Fuel Tech, Inc. — Form 10-Q Summary
Business context and reporting period
Fuel Tech provides air-pollution-control technologies and FUEL CHEM combustion optimization solutions for utility and industrial customers. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Amounts are in thousands except per-share data.
The company suspended its APC business operation in China during 2019 and completed the wind-down of its discontinued Fuel Conversion business during the third quarter.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $6,452 | $16,070 | $25,555 | $40,708 |
| Gross profit | $2,889 | $5,416 | $10,801 | $14,163 |
| Gross margin | 45% | 34% | 42% | 35% |
| Operating income (loss) | $(1,361) | $1,046 | $(3,509) | $(757) |
| Net income (loss) | $(1,278) | $1,045 | $(3,512) | $(924) |
| Net income (loss) per diluted share | $(0.05) | $0.04 | $(0.15) | $(0.04) |
- APC revenue declined 83% year over year in Q3 to $1,816 and 55% year to date to $12,408. FUEL CHEM revenue declined 11% in Q3 to $4,636 but increased 2% year to date to $13,147.
- Q3 gross margin improved primarily because of revenue mix and improved APC project margins. FUEL CHEM gross margin was 49%, compared with 51% in Q3 2018.
- SG&A declined 7% in Q3 and 8% year to date, but increased as a percentage of revenue to 59% and 50%, respectively, because of lower sales.
- Nine-month operating results included a $625 restructuring charge related primarily to China severance and lease termination costs, and $127 of intangible-asset abandonment charges.
- Cash, cash equivalents and restricted cash totaled $15,332 at September 30, 2019, including unrestricted cash of $12,850 and restricted cash of $2,482. This compared with $18,059 of total cash and restricted cash at December 31, 2018.
- Working capital was $20,143. Net cash used in operating activities was $2,341 for the nine months, including $2,320 from continuing operations. Capital expenditures and patent purchases were $431.
- Total liabilities were $7,238 and stockholders’ equity was $30,641 at September 30, 2019. The company reported no outstanding debt obligations other than standby letters of credit.
- The company had approximately $2,361 of standby letters of credit supported by $2,482 of restricted cash. Its prior JPMorgan domestic credit facility was canceled on September 25, 2019.
Material changes versus the prior comparable period
- Revenue decreased 60% in Q3 and 37% for the nine-month period, driven principally by lower APC project execution and a reduced APC backlog.
- APC backlog declined to $6,773 at September 30, 2019 from $12,384 at December 31, 2018 and $22,100 at December 31, 2017. The remaining backlog comprised $5,423 of U.S. projects and $1,350 of international projects.
- FUEL CHEM year-to-date revenue increased modestly, helped by equipment sales and installation for two new U.S. coal-fired units, but Q3 demand was affected by soft electric demand, low natural-gas prices, fuel switching, outages and lower utilization.
- The company recognized $20 of gain from the sale of remaining Fuel Conversion equipment and completed that business wind-down.
- Accounts receivable declined to $10,124 from $18,399 at year-end, while accounts payable and accrued liabilities also declined substantially.
- Adoption of ASC 842 increased reported right-of-use assets and operating lease liabilities. Lease liabilities totaled $1,091 at September 30, 2019.
Guidance, outlook, commentary, risks and unusual items
- Management projected a consolidated effective tax rate of approximately 0% for 2019 because of a full valuation allowance on U.S., China and Italy deferred tax assets.
- Management stated that current cash and working capital were sufficient to operate the base APC and FUEL CHEM businesses, while noting that future operations depend on securing new APC orders and executing existing projects within budget.
- Remaining APC performance obligations totaled $6,773 at September 30, 2019; approximately $5,150 was expected to be recognized over the next 12 months.
- A U.S. customer equipment non-conformance matter resulted in a $760 accrued remediation liability and a $1,991 insurance receivable at September 30, 2019. The company expects to collect remaining customer receivables after satisfactory remediation.
- The business is materially dependent on the continued existence and enforcement of air-quality regulations, particularly in the United States. Additional risks include weak APC order activity, project execution and cost estimates, soft electricity demand, low natural-gas prices, fuel switching, foreign-currency fluctuations and customer acceptance or warranty claims.
- The company stated that its previously disclosed risk factors had not materially changed and that no pending litigation or loss contingency was expected to have a material effect.
- Management determined that disclosure controls and procedures were effective as of September 30, 2019.
Important facts for investors to verify
- Whether APC bookings and backlog recover after the sharp 2019 decline.
- The timing and profitability of the $6,773 remaining APC performance obligations.
- Whether operating cash burn continues and whether the stated liquidity is sufficient if losses persist.
- Collection of the $1,991 insurance receivable and resolution of the related customer remediation obligation.
- Impact of the China APC suspension on future revenue, costs and asset recoverability.
- Exposure to regulatory changes, low natural-gas prices, fuel switching and declining coal-fired generation affecting FUEL CHEM demand.