UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] 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: 000-21724
--------------------
FUEL-TECH N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N.A.
(State of Incorporation) (I.R.S. Employer
Identification No.)
Fuel-Tech N.V. Fuel Tech, Inc.
(Registrant) (U.S. Operating Subsidiary)
Castorweg 22-24 695 East Main Street A-1
Curacao, Netherlands Antilles Stamford, CT 06901
(599) 9-461-3754 (203) 425-9830
(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_X_ NO___
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 ___ ACCELERATED FILER _X_ NON-ACCELERATED FILER ___
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS SHELL COMPANY (AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT).
YES___ NO_X_
AS OF APRIL 20, 2006 THERE WERE OUTSTANDING 21,648,948 SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
================================================================================
FUEL-TECH N.V.
Form 10-Q for the three-month period ended March 31, 2006
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2006 1
and December 31, 2005
Condensed Consolidated Statements of Income for the Three- 2
Month Periods Ended March 31, 2006 and 2005
Condensed Consolidated Statements of Cash Flows for the Three- 3
Month Periods Ended March 31, 2006 and 2005
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
SIGNATURES 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FUEL-TECH N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
March 31, December 31,
2006 2005
------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $4,917 $10,375
Short-term investments 14,000 6,000
Accounts receivable, net of allowances for doubtful
accounts of $150 and $150, respectively 12,481 12,184
Inventories 151 358
Deferred income taxes 2,799 3,043
Prepaid expenses and other current assets 1,654 1,072
------------------------------------
Total current assets 36,002 33,032
Equipment, net of accumulated depreciation of $8,367 and
$7,900, respectively 4,297 4,045
Goodwill 2,119 2,119
Other intangible assets, net of accumulated amortization of
$1,116 and $1,087, respectively 1,207 1,224
Deferred income taxes 1,823 1,579
Other assets 810 1,027
------------------------------------
Total assets $46,258 $43,026
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,411 $6,493
Accrued liabilities 4,821 6,949
------------------------------------
Total current liabilities 11,232 13,442
Other liabilities 459 448
------------------------------------
Total liabilities 11,691 13,890
Shareholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 21,477,525 and 20,424,133 shares issued,
respectively 215 204
Additional paid-in capital 95,606 91,559
Accumulated deficit (61,520) (62,870)
Accumulated other comprehensive loss (16) (39)
Nil coupon perpetual loan notes 282 282
------------------------------------
Total shareholders' equity 34,567 29,136
------------------------------------
Total liabilities and shareholders' equity $46,258 $43,026
====================================
See notes to condensed consolidated financial statements.
1
FUEL-TECH N.V.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of U.S. dollars, except share data)
Three Months Ended
March 31
2006 2005
--------- --------
Net sales $ 17,121 $ 12,051
Costs and expenses:
Cost of sales 9,056 6,397
Selling, general and administrative 5,424 4,056
Research and development 351 334
--------- --------
14,831 10,787
--------- ----------
Operating income 2,290 1,264
Other income (expense), net 132 (28)
--------- ----------
Income before taxes 2,422 1,236
Income taxes (1,072) (483)
---------- --------
Net income $ 1,350 $ 753
========== ========
Net income per Common Share:
Basic $ 0.07 $ 0.04
======== ========
Diluted $ 0.06 $ 0.03
======== ========
Average number of Common Shares outstanding:
Basic 20,613,000 19,683,000
========== ==========
Diluted 23,708,000 22,587,000
========== ==========
See notes to condensed consolidated financial statements.
2
FUEL-TECH N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of U.S. dollars)
Three Months Ended
March 31
2006 2005
------------- -------------
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities $ (582) $ 424
-------------- -------------
INVESTING ACTIVITIES
(Purchases) sales of short term investments, net (8,000) -
Purchases of equipment and patents (730) (833)
-------------- --------------
Net cash used in investing activities (8,730) (833)
-------------- --------------
FINANCING ACTIVITIES
Exercise of stock options 2,763 269
Income tax benefit from exercise of
stock options 1,068 -
------------- -------------
Net cash provided by
financing activities 3,831 269
------------- -------------
Effect of exchange rate fluctuations on cash 23 (45)
------------- --------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (5,458) (185)
Cash and cash equivalents at beginning
of period 10,375 4,031
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,917 $ 3,846
============= =============
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE A: 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results of operations for the periods covered have been included. Operating
results for the three months ended March 31, 2006 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2006.
