e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33059
FUEL TECH, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation of organization)
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20-5657551
(I.R.S. Employer Identification Number) |
Fuel Tech, Inc.
27601 Bella Vista Parkway
Warrenville, IL 60555-1617
630-845-4500
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer (as defined in rule 12b-2 under the Securities Exchange Act
of 1934).
Large Accelerated Filer o |
Accelerated Filer þ |
Non-accelerated Filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of October 27, 2009 there were outstanding 24,211,967 shares of Common Stock, par value
$0.01 per share, of the registrant.
FUEL TECH, INC.
Form 10-Q for the nine-month period ended September 30, 2009
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
FUEL TECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per-share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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(Note B) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
13,203 |
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$ |
28,149 |
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Restricted cash |
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881 |
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Accounts receivable, net of allowance for doubtful accounts of
$69 and $80, respectively |
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20,184 |
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23,365 |
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Inventories |
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498 |
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1,014 |
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Deferred income taxes |
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767 |
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767 |
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Prepaid expenses and other current assets |
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4,392 |
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4,718 |
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Total current assets |
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39,925 |
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58,013 |
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Equipment, net of accumulated depreciation of $14,595 and
$12,588, respectively |
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16,292 |
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17,515 |
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Goodwill |
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21,441 |
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5,158 |
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Other intangible assets, net of accumulated amortization of
$2,587 and $1,504, respectively |
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6,957 |
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2,543 |
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Deferred income taxes |
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4,025 |
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2,412 |
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Other assets |
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2,605 |
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3,232 |
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Total assets |
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$ |
91,245 |
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$ |
88,873 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Short-term debt |
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$ |
2,194 |
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$ |
2,188 |
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Accounts payable |
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5,950 |
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8,196 |
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Accrued liabilities |
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3,851 |
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3,283 |
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Total current liabilities |
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11,995 |
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13,667 |
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Other liabilities |
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2,954 |
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1,389 |
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Total liabilities |
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14,949 |
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15,056 |
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Stockholders equity: |
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Common stock, $.01 par value, 40,000,000 shares
authorized, 24,163,217 and 24,110,967 shares issued,
respectively |
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242 |
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241 |
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Additional paid-in capital |
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123,530 |
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118,588 |
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Accumulated deficit |
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(47,818 |
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(45,280 |
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Accumulated other comprehensive income |
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261 |
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187 |
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Nil coupon perpetual loan notes |
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81 |
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81 |
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Total stockholders equity |
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76,296 |
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73,817 |
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Total liabilities and stockholders equity |
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$ |
91,245 |
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$ |
88,873 |
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See notes to condensed consolidated financial statements.
1
FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per-share data)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues |
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$ |
16,475 |
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$ |
23,703 |
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$ |
52,714 |
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$ |
62,961 |
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Costs and expenses: |
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Cost of sales |
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10,034 |
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13,019 |
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31,786 |
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33,521 |
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Selling, general and
administrative |
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8,000 |
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6,789 |
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25,130 |
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21,181 |
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Gain from revaluation of
contingent performance
obligation |
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(781 |
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(781 |
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Research and development |
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160 |
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380 |
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391 |
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1,844 |
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17,413 |
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20,188 |
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56,526 |
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56,546 |
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Operating (loss) income |
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(938 |
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3,515 |
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(3,812 |
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6,415 |
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Interest expense |
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(27 |
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(31 |
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(83 |
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(93 |
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Interest income |
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7 |
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145 |
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30 |
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610 |
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Other expense |
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(4 |
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(238 |
) |
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(166 |
) |
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(154 |
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(Loss) income before taxes |
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(962 |
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3,391 |
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(4,031 |
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6,778 |
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Income tax benefit (expense) |
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264 |
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(1,289 |
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1,493 |
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(2,596 |
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Net (loss) income |
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$ |
(698 |
) |
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$ |
2,102 |
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$ |
(2,538 |
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$ |
4,182 |
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Net (loss) income per Common
Share: |
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Basic |
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$ |
(0.03 |
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$ |
0.09 |
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$ |
(0.11 |
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$ |
0.18 |
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Diluted |
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$ |
(0.03 |
) |
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$ |
0.09 |
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$ |
(0.11 |
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$ |
0.17 |
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Weighted-average number of
Common Shares outstanding: |
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Basic |
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24,142,000 |
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23,978,000 |
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24,127,000 |
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23,450,000 |
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Diluted |
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24,142,000 |
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24,638,000 |
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24,127,000 |
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24,604,000 |
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See notes to condensed consolidated financial statements.
