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 June 30, 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 or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification Number)
Fuel-Tech N.V. Fuel Tech, Inc.
(Registrant) (U.S. Operating Subsidiary)
Castorweg 22-24 695 East Main Street
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 JULY 20, 2006 THERE WERE OUTSTANDING 21,711,438 SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
================================================================================
FUEL-TECH N.V.
Form 10-Q for the six-month period ended June 30, 2006
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2006 1
and December 31, 2005
Condensed Consolidated Statements of Income for the Three and Six- 2
Month Periods Ended June 30, 2006 and 2005
Condensed Consolidated Statements of Cash Flows for the Six- 3
Month Periods Ended June 30, 2006 and 2005
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 19
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)
June 30, December 31,
2006 2005
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,876 $10,375
Short-term investments 16,200 6,000
Accounts receivable, net of allowances for doubtful accounts of
$150 and $150, respectively 17,065 12,184
Inventories 181 358
Deferred income taxes 2,799 3,043
Prepaid expenses and other current assets 711 1,072
------------------ -----------------
Total current assets 40,832 33,032
Equipment, net of accumulated depreciation of $8,840 and $7,900,
respectively 4,424 4,045
Goodwill 2,119 2,119
Other intangible assets, net of accumulated amortization of $1,147
and $1,087, respectively 1,179 1,224
Deferred income taxes 2,146 1,579
Other assets 983 1,027
------------------ -----------------
Total assets $51,683 $43,026
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,571 $6,493
Accrued liabilities 4,386 6,949
------------------ -----------------
Total current liabilities 11,957 13,442
Other liabilities 475 448
------------------ -----------------
Total liabilities 12,432 13,890
Shareholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 21,711,438 and 20,424,133 shares issued,
respectively 217 204
Additional paid-in capital 98,284 91,559
Accumulated deficit (59,562) (62,870)
Accumulated other comprehensive loss 35 (39)
Nil coupon perpetual loan notes 277 282
------------------ -----------------
Total shareholders' equity 39,251 29,136
------------------ -----------------
Total liabilities and shareholders' equity $51,683 $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 Six Months Ended
June 30 June 30
2006 2005 2006 2005
----------------- -------------- -------------- ------------------
NET SALES $ 19,759 $ 11,780 $ 36,880 $ 23,831
COSTS AND EXPENSES:
Cost of sales 10,112 6,053 19,168 12,450
Selling, general and
administrative 6,039 3,753 11,463 7,809
Research and development 499 326 850 660
----------------- -------------- -------------- ------------------
16,650 10,132 31,481 20,919
----------------- -------------- -------------- ------------------
OPERATING INCOME 3,109 1,648 5,399 2,912
Other income (expense), net 246 (64) 378 (92)
----------------- -------------- -------------- ------------------
Income before taxes 3,355 1,584 5,777 2,820
Income tax (expense) benefit (1,397) 1,588 (2,469) 1,105
----------------- -------------- -------------- ------------------
NET INCOME $1,958 $ 3,172 $3,308 $ 3,925
================= ============== ============== ==================
NET INCOME PER COMMON
SHARE:
Basic $ 0.09 $ 0.16 $ 0.16 $ 0.20
================= ============== ============== ==================
Diluted $ 0.08 $ 0.14 $ 0.14 $ 0.17
================= ============== ============== ==================
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 21,697,000 19,994,000 21,158,000 19,838,000
================= ============== ============== ==================
Diluted 24,230,000 22,750,000 24,004,000 22,672,000
================= ============== ============== ==================
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)
Six Months Ended
June 30
2006 2005
----------------- -----------------
OPERATING ACTIVITIES
Net cash used in operating activities $ (708) $ (622)
----------------- -----------------
INVESTING ACTIVITIES
Purchases of short-term investments (10,200) (500)
Purchases of equipment and patents (1,333) (1,058)
----------------- -----------------
Net cash used in investing activities (11,533) (1,558)
----------------- -----------------
FINANCING ACTIVITIES
Exercise of stock options 2,880 396
Income tax benefit from exercise of stock options 2,788 -
----------------- -----------------
Net cash provided by financing activities 5,668 396
----------------- -----------------
Effect of exchange rate fluctuations on cash 74 (118)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,499) (1,902)
Cash and cash equivalents at beginning of period 10,375 4,031
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,876 $ 2,129
================= =================
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six months ended June 30, 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
that provides advanced engineering solutions for the optimization of combustion
systems in utility and industrial applications. 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 and six-month periods ended
June 30, 2006 and 2005:
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- -------------------------------
2006 2005 2006 2005
------------- ------------ ------------ --------------
Basic weighted-average 21,697 19,994 21,158 19,838
shares
Conversion of unsecured
loan notes 46 59 46 72
Unexercised options and
warrants 2,487 2,697 2,800 2,762
------------- ------------ ------------ --------------
Diluted weighted-average
shares 24,230 22,750 24,004 22,672
============= ============ ============ ==============
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 Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- ------------------------------
2006 2005 2006 2005
----------------- --------------- ------------ ---------------
Comprehensive income:
Net income $1,958 $3,172 $3,308 $3,925
Foreign currency translation 51 (73) 74 (118)
----------------- --------------- ------------ ---------------
$2,009 $3,099 $3,382 $ 3,807
================= =============== ============ ===============
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 June 30, 2006, Fuel Tech
has 1,343,000 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 six-month period ended June 30, 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 for the quarter ended June 30, 2006 is $839,000 lower than
if it had continued to account for share-based compensation under Opinion 25.
