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FUEL TECH, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 11, 2014

Results of Operations Revenues for the three- and six-months ended June 30, 2014 and 2013 were $20,190 and $29,092 and $38,851 and $51,576, respectively, representing a 31% and 25% respective decrease versus the same periods last year. The Air Pollution Control (APC) technology segment generated revenues of $11,304 and $22,038 for the three- and six-month periods ending June 30, 2014, respectively, a decrease of $8,935 or 44%, and $11,148 or 34% from the prior period amounts of $20,239 and $33,186, respectively. Consolidated APC backlog at June 30, 2014 was $17,682 versus backlog at June 30, 2013 of $45,135. Our current backlog consists of US domestic projects totaling $9,046 and international projects totaling $8,636. The FUEL CHEMŽ technology segment generated revenues of $8,886 and $16,813 for the three- and six-months ended June 30, 2014, respectively. For the three-month period this represents a modest increase of $33 versus the prior year amount of $8,853. For the six-month period ended June 30, 2014 this represents a decrease of $1,577 or 9% compared to the prior year period amount of $18,390 . This segment continues to be affected by the soft electric demand market and low natural gas prices, which leads to fuel switching, unscheduled outages, and combustion units operating less than capacity.

Consolidated gross margin percentage for both the three- and six month periods ended June 30, 2014 and 2013 was 42% and 41%, respectively. The gross margin percentage for the APC technology segment decreased to 32% from 35% in the comparable three-month prior-year period. For the FUEL CHEM technology segment, the gross margin percentage increased to 55% from 53% in the comparable prior-year quarter. For the six-month period, the gross margin percentage for the APC technology segment decreased to 33% from 35% compared to the prior-year period, and for the FUEL CHEM technology segment the gross margin percentage increased to 54% from 53% in the comparable prior-year period.

Selling, general and administrative expenses (SG&A) for the three- and six-month periods ended June 30, 2014 were $8,959 and $17,703, respectively, and for the same periods in 2013 were $9,307 and $17,765, respectively. For the three-month period this represents a twelve point increase in SG&A as a percentage of revenues to 44% from 32%, and for the six-month period this represents a twelve point increase as a percentage of revenues to 46% from 34%. These increases in SG&A percentages are attributed to lower overall revenues and relatively flat spending levels in the current periods compared to the prior periods. On a total dollar basis, SG&A for the six month period ended June 30, 2014 has decreased slightly by $62, which was primarily the result of decreases in employee related costs of $1,386 partially offset by increases in stock compensation of $560, professional fees of $264, former leased office expenses of $300, depreciation of $146, and administrative costs associated with our foreign operations of $49.

Research and development expenses for the six-month periods ended June 30, 2014 and 2013 were $469 and $1,363, respectively. Although our annual R&D spending has decreased, the Company plans to continue to pursue new commercial applications for technologies outside of our traditional markets and in the development and analysis of new technologies that could represent incremental market opportunities.

Interest expense for the three- and six-month periods ended June 30, 2014 and 2013 were $34 and $10, and $63 and $10, respectively. This interest expense relates to borrowings made under the Beijing Fuel Tech credit facility.

Income tax benefit (expense) for the three- and six-months ended ended June 30, 2014 and 2013 were $18 and $(767), and $117 and $(764) respectively, and reflective of the Company's net loss for the respective quarters. The Company is projecting a consolidated effective tax rate of 7% for 2014.

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Liquidity and Sources of Capital

At June 30, 2014, Fuel Tech had cash and cash equivalents and short-term investments on hand of $16,960 and working capital of $40,535 versus $27,768 and $48,619 at December 31, 2013, respectively.

Operating activities used cash of $1,911 during the six-month period ended June 30, 2014. This decrease in cash from operations was due to cash used by our net loss of $1,806, an increase in inventories and prepaid expenses of $1,085 and a decrease in the outstanding accounts payable and accrued liabilities balances of $4,107, offset by non-cash expenses of $2,503, and a decrease in accounts receivable of $2,584.

Investing activities used cash of $9,272 during the six-month period ended June 30, 2014 and related to net cash used for the PECO and FGC acquisitions of $8,079 and purchases of equipment and patents of $1,193.

Financing activities provided cash of $770 as a result of cash proceeds from short term borrowings of $732 and the cash proceeds and excess tax benefits from the exercise of stock options of $305 , offset by cash used of $267 for the acquisition of common shares held in treasury that were withheld for taxes due by employees upon lapsing of restricted stock units. On June 30, 2013, Fuel Tech amended its existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A (JPM Chase) to extend the maturity date through June 30, 2015. The total borrowing base of the facility is $15,000 and contains a provision to increase the facility up to a total principal amount of $25,000 upon approval from JPM Chase. The Facility is unsecured, bears interest at a rate of LIBOR plus a spread range of 250 basis points to 375 basis points, as determined by a formula related to the Company's leverage ratio, and has the Company's 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 June 30, 2014 and December 31, 2013, there were no outstanding borrowings on the credit facility. The Facility contains several debt covenants with which the Company must comply on a quarterly or annual basis, including a maximum Funded Debt to EBITDA Ratio (or "Leverage Ratio", as defined in the Facility) of 2.0:1.0 based on the four trailing quarterly periods. 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, depreciation and amortization, and stock-based compensation expenses. In addition, the Facility covenants include an annual capital expenditure limit of $10,000 and a minimum tangible net worth of $55,000, adjusted upward for 50% of net income generated and 100% of all capital issuances. At June 30, 2014, the Company was in compliance with all financial covenants specified by the Facility. At June 30, 2014 and December 31, 2013, the Company had outstanding standby letters of credit and bank guarantees totaling approximately $3,863 and $3,478, respectively, on its domestic credit facility in connection with contracts in process. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At June 30, 2014 and December 31, 2013, there were no cash borrowings under the domestic revolving credit facility and approximately $11,137 and $11,522, respectively, was available for future borrowings. The Company pays a commitment fee of 0.25% per year on the unused portion of the revolving credit facility. On June 27, 2014, Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, entered into a new revolving credit facility (the China Facility) agreement with JPM Chase for RMB 35 million (approximately $5,684), which expires on June 26, 2015. This credit facility replaced the previous RMB 35 million facility that expired on June 27, 2014. The facility is unsecured, bears interest at a rate of 125% of the People's Bank of China (PBOC) Base Rate, and is guaranteed by Fuel Tech.BeijingFuel Tech can use this facility for cash advances and bank guarantees. As of June 30, 2014 and December 31, 2013, Beijing Fuel Tech has borrowings outstanding in the amount of $2,355 and $1,636, respectively. These borrowings were subject to interest rates of approximately 7.0% at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, the Company had outstanding standby letters of credit and bank guarantees totaling approximately $916 and $646, respectively, on its Beijing Fuel Tech revolving credit facility in connection with contracts in process. At June 30, 2014 and December 31, 2013, approximately $2,413 and $3,443 was available for future borrowings. In the event of default on either the domestic facility or the China facility, the cross default feature in each allows the lending bank to accelerate the payments 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 Company's 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. Contingencies and Contractual Obligations Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note M. The warranty liability balance during the six-months ended June 30, 2014 decreased by approximately $97. 18 --------------------------------------------------------------------------------



Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations regarding future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. Fuel Tech has tried to identify forward-looking statements by using words such as "anticipate," "believe," "plan," "expect," "estimate," "intend," "will," and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed in Fuel Tech's Annual Report on Form 10-K for the year ended December 31, 2013 in Item 1A under the caption "Risk Factors," which could cause Fuel Tech's actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in Fuel Tech's filings with the Securities and Exchange Commission.


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Source: Edgar Glimpses


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