Fuel Tech, Inc. 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 10, 2020. Fuel Tech provides air-pollution-control technologies and FUEL CHEM solutions for utility and industrial combustion systems. Results are unaudited and COVID-19 materially affected demand and project activity.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|
| Revenue | $8.2 million | $6.5 million | $16.3 million | $25.6 million |
| Gross margin | 72% | 45% | 49% | 42% |
| Operating income (loss) | $2.4 million | $(1.4) million | $(2.7) million | $(3.5) million |
| Net income (loss) | $2.4 million | $(1.3) million | $(2.7) million | $(3.5) million |
| Diluted EPS | $0.09 | $(0.05) | $(0.11) | $(0.15) |
| Operating cash flow | Not separately provided for Q3 | $(3.3) million | $(2.3) million |
- Q3 revenue increased 26%, while nine-month revenue declined 36% year over year.
- Q3 gross profit benefited substantially from a $2.589 million insurance settlement related to a prior APC warranty remediation issue. APC reported an unusually high 110% gross margin for the quarter.
- Q3 SG&A declined to $3.184 million from $3.822 million; nine-month SG&A declined to $9.825 million from $12.735 million.
- At September 30, 2020, cash and cash equivalents were $9.418 million, and total cash, cash equivalents and restricted cash were $11.810 million. Restricted cash totaled $2.392 million.
- Working capital was $15.733 million. Total assets were $31.525 million and stockholders’ equity was $23.831 million.
- Debt consisted principally of a $1.556 million PPP loan bearing 1% annual interest. The company used the proceeds for payroll and believed it met forgiveness criteria, but forgiveness was not assured.
Business and Segment Trends
| Segment | Q3 2020 Revenue | Year-over-year change | 9M 2020 Revenue | Year-over-year change |
|---|
| Air Pollution Control | $2.886 million | Up 59% | $6.019 million | Down 52% |
| FUEL CHEM | $5.269 million | Up 14% | $10.315 million | Down 22% |
- APC results reflected timing of project execution and reduced new orders. APC backlog was $6.417 million at September 30, 2020, down from $9.671 million at December 31, 2019; approximately $4.130 million was expected to be recognized over the next 12 months.
- FUEL CHEM’s Q3 increase was attributed to sales and installation of equipment on three new units. Nine-month results declined because of lower power-generation demand, extended outages and reduced operations related largely to COVID-19.
- Foreign revenue was $1.682 million in Q3 and $3.454 million for nine months, compared with $0.725 million and $3.451 million, respectively, in the prior-year periods.
Cash Flow, Liquidity and Debt
- For the first nine months, operating activities used $3.291 million, investing activities used $0.206 million, and financing activities provided $1.550 million, principally from the PPP loan.
- Cash, cash equivalents and restricted cash decreased $1.691 million during the nine months.
- Standby letters of credit totaled approximately $2.278 million and were supported by approximately $2.392 million of restricted cash. The related cash-collateral arrangement has no financial covenants.
- Management stated that available cash and expected operating cash flows were adequate to fund planned operations for the next 12 months, while noting that additional financing could be required and might be unavailable or dilutive.
Material Changes and Unusual Items
- The company recorded no restructuring charges in 2020, compared with $0.625 million in the first nine months of 2019, as it continued winding down APC operations in China.
- A $2.589 million insurance receivable was recorded in Q3 for the completed remediation of a U.S. customer equipment non-conformance issue; the receivable was collected in October 2020.
- The company recorded a $0.238 million liability for an equipment component failure at a foreign customer location that remained under investigation.
- The company corrected a prior-period lease-accounting error related to ASC 842. Management concluded the correction was not material to prior periods and no amended filings were required; the correction did not affect 2019 net loss or EPS.
Outlook and Risks
- No formal revenue or earnings guidance was provided. Management continued to focus on cost reductions, operational restructuring, new APC orders, execution of existing projects and development of newer technologies, including water-treatment applications.
- COVID-19 caused reduced demand, customer outages, delayed or abandoned projects, and potential supply-chain, workforce and travel disruptions. The duration and magnitude of further effects remained uncertain.
- The business is materially dependent on continued existence and enforcement of air-quality regulations, particularly in the United States.
- Management reported recurring losses and reliance on new APC orders and successful project execution. Future financing, if needed, could involve debt, equity or convertible securities and could dilute shareholders.
- The company had no pending litigation or loss contingencies that management believed would have a material impact, although standard product warranties and other claims remain part of normal operations.
Investor Verification Items
- Verify whether the $1.556 million PPP loan was ultimately forgiven and assess any remaining repayment obligation.
- Separate recurring operating performance from the one-time $2.589 million insurance benefit and its effect on APC gross margin and consolidated profitability.
- Track APC backlog, new order intake and conversion of the $6.417 million backlog into revenue and cash.
- Assess whether operating cash burn can be reduced sufficiently given the nine-month $3.291 million use of operating cash.
- Monitor COVID-19 effects on customer demand, outages, project timing, supply chains and international operations.
- Review the foreign customer equipment failure, warranty exposure and the $0.238 million accrued liability.
