Fuel Tech, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Fuel Tech provides engineered combustion optimization and air-pollution-control solutions, primarily through its Air Pollution Control (APC) and FUEL CHEM technology segments. The filing covers the three months ended March 31, 2019, compared with the same period in 2018. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $10.155 million | $12.791 million | Down 21% |
| Gross profit | $4.014 million | $5.025 million | Down 20% |
| Gross margin | 40% | 39% | Up 1 percentage point |
| Operating loss from continuing operations | $1.305 million | $0.184 million | Loss increased |
| Net loss | $1.289 million | $0.216 million | Loss increased |
| Basic and diluted loss per share | $0.05 | $0.01 | Loss increased |
| Cash used in operating activities | $4.900 million | $2.562 million | Use increased |
APC revenue was $5.789 million, down 33%, primarily because of project execution timing and lower prior-year order activity. FUEL CHEM revenue increased 4% to $4.366 million. APC gross margin declined to 33% from 35%, while FUEL CHEM gross margin remained 48%. SG&A declined to $4.458 million from $4.921 million, but increased to 44% of revenue from 38% because of lower sales.
Cash and cash equivalents were $7.135 million at March 31, 2019, excluding $6.020 million of restricted cash. Total cash, cash equivalents and restricted cash were $13.155 million. Working capital was $22.021 million, compared with $23.556 million at December 31, 2018. Total assets were $47.245 million and stockholders’ equity was $32.983 million.
There were no outstanding borrowings under the domestic or China credit facilities. The domestic facility provides up to $5.500 million, matures June 28, 2019, and had approximately $245,000 available after $5.255 million of standby letters of credit and bank guarantees. The China facility had approximately $391,000 available and is not expected to be renewed at its June 30, 2019 maturity.
Material changes versus the prior comparable period
- Revenue declined $2.636 million, driven primarily by a $2.794 million decline in APC revenue.
- Operating loss increased to $1.305 million from $184,000, including a $595,000 restructuring charge that was absent in the prior-year quarter.
- Net loss increased to $1.289 million from $216,000.
- Operating cash use increased to $4.900 million from $2.562 million, substantially affected by reductions in accounts payable and accrued liabilities.
- Foreign revenue declined to $1.340 million from $2.549 million, while U.S. revenue declined to $8.815 million from $10.242 million.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $1.411 million of right-of-use assets and $1.403 million of operating lease liabilities at March 31, 2019.
Guidance, outlook, risks, contingencies, and unusual items
- Management projected a consolidated effective tax rate of 0% for 2019 because of a full valuation allowance on U.S., China and Italy deferred tax assets.
- Management stated that it currently believes available cash and working capital are sufficient to operate the APC and FUEL CHEM businesses, but continued operations depend on securing new APC orders and executing existing projects within budget.
- APC backlog was $12.219 million at March 31, 2019, including $9.954 million of U.S. projects and $2.265 million of international projects. Approximately $11.892 million of remaining performance obligations was expected to be recognized over the following 12 months.
- The company announced suspension of its APC business operation in China, expected to be completed in the second half of 2019. Q1 restructuring charges were $595,000, including $532,000 of severance and a $63,000 lease termination penalty. Additional disposal or termination costs were not yet estimable.
- The company expects approximately $632,000 of China-related severance costs in total; $257,000 was paid in Q1 and $375,000 was expected in Q2.
- A U.S. customer identified equipment non-conformance issues. Fuel Tech accrued $1.223 million for remediation and recorded $973,000 of expected insurance proceeds. Approximately $500,000 of related receivables was past due and expected to be collected after satisfactory remediation.
- The Fuel Conversion business remains discontinued. Assets held for sale totaled $413,000, and the company received a $20,000 nonrefundable deposit for a potential purchase option at a $500,000 price, subject to applicable commissions.
- The business is materially dependent on air-quality regulations, particularly in the United States. Management also cited soft electric demand, fuel switching to natural gas, lower APC orders, project timing, foreign-currency movements and liquidity requirements as relevant risks.
- The IRS notified the company on April 3, 2019 that its 2016 U.S. income tax return is under audit. The filing reports no unrecognized tax benefits.
Most important facts for investors to verify
- Whether the domestic credit facility was renewed before its June 28, 2019 maturity and whether restricted cash requirements changed.
- Whether APC backlog and new order activity stabilized or continued to decline after March 31, 2019.
- Whether the China APC suspension was completed as planned and whether total exit costs remained within management’s estimates.
- Whether the U.S. customer remediation was completed, insurance proceeds were collected and the $500,000 past-due receivable was recovered.
- Whether operating cash burn improved from the $4.900 million Q1 use and whether unrestricted cash remained sufficient.
- Whether the company achieved the minimum $2 million of 2019 operating income required for potential executive performance RSU awards.