Fuel Tech Reports Second Quarter 2012 Results

Fuel Tech, Inc. (NASDAQ: FTEK), a world leader in advanced engineering solutions for the optimization of combustion systems and emissions control in utility and industrial applications, today reported results for the three- and six-month periods ended June 30, 2012.

Recent Highlights
  • Record Air Pollution Control (APC) bookings of $47.4 million in July, including the largest contract booking in Company history of $36.6 million, bringing our total backlog from $20.1 million on June 30, 2012 up to $67.5 million and reflecting strong growth in international business
  • Slower domestic APC bookings, the result of regulatory delay with Cross-State Air Pollution Rule (CSPAR)
  • Continued softness in our FUEL CHEM® markets, the result of low natural gas prices and decreased coal usage, leading to a year-over-year revenue decline and reduced diluted earnings per share of $0.03 compared to the second half of 2011
  • Increased year-over-year spending in Research & Development of $0.7 million, representing $0.02 diluted earnings per share, in support of new product development and additional offerings

Financial Results

Revenues for the second quarter totaled $20.9 million, a 10% increase from the comparable prior-year quarter. Net income for the quarter was $0.07 million, or $0.00 per diluted share, compared with net income of $0.4 million, or $0.02 per diluted share, in the same quarter in the prior year.

Revenues for the six months ended June 30, 2012 totaled $46.1 million, representing an increase of $4.5 million or 11% from the comparable prior-year period amount of $41.6 million. Net income for the six-month period was $1.6 million, or $0.07 per diluted share, compared with a net income of $1.8 million in the same year-ago period. Adjusted EBITDA for the six months ended June 30, 2012 totaled $4.6 million, a decrease of $2.7 million, or 37% from the comparable prior-year period of $7.2 million.

The APC technology segment generated second quarter revenues of $12.8 million, an increase of 33% versus the second quarter of 2011. This increase is due primarily to the recognition of revenue from our record year-end backlog that occurred as a result of the higher contract bookings recorded during the second half of 2011.

Gross margin for the APC segment was 38% in the second quarter of 2012 versus 46% reported in the second quarter of 2011, primarily due to a greater mix of lower margin international projects. The APC segment recorded revenues of $28.5 million in the first half of 2012, an increase of $7.8 million, or 38% from the prior year amount of $20.7 million. Segment gross margin for the first half of 2012 stood at 41% versus 48% reported in the prior year. This decrease is attributable to the aforementioned lower margin international projects.

The FUEL CHEM ® technology segment (FUEL CHEM segment) generated revenues of $8.1 million in the second quarter of 2012, a decrease of $1.3 million, or 14%, from the comparable 2011 quarter. Current quarter revenues include $7.5 million from coal-fired units, a 12% decrease versus a year ago, and $0.6 million from non-coal-fired units, a 40% decrease from the comparable prior-year quarter. The coal revenue decrease is due in part to attrition at existing customer accounts due to the soft electric demand market and fuel switching as a result of low natural gas prices. These factors led to coal combustion units operating at less than full capacity, along with unscheduled outages, which resulted in a corresponding decrease in our second quarter revenues. Segment gross margins increased from 43% in the second quarter of 2011 to 51% in the current quarter. The quarter gross margin in 2011 was negatively impacted by $0.4 million attributable to the costs of a FUEL CHEM demonstration in China.

Revenues for the FUEL CHEM segment for the six-month period totaled $17.6 million, a decrease of $3.3 million, or 16% versus the prior year amount of $20.9 million. Six-month revenues for 2011 include approximately $1.3 million in non-recurring lower-margin installation work for a specific new customer. Six-month revenues include $16.3 million from coal-fired units, a 15% decrease versus a year ago, and $1.2 million from non-coal fired units, a 32% decrease versus the year-earlier period. Segment gross margin increased to 52% in the first half of 2012 from 46% in the comparable period in 2011. The higher gross margin in 2012 is attributable to a higher margin mix of customer orders and the previously discussed non-recurring, lower margin installation work that was recognized in 2011.