The balance sheet at December 31, 2005 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-Tech N.V.'s Annual Report on Form 10-K for
the year ended December 31, 2005.
Fuel-Tech N.V., through its subsidiaries ("Fuel Tech"), is a technology company
active in the business of air pollution control. Fuel Tech, incorporated in 1987
under the laws of the Netherlands Antilles, is registered at Castorweg 22--24 in
Curacao under No. 1334/N.V.
4
NOTE B: 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 (in thousands) used
in calculating the earnings per share for the three-month periods ended March
31, 2006 and 2005:
For the three months ended
March 31
-----------------------------
2006 2005
------------ ------------
Basic weighted-average shares 20,613 19,683
Conversion of unsecured loan notes 46 85
Unexercised options and warrants 3,049 2,819
------------ ------------
Diluted weighted-average shares 23,708 22,587
============ ============
NOTE C: TOTAL COMPREHENSIVE INCOME
Total comprehensive income for Fuel Tech is comprised of net income and the
impact of foreign currency translation as follows:
in thousands of U.S. dollars For the three months ended
March 31
--------------------------
2006 2005
--------- --------
Comprehensive income:
Net income $ 1,350 $753
Foreign currency translation 23 (45)
--------- --------
$ 1,373 $708
========= ========
NOTE D: DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Risk Management:
Fuel Tech's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. Fuel Tech does not enter into foreign currency
forward contracts or into foreign currency option contracts to manage this risk
due to the immaterial nature of the transactions involved.
5
NOTE E: STOCK-BASED COMPENSATION
Fuel Tech has one stock-based employee compensation plan, referred to as the
1993 Incentive Plan (1993 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 1993 Plan may be Fuel Tech's 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 Tech's business. The amount of shares that may be issued or reserved for
awards to participants under a 2004 amendment to the 1993 Plan is 12.5% of
outstanding shares calculated on a diluted basis. At March 31, 2006, Fuel Tech
has 1,311,000 stock options available for issuance under the 1993 Plan.
Prior to January 1, 2006, Fuel Tech accounted for the stock options granted
under the 1993 Plan under the recognition and measurement provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (Opinion 25) and
related Interpretations, as permitted by FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (Statement 123). No stock-based employee compensation
cost was recognized in Fuel Tech's historical Statements of Income as all
options granted under the 1993 Plan had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Effective January 1, 2006, Fuel Tech adopted the fair value recognition
provisions of FASB Statement No. 123(R), "Share-Based Payment" (Statement
123(R)) using the modified-prospective transition method. Under that transition
method, compensation cost recognized in the first quarter of 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on January 1, 2006, Fuel Tech's income
before income taxes and net income for the quarter ended March 31, 2006 is
$227,000 lower than if it had continued to account for share-based compensation
under Opinion 25. Basic and diluted earnings per share for the quarter ended
March 31, 2006 would have been $0.08 and $0.07, respectively, if Fuel Tech had
not adopted Statement 123(R), compared to reported basic and diluted earnings
per share of $0.07 and $0.06, respectively.
Prior to the adoption of Statement 123(R), Fuel Tech presented all tax benefits
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from
the tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. The $1,068,000 excess tax benefit classified as a
financing cash inflow on the Statement of Cash Flows for the quarter ended March
31, 2006 would have been classified as an operating cash inflow if Fuel Tech had
not adopted Statement 123(R).
The awards granted under the 1993 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.
6
Prior to January 1, 2006 Fuel Tech used the Black-Scholes option-pricing model
to estimate the fair value of employee stock options for the required pro forma
disclosure under Statement 123. This model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. With the adoption of Statement 123(R) as of January 1, 2006, Fuel
Tech has continued to use the Black-Scholes option-pricing model to estimate the
fair value of stock option grants.
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 zero-coupon 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 Tech's 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.
