Aspen Aerogels, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Aspen designs and manufactures aerogel insulation for energy infrastructure and building-material markets, and performs contract research. It operates as one reportable segment. At June 30, 2019, annual manufacturing capacity was approximately 55 million square feet; the company is targeting approximately 60 million square feet by the end of 2020.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $29.5 | $21.7 | $57.4 | $44.7 |
| Gross profit | $3.5 | $2.7 | $7.2 | $5.6 |
| Gross margin | 11.9% | 12.7% | 12.6% | 12.4% |
| Operating loss | $(5.2) | $(6.9) | $(11.2) | $(13.6) |
| Net loss | $(5.3) | $(7.0) | $(11.3) | $(13.8) |
| Net loss per share | $(0.22) | $(0.29) | $(0.47) | $(0.58) |
| Adjusted EBITDA (non-GAAP) | $(1.7) | $(3.2) | $(4.2) | $(5.6) |
- Q2 revenue rose 36%; product revenue increased 37%. Product shipments grew 18% to 8.4 million square feet, and average selling price rose 16% to $3.43 per square foot.
- For the first half, revenue rose 28%, shipments increased 15% to 17.1 million square feet, and average selling price rose 11% to $3.26 per square foot.
- At June 30, cash and cash equivalents were $3.3 million, versus $3.3 million at year-end 2018. Current assets were $39.9 million and current liabilities $24.9 million. The company used $1.9 million in operating cash and $1.3 million in capital expenditures during the first half.
- Revolver borrowings were $2.9 million; $0.6 million of letters of credit were also outstanding. Reported remaining availability was $6.4 million, subject to borrowing-base and covenant requirements. The facility matures April 28, 2020.
- Total liabilities were $41.4 million. These include $9.8 million of BASF prepayment liability, in addition to $5.8 million of operating lease liabilities. The BASF prepayments are customer funding with contractual credit/repayment provisions, not revolving-credit borrowings.
Changes versus comparable periods
- Revenue growth reflected higher subsea project work, U.S. petrochemical and refinery demand, and early-2019 price increases; lower shipments in building materials and certain Asian markets partly offset growth.
- Q2 gross margin declined to 11.9% from 12.7%, mainly due to unfavorable product mix. First-half gross margin improved modestly to 12.6% from 12.4%, with fixed manufacturing costs leveraged against higher revenue partly offset by mix.
- Operating and net losses narrowed in both comparisons. First-half operating expenses fell 4%, including lower general and administrative expense, partly offset by higher R&D spending. Adjusted EBITDA remained negative but improved.
- First-half operating cash use decreased to $1.9 million from $6.2 million. Working-capital movements included a $5.8 million inventory increase and a $6.6 million increase in deferred revenue.
Outlook, commentary and risks
- Management projected 2019 revenue growth above 20%, a lower net loss than in 2018, and a return to positive Adjusted EBITDA. It cited expected growth in U.S. petrochemical and refinery markets and project demand, particularly subsea and LNG, as well as price increases. These are forward-looking expectations, not reported results or guarantees.
- Management expected material costs and manufacturing expense to decline as a percentage of revenue, supported by pricing, lower-cost formulations, sourcing improvements, yield gains and fixed-cost leverage. It expected R&D expense to increase in 2019.
- The planned East Providence expansion could require up to an additional $12 million through 2020. Management stated that available cash and credit cover only part of the planned investment and that further operating cash flows, debt, customer prepayments, licensing or equity financing may be needed.
- The company reported compliance with its credit covenants at June 30, 2019, but must extend or replace its revolver before maturity. Low cash, restricted borrowing availability and ongoing losses make liquidity and financing execution important risks.
- BASF has no obligation to purchase under its supply agreement. It had advanced $10 million by June 30, 2019; repayment or credit provisions apply if specified amounts remain uncredited after contractual dates.
- Patent enforcement and validity disputes remain ongoing and could cause significant legal expense; outcomes and costs are difficult to predict. In a separate Brazil collection action, $2.9 million of past-due invoices were at issue and only $0.3 million had been recovered by June 30; further recovery was uncertain. Management reported no litigation loss probable requiring accrual.
- Prior product testing identified a specific attribute outside published specifications. Management assessed a liability as remote at June 30, 2019; no warranty expense was recorded in the first half, and all warranty claims had been satisfied.
- The company adopted lease accounting in 2019, recognizing operating lease right-of-use assets and liabilities; management said adoption did not materially affect net loss or operating cash use. Disclosure controls were reported effective.
- After quarter-end, the CEO’s change-of-control bonus eligibility period was extended through December 31, 2021.
Important facts for investors to verify
- Whether revenue and margin gains persist, especially as subsea/LNG projects and product mix change; compare actual pricing, shipment volume and customer concentration with management’s assumptions.
- Progress, cost and timing of the capacity expansion, and the availability and terms of financing needed to complete it.
- Revolver borrowing availability, covenant compliance and refinancing or extension plans ahead of the April 2020 maturity.
- Collection of the Brazilian receivable and developments, costs and outcomes in the patent proceedings.
- How much BASF prepayment liability is credited through future sales and whether any repayment could become due under the agreement.