Fuel Tech, Inc. 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered solutions for combustion optimization, primarily Air Pollution Control (APC) technologies and the FUEL CHEM program. The filing covers the three and nine months ended September 30, 2018. The company’s results remain materially dependent on air-quality regulations, APC project execution and demand conditions affecting electric utilities.
The Fuel Conversion business was suspended in 2017 and is reported as discontinued operations. The company had 24.17 million common shares outstanding as of October 31, 2018.
Financial Performance and Position
Amounts below are in thousands, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Revenue | $16,070 | $13,548 | $40,708 | $31,780 |
| Gross profit | $5,416 | $5,050 | $14,163 | $12,397 |
| Gross margin | 34% | 37% | 35% | 39% |
| Operating income (loss), continuing operations | $1,046 | $(134) | $(757) | $(7,512) |
| Net income (loss) | $1,045 | $(417) | $(924) | $(9,777) |
| Net income (loss) per diluted share | $0.04 | $(0.02) | $(0.04) | $(0.41) |
- Q3 revenue increased 19%, while nine-month revenue increased 28% year over year.
- APC revenue increased 24% in Q3 and 52% for the nine-month period, reaching $10,882 and $27,872, respectively.
- FUEL CHEM revenue declined 9% in Q3 and 4% for the nine-month period, reaching $5,188 and $12,836, respectively.
- SG&A declined to $4,105 in Q3 and $13,789 for the nine-month period, compared with $4,968 and $16,045 in the respective 2017 periods.
- Loss from discontinued operations was $10 in Q3 and $109 for the nine-month period, versus $239 and $2,238 in the comparable 2017 periods.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and restricted cash totaled $10,718 at September 30, 2018, including $4,198 of unrestricted cash and $6,520 of restricted cash.
- Working capital was $23,234, compared with $18,025 at December 31, 2017.
- Operating activities used $2,664 of cash for the first nine months, including $2,330 from continuing operations.
- Investing activities used $391, primarily for equipment and patents. Financing activities used $12 for employee tax withholding related to vested equity awards.
- The company had no outstanding borrowings under its domestic or China credit facilities. The domestic facility had approximately $447 of borrowing availability at September 30, 2018, but was supporting approximately $5,053 of standby letters of credit and bank guarantees.
- The domestic facility matures June 28, 2019 and requires pledged cash collateral. The China facility had approximately $765 of availability at September 30, 2018 and no cash borrowings or outstanding guarantees.
- Management stated that current cash and working capital were sufficient to operate the base APC and FUEL CHEM businesses, while noting continued losses and dependence on new APC orders and successful project execution.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by APC project execution and conversion of new orders announced during 2017.
- Consolidated operating results improved substantially because of higher APC revenue, lower SG&A, and reduced discontinued-operation costs. However, the company remained loss-making for the nine-month period.
- Gross margin declined because of business mix, project timing and lower-margin foreign APC projects. FUEL CHEM’s nine-month margin also declined due to international product demonstration costs.
- APC backlog was $21,299 at September 30, 2018, compared with $22,053 at December 31, 2017. Approximately $19,536 of remaining performance obligations was expected to be recognized over the following 12 months.
- Accounts receivable increased to $26,437 from $19,690, partly reflecting contract assets of approximately $11,146 versus $7,894 at year-end.
- The company adopted ASC 606 using the modified retrospective method and adopted the restricted-cash cash-flow presentation requirements in 2018.
Guidance, Outlook, 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.
- FUEL CHEM demand remained pressured by soft electric demand, low natural-gas prices, fuel switching, unscheduled outages and lower utilization of combustion units.
- The company recorded a $317 abandonment charge for international patent assets in the second quarter of 2018 and a $56 impairment charge related to Carbonite patent assets within discontinued operations.
- Six construction contracts were identified as loss contracts at September 30, 2018, with a $159 provision recorded.
- A Chinese customer had asserted potential liquidated damages of approximately $920 against a prime contractor on a project for which Fuel Tech was a subcontractor. The matter was in preliminary negotiations, and the company could not estimate a probable loss.
- Assets held for sale totaled $485, primarily equipment from the discontinued Fuel Conversion business. The company cautioned that proceeds may be below the carrying value and that additional storage, disposal and contractual termination costs may arise.
- The company expects the new lease accounting standard to have a material impact on its financial statements beginning January 1, 2019, although the quantitative effect was not yet estimable.
- Foreign-currency movements affected comprehensive income, and the company does not hedge foreign-currency exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether APC backlog converts into revenue at expected margins, particularly given the reported foreign project margin erosion.
- The pace of new APC order bookings and the company’s ability to sustain operations while continuing to use cash.
- The availability of unrestricted liquidity after $6,520 of cash collateral and the substantial standby letters of credit and bank guarantees.
- The resolution and potential financial exposure from the approximately $920 Chinese liquidated-damages claim.
- Whether FUEL CHEM demand improves as power-market conditions, natural-gas prices and plant utilization change.
- The recoverability of $485 of assets held for sale and any remaining Fuel Conversion wind-down costs.
- The eventual balance-sheet impact of ASC 842 lease adoption and the continuing valuation allowance on deferred tax assets.