Fuel Tech, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides air-pollution-control technologies and FUEL CHEM® combustion-efficiency solutions to utility and industrial customers worldwide. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, filed November 9, 2015.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $21.7 million | $21.5 million | $55.5 million | $60.3 million |
| Gross margin | 36% | 46% | 39% | 44% |
| Operating income (loss) | $(0.8) million | $1.4 million | $(5.5) million | $(0.4) million |
| Net income (loss) | $(0.3) million | $1.2 million | $(3.3) million | $(0.6) million |
| Diluted EPS | $(0.01) | $0.05 | $(0.14) | $(0.03) |
- Q3 revenue increased 1%, while nine-month revenue decreased 8% year over year.
- Q3 selling, general and administrative expense declined 12% to $7.1 million; nine-month SG&A declined 8% to $23.7 million.
- Research and development expense increased substantially to $1.5 million in Q3 and $3.4 million for nine months, primarily due to the fuel-conversion initiative.
- At September 30, 2015, cash and cash equivalents were $14.4 million, marketable securities were $31 thousand, and working capital was $39.2 million. Total assets were $82.9 million and shareholders’ equity was $68.0 million.
- Operating activities used $1.1 million of cash during the first nine months, compared with $1.4 million provided in the prior-year period. Investing activities used $0.5 million, and financing activities used $1.9 million.
- There were no cash borrowings under either the domestic or China revolving facilities at September 30, 2015. Total short-term debt was zero, compared with $1.6 million at December 31, 2014.
Material Changes Versus the Prior Comparable Period
- APC revenue rose 17% in Q3 to $13.1 million but declined 6% for the first nine months to $31.0 million. APC gross margin fell to 23% in Q3 from 41% and to 29% for nine months from 36%.
- FUEL CHEM revenue declined 17% in Q3 to $8.6 million and 10% for nine months to $24.4 million. Its gross margin improved to 56% in Q3 from 52%, but decreased slightly to 52% for nine months from 53%.
- Management attributed FUEL CHEM weakness to soft electric demand, low natural-gas prices, fuel switching, unscheduled outages, and lower operating capacity at combustion units.
- Consolidated gross margin declined because of lower APC margins and segment mix, despite lower SG&A.
- Foreign revenue declined to $8.0 million in Q3 and $17.3 million for nine months, while U.S. revenue increased to $13.7 million and $38.1 million, respectively.
- APC backlog was $16.9 million at September 30, 2015, down from $18.0 million at December 31, 2014; $6.9 million was domestic and $10.0 million international.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management projected a 45% consolidated effective tax rate for 2015. The filing does not provide clear revenue or earnings guidance.
- The domestic revolving facility has a $15.0 million borrowing base, extendible to $25.0 million with lender approval, and matures June 30, 2017. Approximately $5.5 million was available after $9.5 million of standby letters of credit and bank guarantees.
- The China facility provides approximately $5.5 million of capacity and matures June 24, 2016; approximately $5.4 million was available, with $87 thousand of guarantees outstanding.
- Key domestic facility covenants include minimum trailing-twelve-month EBITDA of $0.5 million for the period ending December 31, 2015, increasing to $1.0 million beginning June 30, 2016, and minimum shareholders’ equity of $69.0 million from December 31, 2015 through December 30, 2016. The company reported a nine-month operating loss and equity of $68.0 million at September 30, 2015, making covenant compliance an item to monitor.
- Defaults may trigger cross-default provisions, acceleration of outstanding amounts, or cancellation of facilities. The company must reimburse issuing banks for payments under outstanding guarantees.
- The business depends materially on the continued existence and enforcement of worldwide air-quality regulations. Foreign-currency fluctuations affect earnings and cash flow; the company does not hedge this exposure.
- No material litigation was reported, and risk factors were said not to have materially changed from the 2014 Form 10-K. No goodwill or intangible-asset impairment indicators were identified.
- The company is evaluating the new revenue-recognition standard, effective January 1, 2018; the filing does not state the expected financial impact.
Investor Verification Checklist
- Verify APC project execution, backlog conversion, and the causes of the sharp APC gross-margin decline.
- Assess whether FUEL CHEM demand can recover from low power-market utilization and fuel switching.
- Monitor EBITDA and shareholders’ equity against the revolving-credit covenants, particularly the $69.0 million equity threshold.
- Reconcile ongoing operating cash usage with the reported cash balance and available credit capacity.
- Evaluate the potential commercial and financial impact of the fuel-conversion research-and-development initiative.
- Review customer acceptance, unbilled receivables of $11.4 million, performance guarantees, and $9.6 million of total standby letters of credit and bank guarantees.