Business context and reporting period
The supplied filing is American Electric Technologies, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter ended September 30, 2011—not a filing identified as Stabilis Solutions, Inc. The company reports three segments: Technical Products and Services (TP&S), Electrical and Instrumentation Construction (E&I), and American Access Technologies (AAT); it also holds equity-method interests in three foreign joint ventures.
Financial highlights
Amounts are in thousands of dollars except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $13,704 | $10,472 | $37,200 | $28,417 |
| Gross profit | $2,183 | $1,043 | $4,887 | $2,150 |
| Gross margin | 15.9% | 10.0% | 13.1% | 7.6% |
| Net income (loss) | $359 | $(340) | $(690) | $(1,893) |
| EPS, basic / diluted | $0.05 / $0.04 | $(0.04) / $(0.04) | $(0.09) / $(0.09) | $(0.24) / $(0.24) |
| Cash flow from operations | Not separately stated | Not separately stated | $(1,066) | $(672) |
- At September 30, cash was $1,871; working capital was $11,988 and the current ratio was 2.4:1. Total assets were $36,329 and stockholders’ equity was $22,609.
- Balance-sheet notes payable were $5,250 in total, comprising $144 current and $5,106 noncurrent. The company separately reported $5,000 drawn on its revolving facility, with $1,440 of additional borrowing capacity. Facility borrowings bear 30-day LIBOR plus 3.25% and mature July 1, 2013.
- Nine-month investing cash flow was positive $711, including $1,052 in joint-venture dividends; financing cash flow was positive $862, including $1,000 of revolving-credit borrowings. Cash increased $507 over the period.
Changes versus comparable periods
- Q3 revenue rose 31% year over year; nine-month revenue also rose 31%. TP&S was the largest growth contributor: Q3 sales increased 43% and nine-month sales increased 34%.
- Gross profit improved substantially, particularly in TP&S, which management attributed to stronger oil-and-gas demand, better direct margins, and lower indirect manufacturing costs following cost reductions begun in late 2010.
- Q3 returned to profitability, while the nine-month net loss narrowed from $1,893 to $690. Domestic operations nevertheless remained loss-making for the first nine months, at $(1,821), compared with $(3,715) in 2010.
- E&I nine-month revenue rose 39%, but gross margin fell to 7% from 8%; increased estimated costs on a fixed-price water/wastewater project weighed on results. AAT faced weak industrial-sector conditions, with lower operating income and Q3 gross margin of 24% versus 27%.
Outlook, commentary, risks and unusual items
- Backlog at September 30 was $22,657, up from $14,868 at year-end 2010. Management expected approximately 50% of TP&S backlog and 25% of E&I backlog to convert to revenue during the remainder of 2011. No quantified full-year revenue or earnings guidance is provided.
- Management said existing cash, working capital, unused credit capacity, and operating earnings should meet working-capital needs for the next 12 months. However, operating cash use increased year over year, in part because of higher receivables and inventory associated with increased demand.
- Management described improving shale-related oil-and-gas demand, continued softness in industrial markets, and marketing of its new integrated solar power product. It cautioned that results and cash flows may vary with market conditions and are not necessarily indicative of full-year results.
- The company recorded a $220 reduction in deferred tax assets following an IRS examination concerning Section 382 limitations on net operating loss carryforwards. Management estimated a 55% effective tax rate for fiscal 2011, primarily reflecting foreign taxes and income mix.
- An E&I contract dispute was resolved by binding arbitration after quarter-end: on October 25, 2011, the company received an award of approximately $434, and made no Q3 adjustment. The dispute had involved company claims of approximately $1,100, a contractor counterclaim of $800, and $565 withheld from the contract balance; the company had incurred $485 of related legal expenses in the first nine months.
- The company obtained a one-time reduction in its tangible-net-worth covenant for the September quarter from $10,000 to $9,550, citing the pending arbitration. It met the covenant under both thresholds; the covenant returned to $10,000 for the December quarter. The credit line is secured by specified property, receivables, equipment, inventory, and work in process.
- Risks noted include contract cost estimation, customer collections and inventory valuation, commodity-price exposure, joint-venture performance and foreign-currency translation, and credit-facility covenants. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the issuer and filing identity: the provided text names American Electric Technologies, Inc., although the request metadata names Stabilis Solutions, Inc.
- Review the revolving-credit agreement, borrowing-base availability, upcoming tangible-net-worth covenant, and the effect of any operating losses on borrowing limits.
- Assess whether receivables and inventory growth convert into cash, given nine-month operating cash use and increased working-capital requirements.
- Track E&I project cost estimates and the accounting and cash collection related to the post-quarter arbitration award.
- Verify the impact of the Section 382 tax limitation and the stated 55% expected effective tax rate, as well as the sustainability of joint-venture earnings and dividends.