Fuel Tech, Inc. Form 10-Q Summary
Business context and reporting period
Fuel Tech provides boiler optimization, efficiency improvement, nitrogen oxide reduction, air-pollution control, and FUEL CHEM chemical solutions to utility and industrial customers worldwide. This unaudited quarterly report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The company reported 23.2 million common shares outstanding as of August 10, 2015.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $18.683 million | $20.190 million | $33.786 million | $38.851 million |
| Gross margin percentage | 38% | 42% | 41% | 42% |
| Operating loss | $(2.246) million | $(0.671) million | $(4.655) million | $(1.808) million |
| Net loss | $(1.371) million | $(0.720) million | $(3.025) million | $(1.806) million |
| Loss per diluted share | $(0.06) | $(0.03) | $(0.13) | $(0.08) |
Six-month operating cash flow was negative $1.307 million, compared with negative $1.911 million in the prior-year period. Investing activities used $0.357 million, primarily for equipment and patents, while financing activities used $1.888 million, including repayment of short-term borrowings and treasury shares withheld for employee taxes. Cash and cash equivalents were $14.967 million at June 30, 2015, down from $18.637 million at December 31, 2014. Cash and short-term investments totaled $15.004 million, and working capital was $38.891 million at quarter-end.
Total assets were $84.291 million, compared with $91.471 million at December 31, 2014. Shareholders’ equity was $68.397 million, compared with $72.301 million. Accounts receivable declined to $29.539 million from $31.910 million, while inventories increased to $1.390 million from $1.111 million.
There were no cash borrowings under the domestic revolving facility or the China facility at June 30, 2015. The domestic facility had approximately $6.829 million available, after $8.171 million of outstanding letters of credit and bank guarantees. The China facility had approximately $5.574 million available, after $0.174 million of letters of credit and guarantees. Total short-term debt declined to zero from $1.625 million at year-end 2014.
Material changes versus the prior comparable periods
- Revenue decreased 7% in the second quarter and 13% for the first six months.
- Air Pollution Control revenue decreased 2% in the quarter and 19% year to date. APC backlog was $17.132 million at June 30, 2015, compared with $17.965 million at December 31, 2014.
- FUEL CHEM revenue decreased 15% in the quarter and 6% year to date. Management attributed the weakness to soft electric demand, low natural-gas prices, fuel switching, unscheduled outages, and lower utilization of combustion units.
- Consolidated gross margin declined to 38% from 42% in the quarter and to 41% from 42% year to date. FUEL CHEM gross margin declined to 50% from 55% in the quarter and to 50% from 54% year to date.
- SG&A declined 6% in the quarter and 6% year to date, but increased as a percentage of revenue because of lower sales.
- Research and development expense increased to $0.982 million from $0.225 million in the quarter and to $1.854 million from $0.469 million year to date, primarily reflecting the fuel conversion initiative.
- The income tax benefit increased to $1.807 million year to date from $0.117 million in the prior-year period. Management projected a 2015 effective tax rate of approximately 38%.
- The company amended its domestic revolving credit facility to extend maturity through June 30, 2017. The borrowing base remains $15 million, with potential expansion to $25 million subject to lender approval.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific revenue or earnings guidance in the filing. It projected a consolidated 2015 effective tax rate of approximately 38%.
The amended domestic facility includes minimum EBITDA requirements, minimum shareholders’ equity requirements, and a $5 million annual capital-expenditure limit. The company must achieve minimum EBITDA of $0.5 million for the twelve months ending December 31, 2015 and, beginning with the quarter ending June 30, 2016, $1.0 million on a trailing-twelve-month basis. Minimum shareholders’ equity is $69 million from December 31, 2015 through December 30, 2016, increasing to $70 million beginning December 31, 2016. Continued operating losses and declining equity could therefore increase covenant-compliance risk.
The business is materially dependent on the existence and enforcement of worldwide air-quality regulations. Other disclosed risks include foreign-currency exposure, customer and project-performance requirements, contract-estimate risk under percentage-of-completion accounting, and market weakness affecting utility operating levels. The company does not hedge its foreign-currency exposure, which management considered immaterial, and stated that a hypothetical 100-basis-point increase in interest rates would not materially affect expected 2015 interest expense.
At June 30, 2015, there were no contracts in progress identified as loss contracts. Unbilled receivables were approximately $8.720 million, and billings in excess of costs and estimated earnings were $1.024 million. The product-warranty liability was $0.268 million. Management reported no material pending litigation, no goodwill or intangible-asset impairment indicators, and no material changes to previously disclosed risk factors. Disclosure controls and procedures were assessed as effective.
Important facts for investors to verify
- Whether revenue and backlog recover, particularly in the APC segment and the utility-exposed FUEL CHEM segment.
- Whether the company can return to positive operating cash flow while funding the fuel conversion initiative.
- Compliance with the amended credit facility’s EBITDA and shareholders’ equity covenants.
- The sustainability and cash-tax implications of the reported income tax benefits and projected 38% effective tax rate.
- Whether the lower gross margins represent temporary project mix and utilization effects or a continuing trend.
- The collectability and timing of the $8.720 million of unbilled receivables and performance of contracts with customer-specific guarantees.
- Execution risk and future spending associated with the fuel conversion research and development program.