Fuel Tech, Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Greetings, and welcome to the Fuel Tech, Inc. 2019 Fourth Quarter and Full Year Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Sir, you may begin.

[Devin Sullivan:]

Thank you, Jesse. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2019 Fourth Quarter and Full Year Financial Results Conference call. Yesterday, after the close, we issued a copy of the release, a copy of which is available at the company's website, www.ftek.com.The speakers on today's call will be Vince Arnone, President -- Chairman, President and Chief Executive Officer; and Jim Pach, the company's Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors.Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities Act of 1934, as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations regarding future growth, results of -- future growth and results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by and information currently available to our company's management.Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties and other factors, including, but not limited to, those discussed in Fuel Tech's annual report on Form 10-K in Item 1A under the caption Risk Factors and subsequent filings under the Securities Exchange Act of 1934, as amended, which could cause fuel Tech's actual growth, results of operations, financial condition, cash flows, performance, and business prospects and opportunities to differ materially from those expressed in or implied by these statements.Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any 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 the company's filings with the SEC.Having said that, I'd now like to turn the call over to Vince Arnone. Vince, please go ahead.

[Vincent Arnone:]

Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. 2019 was a challenging year for our company, driven primarily by ongoing delays in closing new APC business awards. And these delays are continuing into the first quarter of 2020. Our 2019 financial results were a direct reflection of these delays. We recognize that we are fortunate that the effects of these delays have been mitigated by the cost savings generated via the domestic and international restructuring efforts that we implemented over these past 4 years.In 2020, to address our immediate issues, we are engaging in the following activities. For all near-term business development opportunities for our APC or our FUEL CHEM business segments, we are engaging a multi-disciplined team

[James Pach:]

Thank you, Vince, and good morning, everyone. As Vince noted, our Q4 results were impacted primarily by slower-than-expected new business awards in our APC business segment. Revenue for the fourth quarter declined to $4.9 million from $15.8 million, driven by a nearly $9 million revenue decline at APC. Lower APC revenues were the result of a decline in backlog entering the fourth quarter and slower-than-expected new APC contract awards. We continue to pursue these awards, and as Vince has mentioned previously, expect to secure new contracts before the end of the second quarter or shortly thereafter.Cost of sales for Q4 2019 included a $2 million charge associated with the accounting treatment of an insurance receivable related to a previously disclosed equipment warranty liability with a U.S. customer. Fuel Tech has submitted a reimbursement request to its insurer for the $2 million expended in remediation, and such amount is within coverage limits of our insurance policy. Fuel Tech and the insurance company continue to work amicably to resolve this matter. And upon settlement with its insurer, all amounts received will be applied to reverse the charge in a future quarter.Consolidated gross margin for Q4 2019 was less than 1% of revenues compared to 37.3% of revenues in Q4 2018. Excluding the impact of the insurance receivable charge, consolidated gross margin was 41.1% of revenues as compared to 37.3% of revenues in Q4 2018 due to the mix in revenues between APC and FUEL CHEM.APC gross margin, including the $2 million charge, was negative $1.5 million as compared to $3.2 million or 30.4% in Q4 2018. Excluding the $2 million charge, APC gross margin was $0.5 million or 28.1%. APC results for Q4 2019 included no revenues from Beijing Fuel Tech and an operating loss of $0.2 million. In Q4 2018, revenues from Beijing Fuel Tech were approximately $0.6 million with an operating loss of about $0.4 million.FUEL CHEM's segment revenues were $3.2 million as compared to $5.3 million in Q4 2018, reflecting soft electric demand market and low natural gas prices, which leads to fuel switching and unscheduled outages. This segment will likely continue to be affected by these factors going forward. Segment gross margin was 47.8% in Q4 2019 and 51.1% in Q4 2018.As Vincent had noted previously, we have been quite successful in controlling our costs and our SG&A reflects that. SG&A for Q4 2019 declined by 6.5% to $4.5 million from $4.8 million in Q4 of 2018. SG&A also declined for the fourth consecutive year, and we hit our full year targeted SG&A range of $15 million to $16 million, excluding China SG&A and restructuring costs that totaled approximately $15.5 million. R&D expenses were just over $0.3 million, which approximated costs to last year's fourth quarter, reflecting our continued focus and efforts on the development of the Dissolved Gas Infusion technology.Net loss from continuing operations was $4.7 million or $0.18 per diluted share compared to net income from continuing operations of $0.9 million or $0.04 per share in last year's fourth quarter. Excluding the impact of operating losses at Beijing Fuel Tech and the previously mentioned $2 million charge for the insurance receivable charge, Fuel Tech's net loss from continuing operations for Q4 2019 was $2.5 million or about $0.10 per diluted share. Our balance sheet at December 31, 2019, remained debt-free, and we had cash and cash equivalents of $13.5 million, which included restricted cash of $2.6 million. Our working capital balance at December 31, 2019, was $16.7 million, which will continue to support our ongoing operating needs of the business.With respect to valuation, our book value per share was $1.08; our tangible book value per share was $0.96; and our working capital per share was $0.69 at December 31, 2019. Given our cumulative net operating losses of $35.8 million at December 31, 2019, which covers all of our geographies, we expect that our income tax expense for 2020 will be at or near 0. This figure does include China NOLs, which we will maintain, given we are preserving the legal entity in China.As Vincent had noted, I have accepted a position in another company and leaving Fuel Tech after several years of service here. I wanted to thank Vince and the entire team at Fuel Tech for this opportunity. I also wanted to congratulate Ellen and welcome her to her new role.With that, I would like to turn the call back over to Vince.

