Fuel Tech, Inc. (Fuel Tech) has reported revenues of $81.07 million for the year-end 2008, compared with the revenues of $80.29 million in the previous year-end. It has also reported a net income of $3.6 million, or $0.15 per diluted share, for the year-end 2008, compared with the net income of $7.2 million, or $0.29 per diluted share, in the previous year-end.

Fourth-Quarter 2008

Revenues for the fourth quarter totaled $18.1 million, a decline of 44% from the comparable prior-year period. The net loss for the quarter was $0.6 million, or ($0.02) per diluted share, compared with net income of $5.2 million, or $0.21 per diluted share, in the same year-ago quarter. The declines primarily reflect impaired results in the Air Pollution Control technology segment (APC segment) and higher FUEL CHEM demonstration program costs, especially in India and China.

The APC segment generated revenues of $8.7 million, down 65% versus the $24.6 million recorded in the comparable year-earlier quarter. Year-to-year comparisons are heavily influenced by the timing of orders placed by customers to achieve compliance with the Clean Air Interstate Rule (CAIR). The rule, originally scheduled to go into effect January 1, 2009, generated a surge in order activity during 2007, which contributed to the company’s record-breaking fourth-quarter 2007 performance. However, a July 2008 decision by the U.S. District of Columbia Court of Appeals to vacate CAIR, coupled with unusually tight credit markets, resulted in a sharp curtailment of APC orders during the second half of 2008, contributing to reduced revenue levels during the fourth quarter. On December 23, 2008, the same Court agreed to reinstate CAIR, with the original January 1, 2009 effective date reinstituted, provided that the EPA undertook the process of revising the ruling to address the Court’s primary concerns. Gross margins for the APC segment were 44% in the fourth quarter, compared with 51% a year ago, reflecting more lower margin installation-related work in our mix of project business.

Revenues for the FUEL CHEM technology segment (FUEL CHEM segment) totaled $9.4 million, an increase of 19% from the comparable 2007 quarter, as results benefited from the impact of new customer accounts. Current-quarter revenues include $7.8 million from coal-fired units, a 20% increase versus a year ago, and $1.6 million from non-coal fired units, a 13% gain versus the year-earlier quarter, driven by the recent decline in the price of crude oil resulting in increased operation of fuel oil-fired units. Segment gross margins declined from 46% in the fourth quarter of 2007 to 37% in the current quarter, reflecting significant costs associated with demonstration programs at customer sites in India and China. Demonstration programs are designed to prove the effectiveness of TIFI Targeted In-Furnace Injection(TM) 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. Due to the market potential of TIFI applications in China and India, the company has invested substantially more expense in these demonstration programs than is typical for demonstrations in the United States.

Selling, general and administrative expenses totaled $6.8 million, unchanged from the fourth quarter of 2007. Research and development expenses were $0.3 million, down from $0.5 million in the comparable year-ago period, while net interest income declined to $0.1 million from $0.4 million in the prior-year quarter, reflecting significantly lower interest rates on outstanding cash and cash-equivalent balances.

Full-Year 2008

Despite a marginal revenue gain, net income declined for the year, due in part to the costs associated with a record number of FUEL CHEM demonstration programs, including those in India and China, as discussed above.

The APC segment generated annual revenues of $44.4 million, down 7% from 2007. Revenues were very strong during the first nine months of 2008, as the company worked through its sizable year-end 2007 backlog. However, due to the aforementioned vacatur of CAIR in July 2008 and the tightening of global credit markets, orders came to a virtual standstill during the second half of the year, contributing to a reduction in year-over-year revenues. Segment gross margins of 45% were down slightly from the 46% reported for fiscal 2007.

Revenues for the FUEL CHEM segment totaled a record $36.7 million, up 13% from the $32.5 million reported in fiscal 2007. The improvement reflects the record number of demonstration programs awarded to Fuel Tech during 2008 and the conversion of demonstration programs to commercial status. Of total 2007 segment revenues, $26.2 million was generated from coal-fired units while $6.3 million was derived from non-coal fired units. Of the $36.7 million in 2008 segment revenues, $31.6 million was associated with coal-fired units, a 20% increase, while revenues from non-coal fired units declined 19% to $5.1 million. The reduction in 2008 revenues from non-coal fired units reflects higher crude oil prices experienced during the first nine months of 2008, which kept many domestic oil-fired units from running in all but peak or other critical situations, and the company’s decision to withdraw from Venezuela in response to that government’s nationalization efforts. Annual segment gross margins declined versus fiscal 2007, from 49% to 46%, reflecting the costs associated with the aforementioned demonstration programs.

Selling, general and administrative expenses were $28.0 million in 2008, compared with $25.0 million in 2007. The increase reflects continued investments in personnel and infrastructure, as the company positions itself to satisfy global demand, combined with an increase in Statement of Financial Accounting Standards No. 123R stock compensation expenses of $1.0 million. Research and development expenses were $2.1 million, unchanged from 2007, while net interest income declined to $0.6 million in 2008 from $1.6 million in 2007, principally reflecting significantly lower interest rates on outstanding cash and cash-equivalent balances.

During 2008 the company announced contract awards with a value of AROUND $21 million. After accounting for the conversion of backlog to revenues, the APC segment’s capital projects backlog stood at $9 million as of December 31, 2008, reflecting the impact of the aforementioned Court decisions regarding CAIR and the tightening of global credit markets on capital investments by electric utilities during the second half of 2008.

John F. Norris, president and chief executive officer, commented, Though in line with our expectations, Fuel Tech’s fourth-quarter results largely reflect the unfortunate delays in air pollution control orders arising from the vacatur of CAIR. With the Court’s recent favorable ruling and with the technologies added by our recent acquisitions, we have begun to experience heightened quotation and order activity, and assuming that capital markets begin to stabilize, we believe we are well on the way to rebuilding our domestic APC project pipeline.

Norris continued, Our FUEL CHEM segment experienced respectable revenue growth during the fourth quarter, particularly in light of the global economic slowdown, which caused certain of our customers to scale back chemical usage due to reduced electricity demand. Despite higher revenues, this segment did experience a reduction in operating income as the cost of conducting a record number of demonstration programs, especially costs associated with our initial demonstrations in India and China, weighed on the bottom line. We view the expenditures associated with these demonstration programs as vital to growing our customer base and increasing our long-term revenue stream. During the fourth quarter, we were awarded three demonstrations, including our second demonstration in China, bringing our full-year total to a record 15, including 13 on coal-fired boilers.