Net income for the quarter ended June 30, 2006 is $556,000 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 June 30, 2006 would have been
$0.12 and $0.10, respectively, if Fuel Tech had not adopted Statement 123(R),
compared to reported basic and diluted earnings per share of $0.09 and $0.08,
respectively.
For the six-month period ended June 30, 2006, income before income taxes is
$1,066,000 lower than if it had continued to account for share-based
compensation under Opinion 25. Net income for the six-month period ended June
30, 2006 is $743,000 lower than if it had continued to account for share-based
compensation under Opinion 25. Basic and diluted earnings per share for the six
months ended June 30, 2006 would have been $0.19 and $0.17, respectively, if
Fuel Tech had not adopted Statement 123(R), compared to reported basic and
diluted earnings per share of $0.16 and $0.14, 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 $2,788,000 excess tax benefit classified as a
financing cash inflow on the Statement of Cash Flows for the six months ended
June 30, 2006 would have been classified as an operating cash inflow if Fuel
Tech had not adopted Statement 123(R).
6
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.
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 the stock
options granted during the six-month period ended June 30, 2006 was $8.19 per
share using the following assumptions:
2006 2005
--------------------- -----------------------
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 4.90% 4.26%
Expected volatility 64.0% 48.7%
Expected life of option 5.3 years 4.0 years
7
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.
----------------- --------------
For the three For the six
months ended months ended
June 30 June 30
----------------- --------------
2005 2005
----------------- --------------
Net income as reported $3,172 $3,925
Deduct:
Total stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects 341 532
-------------- --------------
Pro forma net income $2,831 $3,393
============== ==============
Basic and diluted income per share:
Basic - as reported $0.16 $0.20
Basic - pro forma $0.14 $0.17
Diluted - as reported $0.14 $0.17
Diluted - pro forma $0.12 $0.15
Stock option activity for Fuel Tech's 1993 Plan for the six months ended June
30, 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, 2006 2,799,000 $4.29
Granted 269,500 13.75
Exercised (1,089,425) 2.66 $11,918
Expired or forfeited (142,625) 5.96
-------------------------------------------------------
Outstanding on June 30, 2006 1,836,450 $6.51 7.68 years $10,486
-------------------------------------------------------
Exercisable on June 30, 2006 716,075 $5.02 5.86 years $ 5,174
Weighted-average fair value of
options granted during the first half of 2006
$8.19
8
The weighted-average price per nonvested stock award at grant date was $13.11
for the nonvested stock awards granted in 2006. Nonvested stock award activity
for all plans for the six months ended June 30, 2006 was as follows:
-----------------
NONVESTED STOCK
OUTSTANDING
-----------------
Outstanding on January 1, 2006 1,111,625
Granted 269,500
Released (122,625)
Expired or forfeited (138,125)
-----------------
Outstanding on June 30, 2006 1,120,375
-----------------
As of June 30, 2006, there was $3.1 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 June 30, 2006, there were
no borrowings outstanding on the facility.
Effective July 31, 2006, this revolving credit facility was terminated. FTI
entered into a new agreement with a different financial institution for a
revolving credit facility expiring July 31, 2009. The facility was issued in the
amount of $25.0 million, is unsecured and bears interest at a rate of LIBOR plus
75 basis points. FTI can use this facility for cash advances and standby letters
of credit.
