Business Context and Reporting Period
Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 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 transmission/distribution markets.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Six Months Ended Sep 30, 2007 |
|---|---|---|
| Revenues | $21,623 | $41,392 |
| Costs of Revenue | $16,004 | $32,191 |
| Gross Margin | 26.0% | 22.2% |
| Operating Loss | $(7,189) | $(15,919) |
| Net Loss | $(6,673) | $(16,326) |
| Net Loss Per Share (Basic/Diluted) | $(0.17) | $(0.44) |
| Cash and Cash Equivalents | $87,139 | $87,139 |
| Marketable Securities | $31,047 | $31,047 |
| Total Current Assets | $154,015 | $154,015 |
| Total Current Liabilities | $32,041 | $32,041 |
| Net Cash Used in Operating Activities (6mo) | $(11,461) | |
| Net Cash Provided by Financing Activities (6mo) | $101,962 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 125% year-over-year for the quarter and 75% for the six-month period. This was driven primarily by the acquisitions of Windtec Consulting GmbH and Power Quality Systems, Inc. (PQS), which contributed $10.8 million and $18.6 million to revenues in the three and six months ended September 30, 2007, respectively.
- Segment Performance:
- AMSC Power Systems: Revenues surged 196% (quarter) and 235% (six months) due to acquisitions and higher PowerModule sales. Operating income improved to $0.8 million (quarter) from $0.2 million.
- AMSC Superconductors: Revenues declined 22% (quarter) and 42% (six months) due to the completion of the U.S. Navy 36.5 MW motor program and discontinuation of 1G wire sales. Operating loss narrowed slightly in the quarter but widened for the six-month period due to inventory write-offs and asset impairments.
- Liquidity: Cash and cash equivalents increased from $15.9 million (March 31, 2007) to $87.1 million (September 30, 2007), primarily due to a public offering of 4.7 million shares completed on July 25, 2007, yielding net proceeds of $94.3 million.
- Expenses: Selling, general, and administrative (SG&A) expenses increased significantly (62% for the quarter) due to stock-based compensation and integration costs from acquisitions. Amortization of acquisition-related intangibles was $1.8 million for the quarter, with no comparable amount in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue incurring operating losses through at least the end of fiscal year 2009. The company is transitioning its 344 superconductor manufacturing line to full-scale production, expecting an initial capacity of 720,000 meters annually by December 2007.
- Restructuring: On October 25, 2007, the Board approved a plan to consolidate operations in Massachusetts (closing Westborough, moving to Devens). This is expected to result in restructuring charges of $5.5 million to $6.0 million, with the majority recorded in the third and fourth quarters of fiscal 2008.
- Backlog: Total backlog as of September 30, 2007, was approximately $180.3 million, a significant increase from $75.1 million in June 2007, driven largely by $90.0 million in orders from Sinovel Wind (China).
- Risks:
- Customer Concentration: Sinovel accounted for approximately 52% of total revenues for the six months ended September 30, 2007.
- Government Contracts: A significant portion of revenue is derived from U.S. government contracts (Navy, DOE, DHS), which are subject to funding appropriations and potential termination. The House Committee on Energy and Commerce is reviewing the DHS contract for the "Secure Super Grids" project.
- Manufacturing Scale: Commercial success depends on scaling 344 superconductor manufacturing to 9 million meters annually, requiring an estimated additional $28 million to $35 million in capital expenditures.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the relationship with Sinovel Wind, which represents over half of recent revenue.
- Government Funding: Monitor the status of the DHS "Secure Super Grids" contract under congressional review and the funding status of DOE projects (LIPA, HYDRA).
- Restructuring Costs: Track the execution of the facility consolidation plan and the timing of the anticipated $5.5M–$6.0M charge in fiscal 2008.
- Manufacturing Capacity: Confirm the timeline and capital requirements for scaling 344 superconductor production to commercial levels (9 million meters/year).
- Warrant Liability: Review the mark-to-market valuation of the TM Capital warrant, which resulted in a $1.3 million loss for the six-month period.