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, 2006
Business Overview: AMSC develops and manufactures high-temperature superconductor (HTS) wires and power electronic converters. Operations are divided into three segments: AMSC Wires, SuperMachines (ship propulsion motors), and Power Electronic Systems. The company has incurred operating losses since its inception in 1987 and expects to continue doing so through at least fiscal 2009.

Key Financial Metrics

Debt: The company reported no long-term debt. Current liabilities totaled $22.07 million, primarily consisting of accounts payable and accrued expenses ($19.12 million) and deferred revenue ($2.96 million).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 30% year-over-year for the quarter ($9.45M vs. $13.50M) and 9.5% for the nine-month period ($33.10M vs. $36.58M).
  • SuperMachines: Revenues dropped significantly ($0.99M vs. $8.86M in Q3) due to lower work levels on the U.S. Navy 36.5 MW motor program following a contract conversion to firm-fixed-price.
  • AMSC Wires: Revenues declined ($1.34M vs. $3.21M in Q3) primarily due to reduced funding recognition on the Long Island Power Authority (LIPA) project.
  • Power Electronic Systems: Revenues increased substantially ($7.12M vs. $1.43M in Q3) driven by higher sales of D-VAR and PowerModule systems for wind energy applications.
• Increased Losses: Net loss widened to $9.55 million for the quarter (from $7.45 million) and $23.25 million for the nine months (from $19.85 million).
  • Accounting Change: Adoption of SFAS No. 123(R) for stock-based compensation increased expenses by approximately $0.92 million for the quarter and $2.72 million for the nine months.
  • Contract Losses: A $1.62 million loss was recorded on the Navy 36.5 MW motor program due to a crack in a non-superconductor component requiring repair.
  • LIPA Costs: $1.92 million in costs on the LIPA project were expensed as incurred because they exceeded the current contract ceiling and funding was not yet deemed probable.
• Liquidity Reduction: Cash and marketable securities decreased by $24.06 million to $41.61 million, driven by operating losses and $7.93 million in capital expenditures for the 2G wire manufacturing line.

Guidance, Outlook, and Risks

• Profitability Outlook: Management expects to continue incurring operating losses until at least the end of fiscal 2009. The company anticipates increased depreciation as the 2G wire manufacturing line comes online.
• Capital Requirements: The company plans to invest an additional $5 million to $7 million by December 2007 to complete the 2G wire pilot production line (total project cost estimated at $12M-$14M). Full commercial production capacity (8 million meters/year) would require an additional $25M-$30M.
• Recent Acquisition: On January 5, 2007, AMSC acquired Windtec Consulting GmbH for approximately $13.1 million in stock. Windtec, a wind turbine systems designer, will be integrated into the Power Electronic Systems segment. The deal includes an earn-out of up to 1.4 million additional shares.
• Key Risks:
  • Government Funding: Significant revenue dependence on U.S. government contracts (Navy, DOE) which are subject to annual appropriations and potential termination.
  • Technology Commercialization: Risks associated with scaling 2G HTS wire manufacturing and achieving widespread market acceptance for superconductor products.
  • Contract Performance: Exposure to cost overruns on firm-fixed-price contracts, as evidenced by the recent Navy motor loss accrual.

Investor Verification Checklist

• Liquidity Runway: Verify if the current $41.6 million cash balance is sufficient to fund operations and the $5M-$7M capital expenditure plan through fiscal 2009 without further dilution.
• LIPA Project Funding: Monitor negotiations with the DOE regarding the contract modification to cover the $1.92 million in excess costs and the release of deferred funding.
• Navy Motor Delivery: Confirm the March 2007 delivery timeline for the 36.5 MW motor and the collection of the remaining $8.3 million in milestone payments.
• 2G Wire Scale-Up: Track progress on the conversion of the pre-pilot line to full-scale manufacturing and the associated capital spending.
• Windtec Integration: Assess the revenue contribution and integration costs of the Windtec acquisition in the upcoming fiscal quarters.