American Superconductor Corp (AMSC) 2003 Q1 法說會逐字稿

Good morning and welcome to American Superconductor's fiscal year 2003 first-quarter conference call. With us today is Greg Yurek, president and CEO, and Stan Piekos, senior vice president, corporate development and CFO of American Superconductor. I would now like to turn the call over to Greg Yurek.

Thank you, Chris. Good morning and welcome to our earnings conference call. With me today is Stan Piekos, our chief financial officer, and also John Howell, our vice president for electric industry affairs, and Jeff Nestel-Patt, our vice president for corporate communications. In our conference call today, we will start with a very brief review presented by Stan of the results for the first quarter. I'll then provide a very brief update on operations and key metrics and will provide an outlook regarding key events for our company. Finally, we'll open the session to your questions.

Stan, would you please review the financial reports for the first quarter.

Thanks, Greg, and good morning to all.

Before I get into the numbers, let me provide the following guidance. In our attempt to share information with you to provide insight to help you understand our business plans, we may use statements containing our beliefs, plans, and expectations which constitute forward-looking statements. There are a number of factors and uncertainties that may cause actual results to differ significantly. Please also refer to our SEC filings, and in particular, management's discussion and analysis, for more information on these factors and uncertainties.

Out release of the results of operations, including selected balance sheet data for the first quarter of fiscal 2003 ending June 30th hit the wires earlier this morning.

I'll comment on certain numbers in that release. Complete detailed financial statements will be included in our Form 10-Q quarterly report which we expect to file with the SEC by August 15th.

Revenues for the 3 months ended June 30th, 2002 were 2.9 million compared with 1.7 million for the same period last year. For the first time, we are reporting our quarterly results by three business segments, consistent with how we manage the business. I'll comment by business unit.

HTS wire. Revenues recorded in HTS wire were 220,000, down from 760,000 last year, primarily as a result of the discontinuance of R and D funding from [Pirelli] as a result of a revised alliance agreement announced in February that allows us to sell HTS wire to other cable manufacturers.

Costs and expenses incurred by the HTS wire business unit were 7.2 million, compared with 5.9 million last year. Increased costs were incurred related to the occupancy of the new Devins plant and initial test production runs of multifilamentary composite wire in that facility.

The electric motors and generators business unit. Revenues recorded in the motors and generators business unit increased to 1 and a half million in the first quarter, approximately $670,000 higher compared with revenues recorded in this business unit during the same period last year. Current-quarter revenues result from our fourth U.S. Navy contract involving the build and delivery of a 5-megawatt HTS ship propulsion motor.

Costs and expenses incurred for work on the Navy contract and company-funded development of other HTS motor and generator technology was 3.3 million, about $430,000 higher than costs incurred in this business unit in the same period last year.

The power electronics systems business unit. Revenues in the power electronics systems business unit were 1.1 million, up from $32,000 in the first quarter of last year. Current-quarter revenues resulted from the power electronic development contract and services associated with our power quality and reliability system solutions.

Costs and expenses in fiscal Q1 were 3.2 million, down from 3.6 million recorded in the power electronics system business during the same quarter last year.

Looking at consolidated AMSC results, the operating loss in the first quarter was 11.2 million, relatively unchanged from the 11.1 million recorded in the first quarter of last year. An increased loss in the HTS wire business associated with the scale-up of Devins was essentially offset by a decreased loss in the electric motors and generator and the power electronics systems business units.

The net loss increased to 10.8 million from 9 million last year because of a 1.7 million decline in investment income.

Looking at key items in the balance sheet, cash declined to 45.6 million, about 22.6 million in the last three months. The key components in the use of cash, the 10.8 million net loss, 7.6 million to reduce fiscal year end payables and expenses accrued relating to last year's restructuring and other onetime charges, including the revision of the [Pirelli] alliance agreement.

Other working capital items, receivables and inventory were essentially unchanged during the quarter. During the rest of this year, we expect to reduce our working capital investment mainly in an inventory receivables, generating cash. As pointed out in the release, we have over 9 million of existing power electronics systems inventory to support new sales, including the two new orders booked in the June quarter.

