ADES » Topics » Results of Operations - 1 st Quarter 2008 versus 1 st Quarter 2007

This excerpt taken from the ADES 10-K filed Mar 27, 2009.

Results of Operations – 2008 versus 2007

Revenues totaled $16.2 million for 2008 versus $19.2 million in 2007, representing a decrease of 16%. Revenues in our MEC segment for 2008 decreased by $2.2 million (12%), and FGC and other activities decreased by $861,000 (67%).

Revenues in 2008 from the MEC segment were comprised of sales of ACI systems (60%), and government and industry-supported contracts (30%), and consulting services (10%), compared to 53%, 40% and 7%, respectively, in 2007. For the year, sales of our ACI systems contributed approximately $9.4 million to MEC revenues recognized for the year, decreasing 2% from the 2007 contribution to revenue of $9.6 million. We had contracts in progress at year-end for supply of ACI systems totaling approximately $6.9 million. We expect to complete and realize approximately $5.9 million of revenue under these contracts in 2009 and the remaining revenue in 2010.

Our DOE and industry demonstration contract revenues totaled $4.7 million in 2008, representing a decrease of 35% from 2007 revenues. The remaining unearned amount of these contracts was $3.4 million as of December 31, 2008, of which we expect to recognize $1.9 million in 2009 (including cash contributions by other industry partners). During 2008, government funded work for mercury demonstration projects diminished as the market has moved into a commercial phase. In the future, we expect an increase in DOE and industry funding for CO2 control technology. We anticipate growth in 2009 in the MEC segment to result primarily from an increasing number of ACI systems sales and expected increase in funding for CO2 technology from government and industry supported contracts.

Our contracts with the government are subject to audit by the federal government, which could result in adjustment(s) to previously recognized revenue. We believe, however, that we have complied with all requirements of the contracts and future adjustments, if any, will not be material. In addition, the federal government must appropriate funds on an annual basis to support these DOE contracts, and funding is always subject to unknown and uncontrollable contingencies. We expect funding from utilities for mercury control evaluation and testing to increase to meet state and local regulations and that DOE may fund other projects related to our business, including CO2 control.

 

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Revenues from consulting services included in the MEC segment increased approximately $392,000, from 2007 to 2008, related to services being performed in Canada, conducting a full-scale test on an ACI system for mercury control.

FGC and other revenues comprised 3% of total revenues in 2008, compared to 7% in 2007. FGC and other revenues decreased due to fewer sales of chemical and revenues related to continuing customers. We expect FGC and other revenues in 2009 to continue to decline as a percentage of our total revenues.

Cost of revenues decreased by $2.3 million or 18% in 2008 from 2007 primarily as a result of diminishing government funded projects and fewer chemical sales. Gross margins were 33% for the year as compared to 31% in 2007. The increase primarily reflects the increase in margins for the MEC segment as described below. For the near term, we expect the sales of mercury control systems and fixed price consulting to continue to represent an increasing source of revenues, for which the anticipated gross margins are lower than for our specialty chemical sales and DOE demonstration work that involves industry cost sharing. As a result, we expect the gross margin for fiscal year 2009 to be slightly lower than the margin realized in fiscal year 2008.

Cost of revenues for the MEC segment decreased by $1.9 million in 2008 or 15%, as compared to the same period in 2007 primarily due to our decreased activity related to our government and industry supported programs. Gross margins for the MEC segment were 34% in 2008 as compared to 31% in 2007. The increase is primarily the result of increased margins related to our ACI system sales of 15%, as a result of the implementation of our improved modular ACI equipment design, which broadens fabrication and material supply options, simplifies field installation and reduces system costs. This increase was offset by a decline in margins from our government and industry supported revenue of 24%, which has historically generated higher margins. As the mercury control market is maturing, we expect more companies to bid on ACI systems. We expect increased competition in this area which may require us to lower our margins in order to maintain our market share. Looking further ahead, we expect CO2 demonstration work and sales of AC to positively affect margins.

Cost of revenues for the FGC and other segment decreased by $409,000 or 48% in 2008, as compared to 2007 primarily as a result of decreased chemical sales. Gross margins for this segment were (2)% for 2008 as compared to 34% in 2007. The decrease in gross margins from 2007 to 2008 is a result of increased FGC sales of a product we license from ARKAY Technologies, which carries a lower margin than historical FGC sales.

