Fuel Tech, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 10, 2016. Financial statements are unaudited and presented in thousands, except per-share data. Fuel Tech provides engineered combustion and emissions-control solutions through its Air Pollution Control (APC), FUEL CHEM, and Fuel Conversion businesses.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $17,822 | $15,103 | +$2,719, or 18% |
| Gross profit | $6,048 | $6,666 | -$618 |
| Gross margin | 34% | 44% | Down 10 percentage points |
| Operating loss | $(2,589) | $(2,409) | Loss increased $180 |
| Net loss | $(2,637) | $(1,654) | Loss increased $983 |
| Net loss per diluted share | $(0.11) | $(0.07) | Worsened $0.04 |
| Cash flow from operations | $(5,588) | $1,115 | Decrease of $6,703 |
- APC revenue increased 89% to $12,990, while FUEL CHEM revenue declined 41% to $4,832. Fuel Conversion generated no significant revenue.
- APC gross margin decreased to 28% from 37%; FUEL CHEM gross margin decreased to 49% from 50%.
- SG&A declined 9% to $7,479, or 42% of revenue versus 54% in the prior-year quarter. Research and development increased 33% to $1,158, including $687 for Fuel Conversion development.
- Other expense was $263; interest expense was zero. The income tax benefit was $205 versus $871 in Q1 2015, and the effective tax rate was negative 7%.
- Cash and cash equivalents were $9,383 at March 31, 2016, down from $21,684 at December 31, 2015. Restricted cash totaled $7,020, and unrestricted cash plus short-term investments totaled $9,397.
- Working capital was $30,794 versus $35,865 at year-end 2015. Total assets were $72,779 and shareholders’ equity was $57,070.
- Accounts receivable increased to $26,546 from $23,060; unbilled receivables increased to approximately $9,141 from $7,312.
- There were no cash borrowings under the domestic or China revolving credit facilities. Domestic standby letters of credit and bank guarantees totaled approximately $7,105; China facility guarantees totaled approximately $171.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by APC project execution, but the higher APC mix and lower APC margins reduced consolidated gross profit and margin.
- FUEL CHEM revenue was pressured by soft electric demand, low natural gas prices, fuel switching, unscheduled outages, lower unit utilization, and mild U.S. weather.
- Operating expenses improved through lower employee-related, professional, consulting, and travel costs, partially offset by higher foreign administrative costs and stock compensation.
- Operating cash flow shifted from $1,115 provided in Q1 2015 to $5,588 used in Q1 2016, primarily due to the net loss, a $3,331 increase in accounts receivable, and a $1,620 decrease in accounts payable and accrued liabilities.
- APC backlog was $17,503 at March 31, 2016, down from $22,185 at December 31, 2015; $10,875 was domestic and $6,628 was international.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that current cash reserves and operating results are expected to meet the liquidity needs of the APC and FUEL CHEM segments.
- The Company projected a consolidated 2016 effective tax rate of negative 7%, affected in part by a full valuation allowance on U.S. deferred tax assets.
- On May 9, 2016, after quarter-end, the domestic credit facility was amended: financial covenants were removed, availability was reduced from $15,000 to $7,000, and the facility became secured by segregated cash collateral. Availability is scheduled to decline to $6,000 and then $5,000, remaining at $5,000 through June 30, 2017.
- Restricted cash of $7,020 was established to support the credit facility. A portion was scheduled to become unrestricted on May 31 and July 31, 2016, with the remainder released at facility maturity.
- The China facility, with approximately $5,428 of stated capacity, was scheduled to expire June 24, 2016; management intended to renew it and expected a similar reduction in availability.
- Business performance is materially dependent on the continued existence and enforcement of air-quality regulations, particularly in the United States. Additional risks include low power demand, natural gas prices, project execution, foreign currency fluctuations, customer acceptance and performance guarantees, and development of Fuel Conversion applications.
- Two contracts in progress were identified as loss contracts, with a $3 provision recorded. Product warranty liability declined to $159 from $268 at year-end 2015.
- Management reported no material litigation, no material change in previously disclosed risk factors, and effective disclosure controls and procedures.
Investor Verification Checklist
- Verify whether APC backlog converts to revenue at expected margins and whether backlog continued to decline after March 31, 2016.
- Assess the sustainability of the $7,020 restricted-cash requirement and the staged reduction in domestic credit availability.
- Review renewal and revised terms of the China facility and the status of related guarantees.
- Monitor accounts receivable collection, unbilled receivables, and operating cash flow, which deteriorated materially year over year.
- Evaluate whether FUEL CHEM demand recovers from low utilization, mild weather, and low natural gas prices.
- Assess the commercial prospects and continuing research and development spending for Fuel Conversion, which generated no significant revenue.
- Consider the full valuation allowance on U.S. deferred tax assets and the resulting variability of future tax benefits.