FuelCell Energy, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017; filed January 11, 2018. The filing also reports fourth-quarter results. Dollar figures below are U.S. dollars.
Business context
FuelCell Energy designs, manufactures, installs, operates and services megawatt-scale fuel-cell power plants, and is developing carbon-capture, distributed-hydrogen and energy-storage applications. Its principal markets are the United States and South Korea. Revenue comes from equipment and project sales, service and royalties, electricity from retained projects, and externally funded technology programs.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $95.7 million | $108.3 million |
| Gross profit (loss) | $2.7 million | $(0.4) million |
| Gross margin | 2.9% | (0.3)% |
| Operating loss | $(44.9) million | $(46.4) million |
| Net loss | $(53.9) million | $(51.2) million |
| Net loss attributable to common stockholders | $(57.1) million | $(54.2) million |
| Loss per common share | $(1.14) | $(1.82) |
| Net cash used in operating activities | $(71.8) million | $(46.6) million |
FY2017 revenue fell 12%, mainly because product sales declined 31% as POSCO Energy kit sales ended and the relationship shifted toward royalties. The improved gross margin reflected better service and technology-contract margins and higher generation revenue; product sales remained loss-making, with a 15.8% gross loss margin. Interest expense rose to $9.2 million from $5.0 million.
Fourth-quarter FY2017 revenue was $47.9 million, gross profit $3.2 million, operating loss $8.2 million and net loss $10.0 million. The quarter included approximately $39 million of revenue recognized on the Korean 20 MW equipment contract.
At year-end, cash and cash equivalents totaled $87.4 million, including $49.3 million unrestricted and $38.2 million restricted or pledged. Working capital was $105.4 million. Total debt was $87.8 million, including $28.3 million classified as current; the company also had $40 million available under an NRG project-financing facility, subject to conditions. Operating cash use increased substantially, in part because accounts receivable rose $51.3 million. Inventory was $74.5 million.
Material changes and business developments
- Contract backlog increased to $554.2 million from $432.3 million, including $296.3 million of generation backlog, $182.3 million of service backlog, $31.3 million of product backlog and $44.3 million of Advanced Technologies backlog. Backlog timing is uncertain and is not a forecast of next-year revenue.
- The retained generation portfolio reached 11.2 MW operating, with another 19.5 MW under construction. FY2017 generation revenue was $7.2 million, up from $1.3 million.
- In June 2017, production was reduced to an annualized 15 MW to manage inventory and prepare for product changes; it returned to a 25 MW annualized rate in October. The company said it was evaluating an increase during 2018.
- The company raised approximately $27.9 million net from Series C preferred shares and raised additional funds through common-stock and warrant transactions. Common shares outstanding increased to 69.5 million at year-end from 35.2 million a year earlier.
Outlook, risks and contingencies
Management stated it believed available cash, operating cash flows, loan-facility availability and capital-market access would fund working capital and capital expenditures for at least 12 months. This is not a guarantee: the company has never been profitable since 1997, expects continued losses and negative operating cash flow until revenue and margins cover costs, and says it may need additional financing.
Management’s stated priorities include growing order volumes, reducing costs, improving plant output and module life, and expanding recurring revenue from retained projects and services. The seven-year module design was expected to enter production in FY2018; FY2018 capital expenditures were forecast at $11–$13 million. No earnings or revenue guidance was provided.
- Financing and dilution: Series C preferred stock requires 33 installments of $1 million through March 2019, payable in cash or, subject to conditions, common shares. Cash installments carry an 8% premium. Triggering events may allow holders to demand redemption at potentially higher amounts. Series C conversion and redemption could materially dilute common shareholders; authorized common shares were increased to 225 million after year-end.
- Debt and liquidity: The $21.5 million Hercules loan balance was due by October 1, 2018, with principal payments beginning November 2017 and minimum-cash covenant requirements. Restricted cash, project construction needs and working-capital demands constrain available liquidity.
- Customer and geographic concentration: Six customers accounted for 78% of FY2017 revenue; Hanyang Industrial Development alone accounted for 40%. South Korea represented 46% of consolidated net sales. Amendments to key POSCO Energy agreements had not been completed, leaving the future relationship uncertain.
- Execution and operating risks: High inventory, project delays, cost overruns, plant performance, module-replacement costs, service guarantees and the ability to achieve cost reductions could pressure margins and cash flow. The company reported $2.2 million of performance-guarantee accruals and $1.1 million of service-contract loss accruals at year-end.
- Other risks and contingencies: Government-funded contracts may be terminated or not fully appropriated; competition, energy prices, regulatory incentives, supplier availability, foreign exchange and technology acceptance may affect results. The company disclosed potential claims relating to historical at-the-market share sales and possible investment-tax-credit indemnities, but said such payments were not considered probable. Ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether operating cash burn declines and the company maintains adequate unrestricted liquidity while meeting debt and preferred-stock obligations.
- Whether backlog and announced awards convert into signed contracts, revenue and cash collections on schedule—especially the Korean contract and U.S. project awards.
- Whether the FY2017 revenue concentration and reliance on Hanyang, South Korea and POSCO Energy lessen, and whether POSCO agreement amendments are completed.
- Whether retained projects achieve expected operating performance, positive cash flows and returns without excessive construction or service costs.
- How many common shares may be issued under Series C conversions or redemptions, warrants and other equity financing, and the resulting dilution.
- Whether elevated inventory is deployed or otherwise recovered without material write-downs, and whether product and service margins improve.