The third use of cash, 4.8 million, was for new fixed capital expenditures, which was partially offset by non-cash depreciation expense of 1.3 million. We expect capital expenditures for the remaining nine months, primarily 4 million for the Devins plant, will be less than depreciation expense during that period.

Our plan is to end this fiscal year with 35 million in cash, cash equivalents, and long-term investments, with no long-term debt.

I'll now turn the microphone back to Greg, who will have some comments on our business development initiatives before we take your questions.

Thanks, Stan. I have about five to ten minutes of remarks I'd like to make before opening it up to your questions.

The earnings announcement that we released this morning has a lot of information regarding our financial results which Stan just reviewed, and along with it, the accomplishments for the first quarter, so I'll refer you to that for details, and I'll also refer you to our new annual report that was published about one month ago.

Our first quarter was on plan in all aspects. We achieved our internal goals for revenue, expenses, and cash burn, and we also achieved a number of key developments and business milestones.

We believe we're on track with respect to achieving our broad financial goals for the fiscal year. Regarding revenue, we have about 10.2 million in - dollars in revenue accounted for this fiscal year after one quarter. To be specific, we recognized 2.9 million in revenue in the first quarter, and we have a backlog of 7.3 million for the remainder of the fiscal year. This is a total of 10.2 million in revenue commitments toward a full-year revenue target of 20 to 28 million, which we guided to earlier.

Our expenses are under control, following the restructuring and consolidation measures we executed in March of 2002. Cash from sales, primarily from reduction in our power electronics systems inventory, and from development contracts, are expected to allow us to achieve our goal of $35 million in cash, cash equivalents, and long-term investments, at the end of the fiscal year.

Prospects for more sales of our power electronics systems, including [D-SMES] and our new dynamic [VAR] product, are looking up. While we cannot give you any assurances that we will close the additional orders necessary to achieve 10 million to $15 million in sales of power electronics systems this fiscal year, we are becoming more encouraged that we will achieve this goal based on customer inquiries, renewed requests for quotes, and our progress towards closing orders already quoted.

We still believe revenue from sales of power electronics systems will come primarily in the second half of our fiscal year, consistent with the continuing strengthening of the economy and clarification in the regulatory environment, and, therefore, increased spending on capital by power transmission companies and industrials.

And while we can make no assurances that we will receive orders this quarter, we believe we are in line to receive orders for two more systems this quarter, probably in September.

Turning to our HTS wire business unit, progress in the scale-up of our new wire manufacturing plant in Devins is proceeding on schedule. We were delighted to report today that the first wire samples that came from test production runs exceeded our expectations in terms of electrical performance of these wires. This bodes well for the future.

While we continue to qualify wire manufacturing equipment at Devins and simultaneously increase our throughput, we are still bringing certain pieces of equipment on-line for the first time. This is all proceeding according to schedule, and we are still expecting to have the capacity in place at the end of the year for 1,000 to 1500 kilometers per year. Actual production will be dictated by market demand.

Our electric motors and generators business unit is also performing on plan. In particular, we expect to deliver a 5-megawatt ship propulsion motor to the U.S. Navy on schedule next summer. In the meantime, we anticipate that there will be opportunities for new Navy contracts for even higher power ship propulsion motors, and we believe we are well positioned to compete for and win such a contract.

Doing so will mean our motors and generators business can operate in the black in our next fiscal year. And from a general corporate perspective, I want to point out that AMSC has further strengthened its already strong patent portfolio during the first quarter. We believe our growing patent portfolio will become an additional key differentiator and important corporate asset as HTS technology gains commercial acceptance this year and going forward.

Over the last one to two years, American Superconductor has continuously positioned itself to focus on high-growth markets for which our products provide a clear customer value proposition. The key markets for us include the transmission grid, commercial cruise and cargo ships, military applications, primarily electric war ships, and wind farms.

The electric ship propulsion and wind energy market opportunities have existing or projected compound annual growth rates of 20% or more, and we believe there is a similar growth opportunity in the transmission grid market.

We will continue to search out similar market opportunities for our existing and emerging technologies and products and we will aggressively pursue penetration of these markets.

If you saw this morning's front-page Wall Street Journal article entitled "Jolt of reality amid collapsing power market, energy companies are reeling," you may be wondering what this means for AMSC.