General and administrative expenses increased by $4.0 million or 76% to $9.2 million in 2008. The dollar increase in 2008 resulted primarily from the increased number of employees, employee benefits, and other overhead expenses (approximately $2.1 million), legal fees due to litigation efforts and significant contract negotiations (approximately $1.1 million) and IT and other consulting fees due to growth (approximately $344,000). Included in our general and administrative expenses was approximately $1.0 million related to share based compensation. We expect that our general and administrative expenses will be approximately 25% to 30% of revenues for the foreseeable future. We continue to hire personnel in response to the growth realized and expected, and sufficient resources of skilled labor have been and are expected to be available to meet anticipated needs.

We incur R&D expenses not only on direct activities we conduct but also by sharing a portion of the costs in the government and industry programs in which we participate. Total research and development expense decreased by $417,000 or 35% in 2008 as compared to 2007. Our direct cost share for R&D under DOE related contracts decreased from $163,000 in 2007 to $30,000 in 2008, reflecting the anticipated decrease in our cost share contribution and the overall decrease in mercury related demonstrations that we carried out during the year. The decrease is somewhat offset by increased activities related to preparing for growth in the delivery of our ACI systems, as well as our refined coal activities. Future consolidated research and development expenses, except for those anticipated to be funded by the DOE contracts and others that may be awarded, are expected to be close to, or slightly lower in 2009 as compared to 2008. We continue to anticipate that our future R&D expenses will grow in direct proportion to DOE funded CO2 work we perform for the next several years.

We recorded a goodwill impairment charge of $1.6 million in 2008, which related to our FGC segment. The goodwill impairment charge was the result of a reduction in the estimated fair value of our FGC segment due to lower chemical sales and market conditions experienced in 2008 that we expect to continue in the near future. We evaluate the recoverability of goodwill at least annually and any time business conditions indicate a potential change in recoverability. There were no goodwill impairment charges for 2007. Refer to Note 3 in the consolidated financial statements.

 

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MEC segment profits decreased by $55,000 or 1% to $3.9 million as compared to 2007. The decrease was primarily a result of decreased MEC segment revenues from our DOE contracts. FGC and other segment loss increased by $1.6 million or nearly 3,000% to $1.9 million, as compared to a loss of $54,000 in 2007. The increase was primarily the result of lower margin chemical sales, goodwill impairment and decreasing segment revenues.

We had net interest and other income of $439,000 in 2008, as compared to $930,000 for 2007. The interest income consists of $292,000 earned from our money market deposits and $139,000 from our investment in corporate and government bonds. We anticipate interest income to decline in 2009 due to a combination of lower invested balances and lower interest rates as compared to prior years.

The income tax provision for 2008 represents an effective tax rate benefit of approximately 27%, which is more than the rate of (2)% we recognized for 2007. The increase is primarily the result of the reduction of tax credits available to be utilized in 2008, and impairment of goodwill and investment items, which totaled approximately $1.6 million, for the year ended December 31, 2008. We adopted the provisions of FIN 48 on January 1, 2007. No unrecognized tax benefits were recorded as of the date of adoption. The primary jurisdictions in which we file income tax returns are the U.S. federal government and State of Colorado. We are no longer subject to U.S. federal examinations by tax authorities for years before 2005 and Colorado state examinations for years before 2004.

Upon forming Carbon Solutions approximately $1.2 million of development costs that had previously been shown on our Balance Sheet were expensed in the fourth quarter of 2008. These costs were directly related to Carbon Solutions and no longer had any value relating to our AC Supply Business.

Our operating loss from continuing operations was $6.7 million in 2008 as compared to a loss of $777,000 in 2007, due in large part to continued activities related to the Company’s growth strategies which included our plans to vertically integrate into the production of and provide an interim supply of AC.

Unrealized gain, net of tax, on investments in debt and equity securities amounted to $31,000 for 2007. We sold all of our investments in debt and equity securities in 2008 and recognized a net gain of $31,000 which is shown in Interest and other income in our consolidated statements of operations.

This excerpt taken from the ADES 10-Q filed May 7, 2008.

Results of Operations – 1st Quarter 2008 versus 1st Quarter 2007

Revenues totaled $4.0 million for 2008 versus $3.9 million in 2007, representing an increase of 3%. Revenues in our MEC segment for 2008 increased by $271,000 (7%), and FGC and other activities decreased by ($172,000) (63%).

