Fuel Tech, Inc. (FTEK) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Fuel Tech Earnings Conference Call. My name is Dorsel, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Devin Sullivan, Senior Vice President of The Equity Group. Please proceed, sir.

Thank you, Dorsel. Good morning, everyone. Thank you for participating on today's conference call to discuss Fuel Tech's fourth quarter and full year financial results. As Dorsel mentioned, my name is Devin Sullivan of The Equity Group, and our firm has been recently retained by Fuel Tech to provide Investor Relations services. On the call this morning are Doug Bailey, Chairman, President and Chief Executive Officer; Dave Collins, Senior Vice President and Chief Financial Officer; and Bill Cahill, Controller. As a reminder, the matters discussed in this call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in forward-looking statements. Factors that could cause results to differ materially are included in Fuel Tech's filings with the SEC. Information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. And as a reminder, the call is being broadcast over the Internet and can be accessed at our website, www.ftek.com. With that said, I would now like to turn the call over to Dave Collins. Dave, please go ahead.

Thank you, Devin, and good morning, everyone. Thank you for participating in today's call. Let me briefly touch on the independence matter before we talk through the numbers. We did issue a press release discussing this matter on March 1 and have provided full disclosure of this in our 10-K. This independence matter, which involve the inadvertent use of the McGladrey entity report [ph] bookkeeping services in China, delayed until today our ability to report fourth quarter and year-end results and has also delayed the filing of our Form 10-K. We filed for an extension of time to April 1 for filing our 10-K and expect to meet that extended due date. Whilst it is an unfortunate and costly divergent from our normal year-end close process, we are thankful that we have reached an agreeable path forward and are progressing through our year-end reporting process. Now onto our discussion of the fourth quarter and year-end results. Consolidated revenues for the fourth quarter were $26.6 million, down 5% from $28 million in the same period last year. Consolidated revenues for the full year of 2012 were a record $97.6 million, up 4% from $93.7 million in 2011. Foreign revenues for the fourth quarter were $13.7 million, up 122% from $6.2 million in the same period last year. And foreign revenues for the full year were $27.2 million, up 55% from $17.6 million in 2011. Foreign revenues represented 51% of current quarter revenues and 28% of full year revenues. Consolidated gross margin for the fourth quarter was 35.6%, down from 47.2% in 2011. Consolidated gross margin for the full year was 41.7%, down from 46.8% in 2011. This change is attributable to a year-over-year decline in our APC segment gross margin through the impact of lower-margin foreign sales, coupled with a decrease in our FUEL CHEM business. Our selling, general and administrative expense was down on a dollar basis and as a percentage of sales for both the current quarter and full year, while our research and development costs increased on a current quarter and full year basis as we continue to focus on our new product development initiative. Consolidated net income for the current quarter was break-even, down from $1.7 million or $0.07 per share in 2011. Consolidated net income for the full year was $2.8 million or $0.12 per diluted share, down from $6.1 million or $0.25 per diluted share in 2011. Included in our 2012 fourth quarter and full year results were after-tax charges totaling $647,000 and $1.4 million or $0.03 and $0.06 per share, respectively. These charges include asset reserves and warranty works that were outside the range of what we normally see and a higher tax rate impacted by discrete items reported in Q4. Now let's move on to the individual segments. The APC segment reported quarterly revenues of $18.5 million, up $500,000 from the same period last year. Full year 2012 revenue in this segment was a record $62.4 million, which represented an increase of $11.5 million or 23% over 2011. APC bookings for the full year were $72.8 million, up 20% from $60.2 million in 2011. Our 2012 bookings were comprised of $37.3 million of Latin America, $26.7 million in China-Pacific Rim, $7.7 million in U.S. domestic and $1.1 million in Europe, Western Asia. Our year-end backlog was $46.7 million, an increase of $15.9 million from the prior year. And 2012 backlog was comprised of $29.8 million of Latin America, $13 million in China-Pacific Rim, $2.8 million in U.S. domestic and $1.1 million in Europe, Western