AMSC

Business Context and Reporting Period

Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended December 31, 2007
Business Overview: AMSC is an energy technologies company operating in two segments: AMSC Power Systems (power electronic converters for wind energy and grid reliability) and AMSC Superconductors (high-temperature superconductor wires and systems). The company serves the wind energy and power grid markets.

Key Financial Metrics

Note: The company has no long-term debt. Total liabilities as of Dec 31, 2007, were $37.4 million, primarily current liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 245% year-over-year for the quarter and 124% for the nine-month period. This growth was driven primarily by the acquisitions of Windtec Consulting GmbH and Power Quality Systems, Inc. (PQS), which contributed $14.9 million and $33.5 million to revenues for the three and nine months ended Dec 31, 2007, respectively.
• Profitability Improvement: While the company remains unprofitable, the operating loss narrowed significantly compared to the prior year. The operating loss decreased from $10.2 million to $6.2 million for the quarter and from $25.1 million to $22.1 million for the nine-month period.
• Liquidity Surge: Cash and marketable securities increased from $35.3 million at March 31, 2007, to $107.8 million at December 31, 2007. This was primarily due to a secondary public offering in July 2007 yielding $94.3 million in net proceeds.
• Restructuring Charges: The company recorded $2.9 million in restructuring and impairment charges for the quarter, primarily related to the closure of its Westborough, Massachusetts facility and consolidation into its Devens facility.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue incurring operating losses through at least the end of the fiscal year ending March 31, 2009, as it devotes resources to commercializing 344 superconductors (2G wire) and R&D.
• Capital Expenditures: The company has spent approximately $13.8 million on its HTS wire manufacturing facility and expects to spend an additional $1.8 million in the current fiscal year. An additional $28.0 million to $35.0 million is estimated to be required for full commercial-scale manufacturing capacity.
• Backlog: Backlog stood at approximately $168.1 million as of December 31, 2007. Approximately 72% is billable within the next 12 months. This excludes $21.1 million of a contract awarded by the Department of Homeland Security (DHS) on January 22, 2008.
• Key Risks:
  • Customer Concentration: Sales to Sinovel Wind accounted for 52% of total revenues for the nine months ended Dec 31, 2007.
  • Government Funding: A significant portion of revenue relies on U.S. government contracts (Navy, DOE, DHS) which are subject to annual appropriations and potential termination.
  • Commercialization: The company faces technological challenges in scaling the production of 344 superconductors to commercial quantities at competitive costs.
  • Performance Bonds: The company has $12.0 million in restricted cash held as collateral for performance bonds on construction contracts.

Investor Verification Checklist

• Verify the status and funding certainty of the $24.9 million DHS "Project HYDRA" contract awarded in January 2008, which is not included in the Dec 31, 2007 backlog.
• Monitor the progress of the 344 superconductor manufacturing line and the ability to achieve the estimated $28M-$35M capital expenditure required for full commercial scale.
• Assess the risk associated with Sinovel Wind representing over 50% of recent revenues and the potential impact of contract cancellations.
• Review the timeline for the closure of the Westborough facility and the realization of the projected $2.5 million annual cost savings.
• Track the utilization of the $107.8 million cash balance against the projected operating losses expected through fiscal 2009.