Selling, general and administrative (SG&A) expenses totaled $7.9 million in the current quarter versus $8.0 million in the same year-ago period. Research and development (R&D) expenses were $1.0 million versus $0.3 million in the year-ago quarter.

SG&A expenses totaled $16.9 million in the first half of 2012, versus $15.9 million in the same year-ago period, which represents a 1% decrease in SG&A costs as a percentage of revenue. The net-dollar increase in SG&A expenses is attributed primarily to higher employee-related costs and sales commissions, partially offset by a decrease in stock-based compensation. Research and development (R&D) expenses increased to $1.5 million in the first half of the year versus $0.7 million in the year-ago period, to support continued emphasis on R&D activities to enhance product offerings.

During the second quarter of 2012, the Company announced contract awards with a value of approximately $6.0 million. After accounting for the conversion of backlog to revenues during this period, the APC segment capital projects backlog stood at $20.1 million as of June 30, 2012. Subsequent to June 30, 2012, the Company has announced APC orders with a value of $47.4 million, including a $36.6 million order placed by a major utility in Chile.

During the three- and six-month periods ended June 30, 2012, the Company repurchased 1,124,797 and 334,636 shares of common stock for $5.3 million and $1.9 million, respectively, under our share repurchase programs. Since the inception of these programs, the Company has repurchased a total of 2,161,147 common shares for approximately $11.3 million, resulting in an average price of $5.22 per share. As of June 30, 2012, an additional $0.7 million is remaining for share repurchases through June 30, 2013.

Douglas G. Bailey, Chairman, President and Chief Executive Officer, commented, “We delivered solid results in our APC segment as progress was made in working through our strong backlog. We are particularly pleased with the orders we have received in the People’s Republic of China. Thus far this year, we have announced $15.8 million in China orders, which exceeds last year’s total of $13.4 million. In particular, we continue to see strong interest from our ULTRA™ product line. During the second quarter, we received three orders for ULTRA projects on six coal-fired units that are being retrofitted with nitrogen oxide (NO x) reduction technology. Additionally, an award was received for a NOxOUT-SCR® system on a carbon black manufacturing facility.

“Subsequent to the quarter-end, we received a $36.6 million award, the largest in the Company’s history, for Low NOx Burners (LNBs) and Over-Fire Air (OFA) systems and mill modernization for six coal-fired units in Chile. In addition, the following awards in China were received: five orders for nine ULTRA systems on large coal-fired units, two awards for Selective Non-Catalytic Reduction (SNCR) projects on two industrial units, and two Flue Gas Conditioning (FGC) contracts, which represent our first commercial FGC applications. Bidding activity in China continues to be robust and we anticipate this to result in additional future orders.

“Despite light domestic APC contract bookings in the first half of the year, we have a good pipeline of business across our domestic portfolio. We continue to see demand from utilities and industrial units for our Low NO x Burner and Over-Fire Air technologies. We are confident that once there's better clarity on the Cross-State Air Pollution Rule (CSAPR), we will see an increase in SNCR and Advanced Selective Catalytic Reduction (ASCR) orders. We have close and trusted relationships with our customers, and we continue to stay on top of their emission control needs so that we are ready to respond in a timely and cost-effective manner.”

Mr. Bailey continued, “The second quarter of 2012 was a challenging period for our FUEL CHEM segment as it continued to be impacted by low natural gas prices and depressed electrical demand which caused a number of our existing customer plants to operate below expectations. While challenges exist with the current market conditions, we continue to work with our clients to improve their fuel selection capabilities, address the challenges of slag formation and furnace fouling, and offer effective solutions to other emissions challenges.”

Mr. Bailey concluded, “We have consciously expanded our international presence to achieve both growth and regulatory diversification in our Air Pollution Control business. We have strategically focused on key geographic markets and we are pleased to see the results of these efforts. As we look for regulatory clarity to emerge in the United States and continued penetration and completion of existing international orders, we expect to see a stronger second half of 2012.”

