Business Context and Reporting Period
Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2005 (Third Quarter of Fiscal Year 2006)
Business Overview: AMSC develops, manufactures, and sells products using high-temperature superconductor (HTS) wires and power electronic converters. Operations are divided into three segments: SuperMachines (ship propulsion motors), AMSC Wires (HTS wire manufacturing), and Power Electronic Systems (power quality solutions). The company has a history of operating losses and expects to continue incurring losses through at least the end of fiscal 2007.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2005 | Nine Months Ended Dec 31, 2005 |
|---|---|---|
| Total Revenues | $13,496,301 | $36,579,008 |
| Net Loss | $(7,451,919) | $(19,849,150) |
| Net Loss Per Share (Basic & Diluted) | $(0.23) | $(0.61) |
| Operating Loss | $(8,278,020) | $(21,823,351) |
| Cash and Cash Equivalents | $31,045,300 | N/A (Balance Sheet Item) |
| Total Cash, Equivalents & Marketable Securities | $71,104,459 | N/A (Balance Sheet Item) |
| Net Cash Used in Operating Activities | N/A | $(15,850,360) |
| Accumulated Deficit | $(339,352,121) | N/A (Balance Sheet Item) |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Total revenues decreased 42% ($9.75 million) in the quarter and 19% ($8.85 million) for the nine-month period compared to the prior year.
- SuperMachines: Revenues dropped significantly due to the winding down of the U.S. Navy 36.5 MW motor contract (engineering and fabrication phases completed).
- Power Electronic Systems: Revenues fell due to fewer D-VAR and PQ-IVR system shipments (one system in Q3 2005 vs. five in Q3 2004).
- AMSC Wires: Revenues increased 39% in the quarter and 15% for the nine months, driven by higher sales of HTS wire for the Long Island Power Authority (LIPA) project and increased wire shipments to other customers.
- Increased Losses: Net loss widened to $7.45 million for the quarter (from $2.46 million) and $19.85 million for the nine months (from $11.49 million). This was driven by lower revenue volumes and higher internally-funded R&D spending, particularly in the AMSC Wires segment for second-generation (2G) wire development.
- Segment Performance:
- SuperMachines: Shifted from an operating profit of $512,000 in the prior year quarter to a loss of $274,000.
- AMSC Wires: Operating loss increased to $5.59 million (from $4.59 million) due to higher R&D costs and lower margins on 1G wire sales.
- Power Electronic Systems: Shifted from an operating profit of $2.0 million to a loss of $1.95 million due to lower gross margins from reduced sales volume.
- Liquidity: Cash and cash equivalents decreased by $7.55 million over the nine-month period, primarily due to operating losses and inventory build-up, partially offset by interest income and proceeds from stock option exercises.
Guidance, Outlook, and Risks
- Profitability Outlook: Management expects to continue incurring operating losses until at least the end of fiscal 2007. The company anticipates that available cash ($71.1 million) will be sufficient to fund operations through at least the end of fiscal 2008.
- Revenue Drivers: Future revenue is heavily dependent on the completion of the U.S. Navy 36.5 MW motor (expected delivery September 2006) and the LIPA HTS cable project. Revenues for the Navy contract are expected to be lower in fiscal 2006 than fiscal 2005 as the project enters final assembly.
- Government Funding Risk: A significant portion of revenue and funding comes from U.S. government contracts (Navy, DOE, Air Force). These contracts are subject to annual congressional appropriation and termination for convenience. Funding limitations in the quarter caused $653,000 in LIPA program costs to be deferred to inventory.
- Technological & Commercial Risks: The company faces challenges in scaling up manufacturing of 2G HTS wire and achieving commercial acceptance of superconductor products. Competition from traditional technologies and other superconductor developers is intense.
- Accounting Changes: The company is assessing the impact of SFAS No. 123R (Share-Based Payment), effective April 1, 2006, which will require expensing the fair value of stock options, likely increasing reported expenses.
Key Facts for Investor Verification
- Cash Runway: Verify the sufficiency of the $71.1 million cash balance against the projected burn rate, given the expectation of continued losses through 2007.
- Government Contract Stability: Monitor the status of funding for the U.S. Navy 36.5 MW motor and LIPA cable projects, as these represent the bulk of current backlog and revenue.
- 2G Wire Development: Assess progress on second-generation (2G) wire manufacturing, as this is critical for future commercial scalability and margin improvement.
- Inventory Valuation: Review the $8.78 million inventory balance, specifically the $653,000 in deferred program costs for the LIPA project, to ensure future funding is secured for revenue recognition.
- Stock-Based Compensation Impact: Evaluate the potential increase in expenses upon the adoption of SFAS 123R in the next fiscal year.