Fuel Tech, Inc. 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides air-pollution-control technologies and FUEL CHEM combustion-treatment solutions for utility and industrial customers. This Form 10-Q covers the three and six months ended June 30, 2017; amounts are in thousands unless otherwise stated. Effective June 28, 2017, the company suspended its Fuel Conversion business, which is presented as discontinued operations.
Financial Performance and Position
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $9,741 | $18,232 |
| Gross profit | $3,625 | $7,347 |
| Gross margin | 37% | 40% |
| Operating loss | $(5,601) | $(7,378) |
| Loss from continuing operations | $(5,585) | $(7,361) |
| Net loss | $(6,854) | $(9,360) |
| Basic and diluted loss per share | $(0.29) | $(0.39) |
- Six-month operating cash flow was negative $5,252, including negative $3,936 from continuing operations and negative $1,316 from discontinued operations.
- Capital expenditures and patent purchases were $233 for the six-month period.
- Cash and cash equivalents were $6,576 at June 30, 2017, excluding $6,020 of restricted cash. Including restricted cash, cash totaled $12,596. Working capital was $18,067.
- Total assets were $49,058, compared with $57,788 at December 31, 2016. Shareholders’ equity was $35,428, compared with $43,392.
- The company had no borrowings under its revolving credit facilities. The U.S. facility provides $5,000 of availability, secured by restricted cash, with approximately $1,946 available after outstanding letters of credit and guarantees. The China facility provides approximately $959 of availability, with approximately $922 available.
- Outstanding standby letters of credit and bank guarantees totaled approximately $3,054 under the U.S. facility and $37 under the China facility.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 36% from $15,175 in 2016; six-month revenue declined 45% from $32,997.
- APC revenue fell 45% in the quarter and 59% for the six-month period, primarily because of historically low backlog at December 31, 2016 and weak utility capital investment.
- FUEL CHEM revenue declined 18% in the quarter and 13% for the six-month period, reflecting soft electric demand, low natural-gas prices, fuel switching, outages and lower combustion-unit utilization.
- Despite lower revenue, six-month consolidated gross margin increased to 40% from 35%; second-quarter gross margin was unchanged at 37%.
- SG&A declined to $5,923 in the quarter and $11,077 for the six-month period, but SG&A represented 61% of revenue in both periods because of lower sales.
- Operating results included a $2,965 building impairment charge and restructuring charges of $58 for the quarter and $119 for the six-month period.
- Stock-based compensation increased due to accelerated vesting of outstanding restricted stock units approved on June 28, 2017.
- Loss from discontinued operations increased to $1,269 in the quarter and $1,999 for the six-month period, compared with $827 and $1,514, respectively, in 2016.
Guidance, Outlook, Risks and Unusual Items
- Management projected a consolidated effective tax rate of 0% for 2017 because of a full valuation allowance on U.S., China and Italy deferred tax assets.
- APC backlog improved to $21,461 at June 30, 2017, from $8,030 at December 31, 2016, consisting of $11,005 of U.S. projects and $10,456 of international projects.
- Management stated that it believes current cash and working capital are sufficient to operate the base APC and FUEL CHEM businesses, while continuing expense reductions and restructuring efforts.
- The company has eliminated approximately $15 million of aggregate expenses over the preceding two years through headcount and operating-cost reductions, according to management.
- Suspension of Fuel Conversion is expected to result in $582 of severance costs, with $402 payable in 2017, $120 in 2018 and $60 in 2019. Additional storage, disposal and contract-termination costs are expected, but the filing does not provide a clear estimate.
- Assets held for sale related to Fuel Conversion totaled $1,839. Management cautioned that these assets may not realize their carrying value and that disposal costs may exceed expectations.
- The company’s business is materially dependent on air-quality regulations and utility demand. Risks include weak coal-fired generation, low natural-gas prices, delayed customer capital spending, foreign-currency fluctuations, contract performance obligations and the need to maintain cash collateral for credit facilities.
- Two construction contracts in progress were identified as loss contracts, with a $262 provision recorded in other accrued liabilities.
- The U.S. credit facility was extended to June 28, 2019, and has no financial covenants under the amendment. The China facility expires June 29, 2018, and management intends to renew it.
Important Facts for Investors to Verify
- Whether the increased APC backlog converts into revenue and operating cash flow at expected margins.
- The sustainability of liquidity given recurring operating losses, negative operating cash flow and $6,020 of restricted cash.
- The amount and timing of additional Fuel Conversion disposal, storage, severance and contract-termination costs.
- Whether the $2,965 building impairment and other restructuring actions fully reflect current asset values and future cost structure.
- The effect of the planned suspension of Fuel Conversion on future reported revenue, research spending and cash requirements.
- Potential exposure from approximately $3,091 of outstanding letters of credit and bank guarantees, including cross-default provisions in the credit facilities.
- The impact of the expected adoption of the revenue-recognition standard in 2018; the filing states that the quantitative effect was not yet reasonably estimable.