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.
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:
9
- 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(TM) 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.
10
Information about reporting segment net sales and gross margin are provided
below in thousands of U.S. dollars.
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Three months ended Nitrogen Oxide Fuel Treatment Other Total
June 30, 2006 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $ 13,155 $ 6,604 $ - $ 19,759
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 7,260 2,810 42 10,112
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 5,895 3,794 (42) 9,647
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative - - 6,039 6,039
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development - - 499 499
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $5,895 $ 3,794 $ (6,580) $3,109
- ------------------------------------ =================== ==================== ==================== ===================
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Three months ended Nitrogen Oxide Fuel Treatment Other Total
June 30, 2005 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $ 8,000 $ 3,779 $ 1 $ 11,780
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 4,024 1,948 81 6,053
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 3,976 1,831 (80) 5,727
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative - - 3,753 3,753
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development - - 326 326
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $ 3,976 $ 1,831 $(4,159) $1,648
- ------------------------------------ =================== ==================== ==================== ===================
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Six months ended Nitrogen Oxide Fuel Treatment Other Total
June 30, 2006 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $ 25,520 $ 11,360 $ - $36,880
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 14,148 4,928 92 19,168
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 11,372 6,432 (92) 17,712
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative - - 11,463 11,463
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development - - 850 850
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $ 11,372 $6,432 $(12,405) $ 5,399
- ------------------------------------ =================== ==================== ==================== ===================
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Six months ended Nitrogen Oxide Fuel Treatment Other Total
June 30, 2005 Reduction Chemical
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Net sales from external customers $16,320 $7,506 $ 5 $ 23,831
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Cost of sales 8,316 3,956 178 12,450
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Gross margin 8,004 3,550 (173) 11,381
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Selling, general and administrative - - 7,809 7,809
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Research and development - - 660 660
- ------------------------------------ ------------------- -------------------- -------------------- -------------------
Operating income (loss) $ 8,004 $3,550 $(8,642) $2,912
- ------------------------------------ =================== ==================== ==================== ===================
11
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.
Three months ended June 30 Six months ended June 30
------------------------------------------ ---------------------------------------
2006 2005 2006 2005
------------------- ------------------- ------------------ -----------------
Net sales:
United States $ 13,293 $ 9,664 $26,199 $19,715
Foreign 6,466 2,116 10,681 4,116
------------------- ------------------- ------------------ -----------------
$19,759 $11,780 $36,880 $23,831
=================== =================== ================== =================
June 30, December 31,
2006 2005
------------------- -------------------
Assets:
United States $47,417 $39,006
Foreign 4,266 4,020
------------------- -------------------
$51,683 $43,026
=================== ===================
NOTE I: RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
Fuel Tech recognize in its financial statements, the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective as
of the beginning of Fuel Tech's 2007 fiscal year, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. Fuel Tech is currently evaluating the impact, if any, of adopting FIN
48 on its financial statements.
12
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 second quarter ended June 30, 2006 and 2005 were $19,759,000
and $11,780,000, respectively, while net sales for the six months ended June 30,
2006 and 2005 were $36,880,000 and $23,831,000, respectively. The 55%
year-to-date increase is due to a $9,200,000 increase in revenues derived from
the nitrogen oxide (NOx) reduction technology segment and to a $3,854,000
increase in revenues derived from the fuel treatment technology segment.
The NOx reduction technology segment generated revenues of $25,520,000 for the
six months ended June 30, 2006, an increase of 56% over the prior year. 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 continue to utilize Fuel
Tech's technology as an important element of their ongoing regulatory compliance
strategy. Fuel Tech continues to work towards developing alliance agreements
with selected customers.
The fuel treatment chemical technology segment generated revenues of $11,360,000
for the six months ended June 30, 2006, an increase of 51% over the prior year.
This segment's growth is indicative of the continued market acceptance of Fuel
Tech's patented TIFI(TM) Targeted In-Furnace Injection(TM) technology,
particularly on coal-fired units. This segment's revenues would have been
further enhanced had they not been hampered by the high price of oil. Fuel
Tech's oil-fired business was negatively impacted by this market dynamic in the
first six months of the year.
