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| FTEK > SEC Filings for FTEK > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Results of Operations
Revenues for the three months ended September 30, 2009 and 2008 were $16,475 and
$23,703, respectively, while revenues for the nine months ended September 30,
2009 and 2008 were $52,714 and $62,961, respectively. The decreases in
consolidated revenues versus the prior year, for both the quarterly and
year-to-date periods, are primarily driven by suppressed domestic Air Pollution
Control (APC) technology segment orders which led to the APC segment revenue
shortfall.
The APC technology segment generated revenues of $6,182 and $24,179 for the
three- and nine-month periods ended September 30, 2009, respectively, a decrease
of $7,385, or 54%, and $11,534, or 32%, from the respective prior year periods
due to an across-the-board slowdown of capital project orders for pollution
control equipment from our customer base. While revenues are down from the prior
year, this segment remains uniquely positioned to capitalize on the next phase
of increasingly stringent U.S. and Chinese air quality standards, specifically
on NOx control. Interest in Fuel Tech's suite of pollution control technologies,
on both a new and retrofit basis, remains strong, both domestically and abroad,
and recent quotation and order activity has been strong.
The FUEL CHEM technology segment generated revenues of $10,293 and $28,535 for
the three- and nine-month periods ended September 30, 2009, respectively, an
increase of $157, or 2%, and $1,287, or 5%, versus the respective prior year
periods. This increase is primarily due to the addition of new customer units
and increased project demonstrations activity. The Company recently announced
the addition of several new international commercial contracts, further
strengthening its global presence in the marketplace. Despite a record level of
year-to-date revenues through September 30, 2009, the recent decrease in demand
for electricity, largely related to the economic recession, has dictated that
certain Fuel Tech customers shut down or scale back certain boiler operations.
This, in turn, has resulted in certain FUEL CHEM programs being operated at
reduced levels or, in some cases, being temporarily turned off. Even with the
near-term economic environment, the marketplace acceptance for Fuel Tech's
patented TIFI® Targeted In-Furnace Injection™ technology remains strong, both
domestically and abroad, particularly on coal-fired units, which represent the
largest market opportunity for the technology.
The FUEL CHEM technology segment revolves around the unique application of
specialty chemicals to improve the efficiency, reliability and environmental
status of plants operating in the electric utility, industrial, pulp and paper,
and waste-to-energy markets. FUEL CHEM programs are currently commercial on over
75 combustion units around the world, treating a wide variety of solid and
liquid fuels, including coal, heavy oil, biomass and municipal waste.
Cost of sales as a percentage of revenue for the three months ended
September 30, 2009 and 2008 was 61% and 55%, respectively. The quarterly cost of
sales percentage for the APC technology segment increased to 66% from 57% in the
comparable prior-year period, primarily due to a pass-through product sale at a
nominal gross margin percentage whereby Fuel Tech was acting as a conduit for
the catalyst manufacturer and the timing of project milestones for other
contracts that primarily involved lower margin revenue-generating activities
supporting APC projects.
For the FUEL CHEM technology segment, the quarterly cost of sales percentage
increased to 58% from 52% for the comparable prior-year quarter. This increase
was primarily due to demonstration program expenses as the Company continues to
run a substantial number of domestic demonstrations, the one-time sale of FUEL
CHEM equipment at a nominal price to support the start up of a Mexican-based
FUEL CHEM program, and the continued suppressed average revenue base at many
existing customers that dilutes customer-specific gross margins as local fixed
costs remain in spite of the decreased revenue amount.
Cost of sales as a percentage of revenue for the nine months ended September 30,
2009 and 2008 was 60% and 53%, respectively. The cost of sales percentage for
the APC technology segment increased to 62% from 55% due primarily to the
pass-through product sales of several items at a nominal gross margin percentage
whereby Fuel Tech was acting as a conduit for the catalyst manufacture and
project timing which resulted in a higher-than-average project mix towards other
lower margin revenue-generating activities supporting APC projects.
