Filing and reporting period
Important entity discrepancy: The request identifies Stabilis Solutions, Inc., but the supplied filing is for American Electric Technologies, Inc. and subsidiaries (AETI). It is a Form 10-Q for the quarter and nine months ended September 30, 2012. Financial statement amounts below are in $ thousands unless stated otherwise.
AETI supplied power delivery products and services to energy and industrial markets through Technical Products and Services (TP&S), Electrical and Instrumentation Construction (E&I), and American Access Technologies (AAT), and held equity-method interests in three foreign joint ventures.
Financial performance
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Revenue | $11,725 | $13,704 | $39,029 | $37,200 |
| Gross profit (margin) | $1,689 (14.4%) | $2,183 (15.9%) | $5,634 (14.4%) | $4,887 (13.1%) |
| Income (loss) from domestic operations | $123 | $52 | $92 | $(1,821) |
| Net equity income from foreign joint ventures | $723 | $709 | $2,325 | $961 |
| Net income (loss) attributable to common stockholders | $500 | $359 | $1,595 | $(690) |
| Basic EPS | $0.06 | $0.05 | $0.20 | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $1,166 | $1,046 | $3,631 | $(81) |
- For the nine-month period, operating cash flow was $1,153, versus cash used of $1,066 in 2011. Investing activities provided $7; financing activities provided $1,175. Cash increased by $2,335 to $6,084.
- At September 30, 2012, current assets were $21,532 and current liabilities were $8,182. Total assets were $37,482; total liabilities were $12,760. The balance sheet also reported $4,184 of mandatorily redeemable preferred stock.
- Revolving-credit borrowings were $1,500, down from $5,057 in notes payable at December 31, 2011; the filing reports a 3.48% interest rate at quarter-end. Available borrowing capacity is reported inconsistently as $3,800 in a note and $3,500 in MD&A.
Material changes and operating drivers
- Third-quarter revenue fell 14% year over year, primarily because E&I revenue declined $2,066 as AETI exited water and wastewater construction. Gross profit declined $494.
- Nine-month revenue rose 5%, led by TP&S, up $7,466 (38%), with higher oil and gas demand. E&I revenue fell $4,737 and AAT revenue fell $900.
- TP&S nine-month gross profit increased to $4,464 from $2,830. In contrast, AAT’s nine-month gross profit fell by $650, associated largely with reduced demand for a product after a customer sourced it outside the U.S. AAT reported a third-quarter operating loss of $227.
- Nine-month joint-venture equity income increased by $1,364, primarily reflecting stronger BOMAY results. Joint ventures contributed $2,325 of net equity income, a substantial component of reported earnings.
- Management cited lower general and administrative costs and reduced research and development spending following substantial completion of ISIS solar-inverter development. The nine-month results include a $212 water/wastewater-related charge identified by management as non-recurring.
Outlook, financing, and risks
- Management said existing cash, working capital, unused credit capacity, and operating earnings should meet working-capital needs for the next 12 months, while noting it may raise debt or equity to fund growth opportunities.
- Backlog was reported at $22.0 million at September 30, 2012, with approximately 50% expected to convert to revenue during the rest of fiscal 2012. TP&S backlog was $19.6 million. The filing says total backlog compares with $21.2 million “at December 31, 2012,” a date after the reporting period; verify this apparent date error.
- The $10 million revolving facility was amended in August 2012, extending maturity to July 1, 2014 and revising financial covenants. It is secured by specified real estate, receivables, equipment, inventory and work-in-process; the agreement restricts dividends without bank consent.
- In May 2012, AETI issued $5 million of Series A preferred stock and warrants. The preferred stock accrues cumulative dividends at 6% and may become redeemable after a defined material default or after April 30, 2017, subject to agreement terms. The financing reduced revolving-credit borrowings by $3.5 million.
- Management described energy-market demand as favorable, but industrial markets as weak. Risks discussed include cyclical, capital-intensive markets; commodity-price changes; foreign-currency translation; customer collections and inventory estimates; and reliance on joint-venture earnings. AETI reported no material change to the risk factors in its 2011 Form 10-K, no material impact expected from ordinary-course legal proceedings, and effective disclosure controls as of September 30, 2012.
Important facts for investors to verify
- Confirm the correct issuer: the supplied filing is AETI’s, not Stabilis Solutions, Inc.’s.
- Resolve the backlog comparison’s stated December 31, 2012 date and the inconsistent reported unused credit capacity ($3.8 million versus $3.5 million).
- Assess how much earnings and cash generation depend on foreign joint ventures, especially BOMAY, and the timing and availability of distributions.
- Review the preferred-stock redemption, dividend, and conversion terms and their potential effects on liquidity and common-stock dilution.
- Monitor execution of the water/wastewater exit, AAT demand and cost containment, backlog conversion, and the revolving facility’s financial covenants.