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Summary

  • Aspen Aerogels witnessed a very difficult public offering.
  • Growth is solid, yet gross margins are very poor resulting in operating losses.
  • Continued capital expenditure requirements and leverage create real financial risks.

Aspen Aerogels (NYSE:ASPN) is an energy technology company which develops and manufactures high-performance aerogel insulation, primarily used in large-scale energy infrastructure facilities.

The company is growing at a solid pace yet the poor gross margins and difficult financial position of the firm are real concerns. I will keep the company on my radar for the future, keeping a close eye on gross margin developments.

The Public Offering

Aspen's aerogel blankets deliver great thermal performance compared to other insulation products available. Its blankets provide 2 to 5 times the thermal performance of traditional thin blankets. As such Aspen's solutions save money for clients, reduce energy consumption while being able to better protect assets and workers.

The company's principal Pyrogel and Cryogel products are used by oil producers, refineries and petrochemical companies. These products are used to maintain cold and hot pipes at optimal temperatures, mitigating operational costs as well as risks. The Freedonia Report estimates that the worldwide energy infrastructure insulation market is expected to grow from $2.8 billion in 2013 to $3.5 billion by 2018.

Aspen Aerogels sold 7.5 million shares for $11 apiece, thereby raising $82.5 million in gross proceeds. Some 6.67 million shares were offered by the company which thereby raised $73.4 million while selling shareholders offered 666,667 shares.

The company priced the offering far below the midpoint of the preliminary offering range of $14 to $16 per share set by the firm and its bankers. Shares of the company fell by another 2.3% on their opening day to $10.75 per share. At these levels, the company is valued at roughly $221 million.

The major banks that brought the company public were Barclays, JPMorgan, Citigroup, Baird and Canaccord Genuity.

Valuation

The company introduced its two main products back in 2008. The compelling value, notably in insulation performance, dense design and strong safety results, have driven adoption of these products.

In March of 2011, Aspen opened its second production facility pushing capacity to 40-44 million square feet of aerogel blankets. Given the shipments of 8.8 million square feet in the first quarter, Aspen has a utilization rate of nearly 84% on an annualized basis.

For the year of 2013, Aspen Aerogels posted $86.1 million in revenues which was up 35.7% compared to a year earlier. The company posted losses of $47.6 million for the year which compares to a $56.1 million loss the year before.

High interest costs of $30.6 million were part of the problems, yet poor gross margins are the main cause of the troubled results. Gross margins were just 12.5% compared to negative margins of 12.6% the year before.

For the first quarter of 2014, Aspen posted a 31.5% increase in revenues toward $22.4 million. Gross margins improved to 15.0%, but remain very low. As a result operating losses came in at $2.9 million which combined with a huge $16.2 million interest bill explained a large loss.

Following the public offering, Aspen will be debt-free, alleviating the firm of large interest expenses. The company will operate with roughly $65 million net of cash.

Given the current market capitalization of roughly $220 million, operating assets are valued around $155 million. This values the company at 1.8 times annual revenues. Note that Aspen aims to use $30 million of offering proceeds to fund the construction of its third production line, and it will use another $20 million to repay indebtedness. These moves will impact the cash balances in a huge way.

Investment Thesis

As noted above, the public offering of Aspen Aerogels has been a huge disappointment. Shares were offered 26.7% below the midpoint of the preliminary offering range and have lost further ground ever since.

While Aspen's products are nice and revenues are growing at solid rates, gross margins remain very poor. Gross margins came in at a paltry 15% in the first quarter, after being negative in previous years. It is uncertain how much manufacturing and sourcing efficiencies can push margins upward.

As a result, Aspen is losing about $3-$4 million per quarter on revenues in the low twenty millions. The public offering eliminated the company's debt, which thereby is able to forfeit on large interest payments. On the other hand, the public offering proceeds will largely be used to extend its current production facility and repay debt, leaving relatively small cash balances after making these investments.

As such financial risks are very real, as are the risks of customer concentration, the reliance upon a single manufacturing facility and cyclical end markets as the company derives 87% of sales from the energy market.

I must say that I like the company and the products, yet financial concerns will remain unless margins can be increased significantly while the company faces high capital expenditure requirements. I remain on the sidelines, but will keep the company on my investment radar.

Source: Aspen Aerogels: Severe Margin And Financial Worries Surround This Recent IPO