Asia. Our consolidated gross margin for our year-end backlog was 22%. Thus far, in 2013, we have recorded bookings of $7.6 million, comprised of both U.S. domestic and China-Pacific Rim orders. Our foreign revenues have grown significantly in 2012, and we expect to see more growth in 2013 coming from our China-Pacific Rim and Latin America operations. Our China-Pacific Rim revenue grew 50% and 31% in the current quarter and full-year periods, respectively. Our bookings in China-Pacific Rim, up $26.7 million in 2012, grew $14.2 million or 105% from 2011. We expect to see our business in China continue to grow, although at a more moderate pace in 2013. Our Latin America revenues will continue to show a significant growth through 2013 and into the first half of 2014 as we work through our combustion contract in Chile. Gross margin for the APC segment declined in both the fourth quarter and full year due to a higher concentration of lower margin core revenue. As a result, quarterly gross margins for our APC segment was 28.8%, down from 43.6% in the prior year. And full year 2012 gross margins were 35.7% compared to 44.1% last year. As we look ahead in 2013, we expect to see a continued lower gross margin profile in the APC segment in the 30% range, and then we'll look to see this increase as we replace our foreign revenues with U.S. domestic and higher-margin businesses. Our FUEL CHEM segment reported quarterly gross revenues of $8.1 million, a decline of $1.9 million from the prior year. Full year 2012 revenue in this segment was $35.2 million, a decline of $7.5 million from the prior year. We attribute the decline in FUEL CHEM revenues to the persistence of low natural gas prices and lower load profile of coal-fired generating units. While we are pursuing new opportunities in both the new and existing customers, we expect to see a soft FUEL CHEM market for at least the first half of 2013. Quarterly gross margins for our FUEL CHEM segment was 51%, a decline from 54% in the prior year. Year-to-date gross margin for our FUEL CHEM segment was 52% versus 50% in the prior year. Previously discussed, we expect to see our gross margins continue in the 48% to 52% range for 2013. Selling, general and administrative costs as a percentage of revenue for the current quarter declined 6% to 29% from 35% in the prior year. Year-to-date, SG&A in 2012 declined 3% to 33% from 36% in the prior year. On a dollar basis, our SG&A costs were down $2.1 million in the current period and $765,000 from -- for the full year. This reduction is due in part to lower incentive plan accruals and stock compensation expense. We expect to see our SG&A costs on a dollar basis remain consistent with 2012 levels, and as a percentage of sales decline to around 30%. Research and development expenses were $819,000 in the fourth quarter and $2.9 million for the full year of 2012. These amounts represent approximately double the R&D expense in the fourth quarter of last year and full year 2011, respectively. We continue to invest in focused research and development activities to bring new opportunities to our customers in order to meet the needs of a changing regulatory and operational environment. Operating income for the fourth quarter was $917,000, down from the prior year total of $3 million. Our 2012 operating income of $5.2 million was down from prior year amount of $9.6 million. These decreases in operating income are associated with lower gross margins and a higher research and development costs. Due to the mix of forecasted domestic and international revenue and income levels for the full year 2013, the effective tax rate is expected to range between 38.5% and 43%. Our rate will change based on geographic income levels and permanent items relative to the level of our consolidated free tax income. We are also expecting a lower Q1 2013 income tax rate through the booking of a discrete item related to the extension of the research and development credit that will be booked in the first quarter of 2013 due to the signing of the tax law. Cash and cash equivalents at December 31, 2012, were $24.5 million or $1.07 per diluted share. Our working capital balance was $38.9 million, and we are debt free. We continue to generate strong cash flows from our business models due to the relatively small investment in fixed infrastructure cost. Year-to-date cash generated by operating activities were $8.7 million. Because of our strong cash flow, we were able to return $7.9 million to our shareholders through our stock buyback program and have funded continued research and development activity. We will continue to monitor our capital needs in the business and we will further develop -- as we further develop our business opportunities. Now, I'd like to turn the call over to Doug.

