Fuel Tech, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited and presented in thousands, except per-share data. Fuel Tech provides air-pollution-control technologies and FUEL CHEM combustion-efficiency solutions; its Fuel Conversion business remains under development.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $8,491 | $17,822 | Down 52% |
| Gross profit | $3,722 | $6,048 | Down 38% |
| Gross margin | 44% | 34% | Up 10 percentage points |
| Operating loss | $(2,507) | $(2,589) | Improved $82 |
| Net loss | $(2,506) | $(2,637) | Improved $131 |
| Net loss per share | $(0.11) | $(0.11) | No change |
| Cash used in operations | $(1,620) | $(5,588) | Improved $3,968 |
Operating and net loss margins were approximately (29.5%) in Q1 2017, compared with approximately (14.5%) and (14.8%), respectively, in Q1 2016. The improved gross margin and lower operating expenses largely offset the significant revenue decline.
- APC revenue was $4,002, down 69% from $12,990, primarily reflecting historically low backlog at December 31, 2016, weak U.S. utility capital investment, coal-to-gas switching, and insufficient international demand.
- FUEL CHEM revenue was $4,489, down 7% from $4,832, affected by soft electric demand, low natural-gas prices, fuel switching, unscheduled outages, and lower combustion-unit utilization.
- Fuel Conversion generated no significant revenue other than test products. Research and development included $730 related to Fuel Conversion.
- SG&A declined to $5,154 from $7,162, while research and development declined to $1,014 from $1,158. Restructuring charges were $61 versus $317 in the prior-year quarter.
At March 31, 2017, cash and cash equivalents were $10,203, excluding $6,020 of restricted cash; marketable securities were $11. Management also cites total cash of $16,234 when including restricted cash. Working capital was $24,890, compared with $26,585 at December 31, 2016. Total assets were $52,154 and shareholders’ equity was $40,970.
The company had no outstanding cash borrowings. Its domestic facility provided $5,000 of capacity, secured by restricted cash, with approximately $1,815 available after outstanding letters of credit and bank guarantees of approximately $3,185. The China facility had approximately $921 available, with no cash borrowings and approximately $22 of outstanding guarantees.
Material changes versus the prior comparable period
- Revenue fell $9,331, driven primarily by a $8,988 reduction in APC revenue.
- Gross margin improved from 34% to 44%, including APC margin improvement from 28% to 38%; FUEL CHEM margin remained 49%.
- SG&A decreased by $2,008, reflecting lower employee-related, administrative, professional, consulting, and other costs.
- Cash used in operations improved to $1,620 from $5,588, partly due to a $3,525 reduction in accounts receivable, offset by lower accounts payable and accrued liabilities.
- Backlog improved to $22,462 at March 31, 2017, from $8,030 at December 31, 2016, consisting of $11,266 domestic and $11,196 international APC projects.
- The company continued workforce reductions and recorded a $61 restructuring charge; the remaining restructuring liability was $186 at March 31, 2017.
- A previously disclosed contractor dispute was settled for $1,150 and paid in March 2017. The original contractor claim was $3.9 million.
Outlook, risks, contingencies, and unusual items
- Management believes current cash and working capital are sufficient to operate the base APC and FUEL CHEM businesses, but states that it does not have sufficient capital to support the full longer-term development of Fuel Conversion. Outside funding may be required, with no assurance regarding availability or terms.
- The company intends to renew the $5 million domestic facility at its June 30, 2017 maturity and the China facility at its June 23, 2017 maturity. Failure to renew or a default could reduce liquidity.
- Further cash collateralization of letters of credit could adversely affect liquidity. The facilities contain cross-default provisions.
- Management projects a 0% effective tax rate for 2017 because of full valuation allowances on U.S., China, and Italy deferred tax assets. No income tax benefit was recorded in Q1 2017.
- Business performance remains materially dependent on air-quality regulations, utility capital spending, electric demand, natural-gas prices, coal-fired generation, and customer project timing.
- The company has performance guarantees and warranties on customer projects. Product warranty liability was $159 at March 31, 2017.
- No material litigation was reported, and the 2016 Form 10-K risk factors were not materially changed.
- New revenue-recognition, lease, restricted-cash, and goodwill accounting standards were under evaluation; the filing does not provide quantitative estimates of their future effects.
Investor verification points
- Verify the sustainability and conversion of the $22,462 APC backlog into revenue and cash flow.
- Monitor operating cash burn, recurring losses, and whether expense reductions can offset weak demand.
- Confirm renewal and terms of both credit facilities before their June 2017 maturities, including required cash collateral.
- Assess the funding plan and commercialization prospects for Fuel Conversion, which management says requires outside resources for longer-term development.
- Reconcile reported unrestricted cash of $10,203 with total cash of $16,234, including $6,020 of restricted cash.
- Evaluate exposure to utility demand, coal-to-gas switching, low natural-gas prices, regulatory changes, project performance guarantees, and foreign-currency movements.