Based on the results of the model, the weighted average fair value of stock
options granted during the quarter ended March 31, 2006 was $6.87 using the
following assumptions:
2006 2005
------------ -------------
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 4.70% 4.26%
Expected volatility 65.6% 48.70%
Expected life of option 5.26 years 4 years
The following table illustrates the effect on net income and earnings per share
if Fuel Tech had applied the fair value recognition provisions of Statement
123(R) to options granted under Fuel Tech's stock option plans in all
periods presented. For purposes of this pro forma disclosure, as noted above,
the value of the options is estimated using a Black-Scholes option pricing
model.
(in thousands of U.S. Dollars) For the three
months ended
March 31
-------------
2005
-------------
Net income as reported
$753
Deduct:
Total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects 191
-------------
Pro forma net income $562
=============
Basic and diluted income (loss) per share:
Basic - as reported $0.04
Basic - pro forma $0.03
Diluted - as reported $0.03
Diluted - pro forma $0.02
7
Stock option activity for Fuel Tech's 1993 Plan for the three months ended March
31, 2006 was as follows:
-------------------------------------------------------
NUMBER WEIGHTED- WEIGHTED AGGREGATE
OF AVERAGE AVERAGE INTRINSIC
OPTIONS EXERCISE REMAINING VALUE
PRICE CONTRACTUAL (IN
TERM THOUSANDS)
-------------------------------------------------------
OUTSTANDING ON JANUARY 1 2,799,000 $4.29
GRANTED 142,000 11.40
EXERCISED (1,052,925) 2.64 $11,480
EXPIRED OR FORFEITED (17,625) 4.28
-------------------------------------------------------
OUTSTANDING ON MARCH 31 1,870,450 $5.75 7.81 years $19,438
-------------------------------------------------------
EXERCISABLE ON MARCH 31 689,575 $3.98 5.74 years $ 8,389
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR
$6.87
The weighted average price per nonvested stock award at grant date was $11.40
for the nonvested stock awards granted in 2006. Nonvested stock award activity
for all plans for the three months ended March 31, 2006, was as follows:
---------------
NONVESTED STOCK
OUTSTANDING
---------------
OUTSTANDING ON JANUARY 1 1,111,625
GRANTED 142,000
RELEASED (59,625)
EXPIRED OR FORFEITED (13,125)
---------------
OUTSTANDING ON MARCH 31 1,180,875
---------------
As of March 31, 2006, there was $2.8 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the 1993 Plan. That cost is expected to be recognized over a period of four
years.
NOTE F: DEBT
Fuel Tech, Inc. (FTI) has a $15.0 million revolving credit facility expiring
July 31, 2006, which is collateralized by all personal property owned by FTI.
FTI can use this facility for cash advances and standby letters of credit. Cash
advances under this facility bear interest based on the following:
- - The Bank Prime Rate reduced by a range of zero to 50 basis points, or
- - The Bank Interbank Offering Rate increased by a range of 200 to 250 basis
points
FTI can choose which rate to apply to borrowings. At March 31, 2006, there were
no borrowings outstanding on the facility.
NOTE G: DISCONTINUATION OF ACUITIV(TM) BUSINESS
Effective March 1, 2005, Fuel Tech announced that it would discontinue
commercialization activities associated with its ACUITIV visualization software
business. The software will continue to be maintained and utilized internally on
a prospective basis because it is an essential tool in the design, marketing and
sale of Fuel Tech's Nitrogen Oxide (NOx) reduction and FUEL CHEM(R) product
applications.
8
As part of the cessation of activities, Fuel Tech terminated three individuals,
and a charge of $31,000 for severance obligations was recorded in the "Selling,
general and administrative" expense line item in the condensed consolidated
statement of income for the three-month period ended March 31, 2005.
NOTE H: BUSINESS SEGMENT AND GEOGRAPHIC DISCLOSURES
Fuel Tech segregates its financial results into two reportable segments
representing two broad technology segments as follows:
- The NOx reduction technology segment, which includes the NOxOUT(R),
NOxOUT CASCADE(R), NOxOUT ULTRA(R) and NOxOUT-SCR(R) processes for the
reduction of NOx emissions in flue gas from boilers, incinerators,
furnaces and other stationary combustion sources, and
- The fuel treatment chemicals technology segment, which uses chemical
processes for the control of slagging, fouling, and corrosion and for
plume abatement in furnaces and boilers through the addition of chemicals
into the fuel using TIFI(TM) Targeted In-Furnace Injection technology.