Thank you, Dave, and good morning, everyone. Thank you for joining us today. I'll add a few thoughts to what Dave said, beginning with the year as a whole and then moving to our APC and FUEL CHEM business segments. After that, I'll spend a few minutes discussing our markets and our approaches to them. 2012 was a good year for Fuel Tech. We did report record revenues, the highest annual bookings in our history, significant geographic expansion and a 50% increase in APC backlog of $46.7 million. The year was not without its challenges, however. Our domestic APC business struggled in the wake of regulatory gridlock while FUEL CHEM continued to be impacted by lower energy demand and declining coal consumption. We remain profitable but at a lower level than 2011 while investing in future opportunities. Despite all of this, our balance sheet remains strong, allowing us to return $7.8 million through our share repurchase program and investing $2.9 million in new product development. We're pleased with the year-over-year sales growth for APC, especially given the sluggish domestic market. Last year, we experienced a surge in domestic orders for Selective Non-Catalytic Reduction or SNCR technology that were placed to meet the requirements of the then Cross-State Air Pollution Rule. This regulation mandated greater reductions in domestic NOx emissions beginning January 1, 2012. After that rule was vacated in December 2011, any source of immediate pressure to comply disappeared. As a result, during 2012, many utilities delayed their purchasing decisions in order to consider how to best comply with current EPA regulations. This resulted in a more modest level of domestic sales, driven primarily by state consent decrees and existing regulation, including CAIR or the Clean Air Interstate Rule, MATS or the Mercury and Air Toxic Standards and the Regional Haze Rule. This dynamic regulatory environment certainly impacted our U.S. APC operations. In doing so, however, we demonstrated the agility and capability of our people as well as the success of our international sales and marketing activities. We also increasingly communicated the breadth of our technologies, the depth of our engineering capabilities and return on investment that our solutions-driven approach delivers to our customers. Now in 2013, we are seeing a pickup in bid-and-order activity. Some of these potential projects are larger and more complex, which I expect will equate to some quarterly lumpiness in booking. However, this improving environment speaks to increasing certainty from utilities with respect to their long-term planning process. We believe that we are well positioned to provide utilities with cost-effective solutions that extend plant operating life meet stringent emission control standards and allow them to continue to serve the energy demands of their rate payers. For example, we are aware of 2 large utilities that have recently negotiated settlements with EPA and other regulatory authorities that resulted in these customers shutting down certain existing units and installing SNCR units on remaining generating units. The adoption of this new paradigm was a practical response to a complex matter that allow the utilities to continue operating and avoid more expensive technology that would otherwise not have allowed them to do so. In 2012, total bookings were $72.8 million, nearly 90% of which were generated in Latin America, China and Europe. Our work in Latin America reflects the $36.6 million order placed by a major utility in Chile, return key installations of Over-Fire Air system and mill modernization for 6 coal-fired units, coupled with low NOx burners. This is the largest APC contract in our history. Moreover, it was an important demonstration of our ability to win and execute larger-scale projects as well as penetrate new international markets. Equipment deliveries in Chile commenced in the current first quarter, and the project is scheduled to complete in the third quarter of 2014. In China, we booked projects valued at $26.5 million in 2012. For all of 2012, we received orders from China for: one, project utilizing our ULTRA technology, which uses a proprietary urea conversion process that generate ammonia for SCR system. This is ideal for heavily populated areas where safety is of paramount concern; two, awards for projects utilizing our SNCR system; and three, awards for projects utilizing our ASCR, Advanced Selective Catalytic Reduction system, which is a hybrid technology that combines proven abilities of our SCR with lower capital cost and fuel flexibility function. China remains a market of significant interest and opportunity for Fuel Tech. The rapid development of that nation's economy and culture continues. Unfortunately, these advancements are coming at a very visible expense of its environment. Air quality, water purity and the general health of China's people are deteriorating and public anger is building. In January, the World Health Organization labeled China's air quality as unhealthy. While just last week, 2,800 dead pigs were fished from the Shanghai River, which is a source of that city's drinking water. For the first time, China is in danger of affecting a generation through afflictions brought on by environmental toxins. As part of its response, Chinese authorities have targeted 6 industries for emissions control: coal-fired power generation, steel, petrochemicals, cement, nonferrous metals and chemical plants. Facilities operating in these sectors in 47 cities with air pollution problems are subjected to this emission standard. As of March 1, all new applications to build thermal power plants and steel mills have to comply while coal-fired plants have until July 1, 2014, to upgrade their