FuelCell Energy, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context and reporting period
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and is developing carbon-capture, hydrogen-production and long-duration energy-storage applications. It earns revenue from product sales, service and licensing, electricity generation under PPAs, and sponsored research. Its main markets are the United States and South Korea.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $89.4 million | $95.7 million |
| Gross profit / margin | $3.1 million / 3.5% | $2.7 million / 2.9% |
| Operating loss | $44.6 million | $44.9 million |
| Net loss | $47.3 million | $53.9 million |
| Net loss attributable to common stockholders | $62.2 million | $57.1 million |
| Operating cash flow | +$16.3 million | −$71.8 million |
| Investing cash flow | −$51.3 million | −$31.4 million |
| Financing cash flow | +$27.7 million | +$72.3 million |
- Revenue declined 7%. Product revenue grew 22% to $52.5 million, largely from the 20 MW Hanyang project; service and license revenue fell 42% to $15.8 million, and Advanced Technologies revenue fell 24% to $14.0 million.
- Product sales remained loss-making, with a $2.0 million gross loss, improved from $6.8 million. Generation gross margin fell to 10.5% from 29.8%, reflecting higher maintenance costs and a terminated project impairment.
- FY2018 operating cash flow turned positive mainly through working-capital reductions, including collections and inventory deliveries associated with the Hanyang contract; the company still recorded a substantial net loss.
- At year-end, cash and cash equivalents totaled $80.2 million, including $40.9 million restricted; unrestricted cash was $39.3 million. Working capital was $70.2 million, down from $105.4 million.
- Total debt was $87.9 million, including $46.1 million at project-finance subsidiaries and $41.8 million at the corporate level; $17.6 million was current. Redeemable preferred stock and a subsidiary preferred-stock obligation are additional claims on capital.
- Inventory was $53.6 million, down from $74.5 million; project assets rose to $99.6 million from $73.0 million. Accounts receivable, including long-term unbilled receivables, totaled $32.4 million.
- Fourth-quarter FY2018 revenue was $17.9 million, gross profit $1.1 million, operating loss $11.9 million and net loss $14.1 million. Fourth-quarter revenue was materially below FY2017’s $47.9 million, when large Hanyang shipments were recognized.
Material changes versus the prior comparable period
- Gross margin improved modestly, while total revenue continued to decline. The annual net loss narrowed, but loss attributable to common shareholders increased because of $9.6 million in Series C deemed dividends and $2.1 million in Series D redemption accretion.
- Operating cash flow improved sharply, but depended substantially on collection of receivables and inventory conversion. Investing outflows increased as the company funded project assets.
- Contract backlog increased to approximately $1.2 billion from $554.2 million, including $839.5 million of generation backlog and $316.0 million of service backlog. Product backlog was approximately $1,000. The 2018 backlog includes long-duration contracts and is not a forecast of near-term revenue.
- The company raised $25.3 million net through Series D preferred stock and used its at-the-market equity program, issuing 5.7 million common shares for $8.0 million gross proceeds. Common shares outstanding rose to 95.7 million at year-end from 69.5 million a year earlier.
Outlook, commentary, risks and unusual items
- Management stated that available cash, operating cash flows, financing availability and capital-market access were expected to fund operations for at least 12 months. It cautioned that additional capital may be needed and is not assured.
- Production had been reduced to approximately 25 MW annually and was being increased; the reported annualized run rate was about 35 MW as of December 31, 2018. FY2019 capital expenditures were forecast at $2–$4 million, primarily maintenance.
- Management reported 11.2 MW in its operating portfolio and 83.1 MW under development or construction, including LIPA awards. It estimated those projects could add $70–$80 million in annual recurring revenue when operational; timing, financing and definitive agreements remain important conditions.
- After year-end, the company entered a Generate Lending construction facility of up to $100 million, with a possible increase subject to lender approval, and drew $10 million initially. The facility bears 9.5% interest and is project-based. A separate NRG facility had a $5.8 million draw in December 2018 and a shortened repayment deadline tied to project completion or March 31, 2019.
- POSCO Energy terminated the market-development MOU effective July 15, 2018, ceased communications, and initiated arbitration in November 2018. The company asserted counterclaims and said it did not then expect a material adverse effect, but the dispute may affect Asian market access and incur costs.
- FuelCell Energy agreed to reacquire the 15 MW Bridgeport project from Dominion, subject to arranging financing. It also reported a $0.5 million impairment for a terminated project in development.
- Nasdaq notified the company in November 2018 that its bid price had been below $1.00 for 30 consecutive business days. It had until May 28, 2019 to regain compliance, with possible transfer and extension procedures. A delisting could affect liquidity, financing and preferred-stock provisions.
- The filing disclosed an SEC informal investigation concerning historical at-the-market stock sales made from 2005 to 2017 without contemporaneous prospectus supplements. Potential rescission, damages or regulatory penalties were uncertain.
- Customer concentration is high: the top customers represented 84% of FY2018 revenue; Hanyang alone was 35%. South Korea accounted for 41% of sales.
- Other key risks include continuing losses and negative cash generation over time, reliance on external financing, execution and cost risks in project construction, performance guarantees and service costs, inventory deployment, fuel and power-price competition, government contract funding/termination, and potential dilution from convertible or redeemable preferred securities.
- Adoption of the new revenue standard in FY2019 was expected to increase accumulated deficit by approximately $7–$10 million through a transition adjustment. The auditor reported fairly presented financial statements and effective internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation can be sustained after the Hanyang-related working-capital release, and how quickly unrestricted cash is consumed.
- Availability and terms of project financing, construction milestones, required equity contributions, and conversion of awards and backlog into executed contracts and cash flows.
- Progress on production ramp-up, unit-cost reductions, gross-margin improvement, and performance of newer, longer-life stacks.
- Outcome and financial exposure from POSCO arbitration, the historical ATM-sales investigation, and Nasdaq bid-price compliance.
- Cash-versus-stock settlement requirements, conversion-price resets and dilution exposure under Series C and Series D preferred stock, alongside scheduled redemptions and other preferred obligations.
- Whether customer concentration, South Korean exposure and reliance on government or private research funding decline as the company diversifies.