2
FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Nine Months Ended |
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September 30 |
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2009 |
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2008 |
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Operating activities |
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Net cash provided by operating activities |
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$ |
7,502 |
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$ |
8,335 |
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Investing activities |
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Acquisition of business |
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(20,186 |
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Increase in restricted cash |
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(881 |
) |
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Sales of short-term investments |
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1,998 |
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Purchases of property, equipment and intangible assets |
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(1,774 |
) |
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(9,080 |
) |
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Net cash used in investing activities |
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(22,841 |
) |
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(7,082 |
) |
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Financing activities |
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Proceeds from short-term borrowings |
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5 |
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137 |
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Issuance of deferred shares |
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63 |
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55 |
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Proceeds from exercise of stock options and warrants |
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251 |
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396 |
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Excess tax benefit for stock-based compensation |
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392 |
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Net cash provided by financing activities |
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319 |
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980 |
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Effect of exchange rate fluctuations on cash |
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74 |
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74 |
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Net (decrease) increase in cash and cash equivalents |
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(14,946 |
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2,307 |
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Cash and cash equivalents at beginning of period |
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28,149 |
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30,473 |
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Cash and cash equivalents at end of period |
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$ |
13,203 |
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$ |
32,780 |
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Supplemental disclosure of cash flow information: |
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Increase in contingent consideration payable |
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$ |
1,526 |
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$ |
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Cash paid for interest |
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$ |
47 |
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$ |
94 |
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Cash paid for income taxes |
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$ |
250 |
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$ |
4,636 |
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See notes to condensed consolidated financial statements.
3
FUEL TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
(in thousands, except share and per-share data)
Note A: Nature of Business
Fuel Tech, Inc. (Fuel Tech or the Company) is a fully integrated company that uses a suite of
advanced technologies to provide boiler optimization, efficiency improvement and air pollution
reduction and control solutions to utility and industrial customers worldwide. Originally
incorporated in 1987 under the laws of the Netherlands Antilles as Fuel-Tech N.V., Fuel Tech became
domesticated in the United States on September 30, 2006, and continues as a Delaware corporation
with its corporate headquarters at 27601 Bella Vista Parkway, Warrenville, Illinois, 60555-1617.
Fuel Tech maintains an Internet website at www.ftek.com. Fuel Techs annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made
available through its website as soon as reasonably practical after the Company electronically
files or furnishes the reports to the Securities and Exchange Commission. Also available on the
Companys website are the Companys Corporate Governance Guidelines and Code of Ethics and Business
Conduct, as well as the charters of the Audit and Compensation & Nominating committees of the Board
of Directors. All of these documents are available in print without charge to stockholders who
request them. Information on Fuel Techs website is not incorporated into this report.
Fuel Techs special focus is the worldwide marketing of its nitrogen oxide (NOx) reduction and FUEL
CHEM® processes. The Air Pollution Control (APC) technology segment reduces NOx
emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources
by utilizing combustion optimization techniques and Low-NOx and Ultra Low-NOx burners; over-fire
air systems, NOxOUT® and HERT High Energy Reagent Technology SNCR systems; systems
that incorporate NOxOUT CASCADE®, ULTRA and NOxOUT-SCR®
processes; and Ammonia Injection Grids (AIG) and the Graduated Straightening Grid (GSG). The
FUEL CHEM technology segment improves the efficiency, reliability and environmental status of
combustion units by controlling slagging, fouling and corrosion, as well as the formation of sulfur
trioxide, ammonium bisulfate, particulate matter (PM2.5), carbon dioxide, NOx and
unburned carbon in fly ash through the addition of chemicals into the
fuel or via TIFI®
Targeted In-Furnace Injection programs. Fuel Tech has other technologies, both commercially
available and in the development stage, all of which are related to APC and FUEL CHEM processes or
are similar in their technological base. Fuel Techs business is materially dependent on the
continued existence and enforcement of worldwide air quality regulations.
Note B: Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation of the
balance sheet and results of operations for the periods covered have been included and all
significant intercompany transactions and balances have been eliminated. The results of operations
of all acquired businesses have been consolidated for all periods subsequent to the date of
acquisition.
The balance sheet at December 31, 2008 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in Fuel Techs Annual Report on Form 10-K for the year ended December 31, 2008 as filed
with the Securities and Exchange Commission.
4
Note C: Revenue Recognition Policy
Revenues from the sales of chemical products are recorded when title transfers, either at the point
of shipment or at the point of destination, depending on the contract with the customer. During a
FUEL CHEM demonstration period, the Company will typically absorb all of the direct costs (e.g.,
chemicals, on-site personnel, equipment depreciation and demonstration-related travel expenses) and
indirect costs of operating the demonstration and will offset these costs with partial billings to
the customer. While each demonstration is unique, a typical demonstration will operate for 90 days
and the Company will accumulate future billing amounts that will usually be invoiced to the
customer only if the FUEL CHEM program converts to commercial status. These amounts may range from
less than $100 to over $1,000 depending on the quantity of chemical fed, the agreed-upon cost
sharing arrangement and the length of the demonstration program.
Fuel Tech uses the percentage of completion method of accounting for equipment construction and
license contracts. Under the percentage of completion method, revenues are recognized as work is
performed based on the relationship between actual construction costs incurred and total estimated
costs at completion. Revisions in completion estimates and contract values in the period in which
the facts giving rise to the revisions become known can influence the timing of when revenues are
recognized under the percentage of completion method of accounting. Provisions are made for
estimated losses on uncompleted contracts in the period in which such losses are determined. As of
September 30, 2009 and December 31, 2008, the Company had no construction contracts in progress
that were identified as loss contracts.
