The Air Pollution Control technology segment (APC segment) generated revenues of $8.8 million, down 24% versus the $11.7 million recorded in the comparable year-earlier quarter. The decline can be attributed to the impact of sharply reduced APC orders during the second half of 2008 driven by the regulatory uncertainty caused by the July 2008 decision by the US District of Columbia Court of Appeals (Court) to vacate the Clean Air Interstate Rule (CAIR) coupled with the worldwide economic crisis which dramatically decreased capital availability and reduced electrical demand by industrial customers. This, in turn, significantly decreased the cash flows and earnings for utilities and industrial customers and necessitated certain deferrals of their capital project spending and resulted in a suppressed level of orders for the company’s APC segment in the first quarter of 2009. Partially offsetting this factor were initial revenues derived from contracts acquired in connection with the January 2009 acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. (ACT).
With respect to CAIR, the Court agreed, on December 23, 2008, to reinstitute this rule in its entirety with the original January 1, 2009 effective date, provided that the EPA undertook the process of revising the ruling to address the Court’s primary concern. This development, coupled with the ACT transaction, has generated a surge in quotation activity and a commensurate pick-up in order announcements is anticipated. Gross margins for the APC segment were 28% in the first quarter, compared with 47% a year ago. The decline reflects a large pass-through product sale at a nominal mark-up and the recording of a contingent loss provision on a contract.
Revenues for the FUEL CHEM technology segment (FUEL CHEM segment) totaled $8.5 million, down 3% from the comparable 2008 quarter. The decline primarily reflects the impact of the U.S. economic recession on electricity demand, which has caused certain FUEL CHEM customers to shut down or scale back certain boiler operations. This, in turn, has resulted in certain FUEL CHEM programs being operated at reduced levels or temporarily turned off. Moderating this factor was the onset of chemical injection at several new customer sites. Current-quarter revenues include $7.4 million from coal-fired units, a 3% decrease versus a year ago, and $1.1 million from non-coal fired units, an 8% decline versus the year-earlier quarter, the latter reflecting the discontinuation of a FUEL CHEM program in Venezuela in response to that government’s nationalization efforts. Segment gross margins declined from 49% in the first quarter of 2008 to 41% in the current quarter, due principally to costs associated with ongoing demonstration programs at numerous customer sites and the dilutive impact of fixed operating costs at client sites experiencing reduced chemical demand. Demonstration programs are designed to prove the effectiveness of TIFI Targeted In-Furnace Injection applications, with the company and customer normally sharing in the program’s expense, and typically transition into commercial contracts once the program’s value has been demonstrated.
Selling, general and administrative (SG&A) expenses totaled $8.3 million in the current quarter, versus $7 million in the same year-ago period. Of the $1.3 million increase, $1 million is attributable to the net incremental SG&A expenses associated with the recent acquisitions of substantially all of the assets of Tackticks, LLC, FlowTack, LLC and ACT. Also contributing to the SG&A increase was additional stock compensation expenses of $0.3 million. Research and development (R&D) expenses were $0.2 million, down from $0.6 million in the comparable year-ago period, as the company moderated its near-term R&D expenditures in the wake of the economic downturn. Net interest expense was negligible during the current quarter, compared with $0.2 million of net interest income in the prior-year period, reflecting the reduction in cash and cash equivalents to fund the aforementioned acquisitions.
During the first quarter of 2009, the company announced contract awards with a value of $8.5 million. When combined with the backlog acquired in connection with the ACT transaction, and the ongoing conversion of backlog to revenues, the APC segment’s capital projects backlog totaled $14.3 million as of March 31, 2009. This relatively low level of activity reflects the impact of tight credit markets on APC outlays by electric utilities and industrial customers, but with the reinstatement of CAIR and the addition of new product lines, a substantial increase in APC orders is now expected for the remaining three quarters of 2009.
John F. Norris Jr., president and chief executive officer, stated, The first quarter of 2009 was particularly challenging as the virtual absence of second-half 2008 air pollution control orders limited our ability to generate APC-related revenues. Fortunately, we are experiencing a strong pick-up in quotation activity, including requests that can best be satisfied with new products and services associated with the Tackticks, FlowTack and ACT transactions, including the HERT(TM) High Energy Reagent Technology(TM) system. Especially noteworthy has been our recent success in international markets, with major wins in Canada, France and China, where just this past week we received a $4.6 million contract for multiple NOxOUT ULTRA(R) systems. Thus far in 2009, we have announced APC orders totaling over $13 million.
Norris added, Our FUEL CHEM segment was significantly impacted by the economic recession, but we continue to start-up new programs at coal-fired units and win new business in this challenging environment. Of particular note was the award of a demonstration program on one of the largest coal-fired units in the United States, which has already begun chemical injection. A success here could mean rapid deployment of TIFI(TM) Targeted In-Furnace Injection(TM) technology on other units in the customer’s fleet. Also, the demonstration on our first lignite unit, announced in December 2008, has just been successfully completed and that unit is now a commercial customer of our FUEL CHEM program.
Norris concluded, With respect to the balance of 2009, we believe air pollution control orders will begin to accelerate and that important FUEL CHEM announcements will be forthcoming as well in the not too distant future. Nevertheless, this outlook must be tempered by the reality of ongoing capital constraints and falling electricity demand in the wake of economic contraction in most industrialized nations. As such developments have the potential to alter very rapidly the environment in which we operate, we are unable to offer any additional clarification to our previously stated 2009 guidance at this time. Accordingly, we will defer such pronouncements until our revenues and earnings for this year come into sharper focus.
