Fuel Tech, Inc. — Fiscal 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing was signed March 23, 2016. Although the request references 2015 Q4, this is an annual Form 10-K; fourth-quarter results are included in the annual and unaudited quarterly data.
Business Context
Fuel Tech develops and commercializes technologies for air-pollution control, combustion efficiency, process optimization and boiler treatment. Its principal businesses are Air Pollution Control (APC), FUEL CHEM, and the development-stage Fuel Conversion business based on the CARBONITE technology.
- APC: NOx reduction, SCR/SNCR, low-NOx burners, electrostatic precipitator and flue-gas-conditioning technologies.
- FUEL CHEM: Specialty chemical and TIFI injection programs addressing slagging, fouling, corrosion, opacity and sulfur-trioxide-related issues.
- Fuel Conversion: Research and development of engineered carbon feedstock products; no commercial revenue had been generated.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $73.664 million | $79.017 million | Down 7% |
| Gross profit | $28.557 million | $35.128 million | Down 19% |
| Gross margin | 39% | 44% | Down 5 percentage points |
| Operating loss | $8.257 million | $25.163 million | Improved by $16.906 million |
| Net loss | $12.380 million | $17.725 million | Improved by $5.345 million |
| Diluted loss per share | $0.54 | $0.78 | Improved |
| Operating cash flow | $6.928 million | $5.435 million | Up $1.493 million |
| Capital expenditures and other investing purchases | $0.802 million | $2.808 million | Lower |
| Cash and cash equivalents | $21.684 million | $18.637 million | Up $3.047 million |
| Working capital | $35.865 million | $39.688 million | Down $3.823 million |
APC revenue was $43.485 million, up 3% from $42.031 million. APC gross margin declined to 30% from 37%. FUEL CHEM revenue was $30.179 million, down 18% from $36.986 million, while its gross margin declined modestly to 52% from 53%.
U.S. revenue increased 1% to $51.485 million, while international revenue declined 21% to $22.179 million and represented 30% of consolidated revenue. One FUEL CHEM customer represented 12% of 2015 revenue; management reported that this customer's revenue declined from approximately $15 million in 2014 to $9 million in 2015.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue decreased primarily because of lower FUEL CHEM demand and weaker international sales.
- APC sales benefited from a large contract beginning in Italy and partially offset the completion of several large China contracts.
- Cost of sales increased to $45.107 million from $43.889 million despite lower revenue, contributing to the gross-margin decline.
- SG&A declined 12% to $31.116 million, reflecting lower employee costs, commissions, professional fees and foreign subsidiary administrative costs.
- Research and development expense increased to $4.273 million from $1.459 million, including $2.826 million related to Fuel Conversion versus $0.277 million in 2014.
- The company recorded a $1.425 million non-cash impairment of finite-lived APC intangible assets in 2015. This compares with a $23.4 million APC goodwill impairment charge in 2014.
- APC backlog increased to $22.2 million at December 31, 2015, from $18.0 million. A substantial portion was expected to be recognized in 2016, subject to project timing.
- Quarterly fourth-quarter revenue was $18.201 million and fourth-quarter net loss was $9.066 million, compared with fourth-quarter 2014 revenue of $18.684 million and net loss of $17.111 million. The 2015 fourth-quarter loss included the $1.425 million intangible-asset impairment and a $3.757 million annual income-tax expense was recorded for the year.
Liquidity, Debt and Cash Flow
- Operating activities generated $6.928 million of cash, supported by lower accounts receivable and non-cash depreciation, amortization, stock compensation and tax items.
- Investing activities used $0.776 million, substantially below $13.897 million in 2014, when the company acquired Ohio businesses and Fuel Conversion intellectual property.
- Financing activities used $1.875 million, including repayment of $1.623 million of short-term debt and $0.252 million for employee tax withholding related to equity awards.
- The company had no cash borrowings under its $15 million domestic revolving facility or its approximately $5.392 million China facility at year-end.
- Approximately $7.197 million remained available under the domestic facility and $5.335 million under the China facility, before considering outstanding letters of credit and guarantees.
- The domestic facility matures June 30, 2017, bears interest at LIBOR plus 300 basis points, and includes minimum EBITDA, working-capital and capital-expenditure covenants. The bank waived the EBITDA covenant through December 31, 2015; the company reported compliance with covenants in effect at year-end.
- Outstanding standby letters of credit and bank guarantees totaled approximately $7.860 million, and performance surety bonds totaled $12.389 million. Management did not expect a material adverse impact from these obligations.
- Contractual operating lease obligations totaled $2.493 million, including $0.972 million due in 2016.
Outlook, Management Commentary and Risks
Management expected near-term growth in APC and FUEL CHEM to depend on regulatory compliance, customer capital spending, adoption of TIFI technology, expansion outside the United States and continued use of coal-fired generation. Management also expected core-business liquidity needs to be met by operating results, but stated that additional funding would be needed to commercialize Fuel Conversion.
- Low natural-gas prices, fuel switching, reduced coal-fired generation, delayed environmental investment and constrained customer capital budgets continue to pressure demand.
- Management expected further decline in revenue from the largest FUEL CHEM customer in 2016.
- International opportunities, particularly in China and Europe, are supported by tighter emissions standards, but project timing and customer budgets remain uncertain.
- Fuel Conversion remained commercially unproven, had no meaningful revenue, and required substantial future investment in product development and potential manufacturing facilities.
- The company is exposed to customer concentration, competition, regulatory changes, foreign-currency fluctuations and the availability and cost of magnesium hydroxide used in FUEL CHEM programs.
- Performance guarantees, letters of credit, surety bonds and customer acceptance criteria could create cash requirements if projects fail to meet contractual obligations.
- The company established a full valuation allowance on U.S. deferred tax assets, reflecting uncertainty about future taxable income and utilization of tax attributes.
- The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most Important Facts for Investors to Verify
- Whether APC backlog converts to revenue and cash flow as expected during 2016.
- Whether FUEL CHEM revenue declines further following reduced spending by the largest customer.
- Progress, funding requirements and commercial viability of the Fuel Conversion initiative.
- Compliance with the domestic facility's EBITDA and working-capital covenants after the 2015 waiver period.
- Potential cash exposure from $20.249 million of bank guarantees, letters of credit and performance surety bonds.
- Customer concentration, international project timing and exposure to coal-to-natural-gas fuel switching.
- Assumptions supporting the $1.425 million intangible-asset impairment and the remaining carrying value of goodwill and intangible assets.
- Availability and utilization restrictions on approximately $5.596 million of cash held by the Beijing subsidiary.