Aspen Aerogels, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars. Aspen designs and manufactures aerogel insulation, primarily for energy infrastructure and building materials, and also earns revenue from research services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $29.6m | $31.5m | $90.1m | $85.1m |
| Gross profit (margin) | $6.4m (22%) | $5.2m (16%) | $19.6m (22%) | $14.8m (17%) |
| Operating loss | $(2.4)m | $(2.5)m | $(5.5)m | $(7.9)m |
| Net loss | $(3.1)m | $(2.5)m | $(6.3)m | $(8.1)m |
| Diluted loss per share | $(0.13) | $(0.11) | $(0.27) | $(0.35) |
| Adjusted EBITDA, non-GAAP | $1.5m | $1.7m | $6.1m | $3.7m |
- Q3 revenue fell 6%, as product revenue declined 7%; product shipments nevertheless rose 13% to 11.8 million square feet. Average selling price fell 18% to $2.44 per square foot, reflecting fewer high-priced subsea sales and more project-priced Asian sales.
- For the first nine months, revenue increased 6% and product shipments rose 11% to 33.6 million square feet. Higher volume and research-services revenue more than offset lower average selling prices. International revenue was $61.6m, up from $51.3m; U.S. revenue was $28.5m, down from $33.8m.
- Gross margin improved in both comparison periods, which management attributed principally to better manufacturing productivity and yields and a lower-cost product mix. Q3 operating loss improved modestly, but net loss widened, partly due to a $0.656m charge for postponed financing costs.
Cash, liquidity and investment
- Cash and cash equivalents were $21.1m at September 30, 2016, down from $32.8m at December 31, 2015. Current assets were $55.5m and current liabilities $16.5m.
- Nine-month operating cash use was $1.4m, versus $0.1m in 2015; increased finished-goods inventory was a principal cash use. Inventory rose to $12.9m from $6.5m, including finished goods of $9.0m versus $2.1m.
- Capital expenditures were $10.0m, down from $19.4m in the prior-year period. They included $3.7m for Statesboro facility design and pre-construction and $6.3m for East Providence equipment and efficiency improvements. Cash declined by $11.7m overall during the nine months.
- Debt was limited to approximately $0.1m of capital leases; the company had no revolving-credit borrowings. Its $20m revolving facility had $12.5m available after borrowing-base limits and $2.5m of letters of credit. The facility matured November 29, 2016, and management intended to seek a further extension. The company reported covenant compliance at September 30.
Material developments, outlook and risks
- Plant Two delayed: Management cited energy-market uncertainty and weakness in downstream markets and temporarily delayed the planned Statesboro manufacturing facility and related financing to align capacity with expected 2018–2020 demand. The filing anticipates market weakness continuing into 2017 and says revenue could decline in the near term; it provides no specific numerical earnings or revenue guidance.
- BASF agreement: BASF agreed to a conditional, non-interest-bearing $22m prepayment in eight quarterly installments, subject to product, financing and construction preconditions, including a third-party debt commitment of at least $30m. Because Plant Two was delayed and preconditions remained unmet, the payments were expected to be delayed. BASF has no obligation to buy product; any uncredited balance may become repayable, and the arrangement includes collateral and intellectual-property provisions.
- Customer concentration: In Q3, three customers represented 32%, 13% and 10% of revenue. Two customers accounted for 30% and 15% of receivables at quarter-end. The filing also reports declining subsea and North American and European energy-market sales, partly offset by Asian energy growth.
- Legal and warranty matters: Patent infringement cases involving two China-based companies were ongoing in the U.S. ITC and Germany; patent validity challenges were also pending. The company reported significant related legal-cost increases and warned litigation could be prolonged and costly. A $0.5m warranty expense in the first nine months related principally to unusual claims on a specific project; those outstanding claims had been satisfied, but another customer application issue could still result in a claim.
- Other commitments: The company entered a Northborough headquarters lease for 2017–2026, with first-year base rent of about $0.408m and annual increases of approximately 3%. It also faces potential repayment of certain Georgia incentives if investment and job-creation targets are not met.
- Management said long-term plans anticipate revenue growth, improved gross profit and operating cash flow, alongside substantial capacity-related capital spending through 2020. These expectations are subject to demand, financing, execution and cost risks. No income-tax provision was recorded because deferred tax assets had a full valuation allowance.
Important facts for investors to verify
- Whether the revolving credit facility was extended beyond its November 29, 2016 maturity and on what terms.
- Whether Plant Two financing and construction resumed, and whether BASF’s prepayment conditions were met or payments began.
- Subsequent revenue, pricing, shipment mix and customer concentration, particularly in energy and subsea markets.
- Cash burn, inventory conversion, capital expenditure requirements and availability of funding for planned expansion.
- Developments and costs in the patent litigation, as well as any further warranty claims or BASF-related repayment exposure.