Business context and reporting period
This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparisons to Q1 2012. The filing identifies the registrant as American Electric Technologies, Inc. (AETI), not Stabilis Solutions, Inc.; investors should verify that this is the intended filing. AETI reports Technical Products and Services (TP&S), Electrical and Instrumentation Construction (E&I), and American Access Technologies (AAT). Its business serves energy, power, marine, and industrial markets, and it accounts for interests in joint ventures in China, Singapore, and Brazil using the equity method.
Key financial results
- Revenue: $14.430 million, essentially unchanged from $14.432 million in Q1 2012.
- Gross profit and margin: $2.980 million and 20.7%, versus $1.772 million and 12.3%. Cost of sales fell to $11.450 million from $12.660 million.
- Operating results: Domestic operations income was $602,000, compared with a $199,000 loss. Net equity income from foreign joint ventures was $1.407 million, up from $671,000; combined, domestic operating income and joint-venture equity income were $2.009 million, versus $472,000.
- Net income and EPS: Net income before preferred dividends was $1.738 million, versus $334,000. After $85,000 of preferred dividends, income attributable to common stockholders was $1.653 million, or $0.21 basic and $0.18 diluted per share; Q1 2012 was $334,000, or $0.04 per share.
- Cash flow: Operating activities provided $1.259 million, compared with $729,000 used in Q1 2012. Investing used $277,000 and financing used $256,000. Cash increased $726,000 to $5.203 million.
- Liquidity and debt: Working capital was $12.699 million; the current ratio was 2.1:1, versus 2.2:1 at year-end 2012. Notes payable totaled $514,000, including $500,000 outstanding under a revolving facility, with $8.9 million of additional capacity. Debt was 2% of total capitalization.
- Balance sheet: Total assets were $43.034 million and total liabilities $16.098 million. Investments in foreign joint ventures were $12.913 million.
- Non-GAAP measure: Company-defined EBITDA was $2.195 million, versus $692,000; the filing cautions that EBITDA is not a substitute for GAAP results or cash flow.
Changes versus Q1 2012
- TP&S revenue rose 7% to $10.480 million, and gross profit increased to $1.857 million from $1.369 million.
- E&I revenue fell 16% to $2.528 million, while gross profit rose to $908,000 from $202,000, reflecting a higher-margin project mix and the wind-down of water and wastewater work.
- AAT revenue declined 12% to $1.422 million; gross profit edged up to $215,000 from $201,000. Management cited competitive pricing and foreign competition.
- Operating expenses rose to $2.378 million from $1.971 million. General and administrative expense increased by about $319,000, attributed to stock compensation, bonuses, and salary increases. Research and development increased to $169,000 from $25,000, mainly for drilling-control systems.
- Joint-venture equity income increased, driven by earnings growth in China and Brazil as major projects were completed. Interest expense and other, net, declined to $16,000 from $49,000.
Outlook, risks, and other matters
- Backlog: $28.4 million at March 31, 2013, up from $15.5 million at December 31, 2012. Management expected most of the TP&S and E&I backlog to be recognized as revenue during the remainder of 2013; the filing provides no formal revenue or earnings guidance.
- Management outlook: Management said existing cash, working capital, unused credit capacity, and operating earnings should meet working-capital needs for the next 12 months. It may seek debt or equity financing for growth opportunities. Strategy includes energy-market growth, international expansion, product development, and possible acquisitions.
- Credit facility: The $10 million facility matures July 1, 2014 and is secured by specified real estate, receivables, equipment, inventory, and work in progress. It includes minimum-current-ratio, leverage, and profitability covenants, as well as restrictions on dividends. The filing reports compliance status only indirectly through financial ratios; verify covenant compliance and any subsequent amendments.
- Preferred stock: Series A preferred stock carries cumulative dividends at 6% annually and is convertible into 1 million common shares at $5 per share, subject to adjustments. Warrants cover 325,000 shares at exercise prices of $6 and $7. Redemption rights may apply after a material default or after April 30, 2017, subject to the agreement terms.
- Risks and contingencies: Management highlighted cyclical energy markets, commodity-price exposure (including copper, steel, and aluminum), competition, foreign-joint-venture and currency exposure, and the risk that customer price recovery may not offset input-cost increases. It reported no material change to the risk factors in its 2012 annual report. Routine legal proceedings were not expected to have a material effect; management reported no off-balance-sheet arrangements and no impairment adjustment to joint-venture investments for the period.
- Management concluded disclosure controls were effective as of March 31, 2013 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant and filing match the requested company: this document is for American Electric Technologies, Inc., not Stabilis Solutions, Inc.
- Assess how much earnings depend on equity-method joint-venture income, which contributed $1.407 million in the quarter, and whether those earnings translate into cash available to AETI.
- Check backlog conversion, project margins, and working-capital collection, particularly given the increase in trade receivables to $11.512 million from $9.731 million.
- Review the preferred-stock dividend, conversion, warrant dilution, redemption provisions, and the revolving credit facility’s covenant and maturity terms.
- Compare management’s 12-month liquidity assessment with subsequent cash generation, capital spending, commodity costs, and any financing or acquisition activity.