Fuel Tech, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 12, 2018. Fuel Tech provides air-pollution-control, combustion-efficiency, process-optimization and engineering solutions through its Air Pollution Control (APC) and FUEL CHEM technology segments. The Fuel Conversion segment was suspended effective June 28, 2017 and reported as discontinued operations.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $45.2 million | $55.2 million | Down 18% |
| APC revenue | $27.8 million | $34.1 million | Down 18% |
| FUEL CHEM revenue | $17.4 million | $21.1 million | Down 18% |
| Gross margin | 40% | 34% | Up 6 percentage points |
| Operating loss from continuing operations | $7.1 million | $12.0 million | Improved by $5.0 million |
| Net loss from continuing operations | $7.1 million | $14.6 million | Improved by $7.5 million |
| Net loss, including discontinued operations | $11.0 million | $17.4 million | Improved by $6.4 million |
| Basic and diluted loss per share | $0.46 | $0.74 | Improved by $0.28 |
| Cash used in operating activities | $3.6 million | $2.7 million | Use increased by $0.8 million |
Segment gross margins were 34% for APC and 50% for FUEL CHEM. The consolidated improvement primarily reflected product and technology mix and the absence of certain 2016 charges, including subcontractor-dispute and inventory-reserve costs. SG&A declined 18% to $20.9 million, while R&D declined to $1.1 million from $1.8 million.
At December 31, 2017, cash and cash equivalents were $8.4 million, excluding $6.0 million of restricted cash, and working capital was $18.0 million. Including restricted cash, total cash was approximately $14.4 million. Total liabilities were $16.1 million and stockholders’ equity was $34.3 million. The company reported no cash borrowings under its revolving facilities and no conventional outstanding debt other than $76,000 of perpetual, non-interest-bearing loan notes classified in equity.
The $5.0 million domestic revolving facility, maturing June 28, 2019, was fully cash-collateralized and had no financial covenants under the 2017 amendment. Approximately $3.0 million of letters of credit and guarantees were outstanding, leaving approximately $2.0 million available. The China facility had approximately $1.0 million of capacity, no cash borrowings and approximately $0.2 million of guarantees outstanding.
Material changes versus the prior comparable period
- Revenue declined $10.0 million, with U.S. revenue down 31% to $29.5 million, partly offset by international revenue growth of 24% to $15.7 million.
- APC demand remained weak because of lower coal-fired generation, customer fuel switching to natural gas and delayed capital investment, while FUEL CHEM demand declined among several large customers.
- APC backlog increased substantially to $22.1 million from $8.0 million; a substantial portion was expected to convert to revenue in 2018, subject to project spending and execution timing.
- Operating losses narrowed due to lower revenue being more than offset by reduced SG&A, lower restructuring costs and improved gross margins.
- The company recorded a $3.0 million impairment charge on its Warrenville, Illinois office building and land after an appraisal indicated that carrying value exceeded fair value.
- Fuel Conversion discontinued-operations loss increased to $3.9 million from $2.8 million, including a $1.4 million impairment of the Carbonite intangible asset and $0.6 million of severance-related costs. Assets held for sale declined to $0.5 million from $2.1 million.
- Cash declined by $3.5 million during the year. Continuing operations used $1.7 million of operating cash, and discontinued operations used an additional $1.9 million.
Fourth-quarter information
Fourth-quarter 2017 revenue was $13.4 million, compared with $9.6 million in fourth-quarter 2016. Continuing operations generated net income of $0.5 million versus a $8.4 million loss in the prior-year quarter. Including discontinued operations, fourth-quarter net loss was $1.2 million, or $0.05 per share, compared with a $9.1 million loss, or $0.39 per share, in fourth-quarter 2016.
Outlook, commentary and risks
- Management expected improved U.S. APC order flow in 2018, supported by the backlog, but emphasized that orders depend on customer capital-investment decisions and regulatory requirements.
- International opportunities were tied to tighter emissions standards in Europe, China and India. Management expected increasing demand in China’s industrial market and continued adoption of emissions-control technologies in India.
- Management stated that cash and working capital were currently sufficient to operate the base APC and FUEL CHEM businesses. The company has reduced its expense infrastructure by approximately $19 million over three years through workforce and operating-cost reductions.
- There was no formal revenue or earnings guidance. The 2018 corporate incentive plan requires at least $1.0 million of operating income before any incentive pool is funded.
- Principal risks include dependence on coal-related markets and environmental regulation, competition and pricing pressure, concentrated customers, declining coal-fired generation, foreign-exchange exposure, international execution and intellectual-property protection.
- FUEL CHEM relies on magnesium hydroxide supply. A U.S. supply agreement covering 100% of specified requirements runs through December 31, 2019, but supply outside the United States remains less certain.
- A Chinese project subcontractor was exposed to a potential customer liquidated-damages deduction of approximately $0.9 million for delays. The matter was under negotiation, and the company could not estimate the ultimate loss.
- The company had $3.25 million of performance guarantees and letters of credit supporting construction contracts. Management believed the projects would be completed successfully and recorded no liability for these guarantees.
- Deferred tax assets of approximately $12.1 million were fully offset by valuation allowances, reflecting uncertainty regarding future taxable income and utilization of tax-loss carryforwards.
Important facts for investors to verify
- Whether the $22.1 million APC backlog converts to revenue and cash as expected during 2018.
- Whether APC and FUEL CHEM revenue stabilize despite coal-market weakness, customer concentration and fuel switching.
- The company’s ability to fund continued operating losses and cash use while maintaining cash collateral for letters of credit.
- The resolution and potential financial impact of the approximately $0.9 million Chinese project claim.
- The recoverability of assets held for sale and remaining costs associated with the discontinued Fuel Conversion business.
- Whether the 2018 operating-income threshold for incentive compensation is achieved and how related payouts affect profitability.