For the FUEL CHEM technology segment, the cost of sales percentage increased to
59% from 51% for the comparable prior-year quarter. This increase was primarily
due to demonstration program expenses as the Company continues to run several
international and domestic demonstrations, the one-time sale of FUEL CHEM
equipment at a nominal price to support the start up of a Mexican-based FUEL
CHEM program, and the continued suppressed average revenue base at many existing
customers that dilutes customer-specific gross margins as local fixed costs
remain in spite of the decreased revenue amount.
Selling, general and administrative (SG&A) expenses for the three-month period
ended September 30, 2009 were $8,000, an increase of $1,211, or 18%, versus the
comparable prior year period. The increase was driven by additional sales
commissions, primarily associated with record FUEL CHEM sales, of $544 as the
sales commission plan became effective January 1, 2009, salaries and benefits of
$496 primarily related to the October 2008 acquisition of substantially all of
the assets of Tackticks and FlowTack and the January 2009 ACT Acquisition, lower
than expected utilization of engineering personnel of $303, additional legal
expenses of $223 for general corporate administrative matters, including
contract review and intellectual property-related work, increased
personnel-related costs of $162 in the Company's Beijing office to support
growth, and increased depreciation expense of $102 related to additional FUEL
CHEM equipment deployed at customer sites. Partially offsetting these increases
were reduced expenditures for consultants of $243, lower third-party agency
commissions for APC sales of $175 related to suppressed year-to-date APC
customer orders, and lower personnel recruiting costs of $124.
SG&A expenses for the nine-month period ended September 30, 2009 were $25,130,
an increase of $3,949, or 19%, versus the comparable prior year period. The
increase was driven by additional salaries and benefits of $2,670 primarily
related to the October 2008 acquisition of substantially all of the assets of
Tackticks and FlowTack and the January 2009 ACT Acquisition and a one-time
employee expense of $550 related to the reduction in workforce the Company
undertook during the second quarter of 2009, increased sales commissions,
primarily associated with record FUEL CHEM sales, of $864 as the sales
commission plan became effective January 1, 2009, increased depreciation expense
of $348 related to additional FUEL CHEM equipment deployed at customer sites,
increased personnel-related costs of $232 in the Company's Beijing office to
support growth, lower than expected utilization of engineering personnel of
$185, increased service fees for computer modeling software of $142, additional
travel costs of $128 to support international and domestic growth, and
additional legal expenses of $118 for general corporate administrative matters,
including contract review and intellectual property-related work. Partially
offsetting these increases are reduced personnel recruiting costs of $319, lower
third-party agency commissions for APC sales of $296 related to suppressed
year-to-date APC customer orders, and reduced expenditures for consultants of
$206.
The Company recorded a one-time gain of $781 from the revaluation of the
contingent liability recorded in connection with the ACT Acquisition in
January 2009. The $781 had been recorded in the first quarter of 2009 as part of
a $2,307 contingent consideration accrual representing the fair value,
weighted-average probability of future consideration expected to be paid in
connection with the ACT Acquisition. For the year ended December 31, 2009,
management has concluded that an earnout payment related to the ACT Acquisition
for fiscal 2009 is not probable, thus the $781 portion of the total contingent
liability that related to 2009 was reversed.
Research and development (R&D) expenses for the three months ended September 30,
2009 were $160, a decrease of $220, or 58%, versus the comparable prior-year
period, while R&D expenditures for the nine months ended September 30, 2009 were
$391, a decrease of $1,453, or 78%, versus the comparable prior-year period.
Both the three- and nine-month year-over-year declines in R&D expenditures are
due to the Company moderating its near-term R&D expenditures in the wake of the
global financial crisis and revenue shortfalls. However, Fuel Tech has
maintained its focused approach in the pursuit of commercial applications for
its technologies outside of its traditional markets, and in the development and
analysis of new technologies that could represent incremental market
opportunities.
