AMSC

Business Context and Reporting Period

Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2007
Business Overview: AMSC is an energy technologies company operating in two primary segments: AMSC Power Systems (programmable power electronic converters for wind energy and grid reliability) and AMSC Superconductors (high-temperature superconductor (HTS) wires and products). The company serves the wind energy and power transmission/distribution markets globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 2.6% to $52.18 million. This was driven by a 106% increase in AMSC Power Systems revenue ($30.85 million vs. $15.00 million), primarily due to higher D-VAR and PowerModule sales and the acquisition of Windtec. Conversely, AMSC Superconductors revenue declined 41% to $21.33 million due to reduced work on the U.S. Navy 36.5 MW motor program and the LIPA cable project.
• Increased Losses: Net loss widened by $3.8 million. Key drivers included a $3.1 million estimated loss recognized on the Navy 36.5 MW motor program due to cost overruns and delays, a $524,000 restructuring charge, and a $144,000 impairment charge.
• Acquisitions: The company acquired Windtec Consulting GmbH (January 2007) for approximately $13.6 million in stock and Power Quality Systems, Inc. (April 2007) for approximately $4.0 million in stock.
• Segment Restructuring: The company consolidated its operations into two segments (Power Systems and Superconductors), closing a Westborough facility and reducing headcount by 37 employees.
• Stock-Based Compensation: Adoption of SFAS 123(R) resulted in a $3.68 million stock-based compensation expense, significantly impacting operating results compared to the prior year.

Guidance, Outlook, and Risks

• Profitability Outlook: Management expects to continue incurring operating losses through at least the end of fiscal year 2009. The company anticipates increased depreciation and amortization expenses related to the scale-up of 2G HTS wire manufacturing and recent acquisitions.
• Liquidity: As of March 31, 2007, the company held $35.32 million in cash and marketable securities. Management believes this is sufficient to fund operations through at least March 31, 2009, though additional funding may be required if performance deviates from the business plan.
• Key Projects:
  • LIPA Project: A 138kV HTS cable system installation in New York is scheduled for commissioning in Fall 2007. A contract modification of $4.0 million was awarded in May 2007.
  • Secure Super Grids: A contract with Consolidated Edison and the Department of Homeland Security (up to $25 million) was announced in May 2007 to develop secure grid technology in NYC.
  • 2G Wire Manufacturing: The company is scaling up production of "344 superconductors" (2G wire), targeting a gross capacity of 720,000 meters by December 2007.
• Risks:
  • Government Contract Risk: Significant revenue dependence on U.S. government contracts (Navy, DOE) which are subject to funding limitations, audits, and termination.
  • Commercialization Risk: HTS products are in early commercialization stages; widespread market acceptance is not guaranteed.
  • Manufacturing Scale-up: Failure to manufacture 2G wire at commercial volumes and competitive costs could limit future revenue potential.
  • Customer Concentration: Two customers represented 36% and 10% of total revenue in 2007.

Investor Verification Checklist

• Backlog Realization: Verify the collectability of the $79.5 million backlog, particularly the $6.8 million in milestone payments due from the Navy for the 36.5 MW motor.
• 2G Wire Cost Targets: Monitor progress on achieving the target production cost of one-fifth that of 1G wire at a volume of 2.7 million meters annually.
• Government Funding: Track the status of incremental funding for the LIPA project and the Secure Super Grids contract with Consolidated Edison.
• Integration of Acquisitions: Assess the financial performance and integration of Windtec and Power Quality Systems, including the impact of amortization on future earnings.
• Cash Burn Rate: Review quarterly cash flow statements to ensure the $35.3 million cash balance remains sufficient to fund the planned $6 million capital expenditure for the 2G line in fiscal 2008.