Fuel Tech, Inc. — 2022 Q1 Form 10-Q Summary
Business context and reporting period
Fuel Tech develops technologies for air pollution control, process optimization, water treatment, and advanced engineering services. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
The company operates through Air Pollution Control (APC) and FUEL CHEM technology segments. It continues to wind down its APC operations in China and invest in water-treatment technologies, including DGI Dissolved Gas Infusion Systems.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $5.535 million | $5.033 million | Up 10% |
| Gross profit | $2.290 million | $2.358 million | Down 3% |
| Gross margin | 41% | 47% | Down 6 percentage points |
| Operating loss | $0.984 million | $1.157 million | Improved $0.173 million |
| Net loss | $0.998 million | Net income of $0.398 million | Declined $1.396 million |
| Basic and diluted EPS | $(0.03) | $0.01 | Declined |
| Cash used in operations | $1.746 million | $0.225 million | Higher use of $1.521 million |
Reported operating margin was approximately negative 18% and net margin was approximately negative 18% in Q1 2022. SG&A declined to $3.054 million from $3.100 million, while research and development expense declined to $0.220 million from $0.415 million.
At March 31, 2022, cash and cash equivalents were $34.174 million and total cash, cash equivalents, and restricted cash were $35.240 million. Working capital was $37.474 million. Total assets were $49.621 million and total liabilities were $4.488 million.
The company reported no outstanding debt other than standby letters of credit. Approximately $1.015 million of letters of credit were outstanding under a cash-collateral arrangement, supported by $1.066 million of restricted cash. Management stated that the arrangement has no financial covenants.
Material changes versus the prior comparable period
- APC revenue increased 143% to $2.204 million from $0.907 million, primarily due to project execution and new orders awarded during 2021 and Q1 2022.
- FUEL CHEM revenue decreased 19% to $3.331 million from $4.126 million, reflecting lower power-generation demand, the permanent retirement of one customer plant, and reduced demand related to customer operating schedules.
- APC gross margin declined to 35% from 41%, primarily due to product mix. FUEL CHEM gross margin declined to 45% from 48% because of lower volume and higher material, freight, and labor costs.
- Net results worsened primarily because Q1 2021 included $1.556 million of other income from forgiveness of the Paycheck Protection Program loan, plus related accrued-interest income. No comparable benefit occurred in Q1 2022.
- Operating cash use increased largely because accounts receivable increased by $1.520 million. Accounts payable increased cash flow by $0.682 million.
- Foreign revenue increased to $1.847 million from $0.570 million, driven principally by Asia, while U.S. revenue decreased to $3.688 million from $4.463 million.
- APC backlog was $9.552 million at March 31, 2022, up from $9.119 million at December 31, 2021. Approximately $7.403 million was expected to be recognized over the following 12 months.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that cost-control efforts are expected to maintain existing operating-expense levels and that diminishing pandemic effects could improve the market outlook. Management believes current cash and expected operating cash flows are adequate to fund planned operations for the next 12 months. The company expects additional 2022 maintenance capital expenditures to be funded from cash on hand or operations.
Management projected a consolidated effective tax rate of approximately 0% for 2022 because of a full valuation allowance on U.S., China, and Italy deferred tax assets. No income tax expense was recorded in either comparable quarter.
COVID-19 effects, customer and supplier financial distress, project delays or cancellations, supply-chain disruptions, inflation in materials and energy, and the Russia-Ukraine conflict may adversely affect demand, project execution, costs, and raw-material availability. Foreign-currency fluctuations also affect earnings and cash flow; the company does not use currency derivatives because the exposure is considered immaterial.
The company reported no pending loss contingencies believed probable or reasonably possible to have a material effect, and no litigation expected to materially affect the business. The product-warranty liability was $0.159 million and was unchanged during the quarter. The risk factors disclosed in the 2021 Form 10-K were not materially changed.
On April 6, 2022, the company entered into performance-based RSU agreements for certain executives. Awards require 2022 operating income of at least $1 million; no related expense was recorded because achievement was not considered probable.
Management concluded that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether APC backlog converts to revenue as expected and whether the global sales pipeline of approximately $50 million to $75 million produces new orders.
- Whether FUEL CHEM demand stabilizes after the customer plant retirement and scheduling-related declines.
- The sustainability of cash resources given the Q1 operating cash outflow and continuing net losses.
- Accounts receivable collection, including the increase in unbilled APC receivables to $2.222 million.
- Potential effects of COVID-19, geopolitical developments, supply-chain costs, and energy-market changes on projects and margins.
- Progress and remaining costs associated with the China APC wind-down.
- Whether the company achieves the $1 million 2022 operating-income threshold for performance-based executive RSUs.
- The collateral requirements and maturity dates of the approximately $1.015 million in outstanding standby letters of credit.