systems. Fuel Tech is well positioned to address this large, still untapped market, as evidenced by our announcement in January of this year of our first award for an SNCR system on a cement kiln in China. Equipment delivery is scheduled for the second quarter. Fuel Tech has SNCR systems operating successfully on other cement applications for more than a decade in Europe and the Pacific Rim, and we are hopeful that we will win additional opportunities in China's cement market. We also received 3 other Chinese awards in 2013, 2 from a new utility customer to install ULTRA systems for 6 medium-sized coal-fired power plant being retrofitted with NOx technology. The challenges of doing business in China are well known, and the difficulty of enforcing government-mandated emissions caps is another story all together. Still, for the first time, we believe, that a combination of mounting public pressure, international insistence and a growing sense of self-preservation by Chinese authorities may finally be tilting the playing field in favor of enforcing tighter emissions standards. Our FUEL CHEM business continues to operate in a truly challenged environment driven by low natural gas prices, decreased energy demand and slower economic growth. While revenues declined in both the fourth quarter and full year, gross margin remained over 50% for both periods. In 2012, domestic coal consumption, the primary fuel source for our customers, fell 11.3% to 889.3 million short tons, reflecting market share gains by natural gas and changes in energy demand. In that same time frame, U.S. natural gas consumption increased to 25.5 million cubic feet and 24.4 million in 2011. This combination of factors led many of our customers to operate units below their capacity and/or switch fuel sources. As long as these macro challenges persist and until we introduce new product offering, FUEL CHEM will see slower growth. However, an improving economy suggests that energy demand will rise, creating a scenario that reflects favorably on FUEL CHEM's future performance. As this unfolds, we will continue to deliver value to FUEL CHEM customers by allowing them the flexibility to modify their fuel selection, improve the boiler efficiencies through the removal and prevention of slag and by offering additional emissions control systems. So all of these developments address an overarching theme for Fuel Tech, that being, "How are we positioning the company to compete in and prosper from an evolving global market?" Through that end, we have looked inward and asked a series of questions, the answers to which will help defined Fuel Tech for the next decade and beyond. We believe there are 3 distinct ways to further our growth: one, renew our current portfolio of products and services to better address changing market demand and enhance segment growth and profitability; two, introduce new technologies, whether internally or externally developed; three, penetrate global markets. A major theme for us is to develop products and technologies that can provide recurring revenues and enable our customers to avoid high capital costs. We believe these opportunities exist globally through engineered solutions that leverage our FUEL CHEM business model, not only to address energy efficiency needs but also pollutant removal needs in a changing regulatory landscape. We believe that the company's best opportunity to address mature product lines and to stimulate growth comes by investing in new solutions. So in 2012, we committed $2.9 million to research and development or approximately 3% of annual revenue. This level of commitment will continue to grow in 2013. We have a number of new products in various stages of laboratory and commercial testing for our APC and FUEL CHEM customers. We expect the first wave of these solutions to be introduced to the market by the end of this year with significant operating contributions realized in 2014. Just last week, we completed a new and expanded chemistry laboratory to further advance these development efforts. And as I discussed earlier, we are continuing to expand our geographic reach in response to rising global energy demand and environmental concerns. An associated factor relates to the disparity of coal usage in the U.S. and abroad. While coal usage in the U.S. is down, the U.S. Energy Information Administration recently released data showing that U.S. coal exports hit a record 126 million short tons in 2012. That's a 17% increase over the previous year. Overseas shipments surpassed the previous high mark set in 1981 by 12%. This delta creates opportunities for both our business segments. Although the APC opportunities may be more apparent, we are exploring the possibility of supporting FUEL CHEM's technology beyond our border to markets in which we currently do business like Latin America, China and Europe and areas where we have yet to establish presence. We're very early in this process. However, we believe in the logic of introducing the benefits of FUEL CHEM to countries whose primary fuel source is coal. So while not without its challenges, our accomplishments in 2012 instill in each of us great confidence for 2013 and beyond. We significantly expanded our international market presence, maintained a solid financial position and we remain diligently focused on developing and introducing new products. We allow our customers to operate in a cleaner, more efficient manner. We view 2013 as an opportunity to leverage the human intellectual and capital assets that we have built over these last 25 years. As our end markets evolve, we too must change and grow. We are up to that challenge and excited to about the opportunities that lie ahead. With that, operator, you may please open the floor to questions.