As described in Note G above, commercialization activities associated with
ACUITIV were discontinued effective March 1, 2005. These activities do not meet
the materiality test for disclosure and are aggregated in "Other" below. In
addition, "Other" also includes those profit and loss items not allocated by
Fuel Tech to each reportable segment. Lastly, there are no intersegment sales
that require elimination.
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.
Information about reporting segment net sales and gross margin are provided
below in thousands of U.S. dollars.
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
For the three months ended Nitrogen Oxide Fuel Treatment Other Total
March 31, 2006 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $12,365 $4,756 $ - $17,121
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 6,888 2,118 50 9,056
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 5,477 2,638 (50) 8,065
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative 5,424 5,424
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development 351 351
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $ 5,477 $2,638 $(5,825) $ 2,290
- ------------------------------------ =================== ==================== ==================== ===================
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
For the three months ended Nitrogen Oxide Fuel Treatment Other Total
March 31, 2005 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $8,320 $3,727 $ 4 $12,051
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 4,292 2,008 97 6,397
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 4,028 1,719 (93) 5,654
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative - - 4,056 4,056
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development - - 334 334
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $4,028 $ 1,719 $(4,483) $ 1,264
- ------------------------------------ =================== ==================== ==================== ===================
9
Information concerning Fuel Tech's operations by geographic area is provided
below in thousands of U.S. dollars. Revenues are attributed to countries based
on the location of the customer. Assets are those directly associated with
operations of the geographic area.
For the three months ended
March 31
------------------------------------------
2006 2005
------------------ --------------------
Revenues:
United States $12,906 $10,051
Foreign 4,215 2,000
------------------ -------------------
$17,121 $12,051
================== ===================
March 31, December 31,
2006 2005
------------------ -------------------
Assets:
United States $41,498 $39,006
Foreign 4,760 4,020
------------------ -------------------
$46,258 $43,026
================== ===================
10
FUEL-TECH N.V.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 2006 and 2005 were $17,121,000
and $12,051,000, respectively. The year-on-year increase is primarily due to a
$4,045,000 increase in revenues derived from the nitrogen oxide (NOx) reduction
technology segment. This segment continues to experience a high level of order
activity as utilities and industrial facilities that are impacted by the
Environmental Protection Agency's (EPA) State Implementation Plan (SIP) Call
regulation are continuing to prove that Fuel Tech's technology is a viable tool
in their ongoing regulatory compliance planning. Fuel Tech continues to work
towards developing alliance agreements with critical customers looking to
finalize their compliance plans.
The fuel treatment chemical technology segment generated revenues of $4,756,000
for the first quarter of 2006, an increase of $1,029,000, over the comparable
quarter of 2005. This segment's growth, although indicative of the continued
market acceptance of Fuel Tech's patented TIFI(TM) Targeted In-Furnace
Injection(TM) technology, would have been enhanced had revenues not been
hampered by the following market circumstances during the first quarter of 2006.
- - Oil pricing - the high price of oil continues to result in reduced
oil-fired electricity generation in the United States. Fuel Tech's
oil-fired business was negatively impacted by this market dynamic in
the first quarter of 2006.
- - Coal supply chain issues - rail disruptions in the Powder River Basin
continue to impact business opportunities for the Company as the
required repair and maintenance work on several rail lines is expected
to impact coal shipments in several parts of the country during 2006.
This market dynamic negatively impacted Fuel Tech's revenue generating
capability in the first quarter of 2006 as more than one critical
Western-coal fired utility unit was forced to reduce capacity for an
extended period of time due to transportation related shortages of
Western coal deliveries.
Fuel Tech's TIFI technology alleviates the slagging and fouling issues
associated with burning coals that are high in low-melting-point ash
constituents, such as sodium. More than half of the coal burned in the United
States today to generate electricity is Western coal and it is Western coal that
has higher levels of low-melting-point ash constituents. Due to its lower cost
and lower pollutant content relative to Eastern coals, and despite the rail
issues noted above, it is anticipated that Western coals will be burned in
larger quantities and in an increasing number of facilities. The penetration of
the Western coal-fired utility market remains the top priority for this
technology segment.