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. Powder River Basin (PRB) coal accounts for
approximately 40% of the coal burned in the United States today to generate
electricity, and this coal has high levels of low-melting-point ash
constituents. Due to its lower cost and lower pollutant content relative to
Eastern coals, it is anticipated that PRB coal will be burned in larger
quantities and in an increasing number of facilities.
Additionally, in 2005 and 2006, demonstrations were performed on utility units
that burn higher sulfur, Illinois Basin coal. This coal, whose high iron content
also can create slagging and fouling issues, represents an additional market
opportunity, particularly as environmental regulations require coal-fired
utility units to install sulfur reduction technologies. When high sulfur coals
are used on a unit that has a Selective Catalytic Reduction (SCR) system,
sulfur trioxide (SO3) and plume abatement issues are created, which are a key
concern in many utility and industrial operations today. Fuel Tech's TIFI
Targeted In-Furnace Injection technology provides a solution for these
issues.
Cost of sales as a percentage of net sales for Fuel Tech for the three months
ended June 30, 2006 and 2005 was 51%. The cost of sales percentage for the
second quarter for the NOx reduction business increased to 55% from 50% in the
comparable prior-year period, resulting from the mix of project business. For
the fuel treatment chemical business the cost of sales percentage decreased to
43% in the second quarter of 2006 from 52% in 2005. The decrease is due to the
timing of revenue recognition on cost-share demonstrations.
Cost of sales as a percentage of net sales for Fuel Tech for the six months
ended June 30, 2006 and 2005 was 52%. The cost of sales percentage for the NOx
reduction business increased to 55% for this period versus 51% in the comparable
prior-year period, again resulting from project mix. For the fuel treatment
chemical business,
13
the cost of sales percentage decreased to 43% for this period versus 53% in the
comparable period of the prior year. The decrease is due to the timing of
revenue recognition on cost-share demonstrations.
Selling, general and administrative expenses for the three months ended June 30,
2006 and 2005 were $6,039,000 and $3,753,000, respectively, while these expenses
for the six months ended June 30, 2006 and 2005 were $11,463,000 and $7,809,000,
respectively.
The $3,654,000 increase for the six-month period ended June 30, 2006 is
attributable to the following:
- - Fuel Tech recorded $1,066,000 in stock compensation expense in
accordance with Statement 123(R), as discussed in Note E above.
- - Fuel Tech realized an increase in revenue-related expenses in the
amount of $900,000 as both technology segments had significantly
improved revenue growth versus the comparable prior-year period.
- - Fuel Tech recorded an increase in human resource-related expenses of
approximately $1,500,000 as staffing levels were increased in several
areas in anticipation of overall business growth.
- - Finally, Fuel Tech realized incremental expenses related to audit, tax,
consulting and recruiting fees, all in support of achieving business
growth.
Research and development expenses for the three months ended June 30, 2006 and
2005 were $499,000 and $326,000, respectively, while these expenses for the six
months ended June 30, 2006 and 2005 were $850,000 and $660,000, respectively.
Fuel Tech has established a more 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.
The $470,000 increase in other income and expense for the six months ended June
30, 2006 versus the comparable prior-year period is due principally to the
benefit of an increase in interest income. The increase has been driven by
higher average cash and short-term investment balances, and market interest
rates, than those experienced in the prior year.
For the three months ended June 30, 2006, Fuel Tech recorded tax expense of
$1,397,000. This amount represents deferred tax expense related to taxable
income recognized in the second quarter of 2006. For the three months ended June
30, 2005, Fuel Tech recorded a tax benefit of $1,588,000. The tax benefit
included a $2,200,000 reduction in the deferred tax asset valuation allowance,
which represented the anticipated utilization of net operating loss
carryforwards in subsequent periods. Partially offsetting this amount was
$570,000 in deferred tax expense and $42,000 in current state income tax
expense.
On a year-to-date basis, Fuel Tech recorded tax expense of $2,469,000. This
amount represents deferred tax expense related to taxable income recognized in
the first six months of 2006. For the six months ended June 30, 2005, Fuel Tech
recorded a tax benefit of $1,105,000. The tax benefit was comprised of the
$2,200,000 reduction in the deferred tax asset valuation allowance, partially
offset by $1,044,000 in deferred tax expense and $51,000 in current state income
tax expense.
