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, 2008 (Fiscal Q3 2008)
Business Overview: AMSC operates in two segments: AMSC Power Systems (wind turbine electrical systems, grid reliability products) and AMSC Superconductors (high-temperature superconductor wire and components). The company relies heavily on government contracts for R&D and commercialization of superconductor technologies.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 31, 2008 | 9 Months Ended Dec 31, 2008 | 9 Months Ended Dec 31, 2007 |
|---|---|---|---|
| Total Revenues | $41,334 | $121,526 | $74,016 |
| Cost of Revenue | $31,764 | $89,630 | $54,728 |
| Gross Margin | 23.2% | 26.2% | 26.1% |
| Operating Loss | $(5,736) | $(12,237) | $(22,069) |
| Net Loss | $(7,772) | $(17,943) | $(23,635) |
| Diluted EPS | $(0.18) | $(0.42) | $(0.61) |
| Cash & Equivalents | $55,588 | $55,588 | $71,331 |
| Marketable Securities | $59,049 | $59,049 | $38,398 |
| Total Liquidity (Cash + Securities + Restricted) | $122,650 | $122,650 | $119,404 |
| Total Debt | N/A (No long-term debt reported) | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 27% year-over-year (YoY) for the quarter and 64% for the nine-month period. This was driven primarily by the Power Systems segment, which grew 32% (quarter) and 76% (nine months) due to higher sales of wind electrical systems in the Asia-Pacific region.
- Profitability Improvement: While the company remains unprofitable, the operating loss narrowed significantly. The nine-month operating loss decreased from $22.1 million in 2007 to $12.2 million in 2008. Net loss for the nine months decreased from $23.6 million to $17.9 million.
- Segment Performance:
- Power Systems: Generated operating income of $3.2 million (quarter) and $13.6 million (nine months), up from $4.1 million and $4.3 million in the prior year periods.
- Superconductors: Continued to incur significant operating losses ($6.3 million for the quarter; $17.3 million for nine months), though the nine-month loss was slightly better than the prior year due to one-time write-offs in 2007.
- Cash Flow: Net cash used in operating activities improved dramatically, dropping from a use of $17.5 million in the prior nine-month period to only $0.8 million in the current period. This was due to improved collections and lower net loss.
Guidance, Outlook, and Risks
- Outlook: Management expects available cash ($122.6 million) to be sufficient to fund operations for the next several years. The company anticipates achieving profitable results in the quarter ending March 31, 2009, and the fiscal year ending March 31, 2010, though this is not guaranteed.
- Capital Expenditures: Approximately $14.7 million has been invested in the 344 superconductors production line. An additional $28.0 million to $35.0 million is estimated to be required to achieve full commercial manufacturing capacity (9 million meters/year).
- Key Risks:
- Customer Concentration: Sinovel Wind Co., Ltd. accounted for 70% of revenue in the quarter and 67% for the nine months ended Dec 31, 2008. Loss of this customer would have a severe impact.
- Foreign Exchange: A stronger U.S. dollar reduced gross margin by approximately 240 basis points in the quarter. The company is increasing exposure to the Chinese Renminbi (RMB).
- Government Funding: A significant portion of Superconductors revenue relies on U.S. government contracts (e.g., Project HYDRA), which are subject to appropriation and termination.
- Commercialization: Superconductor products are largely in the prototype or early commercialization stage; widespread market acceptance is not yet achieved.
- Unusual Items:
- Restructuring charges of $0.2 million (quarter) and $0.7 million (nine months) related to the closure of the Westborough, MA facility.
- A $1.3 million charge in the nine months related to the revaluation of a warrant exercised by Provident Premier Master Fund.
Investor Verification Checklist
- Sinovel Dependency: Verify the status of purchase orders and development contracts with Sinovel Wind Co., Ltd., given they represent the majority of revenue.
- Government Contract Funding: Confirm the funding status and renewal likelihood of key government projects, specifically Project HYDRA (DHS) and LIPA II (DOE).
- Superconductor Commercialization: Assess progress on scaling 344 superconductor manufacturing to the estimated 9 million meters/year capacity required for commercial competitiveness.
- Foreign Exchange Exposure: Monitor the impact of the strengthening U.S. dollar on Euro-denominated revenues and the new RMB billing arrangements.
- Backlog Realization: Review the $602 million backlog to understand the risk of order cancellations or deferrals, particularly from Sinovel.