Conference Call

As a reminder, Fuel Tech will host a conference call on Tuesday, August 7 at 9:00 AM EST to discuss the results. The call will simultaneously be broadcast over the Internet at www.ftek.com and can be accessed under “Upcoming Events” on the Home page. The call can also be accessed by dialing 866-788-0539 (domestic) or 857-350-1677 (international) and using the passcode “FUEL TECH.” A replay of the call will be available on the website and can be accessed by dialing 888.286.8010 (domestic) or 617.801.6888 (international) and using the passcode “78747286.” The replay will be available until September 1, 2012.

About Fuel Tech

Fuel Tech is a leading technology company engaged in the worldwide development, commercialization and application of state-of-the-art proprietary technologies for air pollution control, process optimization, and advanced engineering services. These technologies enable customers to produce both energy and processed materials in a cost-effective and environmentally sustainable manner.

The Company’s nitrogen oxide (NO x) reduction technologies include advanced combustion modification techniques - such as Low NOx Burners and Over-Fire Air systems - and post-combustion NO x control approaches, including NOxOUT® and HERT™ SNCR systems as well as systems that incorporate ASCR™ (Advanced Selective Catalytic Reduction), NOxOUT CASCADE®, ULTRA™ and NOxOUT-SCR® processes. These technologies have established Fuel Tech as a leader in NO x reduction, with installations on over 700 units worldwide, where coal, fuel oil, natural gas, municipal waste, biomass, and other fuels are utilized.

The Company’s FUEL CHEM® technology revolves around the unique application of chemicals to improve the efficiency, reliability, fuel flexibility and environmental status of combustion units by controlling slagging, fouling, corrosion, opacity and operational issues associated with sulfur trioxide, ammonium bisulfate, particulate matter (PM 2.5), carbon dioxide and NO x. This technology, in the form of a customizable FUEL CHEM program, is experienced on over 110 combustion units burning a wide variety of fuels including coal, heavy oil, biomass, and municipal waste.

Fuel Tech also provides a range of combustion optimization services, including airflow testing, coal flow testing and boiler tuning, as well as services to help optimize selective catalytic reduction system performance, including catalyst management services and ammonia injection grid tuning. In addition, flow corrective devices and physical and computational modeling services are available to optimize flue gas distribution and mixing in both power plant and industrial applications.

Many of Fuel Tech’s products and services rely heavily on the Company’s exceptional Computational Fluid Dynamics modeling capabilities, which are enhanced by internally developed, high-end visualization software. These capabilities, coupled with the Company’s innovative technologies and multi-disciplined team approach, enable Fuel Tech to provide practical solutions to some of our customers’ most challenging problems. For more information, visit Fuel Tech’s web site at www.ftek.com.

This press release may contain statements of a forward-looking nature regarding future events. These statements are only predictions and actual events may differ materially. Please refer to documents that Fuel Tech files from time to time with the Securities and Exchange Commission for a discussion of certain factors that could cause actual results to differ materially from those contained in the forward-looking statements.

FUEL TECH, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)
 
 

June 30,
 

December 31,

2012

2011
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 24,725 $ 28,229
Marketable securities 40 57

Accounts receivable, net of allowance for doubtful accounts of $424 and $430, respectively
25,750 34,346
Inventories 389 311
Prepaid expenses and other current assets 1,206 2,026
Prepaid income taxes 897 1,124
Deferred income taxes   360     163  
Total current assets 53,367 66,256
 
Property and equipment, net of accumulated depreciation of $19,315 and $18,239, respectively 14,090 13,625
Goodwill 21,051 21,051
Other intangible assets, net of accumulated amortization of $3,836 and $3,385, respectively 5,161 5,442
Deferred income taxes 3,643 3,798
Other assets   2,756     2,818  
Total assets $ 100,068   $ 112,990  
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt $ 1,187 $ 1,181
Accounts payable 6,459 10,476
Accrued liabilities:
Employee compensation 2,367 4,902
Other accrued liabilities   4,849     6,071  
Total current liabilities 14,862 22,630
 
Other liabilities   1,349     1,347  
Total liabilities 16,211 23,977
Shareholders' equity:

