What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-10 compared with 2020-08-11 · 29 added, 28 removed, 61 unchanged (48% of the section changed)

1 unchanged sentence

Results of Operations

Revenues for the three and six month periods ending June 30, 2020 and 2019 were $4,401 and $8,948 , $8,179 and $19,103 respectively, representing a decrease of $4,547 or 51% and $10,924 or 57% versus the same period last year.

The Air Pollution Control (APC) technology segment generated revenues of $1,937 and $3,133 for the three and six month periods ending June 30, 2020 , representing a decrease of $2,866 or 60% and $7,459 or 70% from the prior year amount of $4,803 and $10,592 .

The decrease in APC revenue was principally related to timing of project execution and the decline in backlog of $9.7 million at December 31, 2019 versus $12.4 million at December 31, 2018 , resulting from lower new APC orders announced during 2019 and continuing through the first six months of 2020.

Consolidated APC backlog at June 30, 2020 was $8,321 versus backlog at December 31, 2019 of $9,671 .

Revenues for the three and nine month periods ending September 30, 2020 and 2019 were $8,155 and $6,452, $16,334 and $25,555 respectively, representing an increase of $1,703 or 26% for the quarter and a decrease of $9,221 or 36% versus the same period last year.

The Air Pollution Control (APC) technology segment generated revenues of $2,886 and $6,019 for the three and nine month periods ending September 30, 2020, representing an increase on the quarter of $1,070 or 59% and a decrease of $6,389 or 52% from the prior year amounts of $1,816 and $12,408.

The variances in APC revenue were principally related to timing of project execution on existing projects and the decrease in new APC orders announced during 2019 and continuing through the first nine months of 2020.

Consolidated APC backlog at September 30, 2020 was $6,417 versus backlog at December 31, 2019 of $9,671.

Our current backlog consists of U.S.

domestic projects totaling $5,959 and international projects totaling $458.

The FUEL CHEM ® technology segment generated revenues of $2,464 and $5,046 for the three and six months ended June 30, 2020 , representing a decrease of $1,681 or 41% and $3,465 or 41% from the prior year amounts of $4,145 and $8,511 .

The decrease in FUEL CHEM revenue for the three and six months ended June 30, 2020 as compared to the same period of the prior year was due to a reduction in demand from power generation, extended unscheduled outages and significantly reduced operations which were largely impacted by the COVID-19 pandemic.

We remain focused on attracting new customers in our FUEL CHEM business, for both coal and non-coal applications, and have recently announced a new order for equipment on three new coal-fired units.

Consolidated gross margin percentage for the three and six month periods ended June 30, 2020 and 2019 were 14% and 26% , and 44% and 41% , respectively.

Gross margin for the comparable periods are significantly reduced due to the decline in revenues across the segments and the impact of product mix.

The decrease in Fuel Chem margins to 40% from 50% and to 41% from 49% for the three and six month periods ended June 30, 2020 and 2019 was a direct result of the decrease in sales volume as several accounts remained offline due to soft electric demand, extended outages, and to the margin mix of customers generating revenue.

The decrease in APC gross margin to ( 20% ) and 2% in the three and six months ending June 30, 2020 from 38% and 35% in 2019 is primarily due to $1,150 of charges incurred to remedy a non-conformance issues with a U.S.

The FUEL CHEM ® technology segment generated revenues of $5,269 and $10,315 for the three and nine months ended September 30, 2020, representing an increase of $633 or 14% for the quarter and a decrease of $2,832 or 22% from the prior year amounts of $4,636 and $13,147.

The increase in FUEL CHEM revenue for the three months ended September 30, 2020 as compared to the same period of the prior year was due to the sales and installation of equipment on three new units.

The decrease in revenues for the nine month period ending September 30, 2020 is due to a reduction in demand from power generation, extended unscheduled outages and significantly reduced operations which were largely impacted by the COVID-19 pandemic.

Consolidated gross margin percentage for the three and nine month periods ended September 30, 2020 and 2019 was 72% and 49%, and 45% and 42%, respectively.

Gross margin for the comparable periods have increased due to the settlement and recording of an insurance claim for remediation efforts on the APC product line.

FUEL CHEM margins increased to 52% from 49% in the current quarter due to the product mix largely attributed to the aforementioned new unit installations.

Gross margins for the nine months ended September 30, 2020 and 2019 remained flat at 49%.

The increase in APC gross margin to 110% and 54% in the three and nine months ending September 30, 2020 from 34% and 35% in 2019 is primarily due to the $2,589 insurance settlement recorded for a non-conformance issue with a U.S.

customer under a warranty provision of the contract.

Selling, general and administrative expenses (SG&A) were $2,755 and $6,641 , and $4,455 and $8,913 respectively for the three and six month periods ended June 30, 2020 and 2019 .

For the three and six month periods ended June 30, 2020 the decrease of $1,700 and $2,272 is primarily the result of a reduction in administrative costs relating to foreign subsidiaries of $600 and $950 (largely driven by the suspension of the APC business operation in China), a reduction in administrative costs related to employees of $151 and $185, other administrative costs of $294 and $352 and professional and consulting services of $113 and $190.

The reversal of a specific reserve of $499 for allowance of doubtful accounts related to the remedy of the aforementioned warranty nonconformity also contributed to this reduction.

SG&A as a percentage of revenues increased to 63% and 81% from 50% and 47% in the three and six month periods ending June 30, 2020 and 2019 .

The increase in SG&A percentage is primarily attributed

to the decrease in revenues due to the timing of project execution as well as lower new APC orders announced during 2019 and 2020.