Accounts receivable includes unbilled receivables, representing revenues recognized in excess of
billings on uncompleted contracts under the percentage of completion method of accounting. At
September 30, 2009 and December 31, 2008, unbilled receivables on all projects were approximately
$7,197 and $6,311, respectively. Such amounts are included in accounts receivable on the condensed
consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted
contracts were $1,354 and $1,223 at September 30, 2009 and December 31, 2008, respectively. Such
amounts are included in other accrued liabilities on the condensed consolidated balance sheets.
Note D: Cost of Sales
Cost of sales includes all internal and external engineering costs, equipment and chemical charges,
inbound and outbound freight expenses, internal and site transfer costs, installation charges,
purchasing and receiving costs, inspection costs, warehousing costs, project personnel travel
expenses and other direct and indirect expenses specifically identified as project- or product
line-related, as appropriate (e.g., test equipment depreciation and certain insurance expenses).
Certain depreciation and amortization expenses related to tangible and intangible assets,
respectively, are also allocated to cost of sales.
Note E: Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily include the following categories except
where an allocation to the cost of sales line item is warranted due to the project- or product-line
nature of a portion of the expense category: salaries and wages, employee benefits, non-project
travel, insurance, legal, rent, accounting and auditing, recruiting, telephony, employee training,
Board of Directors fees, auto rental, office supplies, dues and subscriptions, utilities, real
estate taxes, commissions and bonuses, marketing materials, postage and business taxes. Departments
comprising the selling, general and administrative line item primarily include the functions of
executive management, finance and accounting, investor relations, regulatory affairs, marketing,
business development, information technology, human resources, sales, legal and general
administration.
Note F: Earnings per Share Data
Basic earnings per share excludes the dilutive effects of stock options and warrants and of the nil
coupon non-redeemable convertible unsecured loan notes. Diluted earnings per share includes the
dilutive effect of stock options and warrants and of the nil coupon non-redeemable convertible
unsecured loan notes. The following table sets forth the weighted-average shares used in
calculating the earnings per share for the three- and nine-month periods ended September 30, 2009
and 2008:
5
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Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic weighted-average shares |
|
|
24,142 |
|
|
|
23,978 |
|
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|
24,127 |
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|
23,450 |
|
Conversion of unsecured loan notes |
|
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|
|
45 |
|
|
|
|
|
|
|
45 |
|
Unexercised options and warrants |
|
|
|
|
|
|
615 |
|
|
|
|
|
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
24,142 |
|
|
|
24,638 |
|
|
|
24,127 |
|
|
|
24,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note G: Total Comprehensive (Loss) Income
Total comprehensive (loss) income for Fuel Tech is comprised of net (loss) income and the impact of
foreign currency translation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(698 |
) |
|
$ |
2,102 |
|
|
$ |
(2,538 |
) |
|
$ |
4,182 |
|
Foreign currency translation |
|
|
39 |
|
|
|
(35 |
) |
|
|
74 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(659 |
) |
|
$ |
2,067 |
|
|
$ |
(2,464 |
) |
|
$ |
4,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note H: Stock-Based Compensation
Fuel Tech has a stock-based employee compensation plan, referred to as the Fuel Tech, Inc.
Incentive Plan (Incentive Plan), under which awards may be granted to participants in the form of
Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Awards, Bonuses or other forms of share-based or non-share-based awards or combinations
thereof. Participants in the Incentive Plan may be Fuel Techs directors, officers, employees,
consultants or advisors (except consultants or advisors in capital-raising transactions) as the
directors determine are key to the success of Fuel Techs business. The amount of shares that may
be issued or reserved for awards to participants under a 2004 amendment to the Incentive Plan is
12.5% of outstanding shares calculated on a diluted basis. At September 30, 2009, Fuel Tech has
288,980 stock options available for issuance under the Incentive Plan.
Fuel Tech utilizes the Black-Scholes option-pricing model to estimate the fair value of stock
option grants. The Company recorded stock-based compensation expense for the three- and nine-month
periods ended September 30, 2009 of $1,462 and $4,628, respectively. Fuel Tech recorded $1,525 and
$4,638 in stock-based compensation expense for the comparable periods in 2008.
The awards granted under the Incentive Plan have a 10-year life and they vest as follows: 50% after
the second anniversary of the award date, 25% after the third anniversary, and the final 25% after
the fourth anniversary of the award date. Fuel Tech calculates stock compensation expense based on
the grant date fair value of the award and recognizes expense on a straight-line basis over the
four-year service period of the award.
The principal variable assumptions utilized in valuing options and the methodology for estimating
such model inputs include: (1) risk-free interest rate an estimate based on the yield of
zerocoupon treasury securities with a maturity equal to the expected life of the option; (2)
expected volatility an estimate based on the historical volatility of Fuel Techs Common Stock
for a period equal to the expected life of the option; and (3) expected life of the option an
estimate based on historical experience including the effect of employee terminations.