[Operator Instructions] Your first question comes from the line of John Quealy with Canaccord.

It's Chip Moore for John. Was wondering if you could give us just a little more color on the roll-off of existing backlog in '13? And then you alluded to what sounded like some potentially lumpier orders in the pipeline. Could you just talk about potential timing and margin profile there?

Okay, the roll-off of -- are you talking about the backlog as of year end, the roll-off of that?

Yes, the $54 million or so in backlog now, I guess, how you see that rolling off?

Okay, sure. $29 million of that is sitting in Chile. That's going to run over the next, call it, 6 quarters. Our last installation project is in 2014, Q2 of 2014. So I would -- and that portion of the backlog carries a 20% margin profile on it, so you can run that over the next 6 quarters. The rest of the backlog I would look to see pull through by the end of Q3.

Chip, if I may comment on that. As Dave noted, the Chile project is the biggest part of our backlog. And as we've previously said, there is a low margin on that project, but it was strategically important for us to win. It's on 6 units and the actual project work on-site depends on the outage schedule. So the first outage is coming up in April. Other units have their outages scheduled in the second and third quarters of this year. And then in the first and second quarters of 2014, the remaining 2 units have their outages scheduled. So following our revenue recognition accounting policies, you'll see a rather steady recognition of that total contract amount at fairly modest margins and that will be in contrast to the more typical margins that we see domestically. So that'll carry with us all the way through well into the middle of 2014.

Okay, that's helpful. And then it sounded like you referenced some orders. There are some potential larger projects in the pipeline, just maybe you can talk about those?

Well, I sure can. We don't specifically talk about contracts that we have not yet won, but we do anticipate additional wins for our traditional SNCR capabilities relatively near term. And as I noted in my prepared remarks, we are quoting on some relatively large projects that utilize, for example, our Selective Catalytic Reduction technology. So these projects have a very long sales cycle, a very complex bidding process and decision process. And thereby, if we are to win those, they will represent typically higher contract amounts than you might see for the kind of bread-and-butter SNCR contracts that you saw us collecting in 2011. And yet, I think, when we look back at some of the large projects that we have won, they've demonstrated Fuel Tech's ability to take on work of that complexity and scope. So thereby, it's very hard to predict exactly what our bookings might be because they could be highly influenced by one single large contract.

Right, okay. That's helpful. And then just lastly, on the strategic growth front. Cash flow is obviously good. Could you talk about M&A and new product developments, where we stand there?

Sure. On new product developments where we focused much of our effort, we manage a portfolio of projects, really, not only relating to renewing, extending the capabilities of our more mature processes, but really, importantly developing through chemistry new opportunities aimed at pollutant removal but using our FUEL CHEM business model. I do anticipate over the years ahead that you'll see a little bit of merging of those 2 business segments in terms of their business characteristics. Traditionally, our APC segment is the capital project portfolio of activities that we win and execute, but don't carry with it typically recurring revenues, and they're aimed at meeting a regulatory requirement. Our FUEL CHEM business model is one of -- we don't sell the capital equipment. We own it, and we sell a revenue stream of chemicals. At its infancy, as you can imagine, the range of products that FUEL CHEM offered was more narrow. We've expanded that somewhat. But now we're moving beyond flagging and fouling issues by looking at opportunities to remove SO2, hydrogen chloride or other acid gases, issues related to mercury. So now, it's a more of a multi-pollutant recurring revenue FUEL CHEM-type application. Those require development at the chemistry and mechanics that deliver those solutions. Through the last couple of years, we've steadily worked towards demonstrating our capability in that area. We've done significant field testing and we're hopeful that before this year is over, you'll see the fruit of that effort offered in the marketplace.

Your next question comes from the line of Dan Mannes with Avondale.

A couple of quick follow-up questions. First, for Doug, you talked a lot about China and I certainly appreciate the color. Can you maybe talk a little bit about if there are any specific regulations you're tracking that are already in place that line up well with your current product mix, or are you more talking about a generalized trend over an extended period of time relating to emissions controls that will benefit you? Is there something sort of discrete and specific you're pointing to, or this sort of more of a broad-based move?

Sure, Dan. I would say I was not trying to address anticipated new regulations inasmuch as I think the current environment over there is -- the general lack of enforcement of regulations that are in place, or quite honestly, the growth of the economy has outstripped the country's ability to maintain control of the concomitant emissions that have affected China. We've all seen the reports of air qualities such as in Beijing. It's reached completely unhealthy hazardous levels. And I think what you're seeing is a rising cry of public demand for the national government to enforce the regulation. I think that bodes well for what we're able to do. Now many of the projects over there related to new power plants have applied elective catalytic reductions systems, large-scale capital projects that you know we don't participate in. We've been successful at selling many ULTRA systems that convert urea to ammonia to support those systems. But I think we're now beginning to see more interest in some of our other capabilities. Generally, I think you're going to see a strong, growing willingness to adopt more engineered solutions that address what is, I think, a growing crisis in that country. There will be many other companies helping to contribute to that beyond Fuel Tech. But we're very unique in our early position as a U.S. company over there with a good demonstrated track record. We have reliable credible solutions, so that's really the point I was trying to make, Dan.