14
LIQUIDITY AND SOURCES OF CAPITAL
At June 30, 2006, Fuel Tech had cash and cash equivalents and short-term
investments of $20,076,000 and working capital of $28,875,000 versus $16,375,000
and $19,590,000 at the end of 2005, respectively. Operating activities used
$708,000 of cash during the six-month period ended June 30, 2006, primarily due
to the change in working capital from year end. Investing activities used cash
of $11,533,000 during the six months ended June 30, 2006 as short-term
investments were increased by $10,200,000 while $1,333,000 was utilized 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 $5,668,000. Of
this amount, $2,880,000 represents proceeds derived from the exercise price of
options exercised in the first six months of 2006, while $2,788,000 represents
the excess tax benefits realized from the exercise of stock options in the first
six months of 2006.
15
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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
The following risk factors have been updated from those set out in the Issuer's
Annual Report on Form 10-K for the year ended 2005:
RISKS RELATING TO OUR COMMON STOCK:
The price of Fuel Tech's Common Stock may fluctuate substantially, which could
negatively affect the Company and the holders of Fuel Tech's Common Stock.
The price of Fuel Tech's Common Stock has been volatile. Since May
2, 2005, the high and low bid quotations of Fuel Tech's Common Stock have ranged
from a low of $5.33 to a high of $18.80. The trading price of Fuel Tech's Common
Stock may continue to be volatile in response to a number of factors, many of
which are beyond the Company's control including, among others, negative news
about other publicly traded companies in our industry and the industries of our
customers, general economic or stock market conditions unrelated to the
Company's operating performance, quarterly variations in the Company's operating
results, changes in earnings estimates by analysts, and announcements of new
clients or service offerings by our competitors. In addition, the Company's
financial results may be below the expectations of securities analysts and
investors. If this were to occur, the market price of Fuel Tech's Common Stock
could decrease, perhaps significantly.
In addition, the U.S. securities markets have from time to time
experienced significant price and volume fluctuations. These fluctuations often
have been unrelated to the operating performance of companies in these markets.
Broad market and industry factors may negatively affect the price of Fuel Tech's
Common Stock, regardless of the Company's operating performance. Further, if the
Company were to be the object of securities class action litigation as a result
of volatility in Fuel Tech's Common Stock price or for other reasons, such
litigation could result in substantial costs and divert the Company's
management's attention and resources, which could negatively affect the
Company's financial results. In addition, if the Company decides to settle any
class action litigation against it, Fuel Tech's decision to settle may not
necessarily be related to the merits of the claim.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
17
Item 4. Submission of Matters to a Vote of Security Holders
At the Fuel-Tech N.V. annual meeting on June 1, 2006, with a total number of
17,283,648 shares (81.16% of those outstanding) present by proxy, all of the
nominees were elected as Managing Directors, the Report of Management and
Financial Statements for the year 2005 were approved, and the appointment of
Ernst & Young LLP as auditors for the year 2006 was ratified.
The details are:
1. Elect the Managing Directors:
For Withheld
Douglas G. Bailey 16,931,217 352,431
Ralph E. Bailey 17,046,254 237,394
Miguel Espinosa 17,046,252 237,396
Charles W. Grinnell 17,020,838 262,810
Thomas L. Jones 17,044,488 239,160
Samer S. Khanachet 17,041,802 241,846
John D. Morrow 17,044,922 238,726
John F. Norris Jr. 17,047,888 235,760
Thomas S. Shaw, Jr. 17,042,882 240,766
2. Approve the Report of Management and Financial Statements for 2006:
For: 17,255,818 Against: 7,470 Abstain: 20,360
3. Ratify the Appointment of Ernst & Young LLP as 2006 Auditors:
For: 17,260,531 Against: 12,407 Abstain: 10,710
18
Item 5. Other Information
On June 5, 2006, Fuel-Tech N.V. filed with the Securities and Exchange
Commission a Registration Statement on Form S-4 (File No. 333-134742) in
connection with its plan to domesticate in Delaware and continue as a Delaware
corporation rather than a Netherlands Antilles limited liability company.
Item 6. Exhibits
a. Exhibits
Exhibit 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith
19
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: August 7, 2006 By: /s/ John F. Norris Jr.
------------------------
John F. Norris Jr.
Chief Executive Officer and President
Date: August 7, 2006 By: /s/ Vincent J. Arnone
---------------------
Vincent J. Arnone
Chief Financial Officer,
Sr. Vice President and
Treasurer
20