Aspen Aerogels, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with the three months ended March 31, 2015. Amounts are in U.S. dollars unless noted.
Business context
Aspen designs and manufactures aerogel insulation and provides contract research services. Product sales represented 98% of Q1 2016 revenue. The company operates one reportable segment and manufactures at its East Providence, Rhode Island facility. It reported annual nameplate capacity of 50–55 million square feet following the 2015 addition of a third production line.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $32.8 million | $23.5 million | Up 40% |
| Product revenue | $32.3 million | $23.2 million | Up 39% |
| Gross profit / margin | $6.5 million / 20% | $4.5 million / 19% | Up 45%; margin up 1 percentage point |
| Operating loss | $1.8 million | $2.7 million | Loss narrowed |
| Net loss | $1.8 million | $2.8 million | Loss narrowed |
| Diluted net loss per share | $0.08 | $0.12 | Improved |
| Adjusted EBITDA, non-GAAP | $2.0 million | $0.7 million | Improved |
| Operating cash flow | Used $0.2 million | Used $3.7 million | Use declined |
| Capital expenditures | $3.1 million | $10.5 million | Lower |
Product shipments rose 35% to 11.8 million square feet. Average selling price increased 3.4% to $2.73 per square foot. Revenue growth reflected greater sales in Asian petrochemicals, subsea projects, and European building and construction; management cited $6.7 million from one Asian petrochemical project and $2.1 million from a Gulf of Mexico subsea project. Gross margin benefited from volume and price, offset by unfavorable product mix, lower yields, and higher manufacturing expense.
Financial position and liquidity
- Cash and cash equivalents were $29.4 million at March 31, 2016, down from $32.8 million at December 31, 2015. Total assets were $139.0 million and stockholders’ equity was $122.0 million.
- Debt was limited to approximately $0.1 million of capital lease obligations; there were no borrowings on the revolving credit facility. The company had $2.7 million of outstanding letters of credit.
- The $20 million revolving facility, subject to borrowing-base limits, had $13.0 million effectively available after letters of credit. It expired August 31, 2016; the company was considering extension, amendment, or refinancing. The company reported covenant compliance at quarter-end.
- Management said cash and available credit would fund only a portion of the planned second facility and anticipated supplementing them with operating cash flow, grants, debt financing, and potentially equity financing.
Outlook, commentary, and risks
- Management forecast a 5%–10% cumulative decline in product revenue during the remaining three quarters of 2016, citing weaker subsea demand amid the prolonged decline in oil prices. Full-year 2016 revenue guidance was $117 million–$125 million.
- Management expected gross profit and margin to improve over the rest of 2016 through better manufacturing productivity and yields, more favorable product mix, and the continued effect of price increases. These expectations are uncertain; first-quarter yields declined and product mix was unfavorable.
- Aspen planned a second manufacturing facility in Statesboro, Georgia, with a stated $70 million investment and 106 full-time jobs. First-quarter capital spending included $3.1 million for facility design and pre-construction and East Providence equipment. The company expected significant capital expenditures through 2020.
- Georgia incentives include potential repayment obligations if the company fails to meet at least 80% of investment and job targets within the specified period and maintain that achievement for 84 months.
- On May 5, 2016, after quarter-end, Aspen filed an ITC patent-infringement complaint against two China-based companies seeking exclusion orders. The company warned litigation could be protracted and costly; it reported no litigation loss considered probable and requiring accrual.
- Other risks include dependence on demand and product mix in energy markets, execution and funding of manufacturing expansion, production yields and costs, possible refinancing needs, and increased patent-enforcement legal expense. Management reported no material change to the risk factors in its 2015 Form 10-K.
Most important facts for investors to verify
- Whether subsequent quarters support the $117 million–$125 million 2016 revenue outlook and the anticipated subsea-related decline.
- Actual gross-margin, manufacturing-yield, and product-mix trends versus management’s improvement expectations.
- Funding, cost, schedule, and incentive conditions for the Statesboro facility, including the planned $70 million investment.
- Outcome of the August 2016 credit-facility expiry and availability of liquidity for expansion plans.
- Costs and developments in the ITC patent case and any effect on expenses or commercial operations.