Okay. And then switching gears real quick. You mentioned sort of large lumpy orders, but then you also talked about maybe some of the consent decrees we've seen in the Southwest U.S. Are those 2 things connected? Because my understanding is the consent decrees are more traditional SNCR. Or are you -- were those 2 discrete items or were you kind of tying those 2 things together?

Well, some of those SNCR projects are larger, more than $10 million. And so, yes, we are aware of Southwest U.S. needs that they've already successfully settled with the EPA and plan to retire units and put SNCR on their other units. Those are some of the, I believe, near-term contract wins that we have opportunity with. And I'm talking about relatively near-term decisions we would be taken in the next quarter. So that market is active and while we don't have a national rule like CSAPR to drive NOx control, we still have CAIR and we have the Regional Haze Rule, which we're talking about here. And these consent decrees, sometimes there are plant permit requirements that are the driver. But they still show that we have an active SNCR market, but it's more lumpy. We saw in the end of 2011 was a sudden surge of orders to meet the January 1, 2012, compliance date, but then it was canceled. So we executed a lot of those projects in 2012. We turned our attention to the international markets as the U.S. market was unsettled. We won significant business over there and that does come at lower margin for a couple of reasons. But you'll see us execute those projects through 2013 while we replenish the sales pipeline with more traditional domestic products.

Okay. And then again, I think this was your comment to a prior question. It sounded like you did think you're maybe closer to your ASCR or SCR-type solution. Is that a domestic opportunity or international? Or can you maybe give us a little bit more visibility on where the demand might be coming from?

Sure, it's domestic. And these are -- if we were to win projects, this would potentially set even further record for contract size. So there's a lot in the planning stage. We are assembling resources in our catalyst technology center that we maintain in Durham and support our APC sales force. So I expect that to result in contract wins. I would say more of our large contract win opportunities are in the SCR technology area against the combustion area. And we're executing a large combustion project in Chile. We previously executed a large one in the U.S. But we think the future is more aimed at the SCR's side of technology portfolio.

Okay. And then one last question on FUEL CHEM. Obviously, it's been under some pressure given what we've seen in terms of coal usage and the low price of gas. There's also a decent amount of seasonality in that business. I mean, as we move the calendar over to Q1, do you expect things to maybe get a little bit better sequentially, or have you seen your customer count and the usage per customer decline enough that maybe the seasonality doesn't help you out this year the way it did last year?

Yes, Dan. This is Dave. I think we've seen the drop in FUEL CHEM. So from a -- for year-over-year basis, I don't think you'll see a lot of variation from prior year levels. The question is whether we do have some new customer opportunities, either existing fleets or new fleets and if we could get some of those online, that'd give us a lift. But I don't think you'll see further attrition.

So you're at the right level. But again, I mean, if you look at sort of Q4 versus Q1, I think there's almost $2.5 million revenue delta. Is that just seasonality, or was there more customer attrition over the course of 2012?

A little bit of both, Dan. But there is seasonality involved.

And your next question comes from the line of Steve Shaw with Sidoti & Company. Steve Shaw - Sidoti & Company, LLC: Can you just provide a little more color on what you might see or expect from the macro environment, whether it's nat gas prices or anything else, what you see in the first quarter and what you may expect going forward for the rest of the year?

I missed a couple of words. You said with respect to natural gas prices? Steve Shaw - Sidoti & Company, LLC: Yes, or any other factor in the macroeconomic environment in 2013?

I think if you limit the question to the short term of the first quarter, even extend that a little bit, I think we're going to see low natural gas prices for a while. I don't seem to have a better crystal ball than many experts. And you often hear it said in the years ahead that, that situation may not be the same. That being said, I think we discovered large sources of natural gas supply, particularly coming from shale gas. And so I think that's beneficial to the U.S. economy. I think it will help drive renewed manufacturing in industries such as petrochemical. I think you're going to see the ability to make careful considerations as to what your fuel strategies will be. They certainly cannot or will not, in a huge way, just convert to natural gas. You can't be dependent upon that for baseload generation. So I think you're going to see strategies that balance the use of natural gas and coal. Now, the coal industry is not going to sit idle by the side. They have many things to bring to the table. I think you're going to see increasing awareness of opportunities to blend coals, that take advantages of bearing heterogeneous coal qualities from different coal fields as well as the changing prices in those coal markets to bring the price of net fuel down, and importantly, to enable them to utilize that fuel in such a way that can help avoid some of the large capital expenditure requirements that is a pressure on the coal-fired generation utility market. That's where Fuel Tech stands to help. We're known to be a low-capital solutions provider. We can provide a lot of expertise to our customers as to how to maintain the use of coal and cleanly burn it. And we're, of course, aiming with our own product development to provide further capabilities in that area. But in the short term, I for one, believe that natural gas prices will remain relatively low as compared to historical level.

