Fuel Tech, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered solutions for combustion optimization, including Air Pollution Control technologies for reducing nitrogen oxide emissions and the FUEL CHEM program for improving boiler efficiency and controlling slagging, fouling, corrosion and related issues. This report covers the three and six months ended June 30, 2020. The company had 24.7 million common shares outstanding as of July 31, 2020.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $4.4 million, down 51% | $8.2 million, down 57% |
| Gross margin | 14%, versus 44% | 26%, versus 41% |
| Operating loss from continuing operations | $2.4 million | $5.1 million |
| Net loss | $2.5 million, or $0.10 per share | $5.1 million, or $0.21 per share |
| Cash used in operating activities | Not separately disclosed | $3.4 million |
All dollar amounts are presented in thousands unless otherwise indicated. Revenue included APC revenue of $1.9 million for the quarter and $3.1 million year to date, and FUEL CHEM revenue of $2.5 million and $5.0 million, respectively.
At June 30, 2020, cash and cash equivalents were $8.3 million, while total cash, cash equivalents and restricted cash were $11.3 million. Working capital was $12.1 million. Restricted cash totaled $3.0 million and primarily supported standby letters of credit.
Total debt was $1.6 million, consisting of a Paycheck Protection Program loan bearing interest at 1.0% annually. The loan has a two-year term and may be forgiven in whole or in part, although the filing provides no assurance that forgiveness will be obtained. Standby letters of credit totaled approximately $2.9 million and were collateralized by restricted cash.
Total assets declined to $28.6 million from $32.2 million at December 31, 2019, and stockholders’ equity declined to $21.1 million from $26.2 million, principally reflecting year-to-date net losses.
Material Changes Versus the Prior Comparable Period
- Revenue declined $4.5 million, or 51%, in the second quarter and $10.9 million, or 57%, in the first six months.
- APC revenue declined 60% in the quarter and 70% year to date, primarily because of project execution timing and a lower order backlog.
- FUEL CHEM revenue declined 41% in both the quarter and year-to-date period because of reduced power-generation demand, extended outages and lower operating levels associated largely with COVID-19.
- Consolidated gross margin fell to 14% from 44% in the quarter and to 26% from 41% year to date. APC gross margin was negative 20% in the quarter, primarily due to a $1.15 million charge related to a customer equipment non-conformance issue.
- SG&A decreased to $2.8 million from $4.5 million in the quarter and to $6.6 million from $8.9 million year to date, but increased as a percentage of revenue because of the sharp revenue decline.
- No restructuring charges were recorded in 2020, compared with $0.6 million in the first six months of 2019, reflecting the continuing suspension of APC operations in China.
- APC backlog was $8.3 million at June 30, 2020, down from $9.7 million at December 31, 2019. Approximately $4.8 million of remaining performance obligations was expected to be recognized over the next 12 months.
Guidance, Outlook, Risks and Unusual Items
- Management projected an approximately 3% consolidated effective tax rate for 2020. The company maintains a full valuation allowance on certain U.S., China and Italy deferred tax assets.
- Management stated that current cash and expected operating cash flows should fund planned operations for the next 12 months, but noted that additional financing could be required if losses continue. Potential financing could include debt, equity or convertible securities and could be dilutive or unavailable on acceptable terms.
- The COVID-19 pandemic reduced demand, kept certain customer accounts offline, contributed to project delays or cancellations and created continuing risks to customers, suppliers, the workforce, supply chains and international operations. The filing does not provide quantitative full-year revenue or earnings guidance.
- The company recorded a $1.15 million second-quarter charge to remedy a U.S. customer warranty non-conformance issue and reversed $0.5 million of a previously recorded doubtful-account reserve. The company stated that related work was complete at June 30, 2020.
- The company continues winding down its APC business in China. Remaining activities include completing projects with approximately $29 thousand of backlog and collecting remaining receivables.
- Management reported no pending litigation or other loss contingencies expected to have a material effect, although standard product warranty liabilities totaled $0.2 million.
Important Facts for Investors to Verify
- Whether APC and FUEL CHEM demand recover from COVID-19-related disruptions and whether the $8.3 million APC backlog converts to revenue and cash on schedule.
- Whether operating losses and approximately $3.4 million of first-half operating cash use can be reduced sufficiently to preserve liquidity.
- The final forgiveness amount, if any, of the $1.6 million PPP loan and the resulting debt repayment requirements.
- Whether the $3.0 million of restricted cash and $2.9 million of standby letters of credit constrain usable liquidity.
- Whether additional warranty, project-loss or customer-credit charges arise, particularly given the second-quarter non-conformance charge and the allowance for doubtful accounts.
- Whether additional capital is needed and, if so, the potential dilution or other terms of that financing.