Fuel Tech, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Fuel Tech provides engineered combustion-optimization and emissions-control solutions, primarily through its Air Pollution Control (APC), FUEL CHEM, and developing Fuel Conversion segments. The filing is unaudited and was signed November 8, 2016.
Key Financial Metrics
| Metric | Three Months 2016 | Three Months 2015 | Nine Months 2016 | Nine Months 2015 |
|---|---|---|---|---|
| Revenue | $12.6 million | $21.7 million | $45.6 million | $55.5 million |
| Gross margin | 42% | 36% | 37% | 39% |
| Operating loss | $(2.9) million | $(0.8) million | $(7.8) million | $(5.5) million |
| Net loss | $(3.0) million | $(0.3) million | $(8.3) million | $(3.3) million |
| Net loss per diluted share | $(0.13) | $(0.01) | $(0.35) | $(0.14) |
| Cash flow from operations | Not presented | Not presented | $(2.2) million | $(1.1) million |
At September 30, 2016, total assets were $64.8 million versus $76.0 million at December 31, 2015. Unrestricted cash and cash equivalents plus marketable securities were $13.3 million; an additional $6.0 million was restricted as collateral for the domestic credit facility. Working capital was $31.3 million versus $35.9 million at year-end 2015.
The Company had no cash borrowings under its revolving credit facilities. Domestic facility availability was approximately $2.7 million, supported by $6.0 million of restricted cash, and China facility availability was approximately $0.8 million. Outstanding standby letters of credit and bank guarantees totaled approximately $3.5 million. Total liabilities were $12.4 million and shareholders’ equity was $52.4 million.
Material Changes Versus Prior Comparable Period
- Revenue declined 42% in the third quarter and 18% for the nine-month period. APC revenue declined 54% in the quarter and 6% year to date; FUEL CHEM revenue declined 24% and 32%, respectively.
- Management attributed the FUEL CHEM weakness primarily to soft electric demand, low natural-gas prices, fuel switching, unscheduled outages, and lower combustion-unit utilization.
- APC backlog decreased to $10.5 million at September 30, 2016 from $22.2 million at December 31, 2015.
- Gross margin improved to 42% in the third quarter from 36%, but declined to 37% for the nine months from 39%, reflecting changes in revenue mix and lower volume.
- SG&A declined 19% for the quarter and 16% for the nine months, but increased as a percentage of revenue to 46% and 43%, respectively, because revenue fell faster than expenses.
- The Company recorded $1.1 million of third-quarter restructuring expense and $1.4 million for the nine months, primarily for severance and benefit continuation costs following a workforce reduction.
- Operating cash use increased to $2.2 million for the nine months from $1.1 million in the prior-year period. Total cash and restricted cash declined by $2.3 million from year-end after considering the $6.0 million collateral transfer.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that current cash and working capital are sufficient to operate the base APC and FUEL CHEM businesses, but the Company does not have sufficient capital to fund the Fuel Conversion business over the longer term without outside resources.
- Management projected a consolidated effective tax rate of approximately negative 7% for 2016. U.S. deferred tax assets are subject to a full valuation allowance because management cannot determine when sufficient taxable income will be available to use them.
- Fuel Conversion remained in the research-and-development stage with no commercial operations and no significant revenue. The Company may need external financing to develop manufacturing capacity and commercialize the technology.
- A contractor asserted approximately $3.9 million of expenses above a contractual cap related to an APC project. Fuel Tech believes the claims lack merit, has not accrued a liability, and initiated mediation. An adverse settlement or ruling could materially affect future results, cash flows, or financial position.
- The domestic revolving facility matures June 30, 2017. The Company intends to renew it and expects to continue using a fully cash-collateralized structure. Additional letters of credit could require further cash collateral and reduce liquidity.
- The business is materially dependent on air-quality regulations, demand for coal-fired and other combustion-related services, energy-market conditions, customer project timing, and successful execution of long-term contracts.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Points
- Verify the cash runway after separating unrestricted cash from the $6.0 million restricted collateral balance and considering ongoing operating losses.
- Track APC backlog conversion, new bookings, and FUEL CHEM utilization trends following the significant year-over-year revenue declines.
- Assess the renewal and collateral requirements of the domestic and China credit facilities before their June 2017 maturities.
- Monitor the $3.9 million contractor dispute, related mediation, and any subsequent accrual or settlement.
- Evaluate whether restructuring savings are sufficient to offset lower revenue and whether further workforce or cost actions are likely.
- Assess the financing plan, commercialization milestones, and potential funding requirements for the Fuel Conversion business.
- Review the valuation allowance on deferred tax assets and the effect of continued losses on future tax benefits.