Well, our company has been delivering a consistent message for some time now. Future growth opportunities in the U.S. are not the generation and energy trading for American Superconductor. In fact, the consensus of many leading energy experts, including Cambridge Energy Research Associates show that we have a glut of power generation in the U.S. today. Generation was simply built during the last 10 years.

We have a favorite reminder here in our company. It's the grid, stupid. One of the problems associated with the restructuring of electricity generation and energy trading in the '90s was that everybody seemed to forget that you need a secure and reliable network to make restructuring or deregulation of electricity generation and trading a success.

Think about it. In other cases where deregulation has occurred on a grand scale, the network needed to move the product was established first. This includes deregulation of natural gas and telecommunications, where the gas pipelines and telecom networks were installed first. Deregulation of the airline industry required expansion to more gates before deregulation of the airline industry could be a success.

In the power arena, they got it backwards. They opened up electricity generation and trading and didn't figure out how to attract investments in the power grid, the network needed to move the product to customers.

And as a result, we're seeing a lot of power generation companies, energy traders, and bankers who supported them, in trouble today.

The good news is, the problems with the security and reliability of the grid have been recognized by the power transmission industry itself, by top-level policy-makers, and by customers who are noticing that the reliability of the grid is hurting because of neglect.

Recent studies and reports by Rand, [Plass] Energies, the U.S. Department of Energy and others, have both highlighted the need - have all highlighted the need and suggested solutions. Huge investments in the grid in the U.S. will be made over the next couple of decades, and AMSC is well positioned to participate in this growth opportunity.

So to summarize, over the last one to two years, American Superconductor has continuously positioned and re-positioned itself to focus on high-growth markets for which our products provide a clear customer value proposition. This clearly includes the power transmission grid opportunity where we have some key strengths and differentiating technologies and products. Other key markets that we are focused on today are electric motors for commercial cruise and cargo ships, military applications, primarily, again, electric war ships, and also wind farms.

We believe our dedication to market-driven, high-growth opportunities will start to pay off for our shareholders over the next year and beyond. We also believe that we have sufficient cash to carry our business through profitability in our fiscal year 2005.

Now, that concludes my remarks. I thank you for your attention. Now I'd like to open up the session to your questions. Chris? 00:20:13

At this time, if you'd register for a question, please press the 1 on your touch-tone phone. To withdraw your question, press the pound sign. Once again, to register your site for a question, please press the 1 on your touch-tone phone. We will take the first question from the site of David Kurstman at H.C. Wainwright. Go ahead, please.

Thank you. Good morning, everyone. A quick question on the backlog. Can you give me a sense as to the composition of the 7.3 million in backlog?

Yes. That backlog includes the two [D-VAR] - dynamic [VAR] - orders that we announced during the last couple of months. That's a key component there. There is also, from the electric motors and generators, the balance of the Navy contract that we have and we announced back in February, I believe it was.

Uh-huh.

We recognized some of that during the last quarter of that fiscal year, of course.

And a number of other development contracts and some - some wire orders.

Okay. Can you - I'm trying to sort of get a sense here how you think you're going to get to a 35 million cash balance at March '03 if there's 45.6 million left and there's already about 5 million or so accounted for in capex spending and the like.

Well, the plan - we're still on the plan that we've set for ourselves much earlier, and that is, of course, to drive sales in the power electronics systems, as Stan pointed out and I think we pointed out in the earnings announcement this morning, and we've talked about in the past earnings calls.

There's a significant inventory in power electronics systems. As we get orders and deliver on those orders, we've already invested, of course, in that inventory. That turns back into cash. So you get cash from the inventory, as well as the profitability in selling those products. They're all profitable products. So that's one source of cash generation.

Another key component here is delivering on and receiving additional contracts for the ship propulsion industry. We're very optimistic about both of these opportunities for the rest of this fiscal year, and that will generate cash as well.

So those are the key components, David, in keeping us on our target for year end cash.

As a quick follow-up to that, then, can you give a sense as to what you believe the operating cash below the gross margin line, what - what kind of cash you'll need to keep that going for the rest of the year?