Selling, general and administrative expenses (SG&A) were $3,184 and $9,825, and $3,822 and $12,735 respectively for the three and nine month periods ended September 30, 2020 and 2019.

For the three and nine month periods ended September 30, 2020 the decrease of $638 and $2,910 is primarily the result of a reduction in administrative costs relating to foreign subsidiaries of $52 and $1,000 (largely driven by the suspension of the APC business operation in China), a reduction in administrative costs related to employees of $319 and $504, other administrative costs of $134 and $487, space rental of $64 and $171 and professional and consulting services of $73 and $264.

The reversal of a specific reserve of $499 for allowance of doubtful accounts related to the remedy of the aforementioned warranty nonconformity in the second quarter of 2020 also contributed to this reduction.

SG&A as a percentage of revenues decreased to 39% from 59% in the three month periods ending September 30, 2020 and 2019.

For the nine month periods ending September 30, 2020 and 2019, SG&A as a percentage of revenues increased to 60% from 50%.

The increase and decrease in the comparable periods are primarily due timing of project execution and an overall decrease in revenue year over year.

On January 18, 2019, the Company announced a planned suspension of its APC business operation in China.

This action is part of Fuel Tech’s ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs, and drive profitability for the Company on a global basis.

The Company recorded restructuring charges of $0 and $30 , and $0 and $625 for the three and six months ended June 30, 2020 and 2019 , respectively.

The charge in the six months ended June 30, 2019 consisted primarily of one-time severance payments and the early termination penalty for our lease associated with the suspension of our APC business in China.

The Company recorded restructuring charges of $0 and $0, and $0 and $625 for the three and nine months ended September 30, 2020 and 2019, respectively.

The charge in the nine months ended September 30, 2019 consisted primarily of one-time severance payments and the early termination penalty for our lease associated with the suspension of our APC business in China.

For further information related to restructuring, refer to Note 4 - Restructuring Activities.

The Company continues to engage in efforts to complete existing contracts.

Research and development expenses for the three and six -month periods ended June 30, 2020 was $271 and $595, and for the same periods in 2019 was $205 and $471 respectively.

Research and development expenses for the three and nine-month periods ended September 30, 2020 were $285 and $880, and for the same periods in 2019 were $352 and $823 respectively.

The expenditures in our research and development expenses were focused on new product development efforts in the pursuit of commercial applications for technologies outside of our traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities.

3 unchanged sentences

DGI technology benefits include reduced energy consumption, installation costs, and operating costs, while improving treatment performance.

Income tax expense for the three and six month periods ended June 30, 2020 and 2019 were $31 and $2 , and $149 and $2 respectively.

Income tax expense for the three and nine month periods ended September 30, 2020 and 2019 were $0 and $21, and $149 and $23 respectively.

The Company is projecting a consolidated effective tax rate of approximately 5.8% for 2020 which is lower than the federal income tax rate of 21%.

The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and six months ended June 30, 2020 primarily due to a full valuation allowance recorded on our United States, China and Italy deferred tax assets since we cannot anticipate when or if we will have sufficient taxable income to utilize the deferred tax assets in the future.

The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and nine months ended September 30, 2020 primarily due to a full valuation allowance recorded on our United States, China and Italy deferred tax assets since we cannot anticipate when or if we will have sufficient taxable income to utilize the deferred tax assets in the future.

Further, our effective tax rate differs from the statutory federal tax rate due to state taxes, differences between U.S.

1 unchanged sentence

Liquidity and Sources of Capital

We have sustained losses from continuing operations during the six month period ended June 30, 2020 totaling $5,111 .

We have sustained losses from continuing operations during the nine month period ended September 30, 2020 totaling $2,736.

Our cash used from continuing operations for this same period totaled $3,291.

We have taken measures to reduce our expense infrastructure and our ability to operate our base businesses prospectively is based on our ability to secure new orders in the APC business and our ability to successfully execute existing APC projects in line with our internal budgets.

Our cash balance as of June 30, 2020 totaled $11,257 (including restricted cash of $3,003 ), and our working capital totaled $12,133 .

We have debt obligations of $1,556 from a Paycheck Protection Program (the “PPP”) loan, and we have outstanding letters of credit, under our current credit agreement does which not have any financial covenants as we are currently in a Cash Collateral Security agreement with our lender.

Our cash balance as of September 30, 2020 totaled $11,810 (including restricted cash of $2,392), and our working capital totaled $15,733.

We have debt obligations of $1,556 from a Paycheck Protection Program (the “PPP”) loan, and we have outstanding letters of credit, under our current credit agreement which does not have any financial covenants as we are currently in a Cash Collateral Security agreement with our lender.

We continue to monitor our liquidity needs and in response to our continued losses have taken measures to reduce expenses and restructure operations which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and invest in our future.

8 unchanged sentences

There are no financial covenants set forth in the BMO Harris agreement.

At June 30, 2020 , the Company had outstanding standby letters of credit totaling approximately $2,860 under the BMO Harris

As of June 30, 2020 , the Company held $3,003 in a separate restricted use designated BMO Harris Bank N.A.

At September 30, 2020, the Company had outstanding standby letters of credit totaling approximately $2,278 under the BMO Harris agreement.

As of September 30, 2020, the Company held $2,392 in a separate restricted use designated BMO Harris Bank N.A.

deposit account.

23 unchanged sentences

Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note 13.

There was no change in the warranty liability balance during the six months ended June 30, 2020 .

There was no change in the warranty liability balance during the nine months ended September 30, 2020.

Forward-Looking Statements

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis