Fuel Tech, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. The unaudited interim statements cover Fuel Tech’s Air Pollution Control (APC) and FUEL CHEM technology segments. Fuel Tech provides boiler optimization, efficiency improvement, air-pollution reduction and combustion-control solutions worldwide.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $18.661 million | $22.484 million | Down 17% |
| Gross profit | $7.851 million | $9.432 million | Down $1.581 million |
| Gross margin | 42% | 42% | Stable |
| Operating income (loss) | $(1.137) million | $0.041 million | Declined $1.178 million |
| Net income (loss) | $(1.086) million | $(0.021) million | Loss increased |
| Basic and diluted EPS | $(0.05) | $0.00 | Unfavorable |
| Cash flow from operations | $(1.841) million | $(8.400) million | Improved $6.559 million |
APC revenue was $10.734 million, down 17% year over year, while FUEL CHEM revenue was $7.927 million, also down 17%. APC gross margin increased to 35% from 34%; FUEL CHEM gross margin decreased to 52% from 53%.
SG&A increased to $8.744 million from $8.458 million, and rose to 47% of revenue from 38%. The increase primarily reflected higher professional fees, consulting costs, stock compensation and foreign administrative costs, partly offset by lower employee-related costs. Research and development expense decreased to $0.244 million from $0.933 million.
At March 31, 2014, cash and cash equivalents were $24.918 million and marketable securities were $0.076 million, compared with combined cash and short-term investments of $27.768 million at December 31, 2013. Working capital was $48.225 million versus $48.619 million at year-end.
Total assets were $107.525 million and shareholders’ equity was $87.397 million at March 31, 2014. Total liabilities were $20.128 million. Short-term debt was $1.622 million, consisting of borrowings under the China facility. There were no borrowings under the domestic revolving credit facility.
Net cash used in investing activities was $0.322 million, primarily for equipment and patent purchases. Financing activities used $0.089 million, principally for employee tax-related treasury-share withholding, partly offset by stock-option proceeds and related tax benefits. Cash decreased by $2.820 million during the quarter, including a $0.568 million unfavorable foreign-exchange effect.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17%, with decreases in both APC and FUEL CHEM.
- Operating results moved from near break-even to a $1.137 million operating loss, primarily because lower gross profit was accompanied by higher SG&A.
- Net loss increased from $0.021 million to $1.086 million.
- Operating cash use improved substantially, principally because accounts receivable generated $1.059 million of cash in 2014 versus using $7.494 million in 2013.
- Consolidated gross margin remained 42%, despite lower revenue.
- Backlog for APC fell to $14.995 million at March 31, 2014 from $44.673 million at March 31, 2013. Current APC backlog included $2.413 million of U.S. domestic projects and $12.582 million of international projects.
- Accumulated other comprehensive loss increased to $0.444 million, primarily because of a $0.509 million foreign-currency translation loss.
Guidance, Outlook, Risks and Unusual Items
Management stated that FUEL CHEM continues to be affected by soft electric demand, low natural-gas prices, fuel switching, unscheduled outages and lower operating capacity at combustion units. The company plans to continue pursuing commercial applications outside its traditional markets and developing new technologies. Management projected a consolidated effective tax rate of 13% for 2014.
Fuel Tech’s business is materially dependent on the existence and enforcement of worldwide air-quality regulations. Other disclosed risks include foreign-currency fluctuations, customer acceptance and performance requirements on APC contracts, contract-cost estimates, warranty obligations, and reliance on electric-generation and industrial markets.
The company had approximately $4.135 million of domestic standby letters of credit and bank guarantees and $0.841 million under the China facility. Available future borrowings were approximately $10.865 million domestically and $3.215 million under the China facility. Fuel Tech was in compliance with all debt covenants at March 31, 2014. The China facility, with approximately $1.622 million outstanding, was scheduled to expire June 27, 2014. Cross-default provisions could permit acceleration if a facility default occurred.
On April 30, 2014, after the reporting period, Fuel Tech acquired 100% of PECO for $7.25 million in cash. PECO provides electrostatic precipitator rebuilds, retrofits and related products and services. The purchase-price allocation and pro forma financial information were not yet available in the filing.
The company implemented multiple Epicor ERP modules during the quarter, including general ledger, reporting, accounts payable, procurement and materials-management functions. Management stated that related control changes were part of the system implementation and were not undertaken in response to identified control deficiencies. Disclosure controls were assessed as effective.
Important Facts for Investors to Verify
- Whether APC backlog stabilizes or converts into revenue, given the sharp year-over-year decline.
- Whether weak electric demand, low natural-gas prices and fuel switching continue to pressure FUEL CHEM demand.
- Whether SG&A can be reduced relative to revenue and operating profitability restored.
- The renewal or replacement of the China facility before its stated June 27, 2014 expiration.
- The liquidity effect, purchase accounting and operating contribution of the $7.25 million PECO acquisition.
- Potential cash requirements associated with approximately $4.976 million of total standby letters of credit and bank guarantees.
- Foreign-exchange exposure, especially given the $0.509 million first-quarter translation loss and the absence of hedging contracts.
- Execution of the new ERP system and any resulting changes to financial-reporting controls.