You say below the gross margin line.

Yeah. Like SG and A and R and D.

Yeah. Dave, the - the operating - we'll have, by the way, all of the breakdowns in our 10-Q. We do a program reporting right now, we get all our costs by business unit segment and now we do it by three, as you know. In the 10-Q, we do the sort, David, between SG and A and R and D and in general, in trend, in the comments I made at the year end, as we guided, look for our R and D to be flat to down year over year. We've got some increase in selling because of the commercial efforts going on now for the businesses moving into that area. And then as I commented here, too, you know, we've got the Devins occupancy, the Devins costs picking up, and that gets into your cost of sales, product revenues, as we'll break it there. So the details will come, Dave, in the 10-Q with that.

In terms of the operating cash, you know, the other thing to keep in mind here is we'll have depreciation and amortization now, this year, in the about $10 million range involved in that.

Okay.

As a cash expense.

Thank you.

Your next question comes from Jonathan Mogul at CIBC World Markets. Go ahead, please.

Hi. Can you hear me.

Yeah. Barely, John.

Is that better?

Yes.

Yeah. A few questions. Some of them have been answered already, but as far as it seems a little hazy on your - on the press release as far as your revenue guidance for the year. Is it safe to say that you're a little more - a little less optimistic about reaching those targets, versus the last quarter's call?

A little - we're - I would say we're more optimistic, not less. The guidance we gave last - on May 15th, I think it was, for that earnings call, was 10 - or excuse me, 20 to $28 million in revenue. What we're telling you here is that we've accounted for 10.2 million of that revenue, and we gave you the breakdown on that, backlog plus 2.9 million already recognized in the first quarter. So after one quarter, we have accounted for 10.2 million of the target of 20 to 28.

But isn't a lot of that just based on the contracts that you have with the Navy that you know - you knew were going to come in, you know, three months ago as well?

Well, no. Since the May 15th, we've gotten two new orders that we didn't have at May 15th. One for BC Hydro and one for PacifiCorp.

That's for the D [VAR] units.

Yeah.

What are the selling price of those?

The range for [D-VARs] is about 1.2 to 1.6 for the system.

Okay. And you're - the power electronics sales of 1.1 for the quarter, what did that consist of.

That was - as I indicated in my note, John, that was the - the contract we announced in power electronics for the power electronics Navy contract, that we announced back in the first quarter.

Okay.

That was that. And there were no hardware deliveries in there for product electronic systems, but there were services - installation and services associated with the base we have out there.

So Jonathan, what I tried to indicate here in the comments is that we're very much on track to achieve the 20 to 28 million. We're feeling very good about that. We're feeling more optimistic as each day and week goes by. As I said, customer inquiries have increased. We're following up on quotes that we already have out the door. Of course customer inquiries include inquiries - for example, after we put out the PacifiCorp release on de-[VAR] for the wind farms in Wyoming, we got a good dozen inquiries from customers, wind farm operators and so forth, and a lot of those are in the follow-up stage and I think are going to go into quotes in the near term.

So that is a true growth opportunity, over 20% annual compound growth rates in the wind farm business out there, and we think we're going to be a direct participant in that opportunity.

So, again, we're feeling more optimistic. We believe, again, there will be opportunities for more U.S. Navy electric motor contracts for HTS motors and generators. We believe we're in a great position to participate and win those contracts.

Okay.

And I think it's fair to say to add that the key to both, the two orders in the power electronics systems that were won in a very competitive bidding process and in this very depressed energy trading market that Greg talked about, that the penetration there and the follow-ons in the Navy expected are based on performance. We've got solutions out there working and delivering.

Okay. And just lastly, the - as far as the EPS guidance, are you still sticking with the 170 to 215 loss?

Yes.

Yep.

Okay. Great.

And I think you can see from what we've demonstrated in the first quarter, that those costs and expenses are under control.

Okay. Great. Thanks a lot, guys.

Sure.

The next question will come from Christine Vargus at Merrill Lynch. Go ahead, please.

Thanks a lot. Greg, I'm wondering if you can just clarify what it would take for the electric motors and generators segment to operate in the black, and similarly for the power electronics systems segment.