Common stock, $.01 par value, 40,000,000 shares authorized, 22,184,868 and 23,644,301 shares issued and outstanding
222 237
Additional paid-in capital 132,669 132,350
Accumulated deficit (49,584 ) (44,031 )
Accumulated other comprehensive income 474 381
Nil coupon perpetual loan notes   76     76  
Total shareholders' equity   83,857     89,013  
Total liabilities and shareholders' equity $ 100,068   $ 112,990  
 

FUEL TECH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per-share data)
 
 

Three Months Ended
   

Six Months Ended

June 30,

June 30,
2012   2011 2012   2011
 
Revenues $ 20,911 $ 19,021 $ 46,123 $ 41,643
 
Costs and expenses:
Cost of sales 11,880 10,553 25,100 22,019
Selling, general and administrative 7,874 7,966 16,868 15,917
Gain on revaluation of ACT liability - (758 ) - (758 )
Research and development   969     315     1,475     717  
  20,723     18,076     43,443     37,895  
 
Operating income 188 945 2,680 3,748
 
Interest expense (49 ) (38 ) (74 ) (78 )
Interest income 40 4 40 5
Other expense   (72 )   (155 )   (51 )   (195 )
Income before income taxes 107 756 2,595 3,480
 
Income tax expense   (39 )   (326 )   (984 )   (1,711 )
 
Net income $ 68   $ 430   $ 1,611   $ 1,769  
 
Net income per common share:
Basic $ 0.00   $ 0.02   $ 0.07   $ 0.07  
Diluted $ 0.00   $ 0.02   $ 0.07   $ 0.07  
 

Weighted-average number of common shares outstanding:
Basic   23,107,000     24,269,000     23,349,000     24,242,000  
Diluted   23,984,000     24,909,000     24,122,000     24,900,000  
 

FUEL TECH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)
 
 

Three Months Ended
   

Six Months Ended

June 30,

June 30,
2012   2011 2012   2011
 
Net income $ 68 $

430

 
$ 1,611 $

1,769

 
Other comprehensive income:
Foreign currency translation adjustments 70 38 104 99
Unrealized gains/(losses) from marketable securities,   (26 )   68     (11 )   68  
net of tax
Total other comprehensive income 44 106 93 166
       
Comprehensive income $ 112   $ 536   $ 1,704   $ 1,936  
 

FUEL TECH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)
 
 

Six Months Ended

June 30,
2012   2011
Operating Activities
Net income $ 1,611 $ 1,769

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation 1,091 1,534
Amortization 451 455
Gain on equipment disposals - (2 )
Gain on revaluation of ACT liability - (758 )
Deferred income taxes (89 ) (253 )
Stock based compensation 372 1,696
Bad debt expense (6 ) 70
Changes in operating assets and liabilities:
Accounts receivable 8,606 (185 )
Inventories (80 ) 168

Prepaid expenses, other current assets and other noncurrent assets
869 37
Accounts payable (4,017 ) (935 )
Accrued liabilities and other noncurrent liabilities   ( 3,508 )   (2,675 )
Net cash provided by operating activities 5,300 921
 
Investing Activities
Proceeds from the sale of equipment - 2
Purchases of property, equipment and patents   (1,726 )   (1,242 )
Net cash (used in) investing activities (1,726 ) (1,240 )
 
Financing Activities
Payments to repurchase common stock (7,179 ) -
Proceeds from exercise of stock options   -     313  
Net cash (used in) provided by financing activities (7,179 ) 313
 
Effect of exchange rate fluctuations on cash   101     129  
 
Net (decrease) increase in cash and cash equivalents (3,504 ) 123
 
Cash and cash equivalents at beginning of period   28,229     30,524  
 
Cash and cash equivalents at end of period $ 24,725   $ 30,647  
 

FUEL TECH, INC.