And your next question comes from the line of George Gaspar [ph], a private investor.

You may have covered this, but could you give us an update on what your strategy might be on your stock repurchase program and if there's any chance that you would accelerate or expand the program?

Let me just touch real quickly on that. This is Dave. We manage our capital base and we need to carry a certain amount of capital for bonding purposes on our projects. So just a comment in general, we do manage that pretty closely. And if you look at the cash balance and wonder what we're doing that, just understand there is a need for our business to support our business with our capital projects work.

That being said, George, and thank you for the question, when we, from time to time, have seen disparities in what we think the future value of the company is and what the market seems to suggest, we've taken advantage of that. You don't always have a perfect crystal ball. It's only been 3 times, and I remember in our history when we've done that once was, gosh, almost 10 years ago. And we did it twice in 2 programs announced at $6 million. We do not have any present program in place because we've completed those 2.

Okay. And a question on your research development, mentioning your Durham operation as to your technology focus, if you could explain that, if that, in fact, is true. How do you see the possibility of expanding your R&D program and trying to broaden your spectrum of chemical development?

Sure. In Durham, our group there is totally focused on our catalyst technologies. Our R&D efforts are centralized in the Warrenville area. And so we have a new product development team that manages projects across all technologies. Our Ph.D.s, our scientists, our engineers who work on those projects is a more centralized activity. We have a steering committee, we have an executive management review committee that each regulates on those projects and go/no go decisions get made if we see promising results. So it's a program that we have strategically said we're going to commit certain percentage level of our revenues toward with a balanced view between short term and long-term product launch. I think, having had this program in place and rigorously followed over the last 2 years now, we're going to begin to see some fruits of that effort. A lot of our R&D dollars, I can say, George, goes into field testing. That might be at an external laboratory handling [ph] our own its early work and then that might move to a customer site for demonstration. And so, we evaluate test results that are in real environments before finalizing the product attributes and structure. So we're encouraged by what we're doing. As I said earlier, much of that work is aimed at building a more recurring revenue stream for Fuel Tech. That gives us a better flywheel, I call it, to the business versus what you see when you win, execute and then have to go find new capital projects. And I would say, most of our R&D activity is aimed still at pollutant removal, which is where, while it may sound like a FUEL CHEM business model, it's really helping customers meet air pollution control needs.

I see, okay. I know you've got a very high level of chemical analysis and expansion in your field. Have you ever thought -- there's a lot of new streams coming out of liquefied natural gas -- natural gas liquids and it seems like there's more movement toward the use of certain chemical strains in the pentane 5, 6 range for oil fans work in Canada. Is there anything that you see in your broad opportunity scale that could move you in the direction of something like that?

Personally, I've looked a little bit at some of the issues related to the oil sands. There's no particular program active at Fuel Tech today to address opportunities like that. But I can tell you that the bench strength of chemical analysis that we've built is certainly aimed at taking on new, more complex problems. Certainly, I can also tell you that each and every project is carefully scrubbed with respect to near term as well as longer term and bigger market opportunities. So it's still a market-driven process.

And your next question comes of the line of Lucas Pipes with Brean Capital.

This is actually Derek Hernandez for Lucas Pipes. I'm his associate here in Capital. And a number of my questions have been answered already, but I wanted to touch on your understanding is that gas prices will remain around historically low levels. And I wondered how that might affect your FUEL CHEM margins in terms of what kind of projects you're finding and ...