The - start with the power electronics systems. I think we've guided earlier that break-even number there on sales is somewhere in the $17 million range, with the current cost structure we have in place and the profitability of those units.

So that's number one.

Number two, on the motors and generators, we're looking at, again, a significant Navy contract. We got a $8 million contract for a 5 megawatt, and we're looking for a follow-on contract that would get us into the 25-megawatt range. That's the indication from the Navy, and we've guided to that sort of thing in the past.

So you're going to need something like 12 to $15 million annual in the motors and generators business unit to break even and go into the black there.

And the break-even, is that on a gross margin or operating margin basis?

No, this is fully allocated charge, cost of business units, Christine, so it does include selling, G and A, and any corporate support that we may watch very carefully.

Okay. That's an operating break-even then.

Yeah.

And my last question, if you can just comment just a little bit about the recent DOE peer review, specifically as to how the HTS cable plans are coming around the world and what project - if there's been any changes to the projects that were on deck.

We reported - [Pirelli] put out an announcement last week on its - specifically on its Detroit Edison project, which they reported on at that peer review, so I think all the details are there.

Uh-huh.

I can add more to that, if you would like. But they're moving forward with further tests and if the tests work out okay, they'll go with an HTS - one single HTS cable in Detroit Edison's Frisbee station, energized by the end of the year. That's their plan. If that works out, they energize it, they intend to run it for about a year, to get more learning from it.

I think you're also referring to other opportunities here. We mentioned there are active cable demonstration projects going forward. They have not been settled in terms of who's going to supply wire, which is what I'm interested in.

In China, in the U.S., in Europe, in Mexico, Korea, Japan, and we're participating potentially in all of those in terms of being the wire supplier. So there's a lot of activity going forward here, Christine. I - there's nothing else specific that was reported on any of those in the peer review last week, to answer your question.

Great. Thanks a lot.

Yep.

We'll take the next question from John keelie at Adams, Harkness and Hill. Go ahead, please.

Thanks. Good morning.

Hi.

Could you comment on the current RFPs outstanding you folks have? Also wondering what the status of the General Electric relationship is and what sort of progress that they have made in identifying some potential customers and orders.

I'll start with the last one. The relationship with General Electric Industrial Systems, which is one of our multiple GE relationships, GE Industrial Systems is our partner on the power electronic systems that we sell. Again, [D-SMES], power quality [SMES] and dynamic [VAR] now included, a co-branded product. That is a good strong relationship. We're continuing to interact together. They are continuing to bring in new customer leads, very actively, not only now in the U.S. but also outside of the U.S. We had a foreign - potential foreign customer brought in by GE just this week for two days into our Madison, Wisconsin operation.

So they're very active on the power electronics systems end of this, and you may have noticed when we announced the de-[VAR] for PacifiCorp that GE power systems kind of elbowed its way into that press release and asked if they - it could be mentioned that GE power systems is - now has GE wind energy as a business. And we allowed them to do that and in fact, they're seeing the opportunity to bring D [VAR] into the support of the GE wind energy business now.

You know, with GE power systems, again, to broaden it here, you know, on power electronics systems, we were named last year, and GE just signed the contract last week, GE power systems just signed the contract last week with Department of Energy for its high-temperature superconductor, 100-megawatt generator, and we're named as the primary wire supplier for that product.

So we're also in discussions with, as you could guess, with GE in terms of the electric motors. We continue to move forward in discussions with a number of different motor manufacturers to form a jointly-owned business, and you could guess that General Electric would be one of those companies.

So there's a lot of interaction with GE on a going-forward basis, very successful to date.

Okay. And the RFP?

Oh, I'm sorry. The RFPs, you're referring to guidance we had given earlier, I think, in terms of power electronic systems for the semiconductor industry and for the transmission grid operators. Those numbers have not really changed dramatically. Maybe one of those in the - in the transmission grid system disappeared. The - the grid operator simply said our - we're not going to go forward with any solution, so we didn't lose to anybody. And that would have been about a, you know, couple million bucks. A million to two million dollars of value here off of - I'm remembering $48 million of total requests for quotes. There's actually been a - I don't have the number in front of me here, but there's actually been an add to that $48 million because of the increased activity from the GE sales force on the transmission grid side of the equation.

