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, 2009 (Fiscal Year 2010)
Business Overview: AMSC provides proprietary technologies for the electric power infrastructure, operating in two segments: AMSC Power Systems (wind turbine electrical systems, grid reliability products) and AMSC Superconductors (HTS wire, power cables, fault current limiters). The company relies heavily on government contracts for its Superconductors segment and a single major customer, Sinovel Wind Co., Ltd., for its Power Systems segment.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2009 |
3 Months Ended Sep 30, 2008 |
6 Months Ended Sep 30, 2009 |
6 Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Revenues | $74,672 | $40,375 | $147,672 | $80,192 |
| Cost of Revenues | $45,637 | $29,670 | $96,054 | $57,866 |
| Gross Margin | 38.9% | 26.5% | 35.0% | 27.8% |
| Operating Income | $10,330 | ($3,813) | $16,721 | ($6,501) |
| Net Income | $4,340 | ($4,068) | $6,132 | ($10,171) |
| Diluted EPS | $0.10 | ($0.10) | $0.14 | ($0.24) |
| Cash & Equivalents | $86,752 | N/A | N/A | N/A |
| Total Cash & Marketable Securities | $133,056 | N/A | N/A | N/A |
| Operating Cash Flow (6mo) | N/A | N/A | $21,687 | $3,520 |
Note: Balance sheet data for cash and securities is as of September 30, 2009. Total current liabilities were $76.1 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 85% year-over-year for the quarter and 84% for the six-month period. This was driven primarily by the AMSC Power Systems segment, which grew 102% (quarter) and 99% (six months) due to higher sales of wind turbine electrical systems and core components, largely to Sinovel Wind Co., Ltd. (76% of Q2 revenue).
- Profitability Turnaround: The company returned to profitability, reporting net income of $4.3 million for the quarter compared to a net loss of $4.1 million in the prior year quarter. Operating income improved from a loss of $3.8 million to a profit of $10.3 million.
- Margin Expansion: Gross margins improved significantly (38.9% vs. 26.5% in Q2 2008) due to a higher volume of wind turbine shipments and a shift in mix toward higher-margin Power Systems sales.
- Superconductors Segment: Revenue in the AMSC Superconductors segment declined 40% year-over-year due to delays in the HYDRA project milestones and the completion of the NAVSEA Motor Study. This segment continues to operate at a loss.
- Accounting Corrections: The company corrected immaterial errors in prior periods, including a $0.3 million net income adjustment related to bonus expense and a $0.2 million revenue overstatement correction in Q2 2009.
Guidance, Outlook, and Risks
- Liquidity: Management believes available cash ($141.1 million including restricted cash) is sufficient to fund operations for at least the next twelve months. Operating cash flow for the six months ended September 30, 2009, was $21.7 million, a significant improvement over the prior year.
- Customer Concentration: A substantial portion of revenue is derived from Sinovel Wind Co., Ltd. (76% of Q2 revenue). Continued reliance on this single customer presents a concentration risk.
- Government Funding: The Superconductors segment relies on government contracts (DHS, DOE, Navy). Delays in project milestones (e.g., HYDRA) directly impact revenue recognition. Cost-sharing funding from the U.S. government is expected to continue but is not recorded as revenue.
- Foreign Currency: The company faces exposure to Euro and Renminbi fluctuations. Foreign currency translation losses were $3.0 million for the six months ended September 30, 2009.
- Restructuring: The company is finalizing the closure of its Westborough, MA facility. Remaining restructuring charges are expected to be completed by the end of the second quarter of fiscal 2010.
Investor Verification Checklist
- Sinovel Dependency: Verify the status of contracts with Sinovel Wind Co., Ltd., given they represent over 75% of recent quarterly revenue.
- Project HYDRA Milestones: Monitor progress on the DHS-funded HYDRA project, as delays have already impacted Superconductors revenue.
- Working Capital Trends: Review accounts receivable aging and inventory levels to ensure the strong operating cash flow is sustainable.
- Foreign Exchange Impact: Assess the impact of currency fluctuations on future earnings, particularly regarding the Austrian subsidiary (Windtec).
- Stock-Based Compensation: Note that stock-based compensation expense increased significantly ($6.9 million for six months 2009 vs. $5.2 million prior year), impacting operating expenses.