Okay, thanks, Derek. Maybe Dave and I might both answer that. I'll start. Personally, I don't believe it's going to affect our margins. As we stated before, obviously when a unit may switch from coal to natural gas, our Fuel Tech -- FUEL CHEM program will be retired at that unit. We've seen that and spoken to the attrition that the fuel switching has occurred. But we've also seen a major issue with respect to overall electrical load demand. So as units operate at lower load levels, they don't have the same tendency to have a large, significant ongoing piling and slagging problem. So that, too, has affected our FUEL CHEM revenues. But that doesn't have a lot to do with natural gas. I think we have the opportunity to provide new additional products that utilize the FUEL CHEM business model that address multiple needs inside a boiler. And I also think that we will be, in the long term, addressing opportunities that the coal industry can bring back and offer to this dilledant [ph] industry relative to greater awareness of how fuel blending, more so than is being done today, coupled with our type solutions where we're the glue that provides a level of chemistry between the characteristics of coal from this field and coal from that field to provide a very capital efficient as well as cost efficient in operation cost approach to maintaining pollutant emissions. So when you look at an industry that's facing billions and billions of dollars of potential capital investment and does not want to retire asset that have significant infrastructure value at a sudden disruptive period and then all of a sudden natural gas prices are low, and I don't think anybody believes that, decades from now, that we'll be seeing the same situation, we will be there to enable that to smartly consume coal or other fuels and cleanly and efficiently burn those. That's where a lot of our R&D effort is aimed at, Derek.

Precisely, precisely. And then lastly, if I might touch on, you mentioned various coalfields obviously being sourced and many blends being tested right now by utilities in this volatile time. Could you give us maybe a little bit of color on kind of which of these fields are coming up more often in your conversations and how you may be reacting to this on your end?

Sure. Well, I think people are generally aware that the Central Appalachian, Northern Appalachian coalfields are maturing and are higher cost. However, they have a transportation advantage to geographic markets where a lot of people in this country live. The Powder River Basin grew to where it was supplying over 1/2 the coal's usage for electricity generation. And so when you're the biggest market share field contributor and you see natural gas taking some share of that market, you're going to see demand lower. So prices are now a little lower out there. They face the longer transportation hauls and therefore, well, we are delivering PRB coals in far-reaching locations, they still have quality characteristics and mining cost characteristics that make it an advantageous field. The Illinois Basin field is the one that has seen some recent growth. It has some of the "ballsy" characteristics that our customers have turned to Fuel Tech to help alleviate. So if you combine the FOB mine price attributes, the coal quality attributes and the transportation cost attribute and look for blending strategies and couple that with low capital cost, sensible chemistry in-furnace injection programs that we offer, you can optimize your overall costs between the cost of the fuel and the operating and maintenance costs of the plant. That's where we see the market heading. Having grown up in the coal industry, that there's 3 things that are really driving the coal markets: it's the cost to mine the coal, it's the quality of the coal and it's the transportation cost. Those 3 legs of the stool will persist forever. So we have heterogeneous coalfields and yet those are tremendous assets to this country. United States must recognize the value of this resource base because we know where it is, it's plentiful and we have a growing international appetite for that product where they don't have the same fuel alternatives that we have in this country. So that's going to translate into long-term infrastructure shift that will enable us to find new markets for the coal. That means new markets for Fuel Tech and smarter engineered solutions to burn those in a cleaner manner. I think you'll see the market share of coal reverse. I don't think it's going to go back over 50% anytime soon, but you'll see a balance between natural gas and coal. And there's a reason for that. This country and every country needs every possible energy source it can economically develop and there are economic trade-offs between them. So alternative energy has a role. Natural gas has a role. Oil, coal, nuclear, they all have defined roles. And so as I look ahead, I'm hopeful that this country will develop a balanced energy and environmental policy that takes advantage of all those resources.

And there are no further questions at this time. I will now turn the call back over to Mr. Bailey.

Thank you, operator. Well, you know, the financial results of the quarter weren't our best quarter. But the financial success of the year, given the market environment that we were in, I think speaks well for what this company is capable of doing. I'm just as encouraged as I ever have been about our potential, maybe partially because I have a little bit of an inside view of what I think our organization can deliver. So it's an exciting company working diligently at identifying some new product opportunity. I think you're going to see Fuel Tech reemerge as a growth company, taking advantage of looking for its ability to provide solutions that address these customer needs. What we really are good at is understanding complex combustion processes, the chemistry, chemical kinetics, the mechanics of figuring out how to deliver a solution where it's needed in order to perform a useful function. That's what we do. And so we're encouraged. 2013 will have its bumps as well as successes and I do believe that we'll again post a record year, and we're going to continue to invest for the long term. And we thank you for the kind of questions you asked today that help us convey to you the extent of our understanding of that opportunity. Thank you very much for today's call. Bye for now.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.