On the semiconductor industry, we gave numbers of about $18 million of outstanding quotes. That's about the same. Nothing has dropped away here. Everything's been in the delay category, and so we're - we're simply waiting for that economy to come back and capex spending to increase there. There's some positive indications there. We're kind of holding our breath, but we don't see rapid movement on the part of the semiconductors to start ordering a lot of capex for power quality solutions right now.

Thank you.

Yep.

The next question comes from Peter Patterson at Patterson investments. Please go ahead.

Good morning, gentlemen.

Hi, Pete.

A question directed toward John. Do you know the status of the energy bill, and in your opinion, is this something that would get done this fiscal year for us and perhaps provide some stimulus for business out there.

Well, there are conference negotiations right now aimed towards a possible energy bill by the end of the year. It's by no means certain that it's going to get done or how comprehensive it will be. I would say - and this is based on the input from experts in the industry, there's growing recognition of the importance of focusing on incentives for transmission infrastructure investment. So - but I would say that activity in Congress is only one part of what's happening in Washington that has a bearing on our prospects. The Federal Energy Regulatory Commission continues to move forward very actively to develop standard rules for a standard market design that will create, in our view, much more certainty for future investment in the grid.

The FERC is generally expected to issue a proposed rule at the end of July, before going on its August recess, aimed at the development of a standard market design.

And Pete, if I may add, just from the Washington scene here, not the energy bill per se, but you may remember that President Bush back in February put forth his budget and he included $48 million in the DOE budget for the superconductivity program there.

Right.

This - earlier this summer, the house appropriated $47 million, and just Monday this week, the Senate appropriations committee marked that up to $50 million, so that goes into conference in September. Clearly with the house and Senate only 3 million apart and the Senate pushing for a higher number, you ought to see at least the 48 million of the president's budget approved here. So that's a good sign. The budget this past year has been 32 million, so that's a significant uptick there. And we're seeing other activity on Capitol Hill driving for HTS solutions also in the defense sector, so I think that's very good for companies like ours going forward.

By the way, another related item to John's final comment there is I think if you really dig into this, you'll see that there are a lot of transmission related companies starting to come to the fore here, companies like Trans-Elect, the Neptune project. We're hearing more about for the cable connects in the Manhattan area, many others, so there's a lot of activity going off of the FERC activities into transmission businesses for-profit transmission businesses. A whole new era is beginning here.

Thank you gentlemen. Keep up the good work. Look forward to seeing you on Friday.

Thank you.

The next question will come from Robert Smith at the center for performance investments. Please go ahead.

Good morning. I was wondering if the current focal hot summer in certain areas of the country has increased the sense of urgency in any public utility to address the problems. Are you seeing anything like that?

Bob, I think, you know, we're certainly seeing confirmation of the need. The grid is clearly weak. You know, as we say here, "it's the grid, stupid." And again, it's being recognized by the industry itself. They're recognizing that a lot of money is going to have to be invested over the next couple of decades to bring the grid back up to be a secure and reliable network.

It's certainly being recognized by the Federal Energy Regulatory Commission. I'll let John on that more. And it's certainly being recognized by the policy-makers in Washington.

So the fact that we're seeing these various outages occur around the country is simply underscoring what the regulators, the policy-makers, and the industry officials already know. So that's, I think, a positive - positive indication.

John, you want to comment any further?

Yeah. I - I guess just one additional comment, which is to some extent the weakening of the economy in the last year has sort of disguised what's going on in the power grid. People were expecting power demand in New York to be down this year. In fact, demand in New York is up, despite a slower economy, and I think that's adding to a sense of urgency, of a need to invest in the grid.

We have seen sporadic outages around the country in places like Denver, Detroit, Boston, New York, and they are typically delivery-related. Ironically, I heard a report on the National Public Radio this morning about the New York situation, and after announcing what was going on, the discussion went straight into a discussion of the need for power generating - generating facilities. But actually, the real situation there, as in much of the rest of the country, is the generating balance, on balance, is pretty healthy. We now have committed about 25 to 30% reserve margins in many of the so-called nerve regions, electric reliability regions around the country. There's not a shortage of generating capacity. What we really have a problem with is getting the power reliably to customers.

