FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2012; fiscal year ends October 31. The company develops, manufactures, sells and services stationary fuel-cell power plants and reported that it was not generating positive operating cash flow consistently.
Financial performance and position
| Metric | Three months ended July 31, 2012 | Prior-year period | Nine months ended July 31, 2012 | Prior-year period |
|---|---|---|---|---|
| Revenue | $29.7 million | $31.2 million | $85.2 million | $87.8 million |
| Gross profit (loss) | $(2.7) million | $0.1 million | $(0.4) million | $(13.0) million |
| Operating loss | $(10.5) million | $(7.4) million | $(23.7) million | $(37.8) million |
| Net loss attributable to FuelCell Energy | $(9.9) million | $(7.8) million | $(24.2) million | $(38.6) million |
| Net loss to common shareholders | $(10.7) million; $(0.06) per share | $(8.6) million; $(0.07) per share | $(26.6) million; $(0.17) per share | $(50.0) million; $(0.41) per share |
Gross margin was approximately negative 9.2% for the quarter and negative 0.5% for the nine-month period. Product sales and revenues were $27.6 million for the quarter and $79.3 million for the nine months; the respective product cost-to-revenue ratios were 1.10 and 1.01.
- Cash flow: Nine-month operating cash use was $45.2 million, versus $18.0 million in 2011. Investing activities provided $9.4 million and financing activities provided $58.3 million, including $64.0 million in net common-stock proceeds. Cash and cash equivalents rose to $73.8 million from $51.4 million at October 31, 2011.
- Liquidity: Current assets were $149.1 million and current liabilities $88.2 million. Cash and cash equivalents plus investments were $73.8 million at July 31; no Treasury investments remained. Approximately $11.3 million of cash was pledged as collateral and letters of credit.
- Debt and preferred obligations: The balance sheet reported $5.1 million of current debt and $4.0 million of long-term debt and other liabilities. The company also reported $14.0 million of subsidiary preferred-stock obligations and $59.9 million of redeemable Series B preferred stock, with a $64.0 million liquidation preference. A $4.0 million revolving-credit balance was included in contractual obligations.
- Other balance-sheet items: Inventory increased to $49.0 million from $40.1 million; work in process included $9.9 million of completed standard components awaiting customer orders. Total equity was $25.8 million, versus a $14.4 million deficit at October 31, 2011, following equity issuance.
Material changes versus prior periods
- Quarterly revenue declined 5%; the operating loss widened, mainly from lower product margins and higher administrative and selling expenses. A $1.1 million charge for older-generation balance-of-plant components contributed to the quarterly product gross loss.
- Nine-month revenue declined 3%, while gross loss and operating loss improved substantially. Management attributed the improvement largely to cost reductions and the absence of the prior-year $8.8 million B1200 repair-and-upgrade charge, as well as lower research and development expense.
- Customer concentration remained significant: POSCO Energy accounted for 72% of revenue in both the quarter and nine-month period, compared with 34% and 49%, respectively, in the comparable 2011 periods. The three largest customers and U.S. Government together represented 81% of nine-month revenue.
- Total product and service backlog was $158.2 million, down from $230.6 million a year earlier. Product-order backlog fell to $75.7 million from $152.9 million; service-agreement backlog increased to $82.5 million from $77.7 million.
- Common shares outstanding increased to approximately 185.9 million from 138.4 million at October 31, 2011. The increase included a public offering and POSCO Energy’s $30 million purchase of 20 million shares.
Outlook, risks and unusual items
- Management estimated gross-margin breakeven at annual production of 50–55 MW, and net-income profitability and EBITDA breakeven at approximately 80–90 MW. It expected positive quarterly operating cash flow by late 2013 or early 2014, subject to order volume, cost reductions, product mix and service costs.
- The company said its existing capital resources, anticipated orders, revenue and cash flows should meet financial requirements and agreements for at least the next 12 months. It also noted that additional financing may be pursued and that inability to raise capital could constrain growth.
- A 120 MW multi-year POSCO Energy order and cell-license agreement remained under negotiation; management expected to conclude agreements during calendar 2012. The order was not included in reported backlog. Separately, deliveries under POSCO’s existing 70 MW order were accelerated to 4.2 MW of kits monthly through April 2013.
- Production was reduced to align with contractual delivery timing. The filing cites a 45 MW production level for the quarter in one discussion and a 44 MW rate for the same three-month period in another; the nine-month annualized rate was 50.4 MW.
- Key risks include dependence on a small number of customers, uncertain conversion of prospective projects into orders, ongoing operating cash burn, inventory obsolescence, service and warranty costs, and dependence on incremental government funding for some research programs. The filing reported no material change to previously disclosed risk factors.
- Service-agreement and performance-guarantee reserves, the remaining B1200 program reserve, and contingent service costs depend on estimates of future fleet performance. The B1200 program was substantially complete, with a $4.4 million reserve remaining.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect; no material amounts were accrued. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the POSCO 120 MW order and cell-license agreement were executed, and whether expected deliveries and royalties materialized.
- Whether order growth and production utilization supported the stated breakeven and cash-flow targets, and how the 44/45 MW quarterly production figures reconcile.
- How quickly operating cash use and inventory accumulation changed, excluding the substantial equity-financing proceeds.
- Whether customer concentration and the decline in product-order backlog persisted, and whether revenue diversified beyond POSCO Energy.
- Whether reserves for service agreements, warranties, inventory and the B1200 program adequately reflected subsequent costs and performance.