Business context and reporting period
Aspen Aerogels, Inc. designs and manufactures aerogel insulation, primarily for energy infrastructure and building materials, and also earns revenue from research contracts. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $27.2m | $29.6m | $75.3m | $90.1m |
| Gross profit / margin | $4.9m / 18% | $6.4m / 22% | $10.9m / 14% | $19.6m / 22% |
| Operating loss | $3.0m | $2.4m | $17.5m | $5.5m |
| Net loss | $3.1m | $3.1m | $17.6m | $6.3m |
| Adjusted EBITDA (non-GAAP) | $1.1m | $1.5m | $(5.5)m | $6.1m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(5.0)m | $(1.4)m |
For the nine months, capital expenditures were $5.4m and cash declined $10.8m to $7.3m from $18.1m at December 31, 2016. At September 30, the company had no revolving-credit borrowings and less than $0.1m of capital lease obligations. Its $20m revolving facility had $11.3m of effective availability after $2.4m of letters of credit, subject to borrowing-base limits and covenants; maturity was January 28, 2018. The company reported covenant compliance and intended to extend or replace the facility before maturity.
Material changes versus prior periods
- Nine-month revenue fell 16%, with product revenue down 17%; product shipments declined 24%. The end of a multiyear Asian petrochemical project and weak energy-market activity were key drivers. In Q3, shipments fell 27%, while higher average selling prices partly offset lower volume: ASP rose 27% to $3.10 per square foot. For the nine months, ASP rose 10% to $2.88.
- Nine-month gross margin contracted to 14% from 22%, as lower volume and product mix, combined with largely fixed manufacturing costs, reduced operating leverage.
- Operating expenses rose 13% for the nine months, including a 17% increase in general and administrative expense, primarily reflecting higher patent-enforcement and compensation costs. Q3 G&A declined as patent-enforcement costs eased.
- Warranty expense was $0.9m for the nine months versus $0.5m in 2016, relating to claims on two product-application issues described as outside typical experience.
Outlook, risks and unusual items
- Management expected 2017 revenue to decline, net loss and loss per share to increase, and Adjusted EBITDA to decline versus 2016. It expected constrained capital investment and low global energy-market activity, particularly downstream, to continue into 2018. No specific numerical guidance was provided.
- The planned Statesboro, Georgia manufacturing facility and related financing were delayed to align capacity with expected demand. The conditional $22m BASF prepayment has not commenced because preconditions remain unmet, including a third-party debt commitment of at least $30m. The company said it would manage capital spending and working capital.
- Management cautioned that fixed manufacturing costs and planned lower output could make percentage declines in profit and Adjusted EBITDA greater than the revenue decline. It also expected 2017 R&D, sales and marketing, and G&A expenses as a share of revenue to rise.
- In July 2017, Aspen launched Pyrogel HPS, designed for service temperatures up to 650°C (1,200°F); the filing highlights new-product development, customer acceptance, manufacturing yields and competitive pricing as risks.
- In its patent case before the ITC, an administrative law judge issued an initial determination finding infringement and recommending a limited exclusion order. Respondents sought review; the full Commission’s final determination was expected by January 29, 2018. Related U.S. and European proceedings may be prolonged and costly. The company reported no litigation loss probable requiring accrual.
- The company adopted the stock-compensation forfeiture accounting change, recording a $0.3m cumulative-effect adjustment to equity. It expected to adopt the new revenue standard on January 1, 2018; its impact was still under review.
- Management concluded disclosure controls were effective as of September 30, 2017, with no material change in internal control over financial reporting during the nine months.
Important facts for investors to verify
- Whether revenue and shipment trends stabilize after the major Asian project ended, and whether higher selling prices can offset lower volumes and product-mix pressures.
- Cash burn, capital spending and liquidity needs; the status and terms of extending or replacing the revolving facility before its January 2018 maturity.
- Timing and financing conditions for Statesboro construction, including whether BASF’s conditional prepayments become available.
- Progress on margin recovery, product launches and warranty claims, and the potential cost and outcome of ongoing patent litigation.
- Actual full-year results against management’s qualitative 2017 outlook; the filing provides no numerical forecast.