6
Based on the results of the model, the weighted-average fair value of the stock options granted
during the nine-month period ended September 30, 2009 was $5.84 per share using the following
assumptions:
|
|
|
|
|
|
|
2009 |
Expected dividend yield |
|
|
0.00 |
% |
Risk-free interest rate |
|
|
2.37 |
% |
Expected volatility |
|
|
67.6 |
% |
Expected life of option |
|
5.2 years |
Stock option activity for Fuel Techs Incentive Plan for the nine months ended September 30, 2009
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
Number |
|
Average |
|
Remaining |
|
Aggregate |
|
|
of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Term |
|
Value |
Outstanding on January 1, 2009 |
|
|
2,905,325 |
|
|
$ |
16.30 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
505,000 |
|
|
|
9.98 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(52,250 |
) |
|
|
4.82 |
|
|
|
|
|
|
$ |
307 |
|
Expired or forfeited |
|
|
(236,450 |
) |
|
|
19.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on September 30, 2009 |
|
|
3,121,625 |
|
|
$ |
15.25 |
|
|
7.2 years |
|
$ |
5,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on September 30, 2009 |
|
|
1,586,250 |
|
|
$ |
13.37 |
|
|
6.1 years |
|
$ |
4,512 |
|
The weighted-average exercise price per non-vested stock award for all non-vested stock outstanding
as of September 30, 2009 was $17.20. Non-vested stock award activity for all plans for the nine
months ended September 30, 2009 was as follows:
|
|
|
|
|
|
|
Non-vested |
|
|
Stock |
|
|
Outstanding |
Outstanding on January 1, 2009 |
|
|
1,443,625 |
|
Granted |
|
|
505,000 |
|
Released |
|
|
(245,250 |
) |
Expired or forfeited |
|
|
(168,000 |
) |
|
|
|
|
|
Outstanding on September 30, 2009 |
|
|
1,535,375 |
|
|
|
|
|
|
As of September 30, 2009, there was $9,384 of total unrecognized compensation cost related to
non-vested stock-based compensation arrangements granted under the Incentive Plan. That cost is
expected to be recognized over a period of four years.
In addition to the Incentive Plan, Fuel Tech has a Deferred Compensation Plan for Directors
(Deferred Plan). This Deferred Plan, as originally approved, provided for deferral of directors
fees in the form of either cash with interest or as phantom stock units, in either case, however,
to be paid out only as cash and not as stock at the elected time of payout. In the second quarter
of 2007, Fuel Tech obtained stockholder approval for an amendment to the Deferred Plan to provide
that instead of phantom stock units paid out only in cash, the deferred stock unit compensation may
be paid out in shares of Fuel Tech Common Stock. Under the guidance of ASC 718-10, this plan
modification required that Fuel Tech account for awards under the plan for the receipt of Fuel Tech
Common Stock, as equity awards as opposed to liability awards. For the nine months ended September
30, 2009, Fuel Tech recorded stock-based compensation expense of $63 with a credit of the same amount to
additional paid-in capital representing the fair value of the stock awards granted.
7
Note I: Debt
On June 30, 2009, Fuel Tech entered into a $25,000 revolving credit facility (the Facility) with
JPMorgan Chase Bank, N.A. (JPM Chase). The Facility has a term of two years through June 30, 2011,
is unsecured, bears interest at a rate of LIBOR plus a spread range of 250 basis points to 300
basis points, as determined under a formula related to the Companys leverage ratio, and has the
Companys Italian subsidiary, Fuel Tech S.r.l., as a guarantor. Fuel Tech can use this Facility
for cash advances and standby letters of credit. As of September 30, 2009, there were no
outstanding borrowings on this Facility. The Credit Agreement dated as of June 30, 2009 by and
between Fuel Tech, Inc. and JPM Chase and the Revolving Credit Note dated June 30, 2009 from Fuel
Tech, Inc. to JPM Chase were included in their entirety as exhibits to the Companys Form 8-K filed
with the Securities and Exchange Commission on July 2, 2009. The Companys prior facility with
Wachovia Bank, N.A. was terminated on June 30, 2009.
At its inception, the Facility contained several debt covenants with which the Company must comply
on a quarterly or annual basis, including: an annual capital expenditure limit of $10,000 and a
minimum net income for the quarterly period ended September 30, 2009 of $750. For subsequent
periods, the Facility covenants included a maximum funded debt to EBITDA ratio of 2.0:1.0 for the
quarterly period ended December 31, 2009 and a maximum funded debt to EBITDA ratio of 1.5:1.0 for
all succeeding quarterly periods until the facility expires. Maximum funded debt is defined as all
borrowed funds, outstanding standby letters of credit and bank guarantees. EBITDA includes after
tax earnings with add backs for interest expense, income taxes, and depreciation and amortization
expenses. In addition, the Company must maintain a minimum tangible net worth of $42,000, adjusted
upward for 50% of net income generated and 100% of all capital issuances.
