Fuel Tech, Inc. Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech develops technologies for air pollution control, process optimization, water treatment, and engineering services. Reported segments are Air Pollution Control (APC) and FUEL CHEM. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $8.017 million | $7.559 million | $19.920 million | $17.810 million |
| Operating income (loss) | $0.192 million | $0.578 million | $(1.277) million | $(1.268) million |
| Net income (loss) | $0.314 million | $0.678 million | $(1.040) million | $0.298 million |
| Basic EPS | $0.01 | $0.02 | $(0.03) | $0.01 |
| Gross margin | 46% | 49% | 43% | 49% |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $(2.591) million | $0.572 million |
Q3 revenue increased 6%, while nine-month revenue increased 12%. Q3 operating income and net income declined despite higher revenue, primarily because of lower gross margin and higher SG&A. Nine-month results remained loss-making and were affected by the absence of the prior-year PPP loan-forgiveness benefit.
- APC: Q3 revenue increased 40% to $2.728 million; nine-month revenue doubled to $7.670 million. Q3 gross margin was 34%, compared with 42% in the prior-year quarter, mainly due to product and project mix.
- FUEL CHEM: Q3 revenue decreased 6% to $5.289 million; nine-month revenue decreased 12% to $12.250 million. Q3 gross margin was 52%, while nine-month gross margin declined to 49% from 50%.
- Expenses: Q3 SG&A rose 17% to $3.273 million, primarily due to employee compensation and benefits and outside services. Nine-month SG&A increased 4% to $9.201 million. R&D declined to $0.207 million in Q3 and $0.716 million for nine months.
- Liquidity: September 30 cash and cash equivalents were $24.082 million, compared with $35.893 million at December 31, 2021. Working capital was $29.922 million. The company also held $9.808 million of held-to-maturity debt securities at amortized cost.
- Debt and credit support: The company reported no outstanding debt other than standby letters of credit. Letters of credit totaled approximately $0.727 million and were collateralized by $1.090 million of investments. The collateral agreement has no financial covenants.
- Balance sheet: Total assets were $49.682 million and total liabilities were $4.850 million at September 30, 2022. Stockholders’ equity was $44.832 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by APC project execution and new orders, partially offset by lower FUEL CHEM demand.
- FUEL CHEM experienced customer loss from a permanent plant retirement, lower dispatch and demand, plant outages, and operating and maintenance scheduling effects.
- Consolidated gross margin fell six percentage points for the nine-month period, reflecting supply-chain costs, freight and labor costs, and product mix.
- Accounts receivable increased to $6.658 million from $3.259 million at year-end 2021, contributing to negative operating cash flow.
- Investing cash outflows increased to $9.963 million, primarily because the company purchased debt securities. Financing cash flow was nearly neutral in 2022 versus $23.977 million of inflow in 2021 from a private placement.
- Other income was $0.158 million for the nine-month period, versus $1.586 million in 2021, when the company recognized approximately $1.566 million from PPP loan forgiveness, including accrued interest.
- Accumulated other comprehensive loss increased to $2.051 million, primarily from foreign-currency translation losses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that cost-control efforts are expected to maintain existing operating-expenditure levels and that diminishing pandemic effects could improve the market outlook. Management expects a consolidated effective tax rate of approximately 0% for 2022 and believes current cash and expected operating cash flows are sufficient to fund planned operations for the next 12 months.
APC backlog was $8.763 million at September 30, 2022, including $7.016 million of U.S. projects and $1.747 million of international projects. Management reported a global sales pipeline of approximately $50 million to $75 million. Approximately $8.406 million of APC remaining performance obligations were expected to be recognized over the following 12 months.
- COVID-19-related supply-chain disruption, travel restrictions, customer financial distress, and project delays or cancellations remain risks.
- The Russia-Ukraine conflict, sanctions, inflation, and higher shipping, raw material, energy, and labor costs may affect demand, project execution, and margins.
- Long-term demand is affected by the substitution of gas-fired and renewable plants for coal-fired installations.
- The company continues to wind down its APC operations in China. Remaining China APC backlog was approximately $5 thousand; China generated a nine-month net loss of $0.193 million and had net assets of $0.844 million at September 30, 2022.
- The company is exposed to foreign-currency fluctuations and does not use foreign-currency hedging contracts.
- Management reported no pending loss contingencies expected to have a material impact. The warranty liability was $0.159 million and unchanged during the first nine months.
- In October 2022, after the reporting date, the company finalized a supplier settlement related to an equipment component failure. The settlement, consisting of cash, invoice forgiveness, and future purchase credits, totaled approximately $0.245 million and was expected to be recorded in the fourth quarter of 2022.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether APC backlog converts to revenue as expected and whether the reported $50 million to $75 million pipeline produces new orders.
- Whether FUEL CHEM revenue stabilizes after customer retirement, lower demand, and plant-outage impacts.
- Whether gross margins recover from the nine-month 43% level amid supply-chain, freight, labor, and product-mix pressures.
- Accounts receivable collection timing and the company’s ability to reverse negative operating cash flow.
- The liquidity impact of investing approximately $9.8 million in held-to-maturity securities and the $1.09 million collateral requirement for letters of credit.
- The effect of the China wind-down, COVID-19 and geopolitical risks, inflation, and foreign-currency movements on future results.
- The accounting and cash-flow timing of the approximately $0.245 million supplier settlement in the fourth quarter of 2022.