Fluence Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2023, the second quarter of Fluence’s fiscal 2023; fiscal year ends September 30. Amounts below are in U.S. dollars. Comparisons are with the three or six months ended March 31, 2022, as indicated.
Business context and operating performance
Fluence provides battery-based energy storage products and solutions, related services, and digital applications. Energy storage products and solutions generated nearly all revenue. The company reported one operating segment.
- Second-quarter revenue was $698.2 million, up 104%; first-half revenue was $1.009 billion, up 95%. Growth was mainly from higher volumes of Gen6 solutions and projects reaching milestones, with contributions from change orders and consulting services for AES.
- Related-party revenue, primarily from affiliates of AES and Siemens, was $293.1 million in the quarter and $394.1 million for the first half. The top three customers together represented approximately 58% of first-half revenue.
- Second-quarter gross profit was $30.8 million (4.4% margin), versus a $14.7 million gross loss (negative 4.3% margin). First-half gross profit was $42.9 million (4.2% margin), versus a $67.9 million gross loss (negative 13.1% margin).
- Net loss was $37.4 million for the quarter and $74.6 million for the first half, compared with losses of $60.7 million and $172.2 million, respectively. Loss attributable to Fluence Energy, Inc. was $24.9 million for the quarter and $49.5 million for the first half; Class A loss per share was $0.21 and $0.43, respectively.
- Adjusted EBITDA, a non-GAAP measure, was negative $24.8 million for the quarter and negative $50.3 million for the first half, improving from negative $53.2 million and negative $96.0 million, respectively.
Cash flow, liquidity and debt
- Cash and cash equivalents were $194.4 million at March 31, 2023; restricted cash was $108.2 million and short-term investments were $70.0 million. Combined cash, cash equivalents and restricted cash were $312.6 million, down from $429.7 million at September 30, 2022.
- For the first half, operating cash flow was negative $163.4 million, compared with negative $141.0 million a year earlier. Fluence attributed the outflow principally to higher receivables and inventory, partly offset by increased accounts payable and deferred revenue. Free cash flow, as defined by the company, was negative $164.5 million.
- The $200 million revolving credit facility had no borrowings; $152.5 million was available after $47.5 million of letters of credit. The facility matures November 1, 2025. Fluence also reported $21.6 million of borrowings against a pledged customer note receivable.
- Current assets were $1.808 billion and current liabilities were $1.345 billion at March 31, 2023. Inventory was $763.2 million. Accounts payable included $96.2 million subject to a supplier-financing program.
Changes, outlook and significant matters
- Revenue growth and a return to positive gross profit were accompanied by continued net losses and cash outflows. First-half gross profit benefited from a $19.5 million settlement with the largest battery-module vendor, $24.3 million in price-increase change orders, and higher-margin Gen6 projects. The settlement reduced cost of goods and services.
- Warranty expense increased materially: the estimated warranty liability was $12.3 million at March 31, 2023, versus $1.6 million at September 30, 2022. A revised estimation model contributed to the change. Management notes substantial uncertainty in warranty estimates.
- Remaining performance obligations were $2.8 billion; the company expected to recognize approximately 80% as revenue over the next 6 to 30 months. Backlog may be delayed, cancelled or fail to convert to revenue or expected margins.
- Fluence stated that available liquidity, operating cash flows and borrowing capacity were expected to be sufficient for at least the next 12 months. The filing provides no quantified revenue or profitability guidance.
- Battery purchase commitments totaled $2.842 billion, primarily for future battery purchases. Reported guarantees, letters of credit and surety bonds had aggregate maximum exposure of approximately $2.040 billion; these amounts are contingent commitments, not reported debt.
- Two customer-site overheating incidents remain unresolved. The customer in the 2021 incident alleged Fluence was liable, but no specific amount was demanded; Fluence denied liability and could not estimate the financial impact. The 2022 incident at an AES-owned facility was also under investigation, with impact not estimable.
- Disclosure controls were assessed as ineffective because a material weakness in controls over revenue recognition and related inventory had not been fully remediated. Management reported remediation efforts were ongoing.
- Other risks include customer and supplier concentration, project delays and liquidated damages, warranty exposure, supply-chain and commodity costs, and cash balances at banks that may exceed FDIC insurance limits. Fluence said it had no exposure to the banks recently placed into receivership, but disclosed that uninsured bank deposits remain a risk.
Important facts for investors to verify
- Whether improved gross margins persist after the vendor settlement, change-order revenue and other identified favorable items.
- Whether warranty costs, failure rates and replacement expenses support the recorded reserve, and how the updated estimation model performs.
- Whether the $2.8 billion of remaining performance obligations converts to revenue on the expected schedule and at acceptable margins.
- How working-capital needs, inventory growth and customer collections affect cash burn and liquidity.
- Developments in the overheating incidents, related claims, guarantees and other contingent commitments.
- Progress in remediating the material weakness and the timing of management’s conclusion that controls are operating effectively.