Aspen Aerogels, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company designs and manufactures aerogel insulation and also provides contract research services. It reports as one operating segment. Financial figures below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 |
|---|---|---|---|
| Revenue | $27.7; down 8% | $60.5; up 13% | Q2 $30.1; six months $53.6 |
| Gross profit / margin | $6.7 / 24% | $13.2 / 22% | Q2 $5.1 / 17%; six months $9.6 / 18% |
| Operating loss | $(1.3) | $(3.1) | Q2 $(2.7); six months $(5.4) |
| Net loss | $(1.4); $(0.06) per share | $(3.2); $(0.14) per share | Q2 $(2.7); six months $(5.5) |
| Adjusted EBITDA (non-GAAP) | $2.5 | $4.5 | Q2 $1.3; six months $2.0 |
| Cash used in operations | Not separately stated | $(5.2) | $(0.6) |
- Q2 product revenue fell 9% to $27.1 million as shipments declined 11% to 9.9 million square feet; a 2% increase in average selling price partly offset lower volume. Research services revenue rose 74% to $0.6 million.
- For the six months, product shipments rose 9% to 21.8 million square feet and average selling price increased 3% to $2.73 per square foot. Revenue growth reflected higher sales in Asian petrochemicals and European building materials, partly offset by declines in subsea and certain energy markets.
- Gross margin improvement reflected better product mix, pricing, manufacturing productivity and yields. Six-month manufacturing expense increased $2.6 million, principally with operation of the third East Providence production line.
- At June 30, cash and cash equivalents were $19.7 million, down from $32.8 million at December 31, 2015. Capital expenditures were $7.7 million for the six months. Accounts receivable was $24.7 million and inventory $11.8 million, including finished goods of $7.8 million.
- Total liabilities were $17.2 million. Debt was limited to approximately $0.1 million of capital leases; no revolving-credit borrowings were outstanding. The credit facility had $12.3 million effectively available after letters of credit, but was scheduled to expire August 31, 2016. The company was in covenant compliance at June 30.
Material changes and outlook
- Revenue and gross profit increased for the first half, while the second quarter’s revenue declined. Management attributed the quarterly product-sales decrease mainly to lower subsea sales and sales to a major South Asian energy company.
- The company plans a second manufacturing facility in Statesboro, Georgia, with a stated investment of $70 million. It expects significant capital expenditures through 2020 and anticipates funding from cash, operating cash flows, credit, government incentives, debt financing and potentially equity financing. Management expects long-term revenue growth, higher gross profit and improved operating cash flow, but provided no specific full-year financial guidance in the text supplied.
- A June 2016 BASF agreement provides for a conditional, non-interest-bearing $22 million prepayment in eight quarterly installments, expected to begin October 1, 2016 if specified product, financing and construction conditions are met. These include securing at least $30 million of third-party debt commitment. The prepayment is secured by specified manufacturing assets; BASF has no obligation to purchase product, and repayment of any uncredited balance may be required under the agreement.
- The BASF supply arrangement provides for exclusive supply of Spaceloft A2 within specified terms through 2027, with a two-year post-termination supply commitment. The associated joint development agreement may involve jointly owned intellectual property.
Risks, contingencies and unusual items
- The company recorded $0.5 million of warranty reserves in the first half for claims principally related to one project and outside its typical experience. A customer also reported a product application issue; no claim had been made, but additional warranty exposure could not be ruled out.
- Patent infringement actions against two China-based companies were ongoing in the U.S. International Trade Commission and Germany. One German distributor settled; other litigation continued. The company warned of potentially significant legal costs and uncertain outcomes; it reported no litigation loss that it considered probable and requiring accrual.
- Statesboro incentives may require repayment of portions of tax savings or other benefits if the company fails to meet specified investment and job-creation targets. BASF prepayment conditions, repayment provisions and collateral requirements could affect project financing and liquidity.
- A new Northborough headquarters lease runs from 2017 through 2026, with first-year base rent of approximately $408,000 and roughly 3% annual increases. The company also disclosed expected near-term legal expense from patent enforcement actions.
Key facts for investors to verify
- Whether the revolving credit facility was extended, amended or refinanced after its August 31, 2016 expiration, and the resulting borrowing availability and covenants.
- Whether BASF’s prepayment conditions—including the third-party debt commitment—were satisfied and installments began; assess repayment, security and customer-order terms.
- Statesboro facility financing, construction timing, total capital needs and progress toward incentive investment and employment targets.
- Whether warranty claims or the reported product application issue resulted in additional costs or reserves.
- Subsequent outcomes and costs of the patent litigation, and the effect of any rulings or settlements on intellectual property and commercialization.
- Cash conversion and working-capital trends, particularly the first-half operating cash use and increases in receivables and inventory.