During 2008, Energy Composites enjoyed a beneficiary relationship with Fiberglass Piping & Fitting Company (FPF), a piping distribution company owned by Energy Composites’ prime shareholder, and M&W Fiberglass, LLC (M&W), a predecessor company to Advanced Fiberglass Technologies, Inc. (AFT). Both M&W and FPF were considered variable interest entities throughout 2008, thus requiring that Energy Composites report financial performance on a consolidated basis for 2008. On December 30, 2008, the company terminated that beneficial relationship with both entities.
The increase in revenues quarter over quarter was attributable to continuing volume improvements in and strengthening of in-plant production for Energy Composites’ core markets (flue-gas desulfurization, chemical storage, water handling and bio-fuels). Energy Composites experiences softer seasonal field service revenues in the first quarter of each year since most plant outages for the company’s core market customers occur during the spring, summer and fall. In interpreting financial results, the company uses EBITDA as the most meaningful measurement of performance because of the substantial effect of non-cash charges to the income statement due to the method of accounting for convertible debt. The increase in current quarter EBITDA loss is largely driven by the continued investment the company is making in growth, including investments in selling, estimating, designing and contract management infrastructure.
Sam Fairchild, Energy Composites’ chief executive officer, said, “Our expansion and diversification strategy continues apace, with solid core market results in spite of economy-wide weaknesses. We are investing in our WindFiber™ strategy, and have announced our plans to construct a 350,000 square foot wind blade production plant in Wisconsin Rapids over the next twelve months. We are also investing in a stronger sales and marketing platform as well as more solid in-house capability to prepare bids, design composite solutions, engineer product outcomes and manage contract execution. Upgrading these capabilities has been a priority over the quarter, and we have made great progress against our internal targets.”
Fairchild added, “We are confident that making these platform investments now will pay shareholders substantial dividends throughout the rest of 2009 and during 2010. We are bullish on the 2010 and beyond wind market, as well as demand for cost-effective replacements for wastewater infrastructure. Flue gas desulfurization infrastructure demand is driven by strict regulatory requirements, and we are now seeing a new uptick in activity in petrochemical, mining, biofuels and methane digestors. The rest of 2009 and all of 2010 appear to be very favorable for the value proposition we offer customers in each of our market sectors.”
“We are pleased with our progress on internal efficiency and production excellence over the quarter,” Jamie Mancl, Energy Composites’ founder and president, added. “ECC is really turning out superior composite structures. Our recent completion of a large chlor-alkali tank contract allowed us to put some new production concepts into place, as well as put our new home-built vertical winder through its paces. Our Employee-Associates really came through, and many of these new production concepts will help to drive value in the quarters to come.”
Mancl said, “We have also put a huge amount of effort into the launch of our WindFiber™ strategy, and we are very excited about the materials, production, design and logistics innovations we will bring to the wind energy market.”
The rest of the 2008 operational loss was driven by Energy Composites’ investment in the selling and corporate overhead required facilitating and managing its growth plan. Selling, general and administrative expenses (SGA) increased from 33% of revenue in the first quarter of 2008 to 37% in the first quarter of 2009. Much of this increase came from increased headcount in Energy Composites’ sales and marketing force and the administrative resources to support the sales effort. Most of the remainder of the SGA increase relates to increased corporate headcount and associated expenses to accommodate the requirements associated with being a public company.
Jeff Keuntjes, Energy Composites’ vice president, finance, stated “Our operating results are within our operating plan’s expected range, but our loss from operations is three percentage points higher than I expected. We believe that we will enjoy substantial improvement in manufacturing overhead as a percentage of revenues as production volumes increase over 2009. I also expect that new production efficiencies we have been developing over the last several months will also drive additional EBITDA during 2009.”
Energy Composites recorded non-cash amortization of debt discounts for warrants and beneficial conversion feature related to the convertible debt, its primary source of capital in 2008, of $1 million in the quarter. In addition, the company recorded a net income tax benefit of $0.6 million for the first quarter of 2009, resulting in a net loss of $0.9 million for the first quarter of 2009 compared to a net loss of $0.2 million for the first quarter of 2008.
Sam Fairchild stated, “We are on schedule to deliver a high level of shareholder return for 2009, 2010 and beyond. Our strategic platform investments, coupled with our market positioning and our progress on innovations will begin to drive substantial value as the economy strengthens and the wind energy market returns to its previous growth pace. ECC’s Employee-Associates have been at the core of this progress, and Jamie and Jennifer Mancl join me in thanking them for their continued belief in our model and in what we are trying to accomplish. Our future ability to deliver value will also depend in part on the continuing strength of our relationship with the City of Wisconsin Rapids, Wisconsin, the State of Wisconsin, and our many local partners.”
