Fuel Tech, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered air-pollution-control solutions and FUEL CHEM combustion-optimization technologies for utility and industrial customers. The filing covers the three months ended March 31, 2018, with comparative results for the three months ended March 31, 2017. The Fuel Conversion segment was suspended in the second quarter of 2017 and is reported as discontinued operations.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $12.791 million | $8.491 million |
| Gross profit | $5.025 million | $3.722 million |
| Gross margin | 39% | 44% |
| Operating loss from continuing operations | $0.184 million | $1.777 million |
| Net loss from continuing operations | $0.191 million | $1.776 million |
| Net loss | $0.216 million | $2.506 million |
| Basic and diluted loss per share | $0.01 | $0.11 |
| Cash flow from operations | $(2.561) million | $(1.620) million |
- APC revenue increased 114% to $8.583 million, primarily due to the timing of project execution and conversion of orders received during 2017. APC gross margin decreased to 35% from 38%.
- FUEL CHEM revenue decreased 6% to $4.208 million, with gross margin declining modestly to 48% from 49%. Management cited soft electric demand, low natural-gas prices, fuel switching, unscheduled outages and lower plant utilization.
- SG&A declined 5% to $4.921 million, and SG&A as a percentage of revenue decreased to 38% from 61%.
- Discontinued operations generated a $0.025 million loss versus a $0.730 million loss in the prior-year quarter. No revenue was generated by the discontinued business.
- Cash, cash equivalents and restricted cash totaled $12.187 million at March 31, 2018, including $6.520 million of restricted cash. Unrestricted cash and short-term investments totaled $5.667 million.
- Working capital was $18.503 million, compared with $18.025 million at December 31, 2017. Total assets were $48.630 million and total liabilities were $13.954 million.
- The company had no outstanding borrowings under its domestic or China credit facilities. Domestic facility availability was approximately $0.257 million after outstanding letters of credit and bank guarantees of approximately $5.243 million. China facility availability was approximately $0.843 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $4.300 million, or 51%, driven by APC project execution.
- Operating loss from continuing operations narrowed by $1.593 million, reflecting higher revenue and lower SG&A, partially offset by lower consolidated gross margin and project mix.
- Net loss improved by $2.290 million, principally because of improved continuing-operations results and the wind-down of Fuel Conversion.
- Operating cash outflow increased by $0.941 million. The primary uses included a $2.750 million decrease in accrued and other non-current liabilities, along with the continuing operating loss.
- APC backlog was $19.705 million at March 31, 2018, down from $22.053 million at December 31, 2017. Approximately $17.900 million was expected to be recognized over the following 12 months.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced other accrued liabilities by $0.205 million and increased accumulated deficit by $0.205 million at January 1, 2018. Prior-year revenue was not restated.
- The company adopted the restricted-cash cash-flow presentation standard, resulting in restricted cash being included with cash and cash equivalents in the cash-flow reconciliation.
Outlook, Commentary, Risks and Unusual Items
- Management projected a consolidated effective tax rate of 0% for 2018 because of a full valuation allowance on U.S., China and Italy deferred tax assets.
- Management stated that expense reductions over the prior three years totaled approximately $19 million and that current cash and working capital were sufficient to operate the base APC and FUEL CHEM businesses.
- Fuel Conversion wind-down obligations included $0.311 million of severance payable in 2018 and $0.065 million payable in 2019. Additional storage, disposal and contract-termination costs were expected, but the filing did not provide an estimated amount or range.
- Three APC construction contracts were identified as loss contracts, with a $0.073 million provision recorded.
- A Chinese project prime contractor had received notice of potential liquidated damages of approximately $0.920 million related to project delays. The matter was in preliminary negotiations, and the company could not estimate the potential loss or outcome.
- The company remains materially dependent on the existence and enforcement of air-quality regulations, particularly in the United States. FUEL CHEM demand remains exposed to power-market conditions, natural-gas prices, fuel switching and plant utilization.
- Domestic credit availability is cash-collateralized and requires segregated cash equal to the facility amount. The domestic facility matures June 28, 2019; the China facility expires June 29, 2018, and management intended to renew it.
- Management reported effective disclosure controls and procedures, with no material change 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 project mix improves APC and consolidated margins.
- The sustainability of FUEL CHEM revenue amid low natural-gas prices, weak electric demand and lower customer utilization.
- Cash burn, unrestricted liquidity and the amount of cash unavailable because of collateral and other restrictions.
- The renewal and terms of the China credit facility and the company’s exposure to letters of credit, guarantees and potential reimbursement obligations.
- The ultimate resolution and financial exposure related to the approximately $0.920 million Chinese project liquidated-damages claim.
- Additional costs and recoveries associated with the Fuel Conversion wind-down and sale of assets held for sale.
- The effects of ASC 606 adoption on revenue timing, contract assets, contract liabilities and future comparability with 2017.