As of and
for the three-month period ended September 30, 2009, except for
the required minimum quarterly net income covenant of $750, the Company was in compliance with
all debt covenants of the Facility, including a year-to-date capital expenditure amount of $1,774
and a tangible net worth of $47,898 versus a required amount of
45,533. Due to the Companys quarterly net loss of ($698), the required
minimum quarterly net income of $750 was not achieved. The Company has obtained a waiver of this
covenant breach from JPM Chase for the quarterly period ended September 30, 2009 and has
revised certain financial covenants as follows: for the three-month period ended December 31,
2009 the Company shall achieve a Minimum Net Income of ($2,000), and for the three-month period ended March 31,
2010 the Companys Leverage Ratio shall not exceed 2.75:1.0. The purchase price for allowable Acquisitions made during any fiscal year was also
lowered to $5,000 in the aggregate if the Leverage Ratio is greater than 2.75:1.0. No other Facility covenants were
modified for any other period. The Companys spread matrix for fees paid on items such as standby
letters of credit was adjusted upward to include additional tiers tied to the quarterly calculated
Leverage Ratio. These modifications are included in the Second Amendment to the Credit Agreement filed as an attachment to this
Quarterly Report on Form 10-Q.
Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a wholly-owned
subsidiary of Fuel Tech, has a revolving credit facility (the China Facility) agreement with JPM
Chase for RMB 35 million (approximately $5,000), which expires on June 30, 2010. The facility is
unsecured, bears interest at a rate of 120% of the Peoples Bank of China (PBOC) Base Rate and does
not contain any material debt covenants. Beijing Fuel Tech can use this facility for cash advances
and bank guarantees. As of September 30, 2009, Beijing Fuel Tech has borrowings outstanding in the
amount $2,194, which bear interest at 5.8%.
In the event of default on either the Facility or the China Facility, the cross default feature in
each allows the lending bank to accelerate the payment of any amounts outstanding and may, under
certain circumstances, allow the bank to cancel the facility. If the Company were unable to obtain
a waiver for a breach of covenant and the bank accelerated the payment of any outstanding amounts,
such acceleration may cause the Companys cash position to deteriorate or, if cash on hand were
insufficient to satisfy the payment due, may require the Company to obtain alternate financing to
satisfy the accelerated payment.
Note J: Business Segment and Geographic Disclosures
Fuel Tech segregates its financial results into two reportable segments representing two broad
technology segments as follows:
|
|
|
The Air Pollution Control technology segment, which includes the Low- and Ultra-low
NOx Burners, over-fire air systems, HERT systems, NOxOUT®, NOxOUT
CASCADE®, AIG, GSG, ULTRA and NOxOUT-SCR® processes, for the
reduction of NOx emissions in flue gas from boilers, incinerators, furnaces and other
stationary combustion sources; and |
8
|
|
|
The FUEL CHEM® technology segment, which uses chemical processes for the
control of slagging, fouling, corrosion, opacity, acid plume and sulfur trioxide-related
issues in furnaces and boilers through the addition of chemicals into the furnace using
TIFI® Targeted In-Furnace Injection technology. |
Fuel Tech evaluates performance and allocates resources based on reviewing gross margin by
reportable segment. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Fuel Tech does not review assets by
reportable segment, but rather, in aggregate for Fuel Tech as a whole. Reporting segment revenues
and gross margin are provided below. The Other classification includes those profit and loss
items not allocated by Fuel Tech to each reportable segment. There are no intersegment sales that
require elimination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Air Pollution |
|
|
FUEL CHEM |
|
|
|
|
|
|
|
September 30, 2009 |
|
Control Segment |
|
|
Segment |
|
|
Other |
|
|
Total |
|
Revenues from external customers |
|
$ |
6,182 |
|
|
$ |
10,293 |
|
|
$ |
|
|
|
$ |
16,475 |
|
Cost of sales |
|
|
4,089 |
|
|
|
5,945 |
|
|
|
|
|
|
|
10,034 |
|
Gross margin |
|
|
2,093 |
|
|
|
4,348 |
|
|
|
|
|
|
|
6,441 |
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
8,000 |
|
Gain from revaluation of
contingent performance obligation |
|
|
|
|
|
|
|
|
|
|
(781 |
) |
|
|
(781 |
) |
Research and development |
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
2,093 |
|
|
$ |
4,348 |
|
|
$ |
(7,379 |
) |
|
$ |
(938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Air Pollution |
|
|
FUEL CHEM |
|
|
|
|
|
|
|
September 30, 2008 |
|
Control Segment |
|
|
Segment |
|
|
Other |
|
|
Total |
|
Revenues from external customers |
|
$ |
13,567 |
|
|
$ |
10,136 |
|
|
$ |
|
|
|
$ |
23,703 |
|
Cost of sales |
|
|
7,704 |
|
|
|
5,315 |
|
|
|
|
|
|
|
13,019 |
|
Gross margin |
|
|
5,863 |
|
|
|
4,821 |
|
|
|
|
|
|
|
10,684 |
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
6,789 |
|
|
|
6,789 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
380 |
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
5,863 |
|
|
$ |
4,821 |
|
|
$ |
(7,169 |
