Stabilis Solutions, Inc. — 2016 Q2 Form 10-Q summary
Issuer identification: The supplied filing is for American Electric Technologies, Inc. (AETI), not Stabilis Solutions, Inc. It covers the quarter and six months ended June 30, 2016. Confirm that this is the intended filing before relying on this summary.
Business context and reporting period
AETI provides power distribution, conversion, automation and control products and related services to energy, power-generation, marine and industrial markets. Its operations include a Brazilian subsidiary and equity-method investments in joint ventures in China and Singapore. The company sold the manufacturing operations of South Coast Electric Systems on June 24, 2016, retaining the entity and its service organization.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $11.44 million | $12.30 million | $19.74 million | $27.61 million |
| Gross profit / margin | $1.23 million / 11% | $2.04 million / 17% | $1.32 million / about 7% | $4.33 million / 16% |
| Operating income (loss) | ($0.37 million) | $0.21 million | ($3.02 million) | $0.48 million |
| Net income (loss) attributable to common stockholders | $0.06 million | $0.46 million | ($2.91 million) | $0.65 million |
| Basic EPS | $0.01 | $0.06 | ($0.35) | $0.08 |
The filing’s six-month MD&A describes gross margin as 6%, while the reported amounts imply approximately 7%; the segment table also reports 7%.
- Six-month operating cash flow was negative $4.22 million, versus positive $2.71 million in 2015. Investing activities provided $0.53 million and financing activities used $0.39 million.
- Cash and cash equivalents fell to $3.96 million from $7.99 million at year-end 2015. Working capital was $8.48 million and the current ratio was 1.8:1, versus $10.95 million and 2.3:1 at year-end.
- Total borrowings were $5.25 million at June 30, down from $5.54 million at December 31. The debt includes $0.90 million outstanding under Facility A and $4.35 million under Facility B. Debt was 21% of total capitalization.
- Net equity income from foreign joint ventures was $0.25 million in Q2 but only $0.003 million for the first half. The Series A preferred stock accrues a 6% annual dividend; common-stock dividends are prohibited under the loan agreement.
Material changes and unusual items
- First-half sales declined 29%, chiefly from lower oil-and-gas activity; gross profit declined 70% amid lower revenue and competitive pricing pressure. Oil-and-gas sales fell from $22.09 million to $10.65 million, partly offset by growth in power-generation sales.
- Q2 oil-and-gas sales also declined, partly offset by $1.20 million of Brazilian oil-and-gas service revenue and higher power-generation product sales.
- Backlog was $11.6 million at June 30, down from $19.6 million at March 31. Management expected the majority to be realized in the remainder of 2016.
- The South Coast Electric Systems asset sale generated a reported $0.18 million gain, including $0.07 million on fixed assets and $0.11 million related to inventory. MD&A also cites a $0.32 million settlement of a claim associated with the 2010 BP Gulf of Mexico oil spill.
- The Singapore joint venture, MIEFE, was inactive and its investment was written down to zero in Q1. The company also accrued approximately $0.27 million of its share of MIEFE losses, reflecting its intention to fund them.
Outlook, risks and contingencies
Management described continued weakness in oil-and-gas markets, delayed or cancelled customer projects and pricing pressure that could further erode margins. It was emphasizing power generation and distribution, refining and petrochemicals, and the IntelliSafe arc-resistant switchgear product line; no quantified revenue or earnings guidance was provided. Management also cited weaker demand in China and Brazil.
A significant financing uncertainty is the bank’s verbal view, communicated by the filing date, that AETI may not meet the free-cash-flow covenant. The company stated that it believed it was compliant with required covenants and was discussing the issue with the bank. The facilities bear interest at LIBOR plus 4.00% according to the debt note; the market-risk discussion gives LIBOR plus 2.75%, an inconsistency to verify. Other identified exposures include cyclical customer demand, copper, steel and aluminum costs, and foreign-currency translation. Management said ordinary-course legal matters were not expected to materially affect results; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether this AETI filing is the intended document for Stabilis Solutions, Inc.
- The bank covenant status, any waiver or amendment, and the company’s borrowing availability and liquidity needs.
- The debt interest-rate spread, given the conflicting 4.00% and 2.75% disclosures.
- The backlog’s conversion, project margins, and the persistence of oil-and-gas weakness and pricing pressure.
- The nature and cash impact of the BP-related settlement, the asset-sale gain, and remaining obligations associated with MIEFE.
- The discrepancy between the six-month gross-margin percentage stated in MD&A and the percentage implied by the financial statements.