During 2005, demonstrations were performed on utility units that burn Illinois
Basin Coal. The utilization of this coal, whose high iron content also can
create slagging and fouling issues, is likely to provide the Fuel Chem product
line with an additional market niche.
In addition to the above, new technical markets being explored and pursued
include the SO3/plume abatement market, which is a key concern in many utility
and industrial operations today, as well as the corrosion reduction market for
the municipal solid waste incineration industry. Both areas represent market
opportunities for Fuel Tech.
Cost of sales as a percentage of net sales for the quarters ended March 31, 2006
and 2005, respectively, was 53%. The cost of sales percentage for the nitrogen
oxide business increased to 56% in the first quarter of 2006 from 52% in the
first quarter of last year. The increase is attributable to the mix of project
business. For the
11
fuel treatment chemical business, the cost of sales percentage decreased to 45%
in the first quarter of 2006 from 54% in 2005. The decrease is due to the timing
of completion of cost-share demonstrations.
Selling, general and administrative expenses were $5,424,000 and $4,056,000 for
the three months ended March 31, 2006 and 2005, respectively. The increase is
primarily attributable to revenue-related expenses as both technology segments
had significantly improved revenue growth in the first quarter of 2006 versus
the prior year, and to human resource-related expenses as staffing levels were
increased in several areas in anticipation of overall business growth. The
recording of stock compensation expense of $227,000 in accordance with Statement
123(R), as discussed in Note E above, also contributed to the increase in
expenses.
Research and development expenses for the quarter ended March 31, 2006 were at
the same level as the prior quarter. Fuel Tech continues to pursue commercial
applications for technologies related to its core businesses.
The increase in other income and expense for the quarter ended March 31, 2006
versus the prior year is due principally to the benefit of an increase in
interest income, which has been driven by higher average cash and short term
investment balances and market interest rates.
At March 31, 2006, Fuel Tech recorded tax expense of $1,072,000. This amount
represents deferred tax expense related to taxable income recognized in the
first quarter of 2006. At March 31, 2005, Fuel Tech recorded tax expense of
$483,000. This amount represented $474,000 in deferred tax expense and $9,000 in
current state income tax expense.
LIQUIDITY AND SOURCES OF CAPITAL
At March 31, 2006, Fuel Tech had cash and cash equivalents and short term
investments of $18,917,000 and working capital of $24,770,000 versus $16,375,000
and $19,590,000 at the end of 2005, respectively. Operating activities used
$582,000 of cash in the first quarter of 2006 primarily due to the change in
working capital from year end. Investing activities used cash of $8,730,000
during the first quarter of 2006 as short term investments were increased by
$8,000,000 while $730,000 was invested to support and enhance the operations of
the business, principally for equipment related to the fuel treatment chemical
technology segment. Fuel Tech generated cash related to the exercise of stock
options in the amount of $3,831,000. Of this amount, $2,763,000 represents
proceeds derived from the exercise price of options exercised in the first
quarter of 2006, while $1,068,000 represents the excess tax benefits realized
from the exercise of stock options in the first quarter.
12
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. 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. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Fuel Tech's Form 10-K for the year ended December 31, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
FOREIGN CURRENCY RISK MANAGEMENT:
Fuel Tech's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. Fuel Tech does not enter into foreign currency
forward contracts or into foreign currency option contracts to manage this risk
due to the immaterial nature of the transactions involved.
Item 4. Controls and Procedures
Fuel Tech maintains disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in Fuel Tech's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Fuel Tech's management, with the
participation of its principal executive and financial officers, has evaluated
the effectiveness of Fuel Tech's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Fuel Tech's
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 Tech's 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 Tech's internal
control over financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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
Item 6. Exhibits
a. Exhibits
Exhibit 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith
14
FUEL-TECH N.V.
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: May 9, 2006 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
Date: May 9, 2006 By: /s/ Vincent J. Arnone
---------------------
Vincent J. Arnone
Chief Financial Officer,
Vice President and
Treasurer
15