So the recognition is there, again, by the people that count, Bob, and that's good for us.

Uh-huh. And the second question centers on the peer review. Did you have a comment about second generation, where you said you were - had the best product, or did I read that incorrectly?

I mean you mean coated conductor -

Yeah. Coated -

Yeah. There were reports by both some of our scientists, as well as the scientists from the national institute of science and technology, Oak Ridge national laboratory, who have some of our coated conductor wire and have been making a variety of different measurements, and our wires are doing astoundingly well, so we're very pleased with the progress. When you look at the performance, the uniformity and the length and so forth, it's clearly the best in the world.

Okay. Thanks so much, and good luck.

Thanks. You're welcome.

And we'll take the next question from Tom [Daymore] at the state of Wisconsin. Go ahead, please.

Good morning. Just a few questions. What is the break-even revenue figure for the HTS wire segment?

We have guided in the past in terms of volume, Tom, about 7,000 kilometers. And by the way, we reduced that last year. It used to be closer to 10. And generally, you can use in the commercial vein, 10 to $12 per meter type revenue number.

Okay. So that's - that's literally - that's $70 million in revenue?

Right.

Before you would be break-even in that segment?

Right.

Okay. Secondly, with regard to the increased funding by the Congress for superconducting technologies, Greg had mentioned that the prior year was the $32 million appropriation, which I'm assuming referred to 2002.

Can you provide any context on how the company's revenues have been impacted by the prior year's appropriation? You know, what - how has that - how have prior years' appropriations filtered through to American Superconductor?

Well, we've participated in a number of the DOE superconductivity partnership initiatives. The prior-year appropriation of 32 million was for the government fiscal year that ends September 30th, 2002, so that's been underway.

With that appropriation in place, Department of Energy decided to fund the General Electric power systems hundred megawatt generator. We're named as the primary wire supplier on that. They named a cable project, half mile cable project for long island power authority for [Pirelli] and we're the wire supplier for that.

DuPont, we mentioned in our announcement today, the earnings announcement that DuPont reported last week successful completion of a Phase I magnetic separator project and we supplied the - of course the wire but also the coil for that separator. They're now into a phase II and they just put out in June a request for quote for the superconducting magnetic coils and we intend to bid on that.

So given that we have established ourselves as the leading company in terms of wire supply, performance, and capabilities, we tend to participate in those projects.

Also, if you look back last year, the - there was appropriated $4 million for HTS superconducting motors, and that became 4 million of the $8 million contract we got from the U.S. Navy back in February or March. I can't remember.

So we're, I think, direct recipients of that, given the position we have for ourselves in this marketplace.

Okay. And most of the revenues have been recorded in the HTS wire segment?

Well, again, in the motors, electric motors and generators business, we're now recognizing revenue from that $8 million contract, and so you see that's -

Oh, okay.

For example, okay?

Okay. And that was - the $8 million contract was part of prior appropriations by the Congress for superconducting?

Yes. Specifically, there was $4 million put in by Congress for HTS, AC synchronous machines. For motors, I should say. That's specifically what we're producing.

Okay.

And that 4 million plus the 4 million from the Navy gave us a $8 million contract from the Navy.

Okay, okay. And then finally, with regard to the jointly-owned business initiative, could you just outline the strategic reasons for why you are pursuing that, and also discuss the financial implications? What kind of investment or assets would American Superconductor need to make in such a venture?

Uh-huh. Well, the strategic reasons are clear to us. We have tremendous capabilities in the design, the development, the building of prototype HTS motors and I think we've demonstrated our successes here. Those successes have led to the more - most recent Navy contract and I think it's going to lead to additional Navy contracts.

That's terrific. So we come with a dowry of some 47 patents, about 50 people, of these Navy contracts, the know-how, the ability to build prototypes.

What we don't have, Tom, is a manufacturing floor for motors and generators. What we don't have is a name - a recognized nameplate in the industry. I mean, I kind of love, you know, the American Superconductor motor but I don't have the patience to develop that over the years.

Right, right.

