FuelCell Energy, Inc. — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended October 31, 2015; the fourth quarter ended that date. FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, primarily for utility, industrial and commercial customers. Its plants operate in more than 50 locations, and reported installed base and backlog exceeded 300 MW. South Korea and the United States were its principal markets. The 10-K was signed January 8, 2016.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $163.1 million | $180.3 million |
| Gross profit / margin | $12.8 million / 7.8% | $13.7 million / 7.6% |
| Operating loss | $28.9 million | $27.3 million |
| Net loss | $29.7 million | $38.9 million |
| Net loss to common shareholders; loss per share | $32.6 million; $1.33 | $41.3 million; $2.02 |
| Cash used in operating activities | $44.3 million | $57.5 million |
| Capital expenditures | $6.9 million | $6.3 million |
FY2015 fourth-quarter revenue was $51.5 million, gross profit $3.1 million, operating loss $7.9 million and net loss $8.9 million. FY2014 fourth-quarter revenue was $54.4 million, gross profit $6.0 million, operating loss $5.0 million and net loss $4.9 million.
At October 31, 2015, cash and cash equivalents were $58.9 million, plus $26.9 million of restricted cash; working capital was $129.0 million. Total debt was $16.3 million, including $7.4 million current debt. Total liabilities were $122.6 million, and redeemable preferred stock had a $64.0 million liquidation preference. Management said available resources and financing were expected to cover operations for at least 12 months, while noting continued dependence on order growth, cost reductions and potential financing.
Changes versus the prior comparable period
- Revenue fell 10%, mainly due to lower fuel-cell kit sales to POSCO Energy and lower power-plant revenue. Product sales declined 6%; service and license revenue declined 19%, largely because of the timing of module exchanges.
- Gross margin improved slightly to 7.8% from 7.6%. Product-sales margin rose to 7.8% from 7.3%, and service/license margin to 12.9% from 11.2%; advanced-technology contracts were break-even versus a 4.7% margin.
- Operating loss widened by $1.6 million despite lower revenue. Net loss narrowed, primarily reflecting the prior-year $8.4 million make-whole charge associated with conversion of the 8% convertible notes. FY2015 other income included $1.7 million of foreign-exchange gains and $0.6 million of refundable R&D tax credits.
- Operating cash use improved but remained substantial. Cash declined by $24.9 million during the year, while financing activities provided $26.5 million, including $27.1 million from common-stock sales.
- Product backlog decreased to $90.7 million from $113.1 million; service backlog increased to $254.1 million from $196.8 million; advanced-technology backlog rose to $36.5 million from $24.0 million. Total contract backlog was approximately $381.4 million.
Outlook, management commentary and risks
- Management targeted reducing levelized cost of energy to $0.09–$0.11/kWh at 210 MW of annual global production, assuming natural gas prices of $4–$6/MMBtu. The filing estimated current unsubsidized LCOE at about $0.12/kWh at $4.50/MMBtu. These are targets and estimates, not guaranteed results.
- Management targeted converting approximately 30–40 MW of sales pipeline into incremental backlog in 2016. FY2016 capital expenditures were forecast at $16–$18 million.
- The company began a Torrington facility expansion. Connecticut provided a $10 million, 15-year loan at 2% for phase one; up to half the principal may be forgiven if job targets are met, and up to $10 million in tax credits may be earned. A second phase, subject to demand, could increase North American capacity from 100 MW to at least 200 MW. Total two-phase investment could reach $65 million over five years.
- A December 2015 sale-leaseback facility with PNC could provide up to $30 million for projects under development. The first transaction generated approximately $8.8 million; the company expects to make fixed monthly payments over 10 years and may repurchase the plants at term end.
- Fuel-cell eligibility under the U.S. investment tax credit remained uncertain: the December 2015 legislation extended the credit for solar, but not clearly for fuel cells. Management anticipated a legislative correction but gave no assurance it would pass. The credit was described as an important project economic driver.
- Key risks include persistent losses and negative operating cash flow; dependence on incentives and achieving cost reductions; customer and geographic concentration; project financing, construction and conversion risks; product performance, warranty and service obligations; and reliance on POSCO Energy and other strategic partners. POSCO Energy accounted for 67% of FY2015 revenue, and the top six customers accounted for 94%.
- Subsequent to year-end, the company completed a 1-for-12 reverse stock split. The auditor reported fairly presented financial statements and effective internal control over financial reporting; management also concluded disclosure controls were effective. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the company can reduce ongoing cash burn and reach profitability without repeated equity issuance or other external financing.
- Whether backlog converts to deliveries, revenue and cash on schedule, particularly given customer concentration and contract contingencies.
- Whether the U.S. fuel-cell investment tax credit was ultimately extended and how incentive changes affect project economics and demand.
- Whether module life, output, availability and service costs meet management assumptions, including the planned increase in stack life from five to seven years.
- Whether the Torrington expansion, related financing and planned production-volume growth deliver the expected cost reductions and returns.
- The cash and dilution implications of preferred-stock obligations, project financing, restricted-cash requirements and future capital raises.