) |
|
$ |
3,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
Air Pollution |
|
|
FUEL CHEM |
|
|
|
|
|
|
|
September 30, 2009 |
|
Control Segment |
|
|
Segment |
|
|
Other |
|
|
Total |
|
Revenues from external customers |
|
$ |
24,179 |
|
|
$ |
28,535 |
|
|
$ |
|
|
|
$ |
52,714 |
|
Cost of sales |
|
|
15,096 |
|
|
|
16,690 |
|
|
|
|
|
|
|
31,786 |
|
Gross margin |
|
|
9,083 |
|
|
|
11,845 |
|
|
|
|
|
|
|
20,928 |
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
25,130 |
|
|
|
25,130 |
|
Gain from revaluation of
contingent performance
obligation |
|
|
|
|
|
|
|
|
|
|
(781 |
) |
|
|
(781 |
) |
Research and development |
|
|
|
|
|
|
|
|
|
|
391 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
9,083 |
|
|
$ |
11,845 |
|
|
$ |
(24,740 |
) |
|
$ |
(3,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
Air Pollution |
|
|
FUEL CHEM |
|
|
|
|
|
|
|
September 30, 2008 |
|
Control Segment |
|
|
Segment |
|
|
Other |
|
|
Total |
|
Revenues from external customers |
|
$ |
35,713 |
|
|
$ |
27,248 |
|
|
$ |
|
|
|
$ |
62,961 |
|
Cost of sales |
|
|
19,507 |
|
|
|
14,013 |
|
|
|
1 |
|
|
|
33,521 |
|
Gross margin |
|
|
16,206 |
|
|
|
13,235 |
|
|
|
(1 |
) |
|
|
29,440 |
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
21,181 |
|
|
|
21,181 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
1,844 |
|
|
|
1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
16,206 |
|
|
$ |
13,235 |
|
|
$ |
(23,026 |
) |
|
$ |
6,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Information concerning Fuel Techs operations by geographic area is provided below. Revenues are
attributed to countries based on the location of the customer. Assets are those directly
associated with operations of the geographic area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
Nine months ended September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
14,054 |
|
|
$ |
19,319 |
|
|
$ |
43,114 |
|
|
$ |
54,845 |
|
Foreign |
|
|
2,421 |
|
|
|
4,384 |
|
|
|
9,600 |
|
|
|
8,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,475 |
|
|
$ |
23,703 |
|
|
$ |
52,714 |
|
|
$ |
62,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
82,532 |
|
|
$ |
81,241 |
|
Foreign |
|
|
8,713 |
|
|
|
7,632 |
|
|
|
|
|
|
|
|
|
|
$ |
91,245 |
|
|
$ |
88,873 |
|
|
|
|
|
|
|
|
Note K: Contingencies
Fuel Tech issues a standard product warranty with the sale of its products to customers. Fuel
Techs recognition of warranty liability is based primarily on analyses of warranty claims
experienced in the preceding years as the nature of our historical product sales for which we offer
a warranty are substantially unchanged. This approach has proven to provide an aggregate warranty
accrual that is historically aligned with actual warranty claims experienced. Changes in the
warranty liability for the nine months ended September 30, 2009 are summarized below:
|
|
|
|
|
Aggregate product warranty liability at January 1, 2009 |
|
$ |
265 |
|
Aggregate accruals related to product warranties |
|
|
90 |
|
Aggregate reductions for payments |
|
|
(151 |
) |
|
|
|
|
Aggregate product warranty liability at September 30, 2009 |
|
$ |
204 |
|
|
|
|
|
Note L: Income Tax
Fuel Tech had unrecognized tax benefits as of December 31, 2008 in the amount of $781. This amount
included $747 of unrecognized tax benefits which, if ultimately recognized, will reduce Fuel Techs
annual effective tax rate. There have been no material changes in unrecognized tax benefits during
the quarter ended September 30, 2009.
Note M: Recently Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance
establishing two levels of U.S. generally accepted accounting principles (GAAP) authoritative and
non-authoritative and making the Accounting Standards Codification (ASC) the source of
authoritative, non-governmental GAAP, except for rules and interpretive releases of the Securities
and Exchange Commission. This guidance, which was incorporated into Accounting Standards
Codification Topic 105, Generally Accepted Accounting Principles, was effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The adoption
changed certain disclosure references to U.S. GAAP, but did not have any other effect on the
Companys consolidated financial statements.
10
In June 2009, the FASB issued revised authoritative guidance related to variable interest
entities (VIE), which requires entities to perform a qualitative analysis to determine whether a
variable interest gives the entity a controlling financial interest in a VIE. The guidance also
requires an ongoing reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary beneficiary. This guidance,
which was incorporated into ASC Topic 810, Consolidation, will be effective as of the beginning
of an entitys first annual reporting period that begins after November 15, 2009 (January 1, 2010
for the Company). The Company does not expect the adoption to have a material effect on its
consolidated financial statements.
In May 2009, the FASB issued authoritative guidance establishing general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued. This guidance, which was incorporated into ASC Topic 855, Subsequent
Events, was effective for interim or annual financial periods ending after June 15, 2009, and the
adoption did not have any impact on the Companys consolidated financial statements.
