Fuel Tech, Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech develops air pollution control, process optimization, water treatment, and engineering technologies. Reported periods ended September 30, 2021, covering the three and nine months ended September 30, 2021. Financial statements are unaudited and presented in U.S. dollars in thousands, except per-share data.
The company operates through Air Pollution Control (APC) and FUEL CHEM technology segments. It continues to wind down APC operations in China.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 |
|---|---|---|---|---|
| Revenue | $7,559 | $8,155 | $17,810 | $16,334 |
| Operating income (loss) | $578 | $2,437 | $(1,268) | $(2,670) |
| Net income (loss) | $678 | $2,376 | $298 | $(2,735) |
| Diluted EPS | $0.02 | $0.09 | $0.01 | $(0.11) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $572 | $(3,291) |
- Q3 consolidated gross margin was 49%, versus 72% in Q3 2020. Nine-month gross margin was 49% in both periods.
- Q3 SG&A declined to $2,801 from $3,184; nine-month SG&A declined to $8,858 from $9,825. Research and development increased to $340 in Q3 and $1,070 for nine months.
- Cash and cash equivalents were $35,161 at September 30, 2021. Total cash, cash equivalents, and restricted cash were $36,322, including $1,161 of restricted cash.
- Working capital was $38,294. Total assets were $51,039 and total liabilities were $4,595.
- Long-term borrowings were zero at September 30, 2021. The $1,556 PPP loan was fully forgiven in January 2021, producing other income.
- Cash provided by financing activities was $23,977, primarily reflecting $25,812 of gross private-placement proceeds less $1,783 of offering costs.
Material Changes Versus Prior Comparable Period
- Q3 revenue decreased 7%, while nine-month revenue increased 9% year over year.
- APC revenue declined 33% in Q3 and 36% for the first nine months, principally due to project execution timing. APC nine-month revenue was $3,837 versus $6,019.
- FUEL CHEM revenue increased 7% in Q3 and 35% for the first nine months, reaching $13,973 for the nine-month period. Management attributed the increase to new accounts, higher power-generation demand, and recovery from COVID-19-related outages and reduced operations.
- APC backlog increased to $8,173 at September 30, 2021 from $5,268 at December 31, 2020; $8,029 was domestic and $144 was international.
- Q3 operating income fell substantially because the prior-year quarter included a $2,589 insurance claim settlement that benefited APC gross margin. Q3 2021 nevertheless remained profitable at the operating and net-income levels.
- Shares outstanding increased following the February 2021 private placement of 5,000,000 common shares. The transaction also included 2,500,000 warrants, plus 350,000 placement-agent warrants.
Guidance, Outlook, Risks, and Unusual Items
- Management projected a consolidated effective tax rate of approximately 3% for 2021, supported by a full valuation allowance on U.S., China, and Italy deferred tax assets.
- Remaining APC performance obligations totaled $8,173 at September 30, 2021; approximately $5,517 was expected to be recognized over the next 12 months.
- Management stated that current cash and expected operating cash flows should fund planned operations for the next 12 months, while noting the company has sustained historical losses and continues expense-reduction and restructuring actions.
- COVID-19 risks remain material, including project delays or cancellations, customer and supplier financial distress, supply-chain disruption, travel restrictions, and uncertain demand.
- The company had approximately $1,106 of outstanding standby letters of credit, secured by $1,161 of restricted cash. The related collateral agreement has no financial covenants.
- The company reported no pending litigation or other loss contingencies expected to have a material impact. A prior $176 remediation accrual related to an equipment failure was eliminated after the warranty remedy was completed in Q3 2021; the standard warranty liability remained $159.
- Foreign-exchange movements affect earnings and cash flow; the company does not use foreign-currency derivatives because management considers the exposure immaterial.
- Management concluded that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify whether APC backlog converts to revenue as expected and whether APC gross margins normalize after the unusual 2020 insurance settlement.
- Assess the sustainability and customer concentration of FUEL CHEM revenue growth and related margins.
- Reconcile the cash balance and financing inflows to the private placement, including dilution from issued warrants.
- Monitor operating cash generation, recurring operating losses, and the company’s stated ability to fund operations for the next 12 months.
- Evaluate the continuing effects of COVID-19, supply-chain constraints, project delays, and the APC China wind-down.
- Review the full-year 2021 operating-income threshold of $1 million associated with executive performance RSU awards; no related expense was recorded because achievement was not considered probable at September 30, 2021.