BUSINESS SEGMENT FINANCIAL DATA

(in thousands of dollars)
 

Three months ended
 

Air Pollution
 

FUEL CHEM
   

June 30, 2012
 

Control Segment
 

Segment
  Other   Total
Revenues from external customers $

12,818

 
$

8,093

 
$ - $ 20,911
Cost of sales   7,951       3,929       -       11,880  
Gross margin 4,867 4,164 - 9,031
Selling, general and administrative - - (7,874 ) (7,874 )
Research and development     -       -       (969 )    

(969

)
Operating income   $ 4,867     $ 4,164     $ (8,843 )   $ 188  
 
 

Three months ended

Air Pollution

FUEL CHEM

June 30, 2011
 

Control Segment
 

Segment
  Other   Total
Revenues from external customers $ 9,644 $ 9,377 $ - $ 19,021
Cost of sales   5,246       5,307       -       10,553  
Gross margin 4,398 4,070 - 8,468
Selling, general and administrative - - (7,966 ) (7,966 )
Research and development - - (315 ) (315 )
Gain from revaluation of ACT liability     -       -       758       758  
Operating income   $ 4,398     $ 4,070     $ (7,523 )   $ 945  
 
 

Six months ended

Air Pollution

FUEL CHEM

June 30, 2012
 

Control Segment
 

Segment
  Other   Total
Revenues from external customers $ 28,532 $ 17,591 $ - $ 46,123
Cost of sales   16,702       8,398       -       25,100  
Gross margin 11,830 9,193 - 21,023
Selling, general and administrative - - (16,868 ) (16,868 )
Research and development     -       -       (1,475 )     (1,475 )
Operating income   $ 11,830     $ 9,193     $ (18,343 )   $

2,680

 
 
 

Six months ended

Air Pollution

FUEL CHEM

June 30, 2011
 

Control Segment
 

Segment
  Other   Total
Revenues from external customers $ 20,736 $ 20,907 $ - $ 41,643
Cost of sales   10,799       11,220       -       22,019  
Gross margin 9,937 9,687 - 19,624
Selling, general and administrative - - (15,917 ) (15,917 )
Research and development - - (717 ) (717 )
Gain from revaluation of ACT liability     -       -       758       758  
Operating income   $ 9,937     $ 9,687     $ (15,876 )   $ 3,748  

Note: Fuel Tech is an integrated company that segregates its financial results into two reportable segments, both providing advanced technology and engineering solutions for the optimization of combustion systems in utility and industrial applications. The “Other” classification includes those profit and loss items not allocated by Fuel Tech to each reportable segment.

FUEL TECH, INC.

GEOGRAPHIC INFORMATION

(in thousands of dollars)
 
  Three months ended June 30,     Six months ended June 30,
2012   2011 2012   2011
Revenues:
United States $

17,966

 
$

15,529

 
$

40,910

 
$

35,147

 
Foreign   2,945     3,492     5,213     6,496  
$ 20,911   $ 19,021   $ 46,123   $ 41,643  
   

June 30,

December 31,

2012

2011
Assets:
United States $ 87,870 $ 99,601
Foreign   12,198     13,389  
$ 100,068   $ 112,990  
 

FUEL TECH, INC.

RECONCILIATION OF GAAP NET INCOME TO EBITDA AND ADJUSTED EBITDA

(in thousands of dollars)
 
  Six Months Ended June 30,
2012   2011
Net income

$

1,611

 

$

1,769

 
Interest expense 74 78
Income tax expense 984 1,711
Depreciation expense 1,091 1,534
Amortization expense   451     455  
EBITDA 4,211 5,547
Stock compensation expense   372     1,696  
ADJUSTED EBITDA $ 4,583   $ 7,243  
 

Adjusted EBITDA

To supplement the Company’s consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (GAAP), the Company has provided an Adjusted EBITDA disclosure as a measure of financial performance. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax expense (benefit), depreciation expense, amortization expense and stock compensation expense. The Company’s reference to these non-GAAP measures should be considered in addition to results prepared in accordance with GAAP standards, but are not a substitute for, or superior to, GAAP results.

Adjusted EBITDA is provided to enhance investors’ overall understanding of the Company’s current financial performance and ability to generate cash flow, which we believe is a meaningful measure for our investor and analyst communities. In many cases non-GAAP financial measures are utilized by these individuals to evaluate Company performance and ultimately determine a reasonable valuation for our common stock. A reconciliation of Adjusted EBITDA to the nearest GAAP measure of net income (loss) has been included in the financial table above.

Copyright Business Wire 2010

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