In April 2009, the FASB issued updated guidance related to business combinations, which is included
in the Codification in ASC 805-20, Business Combinations Identifiable Assets, Liabilities and
Any Non-controlling Interest. ASC 805-20 amends the provisions in ASC 805 for the initial
recognition and measurement, subsequent measurement and accounting, and disclosures for assets and
liabilities arising from contingencies in business combinations. ASC 805-20 is effective for
contingent assets or contingent liabilities acquired in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The implementation of this standard did not have a material effect on the
Companys consolidated financial statements.
Note N: Business Acquisitions
Fuel Tech accounts for its acquisitions as purchases in accordance with ASC 805-20. Accordingly,
in connection with each acquisition, the purchase price is allocated to the estimated fair values
of all acquired tangible and intangible assets and assumed liabilities as of the date of the
acquisition.
Advanced Combustion Technology, Inc.
On January 5, 2009, Fuel Tech completed its acquisition of substantially all of the assets of
Advanced Combustion Technology, Inc. (ACT or the ACT Acquisition) for approximately $22,500 in
cash, including transaction costs, plus future consideration if certain financial performance is
achieved. In connection with the final determination of the Adjustment Calculation (as defined in
the asset purchase agreement) related to the net working capital amount, Fuel Tech paid ACT an
additional $1,523 on July 23, 2009. All of the goodwill recognized is expected to be deductible
for income tax purposes. Operating results related to the acquisition of substantially all of the
assets of ACT and all of the related goodwill are reported as part of the APC Technology segment.
Acquisition related costs, including out-of-pocket expenses related to the transaction, were
insignificant.
At March 31, 2009, the Company recorded a contingent consideration accrual representing the fair
value, weighted-average probability of future consideration expected to be paid in connection with
the acquisition of substantially all of the assets of ACT of $2,307. The contingent consideration
arrangement requires the Company to pay ACT a pro rata amount of up to $4,000 annually for the
achievement of a minimum annual gross margin dollar level (the Hurdle) of $10,000, $11,000 and
$12,000 in fiscal 2009, 2010 and 2011, respectively. In addition, the Company is required to pay
ACT thirty-five percent (35%) of all qualifying gross margin dollars above the annual Hurdle rate
for each of the three years. The potential undiscounted amount of all future payments that the
Company could be required to make under the contingent consideration arrangement is between $0 and
$4,000 in any one year, and $0 and $12,000 in total, not including the amount related to the
thirty-five percent (35%) sharing of qualifying gross margin dollars above the pre-determined
Hurdle. The fair value of the contingent consideration arrangement of $2,307 was calculated using
a probability of payout for each of the three years and included only twenty-five percent (25%) of
the weighted-average, probable three-year aggregate payout as up to seventy-five percent (75%) of
the contingent consideration is subject to forfeiture.
As of September 30, 2009, the amount recognized for the contingent consideration arrangement, the
range of outcomes, and assumptions used to develop the estimates have changed for fiscal 2009.
Management concluded that a fiscal 2009 earnout payment related to the ACT Acquisition is not
probable. Thus, the Company recorded a one-time gain of $781 from the revaluation of the
contingent liability.
As a result of the previously-announced acquisitions of substantially all of the assets of ACT in
the first quarter of 2009, and Tackticks, LLC (Tackticks) and FlowTack, LLC (FlowTack) in the
fourth quarter of 2008, the Companys condensed
11
consolidated results for the periods presented are not directly comparable. Pro forma results of
operations for the three- and nine-month periods ended September 30, 2009 and 2008, which assumes
the acquisitions were completed on January 1, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
2009 |
|
2008 |
Revenues |
|
$ |
16,475 |
|
|
$ |
43,856 |
|
Net (loss) income |
|
|
($698 |
) |
|
$ |
4,471 |
|
Net (loss) income per Common Share: |
|
|
|
|
|
|
|
|
Basic |
|
|
($0.03 |
) |
|
$ |
0.19 |
|
Diluted |
|
|
($0.03 |
) |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
|
|
2009 |
|
2008 |
Revenues |
|
$ |
52,714 |
|
|
$ |
106,152 |
|
Net (loss) income |
|
|
($2,538 |
) |
|
$ |
9,809 |
|
Net (loss) income per Common Share: |
|
|
|
|
|
|
|
|
Basic |
|
|
($0.11 |
) |
|
$ |
0.42 |
|
Diluted |
|
|
($0.11 |
) |
|
$ |
0.40 |
|
Operating results for the acquired assets are included in the Companys consolidated statements of
income from the date of acquisition.
Note O: Goodwill
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is
defined as an operating segment or one level below an operating segment. Fuel Tech has two
reporting units which are reported in the FUEL CHEM segment and the APC Technology segment. As of
September 30, 2009 and December 31, 2008, goodwill allocated to the FUEL CHEM Technology segment
was $1,723 and $1,723, respectively, while goodwill allocated to the APC Technology segment was
$19,718 and $3,435, respectively. The $16,283 increase in goodwill allocated to the APC Technology
segment from December 31, 2008 is attributable to goodwill from the acquisition of substantially
all of the assets of Advanced Combustion Technology, Inc. on January 5, 2009.