Interest income for the three- and nine-month periods ended September 30, 2009
of $7 and $30, respectively, decreased $138, or 95%, and $580, or 95%,
respectively. The primary drivers of the reduced levels if interest income for
both periods are a significant reduction in cash and cash equivalents on hand
due to the cash outlay for the acquisitions of substantially all of the assets
of Tackticks FlowTack, and ACT, coupled with a decrease in the average return in
the Company's interest-bearing accounts in which the cash is invested.
Income tax benefit / (expense) for the three- and nine-month periods ended
September 30, 2009 and 2008 were $264 and ($1,289) and $1,493 and ($2,596),
respectively, reflecting the Company's pre-tax loss and income positions,
respectively.
Liquidity and Sources of Capital
At September 30, 2009, Fuel Tech had cash and cash equivalents, short-term
investments and restricted cash on hand of $14,084 and working capital of
$27,930 versus $28,149 and $44,346 at December 31, 2008, respectively.
Restricted cash as of September 30, 2009 of $881 was used as collateral for
pre-existing stand-by letters of credit and bank guaranties with Wachovia Bank,
N.A. (Wachovia) at June 30, 2009 as that was the date the Company entered into a
new revolving credit facility with JPMorgan Chase N.A. (JPM Chase). As these
instruments are transferred to JPM Chase and the Wachovia instruments are
retired, the cash collateral will no longer be needed and will cease to be
restricted. The reduction in restricted cash from the June 30, 2009 balance of
$5,525 is reflective of the transfer of most of the stand-by letters of credit
and bank guaranties out of Wachovia to JPM Chase.
Operating activities provided $7,502 of cash during the nine-month period ended
September 30, 2009, primarily due to the add back of non-cash items, including
depreciation of $2,842, amortization of $1,082, and stock compensation expense
of $4,628, an increase in accrued liabilities of $610 and decreases in asset
accounts, including accounts receivable of $3,181, inventory of $517 and prepaid
expenses of $907. Partially offsetting these positive cash flow items were the
year-to-date net loss of $2,538, an income tax benefit of $1,613 and a decrease
in accounts payable of $2,245.
Investing activities used cash of $22,841 during the nine-month period ended
September 30, 2009. This amount was comprised of three items: the acquisition of
substantially all of the assets of ACT required a total funding of $20,186;
capital expenditures of $1,774, primarily to support and enhance the operations
of the FUEL CHEM technology segment; and an increase in restricted cash of $881
to support the transfer of pre-existing stand-by letters of credit and bank
guaranties from Wachovia to JPM Chase.
The Company generated cash from financing activities during the nine-month
period ended September 30, 2009 of $319, primarily from the excess tax benefits
realized of $251 from stock options exercised in the first nine months of 2009
and from the issuance of directors' deferred shares of stock of $63.
Contingencies and Contractual Obligations
Fuel Tech issues a standard product warranty with the sale of its products to
customers as discussed in Note K. The change in the warranty liability balance
during the three months ended September 30, 2009 was not material.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations
regarding future growth, results of operations, cash flows, performance and
business prospects, and opportunities, as well as assumptions made by, and
information currently available to, our management. Fuel Tech has tried to
identify forward-looking statements by using words such as "anticipate,"
"believe," "plan," "expect," "estimate," "intend," "will," and similar
expressions, but these words are not the exclusive means of identifying
forward-looking statements. These statements are based on information currently
available to Fuel Tech and are subject to various risks, uncertainties, and
other factors, including, but not limited to, those discussed in Fuel Tech's
Annual Report on Form 10-K for the year ended December 31, 2008 in Item 1A under
the caption "Risk Factors," which could cause Fuel Tech's actual growth, results
of operations, financial condition, cash flows, performance and business
prospects and opportunities to differ materially from those expressed in, or
implied by, these statements. Fuel Tech undertakes no obligation to update such
factors or to publicly announce the results of any of the forward-looking
statements contained herein to reflect future events, developments, or changed
circumstances or for any other reason. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including those
detailed in Fuel Tech's filings with the Securities and Exchange Commission.
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