Gross margin improved, primarily due to product mix favoring higher-margin wind components, lower costs from localized manufacturing in China, and favorable foreign-exchange effects. Higher sales drove Power Systems’ operating income growth.
- Research and development expense rose to $9.1 million for the quarter and $24.2 million for nine months. SG&A rose to $15.6 million and $47.9 million, respectively, reflecting headcount growth and ERP implementation costs.
- Sinovel, AMSC’s largest customer, represented 73% of quarterly revenue and 75% of nine-month revenue. Backlog increased to approximately $883 million from $588 million at March 31, 2010, primarily following a substantial Sinovel order. A supply contract announced in May 2010 was valued at approximately $445 million and runs through late 2013.
- In November 2010, AMSC issued 4.6 million shares at $35.50 per share, receiving $155.2 million net proceeds. The company cited capacity expansion, strategic relationships and investments, acquisitions, and general corporate purposes as intended uses.
- Investing activity included an $8.0 million purchase of a 25% interest in Blade Dynamics. The company also recorded $10.0 million in acquisition-related contingent consideration for Windtec, expected to be settled in shares.
- Other income included foreign-currency gains net of hedging activity; reported results were also affected by investment losses. Currency hedges had notional amounts of $28.9 million for cash-flow hedges and $87.5 million for balance-sheet hedges.
Outlook, risks and contingencies
- Management said existing resources and product-sale revenue were expected to fund working capital, capital expenditures, and other requirements for at least the next 12 months. It planned to continue increasing operating expenses in dollars during the remainder of the fiscal year, while expecting them to decline as a percentage of revenue compared with fiscal 2009.
- AMSC reported backlog of approximately $883 million and said it believed backlog and its business pipeline positioned it for continued growth. This is not a quantified earnings or revenue forecast.
- Customer concentration, particularly reliance on Sinovel, is a material business risk. Results also depend on product development, commercialization, customer adoption, and execution of growth plans. The filing notes potential limits on access to unused Chinese credit lines due to government measures.
- Unused unsecured credit lines were $18.2 million in China and $2.7 million in euros; an additional $3.8 million in bank guarantees and letters of credit was supported by unsecured lines. Five performance bonds totaled $1.2 million; restricted cash was $5.4 million. The company reported no material pending litigation and no recorded performance-bond liabilities.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. No material changes to the risk factors in the prior annual report were reported.
Important facts for investors to verify
- Sinovel’s share of revenue, contract terms, order conversion, and customer-payment timing.
- Whether the large backlog converts to recognized revenue and cash on the expected schedule.
- Accounts receivable growth and operating cash use: receivables reached $121.4 million, up from $57.3 million at March 31, 2010.
- Execution, cost, and commercial prospects for superconductor products, given the segment’s operating losses and lower revenue.
- Planned use of offering proceeds, manufacturing-capacity expansion, and future operating and capital spending.
- Foreign-exchange exposures, deferred revenue and customer-acceptance conditions, and access to Chinese credit lines.