Fuel Tech, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. The filing was signed November 13, 2017. Fuel Tech provides air-pollution-control technologies and FUEL CHEM combustion-efficiency solutions for utility and industrial applications.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $13.548 million | $12.596 million | $31.780 million | $45.593 million |
| Gross margin | 37% | 42% | 39% | 37% |
| Operating loss | $0.134 million | $2.254 million | $7.512 million | $5.631 million |
| Net loss | $0.417 million | $3.019 million | $9.777 million | $8.284 million |
| Net loss per diluted share | $0.02 | $0.13 | $0.41 | $0.35 |
| Cash flow from operations | Not separately provided | Not separately provided | $(5.535) million | $(2.182) million |
Q3 revenue increased 8%, but nine-month revenue declined 30%. The Q3 gross margin declined to 37%, while the nine-month margin improved to 39%. Selling, general and administrative expense declined to $4.968 million in Q3 and $16.045 million for the nine-month period. The nine-month results include a $2.965 million building impairment charge.
- Cash and liquidity: Cash and cash equivalents were $6.130 million at September 30, 2017, compared with $11.826 million at December 31, 2016. Including restricted cash of $6.020 million, total cash was $12.150 million. Working capital was $17.913 million versus $26.585 million at year-end 2016.
- Debt and credit facilities: There were no borrowings outstanding under the domestic or China facilities. The domestic facility provides $5.000 million of availability through June 28, 2019, but is collateralized by restricted cash; approximately $1.495 million remained available after letters of credit and guarantees. The China facility provides approximately $0.977 million and expires June 29, 2018; approximately $0.737 million remained available.
- Balance sheet: Total assets were $50.020 million and total liabilities were $14.769 million at September 30, 2017. Accounts receivable increased to $21.323 million from $18.790 million at year-end.
- Tax: Management projected a 0% consolidated effective tax rate for 2017, primarily because of full valuation allowances on U.S., China and Italy deferred tax assets.
Material changes versus the prior comparable period
- Q3 revenue increased $0.952 million, primarily because of the timing of APC project execution and conversion of orders announced in the first half of 2017. Nine-month revenue decreased $13.813 million, principally because of historically low APC backlog at December 31, 2016.
- APC revenue increased 46% in Q3 to $8.799 million but decreased 37% for the nine-month period to $18.346 million. APC backlog improved to $23.441 million at September 30, 2017 from $8.030 million at December 31, 2016.
- FUEL CHEM revenue decreased 28% in Q3 to $4.749 million and 19% for the nine-month period to $13.434 million. Management cited soft electric demand, low natural-gas prices, fuel switching, outages and lower plant utilization.
- Q3 operating loss improved by $2.120 million year over year, reflecting lower SG&A, restructuring and research-and-development costs. For the nine-month period, operating loss increased because of the building impairment charge and lower revenue.
- Fuel Tech suspended its Fuel Conversion business effective June 28, 2017. The business generated no revenue and produced discontinued-operations losses of $0.239 million in Q3 and $2.238 million for the nine-month period.
- Q3 net cash used in operating activities was $0.283 million, compared with $5.252 million used during the first six months of 2017. Nine-month operating cash use increased from the prior year, primarily because of the net loss, lower accrued liabilities and higher accounts receivable.
Outlook, risks and unusual items
Management stated that it had reduced expenses and restructured operations, eliminating approximately $15 million of aggregate expenses over the prior two years. Based on its evaluation of the APC and FUEL CHEM businesses and Fuel Conversion wind-down costs, management believed available cash and working capital were sufficient to operate the base businesses.
- APC demand remains constrained by reduced U.S. coal-fired generation, fuel switching to natural gas, limited utility capital investment and insufficient foreign sales to offset U.S. weakness.
- The Fuel Conversion business is being wound down. Fuel Tech expects approximately $0.580 million of severance costs, with payments extending through 2019. Storage, disposal and contractual termination costs were not yet estimable.
- Assets held for sale related to Fuel Conversion totaled $1.839 million. The company warned that proceeds may be below carrying value and that disposal costs may exceed expectations.
- The $2.965 million building impairment resulted from lower market capitalization, an APC slowdown, reduced forecasts and an appraisal indicating that the building and land carrying value exceeded fair value.
- APC contracts include performance guarantees and customer acceptance criteria. Three construction contracts were identified as loss contracts, with a $0.225 million provision recorded.
- Letters of credit and bank guarantees totaled approximately $3.505 million under the domestic facility and $0.240 million under the China facility. Additional collateral requirements could reduce liquidity.
- The company’s business is materially dependent on continued air-quality regulations and customer investment in emissions-control systems. The filing states that no material change occurred in previously disclosed risk factors other than those related to Fuel Conversion.
- The company expects minor timing differences from adopting the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. The filing does not provide a quantified impact.
Important facts for investors to verify
- Whether the $23.441 million APC backlog converts into revenue and operating cash flow at expected margins.
- The sustainability of the improved Q3 revenue trend and whether FUEL CHEM demand remains pressured by low natural-gas prices and utility utilization.
- Cash-burn rates, restricted-cash requirements and the company’s ability to maintain liquidity while remaining loss-making.
- Actual proceeds and total costs from selling or disposing of Fuel Conversion assets.
- Potential exposure under outstanding letters of credit, bank guarantees, performance guarantees and loss contracts.
- Future impairment risk for goodwill, intangible assets and other property if operating forecasts weaken further.
- The financial and disclosure effects of the January 1, 2018 revenue-recognition adoption, which were not quantified in this filing.