So a key strategic reason, design for manufacturing, manufacturing floor, channels to market and the nameplate, recognized nameplate on the motor is what we're looking for in a motor partner. And there are a good number of these, about - about 10 of them around the world, that have - fit those attributes.

However, if you - you're going to narrow that down pretty quickly, because we're looking for a U.S. base here, for continued evolution of the military what are ship market opportunity here, so that narrows it down pretty quickly.

Right.

If we keep on that track.

Okay.

And again, we're in very active discussions.

Okay.

Both in this country, with motor companies in this country as well as ones around the world because this is a worldwide market, not just a U.S. market by any means. We had a major motor company in from the Far East just last week, and they're very clear on their objectives with HTS motors and we believe we'll find business to do with them.

Right. And what about any financial implications? You know, it's possible that cash could become an issue at some point for American Superconductor. What is - what is the implication to the company's cash position of - of a - of one of these jointly-owned ventures?

Well, let me just start out by saying that on our current plan, if we execute on that current plan, we don't need additional cash.

Uh-huh.

However, having said that, I think you have the right idea here, because we've built a tremendous amount of value in our electric motors and generators business unit.

Uh-huh.

Again, let me tick off that we have this dowry, if you will, of contracts, of a body of patents. These are, you know, patents that are quite distinguishable and distinguish that business unit from any potential competitor around the world. The know-how and so forth. So we've built a lot of value here and one opportunity would be to monetize some of that value in a jointly-owned business.

Okay.

So I think your thought processes are along the right direction.

In a jointly-owned business with a strategic relationship that puts demand on the HTS wire plant, too, so it's a very nice crossover time.

Yeah. It's a good two-for.

Okay. Thank you very much, gentlemen.

Sure, Tom.

Again, to register for a question, please press the 1 on your touch-tone phone. We'll take a follow-up question from David Kurst man. Go ahead, please.

Thanks. A question on accounts receivable and accounts payable. Accounts receivable didn't seem to improve in the sequential quarter, and then how much of the account payable do you think is left to be paid down from the big run-up that happened in the fourth quarter?

Yeah. On the receivables, David, you're right, they're about flat with about a quarter-over-quarter million dollar reduction in sales, so we're expecting that to come down, even in the current quarter and in fact, by the way, I did get some payments on the second workday of July, so those, again, we expect to continue to trend down.

On the accounts payable and accrued expenses, those are lumped into the balance sheet item at $7.6 million reduction you saw from the end of last fiscal year to the end of the first quarter of this year.

About 3.5 million, David, of that was the payoff of the restructuring and onetime charges, including the cash that went to the [Pirelli] deal in that.

Uh-huh.

And as we commented when we announced all of those actions, all of the actions taken in the fourth quarter, 13.9 P and L effect but between the two of them, about 4 million of cash, so you can see we've got a half million to - about a half million dollars left on that - those charges still in the balance sheet.

Uh-huh.

And the rest of the reduction that we saw in the quarter was the accounts payable reduction, so that would be about 4 million, 4.1 million, and that was primarily because you may recall, as we prepared for the initial test production runs here in Devins which we've initiated in April, announced in April, we did take a lot of equipment in by the end at the end of last fiscal year, and by the time you take that in, install it, commission it and prove it out so that you can pay the vendor, that's when the payments went.

So that's pretty much behind us and as you can see, the capital spending in the quarter went way down, was 12 million in the prior quarter, the March quarter, and was 4.8 million this quarter, and that trend is continue - that declining trend is expected to continue.

Okay. Thank you.

Sure.

We have no questions registered. I'll turn the call back over to the management staff for closing comments. Please go ahead.

Well, thanks for participating in our call today. I would like to also remind you that we have our annual meeting of shareholders on Friday of this week. That meeting will be held at the Devins manufacturing plant. We'll be providing tours of that plant to the shareholders who attend that meeting. We'll also have objects from our motors division as well as a [D-SMES] trailer out in the parking lot which will be available for tour. So if you have the opportunity, please show up at our annual meeting on Friday. It starts at 9:00 a.m. at the Devins facility, and we look forward to seeing you there. Thanks very much.

This does conclude this morning's call. We thank you for your participation and you 00:56:34 may now disconnect.