Fuel Tech, Inc. 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered solutions for combustion optimization, including NOx reduction technologies and the FUEL CHEM program. The company also develops Fuel Conversion technology. The filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $15.2 million | $18.7 million | $33.0 million | $33.8 million |
| Gross margin percentage | 37% | 38% | 35% | 41% |
| Operating loss | $(2.3) million | $(2.2) million | $(4.9) million | $(4.7) million |
| Net loss | $(2.6) million | $(1.4) million | $(5.3) million | $(3.0) million |
| Net loss per diluted share | $(0.11) | $(0.06) | $(0.23) | $(0.13) |
| Cash flow from operations | Not separately reported for the quarter | $(2.2) million | $(1.3) million |
At June 30, 2016, total assets were $68.7 million and shareholders’ equity was $54.9 million. Cash and cash equivalents were $12.4 million, including $7.0 million of restricted cash; unrestricted cash and short-term investments totaled $12.4 million. Working capital was $33.1 million, compared with $35.9 million at December 31, 2015.
The company had no cash borrowings under its domestic or China revolving facilities. The domestic facility had $5.0 million of credit availability after July 31, 2016, secured by segregated cash. Standby letters of credit and bank guarantees totaled approximately $5.0 million domestically and $0.1 million in China at June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 19%, while six-month revenue declined 2%.
- APC revenue declined 10% in the quarter but increased 28% for the six-month period. APC backlog fell to $11.6 million at June 30, 2016 from $22.2 million at December 31, 2015.
- FUEL CHEM revenue declined 32% in the quarter and 37% for the six-month period, reflecting soft electric demand, low natural gas prices, fuel switching, unscheduled outages and lower unit utilization.
- Gross margin decreased to 35% for the six-month period from 41%, primarily reflecting the revenue mix and lower APC margins. FUEL CHEM segment margins improved to 51% from 50% for the six-month period.
- SG&A declined 20% in the quarter and 14% for the six-month period, driven mainly by lower employee-related and professional-services costs.
- Research and development expense increased to $2.3 million for the six-month period from $1.9 million, including $1.5 million related to Fuel Conversion development.
- Operating losses and net losses widened despite lower SG&A, and the six-month operating cash outflow increased from $1.3 million to $2.2 million.
Guidance, Outlook, Risks and Unusual Items
- Management projected a consolidated effective tax rate of negative 7% for 2016. The U.S. deferred tax assets carry a full valuation allowance because management cannot determine when sufficient taxable income will be available.
- Management stated that current cash reserves and operating results are expected to meet the liquidity needs of the APC and FUEL CHEM businesses.
- In July 2016, the company reduced its workforce and expected to record an approximately $1.0 million charge in the third quarter, principally for severance, unused vacation, benefits continuation and outplacement costs.
- The company’s business is materially dependent on air-quality regulations, particularly in the United States, and FUEL CHEM demand remains exposed to utility operating levels, electricity demand and natural gas prices.
- The company reported no material litigation and stated that risk factors had not materially changed from the 2015 Form 10-K.
- Restricted cash securing the domestic credit facility was reduced by $1.0 million on July 31, 2016; the remaining $6.0 million was expected to remain restricted through the facility maturity date.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of liquidity given continuing losses, negative operating cash flow and the decline in unrestricted cash from year-end.
- Monitor APC backlog conversion and new bookings following the reduction to $11.6 million.
- Assess whether weak FUEL CHEM demand and lower utility utilization persist.
- Review the domestic facility’s cash-collateral requirements, letter-of-credit exposure and cross-default provisions.
- Confirm the timing and amount of the expected third-quarter workforce-reduction charge.
- Evaluate the commercial progress and continued cash investment in Fuel Conversion, which generated no significant revenue during the period.