12
FUEL TECH, INC.
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 Techs 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 Techs 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
13
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 Companys
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 Companys
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 Companys
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 Companys pre-tax
loss and income positions, respectively.
14
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 Techs 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 Techs 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 Techs 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 Techs filings with the Securities and Exchange
Commission.
15
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency Risk Management
Fuel Techs earnings and cash flow are subject to fluctuations due to changes in foreign currency
exchange rates. We do not enter into foreign currency forward contracts nor into foreign currency
option contracts to manage this risk due to the immaterial nature of the transactions involved.
Fuel Tech is also exposed to changes in interest rates primarily due to its long-term debt
arrangement (refer to Note I to the consolidated financial statements). A hypothetical 100 basis
point adverse move in interest rates along the entire interest rate yield curve would not have a
materially adverse effect on interest expense during the upcoming year ended December 31, 2009.
|
|
|
Item 4. |
|
Controls and Procedures |
Fuel Tech maintains disclosure controls and procedures and internal controls designed to
ensure (a) that information required to be disclosed in Fuel Techs filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms, and (b) that such
information is accumulated and communicated to management, including the principal executive and
financial officer, as appropriate to allow timely decisions regarding required disclosure. Fuel
Techs management, with the participation of its principal executive and financial officers, has
evaluated the effectiveness of Fuel Techs disclosure controls and procedures as of the end of the
period covered by this Quarterly Report on Form 10-Q. Fuel Techs principal executive and
financial officers have concluded, based on such evaluation, that such disclosure controls and
procedures were effective as of the end of such period.
There was no change in Fuel Techs internal control over financial reporting that was identified in
connection with such evaluation that occurred during the period covered by this Quarterly Report on
Form 10-Q that has materially affected, or is reasonably likely to materially affect, Fuel Techs
internal control over financial reporting.
16
PART II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
None
THE
COMPANY HAS NEEDED TO OBTAIN A WAIVER FROM ITS U.S. LENDER FOR A
COVENANT VIOLATION DUE TO LESS THAN ANTICIPATED OPERATING RESULTS.
In
the event of default on the domestic Facility, the lending bank may
accelerate the payment of any amounts outstanding and may, under
certain circumstances, cancel the facility. If the Company were
unable to obtain a waiver for a breach of covenant and the bank
accelerated the payment of any outstanding amounts, such acceleration
may cause the Companys cash position to deteriorate or, if cash
on hand were insufficient to satisfy the payment due, may require the
Company to obtain alternate financing to satisfy the accelerated
payment.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
None
|
|
|
Item 3. |
|
Defaults upon Senior Securities |
None
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
None
|
|
|
Item 5. |
|
Other Information |
None
17
|
a. |
|
Exhibits (all filed herewith) |
|
|
|
4.1
|
|
Instrument Constituting US $19,200 Nil Coupon Non-Redeemable Convertible Unsecured
Loan Notes of Fuel-Tech N.V., dated December 21, 1989. |
|
|
|
4.2
|
|
First Supplemental Instrument Constituting US $3,000 Nil Coupon Non-Redeemable
Convertible Unsecured Loan Notes of Fuel-Tech N.V., dated July 10, 1990. |
|
|
|
4.3
|
|
Instrument Constituting US $6,000 Nil Coupon Non-Redeemable Convertible Unsecured
Loan Notes of Fuel-Tech N.V., dated March 12, 1993 |
|
|
|
10.1
|
|
Employment Agreement, dated April 30, 2008, between John P. Graham and Fuel Tech, Inc. |
|
|
|
10.2
|
|
Employment Agreement, dated February 1, 1998, between Stephen P. Brady and Fuel Tech,
Inc. |
|
|
|
10.3
|
|
Employment Agreement, dated October 2, 2008, between Volker Rummenhohl and Fuel Tech,
Inc. |
|
|
|
10.4
|
|
Sublease Agreement, dated January 29, 2004, between American Bailey Corporation and
Fuel Tech, Inc. |
|
|
|
10.5
|
|
Credit Agreement dated as of June 30, 2009 by and between Fuel Tech, Inc. and
JPMorgan Chase Bank, N.A. including exhibits and schedules |
|
|
|
10.6
|
|
First Amendment to Credit Agreement dated as of October 5, 2009 by and between Fuel Tech, Inc.
and JPMorgan Chase Bank, N.A. |
|
|
|
10.7
|
|
Second Amendment to Credit Agreement dated as of November 4, 2009 by and between Fuel Tech, Inc.
and JPMorgan Chase Bank, N.A. |
|
|
|
31.1
|
|
Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
18
FUEL TECH, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
Date: November 5, 2009 |
By: |
/s/ John F. Norris Jr.
|
|
|
|
John F. Norris Jr. |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date: November 5, 2009 |
By: |
/s/ John P. Graham
|
|
|
|
John P. Graham |
|
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
19