[Vincent Arnone:]

Thank you, Jim. Operator, I think we're now ready to open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Sameer Joshi with H.C. Wainwright.

[Sameer Joshi:]

Jim, sorry to see you go, but good luck with your future. Moving to the Milan office, what portion of your revenue during 2019 came from or originated from this office?

[Vincent Arnone:]

Just quickly off the top of my head, I would say approximately 10% of revenues were coming out of our European office, Sameer.

[Sameer Joshi:]

Okay. And so the -- what impact do you see from the yesterday's announcement about travel restrictions to Europe?

[Vincent Arnone:]

Right. Again, as we sit here right now, Sameer, it's difficult to assess the materiality of the impact. Will there be some impact? There is no doubt. And the impact would lie in a situation whereby we're in bidding phases on projects right now that would be planned for, call it, execution in 2020. It's difficult to understand what the impact is going to be on, call it, our supply chain that is -- for the European marketplace that is currently largely Italian-based. Everything that is happening right now is very fluid.For 2020, we are working off backlog that will come through our profit and loss statement. And obviously, that should not be impacted because we're largely through execution phase on that work. But there will likely be an impact on timing of projects and project execution as we move throughout 2020. And as I sit here right now, it's just difficult for me to give you an approximation of what that could be. What I can tell you, as we look at, call it, our overall financial picture for '20, the revenue contribution from the European marketplace would be about that same percentage level.

[Sameer Joshi:]

Understood. Can you then provide a little bit more color on the APC-related award delays? Is it that customers are taking longer to decide? Or are there macroeconomic headwinds that they are facing? Or is it that we are losing to competition?

[Vincent Arnone:]

Right. And I would say since the last time we were on a conference call, Sameer, I would say my answer is more related to project timing and delays relative to funding of projects, relative to permitting of projects and basically having those pieces in place for a project to move forward for a customer. I would attribute that to be the primary driver here in this past, call it, 3 to 4 to 5 months. As I had mentioned on prior conference call, within 2019, we did have some issues whereby project losses were driven in some cases by unexpected customer decisions and in some cases, by competitiveness of our bidding processes. But that has not impacted this past few months. And as I noted in my commentary, where we're taking, what I would call, extraordinary measures to ensure that we're not impacted by those types of behaviors prospectively.

[Sameer Joshi:]

Understood. Yes. No, I think you did a good job outlining the steps you are taking for mitigating this. On the APC trend still, what portion of this $2 million remediation charge do you expect to be reimbursed by the insurance? Do you expect the whole amount to be in reimbursed or part of that?

[James Pach:]

Yes. We would expect the full amount, Sameer, to be reimbursed. It's just a timing issue from an accounting perspective. I know we -- as we sit here right now, we expect the $2 million to come back to us.

[Sameer Joshi:]

Okay. Moving to Fuel Tech, you mentioned the reason for the shortfall was unplanned customer outages and season -- unseasonal weather actually and other headwinds. But if the outages were not to be in place and the weather was normal, seasonally normal, what level of revenues would you have expected with only the headwinds?

[Vincent Arnone:]

Understood. I'd say that we probably lost $0.5 million to $0.75 million in the fourth quarter of the year due to some of those headwinds as an approximation for the combination of outages, weathers and the like.

[Sameer Joshi:]

Understood. Got it. Okay. And I know on the DGI front, you did mention you're also working with oil and gas and other customers. Are there -- should we expect any new demo units in the next few quarters? Or will you focus on the first for pulp and paper as a first [indiscernible] and then move on to other?

[Vincent Arnone:]

We would definitely expect more demo units here as we move throughout 2020. That's our expectation. As we sit here today, we're very pleased to finally have our first demonstration in hand. But simultaneously, we are working with other customers for demonstration opportunities as well. And we are expecting additional demonstration activity that we hope to have convert to commercialized systems before the end of 2020.

