Fuel Tech, Inc. — 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered solutions for combustion optimization, including Air Pollution Control (APC) technologies and the FUEL CHEM program. The unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Position
- Revenue: Second-quarter revenue was $8.9 million, down 24% from $11.8 million; six-month revenue was $19.1 million, down 22% from $24.6 million.
- Segment revenue: APC revenue declined 43% in the quarter and 38% year to date, while FUEL CHEM revenue increased 20% and 11%, respectively.
- Gross margin: Consolidated gross margin improved to 44% from 31% in the quarter and to 41% from 36% for the six months. APC gross margin increased to 38% from 25% for the quarter and to 35% from 30% year to date; FUEL CHEM margin increased to 50% from 48% and to 49% from 48%.
- Operating results: Operating loss from continuing operations was $0.8 million in the quarter and $2.1 million for the six months, compared with losses of $1.6 million and $1.8 million, respectively, in 2018.
- Net loss: Net loss was $0.9 million, or $0.04 per diluted share, in the quarter and $2.2 million, or $0.09 per diluted share, for the six months. The comparable 2018 losses were $1.8 million and $2.0 million.
- Cash flow: Net cash used in operating activities was $2.8 million for the six months, compared with $3.5 million in 2018. Capital expenditures and patent purchases were $0.4 million.
- Liquidity: Cash, cash equivalents and restricted cash totaled $14.9 million at June 30, 2019, including $3.3 million of restricted cash. Working capital was $21.2 million.
- Balance sheet: Total assets were $44.0 million and stockholders’ equity was $32.1 million, compared with $51.7 million and $34.1 million at December 31, 2018.
- Debt and credit facilities: The Company had no outstanding borrowings. Its JPMorgan revolving facility was reduced from $5.5 million to $2.75 million and extended to December 31, 2019. Outstanding letters of credit and bank guarantees under the facility totaled approximately $2.6 million, with approximately $0.2 million available for future borrowings.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of project execution timing, a lower APC backlog, and reduced new APC orders. APC backlog was $8.0 million at June 30, 2019, versus $12.4 million at December 31, 2018 and $22.1 million at December 31, 2017.
- FUEL CHEM growth reflected equipment sales and installation for two new U.S. coal-fired units, although management noted continued pressure from soft electric demand and fuel switching to low-priced natural gas.
- SG&A decreased 6% in the quarter and 8% year to date, but increased as a percentage of revenue to 50% and 47%, respectively, because of lower sales.
- The Company recorded $0.6 million of restructuring charges year to date, primarily related to severance and an early lease termination penalty associated with suspending APC operations in China.
- Fuel Tech adopted ASC 842 lease accounting on January 1, 2019, recognizing $1.6 million of right-of-use assets and $1.6 million of lease liabilities at adoption. Management stated that the adoption did not materially affect ongoing net income.
- Discontinued Fuel Conversion operations generated no revenue and incurred $19,000 of storage and wind-down costs year to date, compared with $99,000 in 2018.
Outlook, Risks, Contingencies, and Unusual Items
- Remaining APC performance obligations were $8.0 million at June 30, 2019, of which approximately $6.3 million was expected to be recognized over the following 12 months.
- Management stated that it expects to complete the suspension of APC operations in China during the second half of 2019 and believes no additional material China wind-down costs will be incurred beyond amounts described in the filing.
- Management projected a consolidated effective tax rate of 0% for 2019 because of full valuation allowances on deferred tax assets. The IRS was auditing the Company’s 2016 U.S. income tax return.
- The Company believes it has sufficient cash and working capital to operate its APC and FUEL CHEM businesses, but continued operations depend on securing new APC orders and executing existing APC projects within budget.
- A U.S. customer identified equipment non-conformance issues. At June 30, 2019, Fuel Tech recorded a $2.2 million accrued remediation liability and a $2.0 million insurance receivable. Approximately $0.5 million of customer receivables related to the project was past due.
- The business is materially dependent on air-quality regulations, particularly in the United States. Other risks include declining APC demand, project execution, customer acceptance, foreign currency exposure, reliance on letters of credit, and continued operating losses.
- The filing states that no pending litigation or other loss contingencies were expected to have a material effect, and that reported risk factors had not materially changed from the 2018 Form 10-K.
Important Facts for Investors to Verify
- Whether APC orders and backlog recover after the sharp decline through June 30, 2019.
- Whether operating cash use and recurring losses can be reduced without materially impairing growth investments.
- The timing and collectability of the $2.0 million insurance receivable and the resolution cost of the customer remediation matter.
- Whether the Company completes the China APC suspension and transitions letters of credit away from the JPMorgan facility before its December 31, 2019 maturity.
- Whether the $8.0 million APC remaining performance obligation converts to revenue and cash flow as expected.
- The impact of regulatory changes, fuel switching, low natural gas prices, and weak electric demand on APC and FUEL CHEM demand.