FuelCell Energy, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; balance-sheet comparisons are with October 31, 2015. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants and develops related technologies. Results are unaudited.
Financial results and position
| Metric | Q1 FY2016 | Q1 FY2015 / prior balance date |
|---|---|---|
| Revenue | $33.5 million | $41.7 million |
| Gross profit (loss) and margin | $(0.2) million; (0.5)% | $4.0 million; 9.6% |
| Operating loss | $(11.5) million | $(5.1) million |
| Net loss | $(11.8) million | $(4.2) million |
| Net loss attributable to common shareholders; diluted loss per share | $(12.5) million; $(0.48) | $(4.9) million; $(0.20) |
| Operating cash flow | $8.6 million provided | $2.3 million used |
| Cash and cash equivalents, unrestricted | $76.9 million | $58.9 million |
| Cash and cash equivalents, restricted | $37.3 million | $26.9 million |
| Total debt, including finance obligation | $27.6 million | $16.3 million |
| Total assets; total liabilities | $294.6 million; $138.6 million | $277.2 million; $122.6 million |
Operating cash flow benefited from lower receivables and inventory and higher accrued liabilities, partly offset by increased project assets and lower deferred revenue. Investing activities used $3.4 million; financing activities provided $13.1 million, including $13.3 million net from common-stock sales and $10.0 million from Connecticut, partly offset by increased restricted cash and debt repayments. The quarter-end cash total including restricted cash was $114.2 million.
Material changes versus the prior comparable period
- Revenue fell 20% year over year. Product sales decreased 25%, mainly on lower Asian module and component sales and lower engineering and construction services; advanced-technology contract revenue fell 52%.
- Service and license revenue rose 63%, but related costs rose 92%, reflecting module replacements and increased performance-guarantee reserves. Its gross margin shifted to (8.4)% from 7.8%.
- Product-sales gross margin declined to 2.7% from 9.2%, which management attributed to sales mix and higher engineering and construction costs. Advanced-technology contracts also moved to a gross loss, attributed to contract timing and mix, including cost-share obligations.
- Operating expenses increased to $11.4 million from $9.1 million, including higher R&D spending for near-term product introductions. The operating loss more than doubled.
- Debt increased, including a new $10.0 million Connecticut loan and a PNC sale-leaseback financing obligation. The company also repaid its $2.9 million revolving credit balance and $2.5 million net on the NRG facility.
Outlook, risks and contingencies
- Management stated that available cash, expected operating cash flows, financing availability and capital-market access should be sufficient for at least the next 12 months. It also noted that sustained positive operating cash flow depends on higher order volume and lower costs.
- Backlog was approximately $403.9 million, including $303.2 million of service agreements and $35.0 million of advanced-technology contracts, of which $19.0 million was funded. Management targeted converting 40–60 MW of its sales pipeline into incremental backlog in 2016. Production was approximately 63 MW in the quarter; current annual capacity is 100 MW.
- Fiscal 2016 capital expenditures were forecast at $16–18 million. The first phase of the Torrington expansion is underway; the broader two-phase expansion could cost up to $65 million over five years. A second phase, subject to demand, could raise capacity to at least 200 MW.
- Liquidity risks include project-development spending and delays in project sales, working-capital needs, unbilled receivables, inventory requirements, and cash collateral for performance security. Restricted cash of $37.3 million included $15.0 million securing a long-term service agreement and $10.0 million supporting PNC-related obligations.
- POSCO Energy represented 45% of quarterly revenue, versus 54% a year earlier, highlighting customer concentration. Unbilled receivables were $34.0 million at quarter-end.
- Unconditional purchase commitments totaled $58.9 million. Service agreements expose the company to operating-performance and potential repair or replacement costs; accrued performance guarantees were $2.5 million. The company also described conditional customer and financing-partner protections related to U.S. investment tax-credit valuations, but said payments were not considered probable. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued.
- Management identified risks involving order growth, cost reduction, customer relationships, project financing, government-contract funding, incentives, market acceptance, and technology and manufacturing execution. It reported no material change to the risk factors in its prior Form 10-K.
Most important facts for investors to verify
- Whether the quarter’s cash-flow improvement is repeatable, given its dependence on working-capital movements.
- Whether margins recover as sales mix, module-exchange costs, performance-guarantee costs and engineering and construction activity change.
- POSCO revenue concentration, receivable collections and the timing of billing on substantial unbilled receivables.
- Project backlog conversion, project-sale timing, financing availability and restricted-cash requirements.
- Progress against production, cost-reduction, 2016 pipeline-conversion and manufacturing-expansion plans, alongside the stated capital-expenditure forecast.