[Sameer Joshi:]

Okay. And two more accounting questions. The $2 million in reimbursable receivable from the insurance company, is that included on the balance sheet as -- or where is it included in the balance sheet?

[Vincent Arnone:]

Sameer, can you repeat that question one more time, if you don't mind, please?

[Sameer Joshi:]

Yes. Sorry. It was the insurance receivable. Is that included in the balance sheet anywhere?

[James Pach:]

No. The receivable is not on the balance sheet. Currently, it's unrecorded. From an accounting perspective, the probability level that the accounting standard requires is like literally a check to be cut from the insurer to the company, which as of the balance sheet, they were not quite at that point.

[Sameer Joshi:]

Understood. And a clarification on the SG&A, this $13 million to $13.5 million. That is on a GAAP basis or on a cash basis?

[Vincent Arnone:]

That's on a GAAP basis.

[Sameer Joshi:]

Yes. Okay, great. And once again, Jim, good luck with your future.

[James Pach:]

Thank you so much.

[Operator:]

Our next question comes from the line of Pete Enderlin with MAZ Partners.

[Peter Enderlin:]

Tough times for you and a lot of other people actually, too. First comment is I don't see the press release on your website. And maybe it's there, maybe I just don't know where to look. But all I see are 2019 press releases and earlier. So I mean it's not a problem because it's available elsewhere, but check that. And then...

[Vincent Arnone:]

Pete, thanks for letting us know. We'll definitely look into it.

[Peter Enderlin:]

Okay. Sameer asked most of the questions, more questions than I was going to ask actually. But a little more on the delays in the APC contract pursuits. Recently, you're saying this was not a function of so much competitive impact or changes in the industry fundamental structure. But earlier in the year, it was. So can we go back to seeing more of those kinds of problems as you pursue contracts throughout the rest of 2020?

[Vincent Arnone:]

Right. Pete, obviously, I can't tell you with certainty that we're going to win 90% of everything that we bid on and that our customer base is going to, in all cases, make, what I would call, rational decisions. So what I can say is that we are taking a very aggressive approach here internally with regard to how we're looking at every opportunity that we are bidding on for both business segments. And I also can tell you that the projects that we are bidding on today and over this past, call it, 3- to 5-month time horizon, these are projects that have been in, what I would call, an ongoing communication mode with the various customers that we're working with. And as I mentioned previously, when you cross a year-end, project budgets need to be approved before purchasing entities are allowed to go forward and officially then work on our queue process. So we felt some of that as we moved from 2019 into 2020.And in a couple of other cases, we're looking at, call it, project approvals and permitting to see those projects go forward. So a little bit different in terms of what we're looking at today. And internally within Fuel Tech, the team here is dedicated to an aggressive approach towards every piece of business that we are looking at. And we are keeping a flexible, open mind to look to serve the customer in the best way we can via equipment configuration and otherwise. It's just, call it, a heightened level of attention, given where we are in the marketplaces today. And given our financial position, it's something that we need to do as a company. And as I noted, I'm intimately involved with all of these discussions as well.

[Peter Enderlin:]

Okay. Understood. And is it fair to say your sense is that most of these projects -- potential projects, whether you get them or somebody else, have been deferred and not eliminated in some sense?

[Vincent Arnone:]

In this past, call it, 3 to 5, 6 months, yes.

[Peter Enderlin:]

Right. Okay. And then on the warranty liability, it was -- is that sort of a one-off kind of unusual thing? Or could you have more problems like that coming along?

[Vincent Arnone:]

It is definitely one-off and unusual.

[Peter Enderlin:]

Okay. And there's no big issue about whether the insurance company will reimburse the whole $2 million, I guess, right? It's just a question, as you said, of the timing of doing that?

[Vincent Arnone:]

Pete, unfortunately, we can't sit here and say with 100% certainty that every dollar is coming back our way. Unfortunately, that's just not how the insurance industry works. And that's part of the reason, as Jim noted, why we could not keep the asset on the balance sheet. But what I can tell you is that the claim is being fully supported and we're working through the process with the insurance company. And we have a good expectation that we will have recovery.

[Operator:]

It appears we have no additional questions at this time. So I'd like to pass the floor back over to management for any additional concluding comments.

[Vincent Arnone:]

Thank you, Operator. As I mentioned previously, 2019 was a difficult year for our company. As a Fuel Tech team, as a whole, we recognize what we need to do to recover from 2019 and reestablish our financial sustainability. I want to thank all of our shareholders for their continued interest in Fuel Tech. And I want to tell everyone to be safe and careful as we're dealing with coronavirus on a global basis and specifically here in this country as well. Thanks for your time, and have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.