Revenues in 2008 from the MEC segment were comprised of sales of ACI systems (62%), government and industry-supported contracts (37%) and consulting services (2%), compared to 49%, 42% and 9%, respectively, in 2007. For the quarter, our ACI systems sales contributed approximately $2.4 million to MEC revenues, increasing 35% from the 2007 contribution to revenue of $1.8 million. We had contracts in progress at quarter-end for supply of ACI systems with remaining revenue of approximately $10.4 million, $5.3 million of which we expect to complete and realize in 2008, with the balance to be completed and realized in 2009 and 2010. The most significant growth occurred in the sales and installations of ACI systems, which increased $627,000 in the quarter and is the result of an increasing number of system sales as noted above.

 

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Such increase is less than initially anticipated as a result of the uncertainty surrounding the recent CAMR ruling. Currently we are aware that utilities have postponed plans on at least 12 installations of ACI systems due to the CAMR ruling. However, we expect growth in 2008 in the MEC segment to result primarily from an increasing number of retrofit ACI systems in response to mercury emission control legislation. Our DOE and industry demonstration contract revenues totaled $1.4 million, representing a decrease of 5% from 2007 revenues. The remaining unearned amount of the contracts was $4.2 million as of March 31, 2008, of which $2.2 million is expected to be recognized in 2008 (including cash contributions by other industry partners). As reported earlier, future commitments on two other projects have not been made as of March 31, 2008 in the amount of $600,000, and it is unclear whether the funds will be allocated and paid on the contracts. This amount is not included in the $4.2 million noted above. Consequently those funds remain at risk pending funding decisions by DOE, and it is possible that other contract amounts could also be decreased or eliminated. We expect the DOE funding for mercury related projects to continue to decline or be eliminated, however we expect increased funding for CO2 technology from government and industry supported contracts will begin to replace that source of revenue for us beginning in late 2008 and continuing into 2009.

Our contracts with the government are subject to audit by the federal government, which could result in adjustment(s) to previously recognized revenue. We believe, however, that we have complied with all requirements of the contracts and future adjustments, if any, will not be material. In addition, the federal government must appropriate funds on an annual basis to support DOE contracts, and funding is always subject to unknown and uncontrollable contingencies. Revenues from consulting services included in the MEC segment decreased approximately $273,000 or 81% from 2007 to 2008.

FGC and other revenues decreased by $172,000 or 63% due to fewer shipments of chemicals to continuing customers. We expect FGC and other revenues in 2008 to be lower than 2007. Demonstrations planned for 2008 have been delayed also due to the recent CAMR ruling and we are unsure at this juncture if these demonstrations will be conducted. Sales related to our ADA-249M product are recorded in the FGC and other segments and were $18,000 and $15,000 for the quarters ended March 31, 2008 and 2007, respectively.

Cost of revenues increased by $369,000 or 16% in 2008 from 2007 primarily as a result of increased volume and changes in our business mix as discussed below. Gross margins were 33% for the first quarter as compared to 41% in 2007. The decrease reflects decreased margins in both MEC and FGC and other segments. For the near term, we expect the sales of mercury control systems to continue to represent an increasing source of revenues, for which the anticipated gross margins are lower than for our specialty chemical sales and DOE demonstration work that involves industry cost sharing. As a result, we expect the gross margin for fiscal year 2008 to be lower than the margin realized in fiscal year 2007.

Cost of revenues for the MEC segment increased by $415,000 in 2008 or 19%, as compared to 2007 primarily as a result of the increased revenue generating activities from our ACI system sales. Gross margins for this segment were 33% for the first quarter as compared to 40% for 2007. The decline in gross margins from the prior year resulted from a decrease in government and industry supported revenue which has historically generated higher margins as an overall percentage of the revenue as compared to the same quarter in the previous year. Another factor in the decline of the margins in the ACI systems market is increased downward pricing pressure as a result of competition. Increased competition in this area has, and we expect will continue, to require us to lower our margins to maintain our desired market share. We have taken numerous steps to decrease costs and improve efficiencies to maintain acceptable margins from our ACI system sales. Looking further ahead, we expect CO2 government and industry supported demonstration work and sales of activated carbon to positively affect margins.

