Fuel Tech, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Fuel Tech develops and sells engineered technologies for air pollution control, combustion optimization, fuel and flue-gas treatment, water treatment, and related engineering services. The principal operating segments are Air Pollution Control (APC) and FUEL CHEM. The filing covers the fiscal year ended December 31, 2018, including quarterly results for the fourth quarter.
APC revenue is generated primarily from NOx reduction, selective catalytic reduction and non-catalytic reduction, burner, electrostatic precipitator, and flue-gas-conditioning technologies. FUEL CHEM applies proprietary chemical-injection and modeling technologies to control slagging, fouling, corrosion, opacity, and sulfur-trioxide-related issues.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $56.535 million | $45.166 million | +25% |
| APC revenue | $38.417 million | $27.808 million | +38% |
| FUEL CHEM revenue | $18.118 million | $17.358 million | +4% |
| Gross profit | $20.064 million | $18.022 million | +11% |
| Gross margin | 35% | 40% | Down 5 points |
| Operating income from continuing operations | $0.110 million | $(7.065) million | Improved |
| Net income from continuing operations | $0.085 million | $(6.535) million | Improved |
| Net loss | $(0.028) million | $(10.449) million | Substantially improved |
| Fourth-quarter revenue | $15.827 million | $13.386 million | +18% |
| Fourth-quarter net income | $0.896 million | $(0.672) million | Improved |
APC gross margin declined to 29% from 34%, primarily because of project mix, execution timing, and margin erosion on lower-margin foreign projects. FUEL CHEM gross margin remained 50% in both years. SG&A decreased 11% to $18.564 million, while research and development expense was essentially unchanged at $1.073 million.
Operating activities generated $4.927 million of cash in 2018, compared with $3.568 million used in 2017. Continuing operations generated $5.049 million of operating cash flow. Investing activities used $0.569 million, and financing activities used $0.012 million.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $12.039 million at December 31, 2018, excluding $6.020 million of restricted cash; total cash, cash equivalents, and restricted cash were $18.059 million.
- Working capital was $23.556 million, compared with $18.025 million at December 31, 2017.
- Total assets were $51.719 million and total liabilities were $17.667 million. Stockholders’ equity was $34.052 million.
- The company had no cash borrowings under its $5.5 million domestic revolving credit facility. Approximately $5.028 million of standby letters of credit and bank guarantees were outstanding, leaving approximately $0.443 million available for borrowing.
- The domestic facility was scheduled to mature on June 28, 2019 and renewal was being pursued. The facility is cash-collateralized and secured by restricted cash.
- The China facility had approximately $0.382 million of borrowing capacity, no cash borrowings, and was not expected to be renewed after its June 30, 2019 maturity.
- Operating lease obligations totaled approximately $0.726 million, primarily payable in 2019 and 2020.
Material changes versus the prior comparable period
- Revenue increased by $11.369 million, driven by higher U.S. revenue, which rose 49% to $43.887 million. International revenue declined 19% to $12.648 million.
- APC revenue increased substantially because of project execution and conversion of orders booked during 2017 and 2018. APC backlog fell to $12.4 million from $22.1 million.
- FUEL CHEM revenue increased modestly despite continued weakness in coal-fired power demand and customer fuel switching toward natural gas.
- Cost reductions materially improved results: SG&A declined by $2.369 million, restructuring expense fell to zero, and discontinued-operation losses declined to $0.113 million from $3.914 million.
- The company recorded a $0.317 million charge for abandoning certain international patent assets. This compared with a $2.965 million building impairment charge in 2017.
- Fuel Tech adopted ASC 606 revenue recognition and ASC 2016-18 restricted-cash presentation in 2018. ASC 606 resulted in a $0.205 million increase to accumulated deficit at adoption and did not materially affect ongoing net income.
- The company revised previously issued 2017 financial statements for a deferred-tax-liability error. The revision increased 2017 income-tax benefit by $0.534 million and reduced reported 2017 net loss from $10.983 million to $10.449 million.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide quantitative revenue or earnings guidance in the filing. Management stated that it expected additional global opportunities in 2019, particularly from European emissions requirements, Indian NOx and particulate-control implementation, and selected Southeast Asian markets. China’s industrial market was described as highly competitive and price-sensitive.
On January 18, 2019, Fuel Tech announced the planned suspension of its APC business in Beijing, targeted for completion by the end of the second quarter of 2019. China generated $3.006 million of revenue and a $1.868 million net loss in 2018. Management expected approximately $0.490 million of severance costs, a $0.067 million lease-termination penalty, and additional disposal or contract-termination costs that had not yet been estimated.
- The business remains highly dependent on environmental regulations, enforcement, and continued use of fossil-fuel-fired power generation, particularly coal.
- Competition, fuel switching, plant closures, delayed capital spending, and lower coal-fired generation may reduce demand and pressure pricing and margins.
- Customer concentration is material: two customers represented 27% and 13% of 2018 revenue, respectively.
- APC contracts include performance guarantees, and $5.028 million of related letters of credit and bank guarantees were outstanding at year-end.
- Five APC construction contracts were identified as loss contracts, with a $0.123 million provision recorded.
- The company relies on magnesium hydroxide supplied under an agreement expiring December 31, 2019 for U.S. and Canadian FUEL CHEM programs.
- Deferred tax assets were subject to a $13.044 million valuation allowance, reflecting uncertainty regarding future utilization.
- Fuel Tech expected adoption of the new lease standard on January 1, 2019 to add approximately $0.756 million of operating lease liabilities and corresponding right-of-use assets.
- Management stated that it had sufficient cash and working capital to operate the base APC and FUEL CHEM businesses, but renewal of the domestic credit facility and future cash collateral requirements remained liquidity considerations.
Most important facts for investors to verify
- Whether the improved profitability and positive operating cash flow are sustainable after the unusually strong APC revenue year and lower foreign-project margins.
- The quality, timing, and replenishment of APC backlog, which declined approximately 44% year over year.
- The total cost and financial effect of winding down the Beijing APC operation, including currently unestimated disposal and termination costs.
- Renewal terms and availability under the domestic credit facility after June 28, 2019, including the effect of additional letters of credit and restricted cash.
- Customer concentration, contract-loss provisions, performance guarantees, and collection of contract assets and accounts receivable.
- Exposure to regulatory changes, coal-power demand, fuel switching, foreign currency movements, and international competition.
- Whether the $13.044 million deferred-tax valuation allowance, tax-law estimates, and prior-period tax revision could produce future earnings volatility.