Business context and reporting period
This is American Electric Technologies, Inc. (AETI), Form 10-K for the fiscal year ended December 31, 2015, filed March 30, 2016—not a Stabilis Solutions filing. The filing reports a full fiscal year, with separate quarterly results. AETI supplies custom power distribution, conversion, control and electrical construction solutions to energy and industrial markets. In 2015 it reported continuing operations as one segment; its supplemental market-sector disclosures show oil and gas, power generation and distribution, and marine and other industrial.
Financial performance and position
Amounts below are U.S. dollars; annual financial statement figures are in millions unless noted.
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $49.083 | $57.254 |
| Gross profit / margin | $6.590 / 13% | $4.995 / 9% |
| Operating loss | $(2.341) | $(3.895) |
| Continuing-operations net loss, before preferred dividends | $(2.593) | $(2.054) |
| Continuing-operations loss attributable to common stockholders | $(2.942) | $(2.399) |
| Operating cash flow | $2.367 | $(2.209) |
| Cash and cash equivalents at year-end | $7.989 | $3.550 |
| Total debt | $5.543 | $4.000 |
Revenue fell 14%, while gross profit rose 32% and gross margin improved four percentage points. The filing attributes improved margins mainly to better project execution after 2014 cost overruns and delays. Cash from operations improved chiefly through lower receivables and inventory. Working capital was $10.945 million and the current ratio was 2.3:1 at year-end, compared with $11.348 million and 2.1:1 in 2014. Total assets were $38.586 million and stockholders’ equity was $18.333 million. The company also had $4.329 million of redeemable convertible preferred stock outstanding.
By market sector, oil and gas revenue was $39.876 million (81% of total), power generation and distribution $3.704 million, and marine and other industrial $5.503 million. Backlog was $19.03 million, down from $26.50 million. In the fourth quarter alone, revenue was $7.690 million, gross loss was $0.298 million and net loss was $3.618 million; the filing does not clearly break out the drivers of that quarterly net loss.
Material changes versus the prior comparable period
- Lower oil prices, project cancellations and postponements contributed to the annual revenue decline. Oil and gas represented 81% of 2015 sales versus 72% in 2014.
- Backlog declined about 28%; management cited cancellations and delayed industry orders, although it said fourth-quarter orders lifted backlog significantly from the third-quarter level.
- Net equity income from foreign joint ventures fell to $0.348 million from $1.672 million, primarily because of weaker demand in China and Southeast Asia. BOMAY’s contribution declined; MIEFE moved from income to loss.
- Investing activities provided $0.796 million versus using $2.039 million in 2014, partly reflecting lower capital spending after the Beaumont facility expansion. The sale of held-for-sale assets generated $0.723 million in 2015; the AAT real estate sale completed in December.
- The company entered a new Frost Bank loan agreement in December 2015, refinancing prior debt and increasing year-end borrowings.
Outlook, risks and other notable items
For 2016, management expected traditional upstream and midstream markets to remain weak, while pursuing downstream opportunities such as storage terminals, LNG, refineries and petrochemical facilities, as well as power generation and distribution and the IntelliSafe arc-resistant switchgear product. It expected international markets to remain approximately flat with 2015. Management cited $19.03 million of opening backlog and said it would continue adjusting costs to conditions; it also noted that additional debt or equity financing could be considered depending on cash needs. No quantified revenue or earnings guidance was provided.
- The Frost facilities carry LIBOR plus 2.75% interest and are secured by assets and future joint-venture distributions. The company had $2.54 million of additional borrowing capacity at year-end, subject to a borrowing base. Covenants include a minimum 1.25:1 fixed-charge coverage ratio and a maximum 1.25 liabilities-to-net-worth ratio.
- Key business risks include oil and gas cyclicality, customer project cancellation, fixed-price contract cost overruns, percentage-of-completion estimates, competition, raw-material prices, skilled labor availability and international, currency and political risks.
- The 40%-owned China joint venture BOMAY faces market and government-related risks; its audit work was performed in China by a firm not registered with the PCAOB, and U.S. regulators may be unable to inspect the underlying work papers.
- AETI fully reserved the remaining $0.87 million note receivable from its exited Brazilian joint venture because collection was uncertain. It also had $1.25 million of secured performance letters of credit outstanding.
- Series A preferred stock accrues cumulative dividends at 6% annually and may become redeemable after April 30, 2017 or following a defined material default. Common-stock cash dividends were not paid and are prohibited under the bank agreement.
- The 2015 tax provision was $0.428 million, while deferred tax assets remained subject to a valuation allowance due to uncertainty of realization. The company reported no material legal proceedings expected to affect its financial position or results.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for American Electric Technologies, Inc. (AETI), not Stabilis Solutions, Inc.
- Review the fourth-quarter gross loss and $3.618 million net loss, including the detailed financial statement notes for unusual charges, estimates or project losses.
- Assess backlog conversion, cancellations, new orders and exposure to continued oil-price weakness; backlog is not a GAAP measure and may not be realized.
- Check covenant compliance, borrowing-base availability, debt maturities and liquidity needs, particularly if operating cash flow weakens.
- Evaluate the recoverability and cash-distribution potential of the BOMAY and MIEFE investments, including China audit-access limitations and currency translation effects.
- Review preferred-stock dividend accumulation and redemption provisions, the valuation allowance on deferred tax assets, and the fully reserved Brazilian joint-venture note.