Cost of revenues for the FGC and other segment decreased by $46,000 or 34% in 2008, as compared to 2007. Gross margins for this segment were 14% for 2008 as compared to 51% in 2007. The decrease in gross margins from 2008 to 2007 is a result of increased FGC sales of a product we license from ARKAY Technologies, which carry a lower margin than historical FGC sales, and direct costs related to the current joint venture activities of Clean Coal. FGC and other revenues comprised 3% of total revenues in 2008, compared to 7% in 2007. The changes in the FGC segment profits from 2008 to 2007 are a result of the same factors.

We expect the amount of fixed price and time and materials work in the MEC segment for the near term to represent an increasing source of revenue. Overall gross margins for 2008 are therefore expected to decline somewhat from the levels achieved in 2007, as a result of an increasing proportion of fixed price and time and materials work, and pricing pressure caused by increased competition.

 

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General and administrative expenses increased by $33,000 or 2% to $1.5 million in 2008. The dollar increase in 2008 resulted primarily from increased administrative wage costs ($98,000); increased vacation wages ($42,000) offset by lower SOx 404 compliance, consulting and outside labor costs ($109,000). Our costs are substantially consistent with those from the previous year. We have been hiring personnel in response to the growth we have realized in the past and expect to achieve in 2008. Adequate resources of skilled labor have been and are expected to be available to meet anticipated needs.

We incur R&D expenses not only on direct activities we conduct but also by sharing a portion of the costs in the government and industry programs in which we participate. Direct research and development expenses decreased by $122,000 or 34% in 2008 as compared to 2007 as a result of a decrease in DOE contract activities. Future consolidated direct research and development expenses, except for those anticipated to be funded by the DOE contracts and others that may be awarded, are expected to continue to grow at a rate of about 10% annually for the next several years. Of the amount incurred in 2008, only $5,000 was directly related to DOE contracts as compared to $125,000 in the same period in 2007.

MEC segment profits decreased by $96,000 or 10% to $900,000 as compared to 2007. The decrease was primarily a result of lower margins on increased MEC segment revenues from our ACI systems and lower revenues from our DOE contracts that historically have higher margins than ACI systems revenue. FGC and other segment loss was $67,000 as compared to a profit of $3,000 as compared to 2007. The decrease was primarily the result of lower margin chemical sales and decreasing segment revenues.

We had net interest and other income of $169,000 in 2008, as compared to $266,000 for 2007. Interest and other income decreased in 2008 due to our increased funding commitments on our development projects and other activities, which has resulted in lower invested balances. In addition a decrease in interest rates is occurring and will reduce interest income on amounts invested in interest bearing accounts.

Other income and expense included our minority interest in the loss in Clean Coal, our joint venture with an affiliate of NexGen Resources Corporation, which is pursuing Refined Coal (RC) opportunities. The minority interest in the loss of Clean Coal amounted to $17,000 in 2008. Our net operating loss for the period ended March 31, 2008 includes net costs of $88,000 related to our RC efforts and $34,000 loss of the joint venture. We incurred an additional $54,000 of expenses related to our direct Clean Coal joint venture activities in 2008. If Clean Coal succeeds in obtaining approval for the Section 45 tax credits, NexGen has the right to maintain its 50% interest by paying us an additional $4.0 million, in eight quarterly payments of $500,000 each, beginning in the quarter Clean Coal receives such qualification. NexGen is not obligated to make those payments, but if it does not do so once Clean Coal has qualified for the Section 45 tax credits, it will forfeit a part of its interest in Clean Coal in direct proportion to the amount of the $4.0 million that it elects not to pay, if any.

The deferred income tax benefit for 2008 represents our expected effective tax benefit of approximately 50% for 2008, which is greater than the rate of 31% we recognized for the first quarter of 2007. The increase is primarily the result of larger impact of R&D tax credits for 2008 as compared to the amount estimated for the first quarter of 2007.

Unrealized loss, net of tax, on investments in debt and equity securities amounted to $121,000 for 2008 as compared to a gain of $4,000 for 2007. The recorded unrealized loss in 2008 was the result of the decrease in the market value of our remaining equity investments as compared to a minor increase in 2007.

EXCERPTS ON THIS PAGE:

10-K
Mar 27, 2009
10-Q
May 7, 2008
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