Fuel Tech, Inc. 2013 Q2 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides boiler optimization, efficiency improvement, nitrogen oxide reduction, air-pollution control, and FUEL CHEM chemical solutions to utility and industrial customers worldwide. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $29.1 million | $20.9 million | $51.6 million | $46.1 million |
| Gross margin | 41% | 43% | 41% | 46% |
| Operating income | $2.1 million | $0.2 million | $2.2 million | $2.7 million |
| Net income | $1.2 million | $0.1 million | $1.2 million | $1.6 million |
| Diluted EPS | $0.05 | $0.00 | $0.05 | $0.07 |
| Operating cash flow | Not separately provided | Not separately provided | $(0.5) million | $5.3 million |
Q2 net margin was approximately 4.2%, compared with approximately 0.3% in the prior-year quarter. Six-month net margin was approximately 2.4%, compared with approximately 3.5% in the prior-year period.
- Cash and cash equivalents were $23.1 million at June 30, 2013, versus $24.5 million at December 31, 2012. Including marketable securities, liquidity was $23.1 million.
- Working capital was $41.9 million, compared with $38.9 million at year-end 2012.
- Total assets were $113.1 million and shareholders’ equity was $85.5 million at June 30, 2013.
- Short-term debt was $0.8 million, consisting of borrowings by the Beijing subsidiary. No borrowings were outstanding under the domestic revolving facility.
- The domestic facility had a $15.0 million borrowing base, $8.0 million of stated availability, and maturity through June 30, 2015. The China facility had approximately $3.7 million of stated availability and expires June 27, 2014.
- Operating cash flow was negatively affected by an $11.1 million increase in accounts receivable. Capital expenditures and patent purchases used $1.3 million.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 39%; six-month revenue increased 12%.
- APC revenue increased 58% in Q2 and 16% year to date, primarily from progress on international and domestic construction projects, including a large Chilean project.
- FUEL CHEM revenue increased 9% in Q2 and 5% year to date, driven by higher shipping activity at several existing customer accounts.
- APC backlog increased to $45.1 million at June 30, 2013, from $20.1 million a year earlier; approximately $15.8 million was domestic and $29.4 million international.
- Consolidated gross margin declined because APC included a greater proportion of lower-margin foreign projects. FUEL CHEM margin improved modestly due to product mix and the absence of lower-margin installation work recognized in 2012.
- SG&A increased to $9.3 million in Q2 and $17.8 million for six months, but declined as a percentage of revenue to 32% and 34%, respectively.
- Research and development expense decreased to $0.4 million in Q2 and $1.4 million for six months.
- Accounts receivable increased to $41.4 million from $30.2 million at year-end; unbilled receivables were approximately $18.1 million, compared with $15.7 million at year-end.
- The company withheld and acquired 88,239 additional shares for employee tax obligations during the first half, increasing treasury shares to 97,365. Prior share-repurchase programs were completed in 2012.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management projected a consolidated effective tax rate of approximately 38% for 2013.
- Management expects near-term growth to depend on TIFI technology adoption, enforcement of domestic environmental regulations, and expansion in non-U.S. markets.
- FUEL CHEM remains pressured by soft electric demand, fuel switching to low-cost natural gas, unscheduled outages, and reduced utilization of coal-fired units.
- Revenue recognition includes percentage-of-completion accounting for certain APC contracts, creating sensitivity to estimated costs, contract values, customer acceptance, and performance criteria.
- Two contracts in progress were identified as loss contracts; aggregate provisions were $4,000 at June 30, 2013.
- Outstanding standby letters of credit and bank guarantees totaled approximately $8.1 million across the domestic and China facilities. Fuel Tech must reimburse banks for payments made under these instruments.
- The credit facilities contain cross-default provisions and financial covenants. The company reported compliance at June 30, 2013.
- Product warranty liability was $0.8 million at June 30, 2013, compared with $0.5 million a year earlier.
- Foreign-currency fluctuations affect earnings and cash flow; the company does not use currency derivatives. Management stated that a hypothetical 100-basis-point interest-rate increase would not materially affect expected 2013 interest expense.
- No material litigation, goodwill impairment, or intangible-asset impairment was reported. The company stated that prior-year risk factors had not materially changed.
Investor Verification Checklist
- Verify conversion of the $45.1 million APC backlog into revenue and cash collections, particularly the international and Chilean projects.
- Monitor accounts receivable, unbilled receivables, contract billings, and operating cash flow for working-capital pressure.
- Assess whether lower-margin foreign APC projects continue to reduce consolidated gross margin.
- Evaluate FUEL CHEM exposure to coal-plant utilization, natural-gas prices, fuel switching, and electric demand.
- Confirm compliance with revolving-credit covenants and the potential obligation represented by approximately $8.1 million of letters of credit and guarantees.
- Reconcile the projected 38% tax rate with quarterly tax expense and the geographic mix of earnings.