FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2012. Amounts below are in U.S. dollars.
Business context
FuelCell Energy develops, manufactures, sells, installs, and services stationary fuel-cell power plants. It reported an installed base and backlog of approximately 180 MW. The company said it was still investing in product and market development and was not generating consistently positive operating cash flow.
Financial performance and liquidity
| Metric | Three months ended Apr. 30, 2012 | Six months ended Apr. 30, 2012 |
|---|---|---|
| Revenue | $24.2 million, down 16% year over year | $55.5 million, down 2% |
| Gross profit (loss) | $0.2 million, versus $(10.9) million | $2.3 million, versus $(13.2) million |
| Operating loss | $(7.8) million, versus $(19.8) million | $(13.2) million, versus $(30.4) million |
| Net loss attributable to FuelCell Energy | $(8.3) million | $(14.2) million |
| Net loss to common shareholders; loss per share | $(9.1) million; $(0.06) | $(15.8) million; $(0.11) |
| Net cash used in operating activities | Not separately presented for the quarter | $(30.1) million, versus $(18.8) million |
Six-month product sales and revenues were $51.7 million. Product gross profit was $2.0 million; the product cost-to-revenue ratio improved to 0.96 from 1.25. For the quarter, that ratio was 1.00 versus 1.40. Revenue improvement in profitability reflected cost reductions and the absence of the prior-year $8.8 million B1200 repair-and-upgrade charge.
At April 30, cash and cash equivalents were $60.3 million, versus $51.4 million at October 31, 2011; there were no Treasury investments. Current assets were $165.6 million and current liabilities $97.1 million. Cash included financing proceeds, while operating activities used $30.1 million in the first half, principally amid higher inventory and lower deferred revenue and accrued liabilities. Approximately $11.3 million of cash was pledged as collateral or for letters of credit.
Total liabilities were $120.6 million. The balance sheet showed $5.1 million of current debt and $4.0 million of long-term debt and other liabilities; separately, subsidiary preferred-stock obligations were $14.1 million in total. Redeemable preferred stock had a $59.9 million carrying value and $64.0 million liquidation preference. Shareholders’ equity improved to $36.0 million from a $13.5 million deficit, primarily following stock issuances.
Material changes and developments
- Product and service backlog was $167.6 million, up from $135.5 million a year earlier; product-order backlog was $89.3 million, representing 52.4 MW. Six-month shipments were 20.8 MW. The proposed 120 MW POSCO order was not included in backlog.
- POSCO Energy accounted for 72% of six-month revenue, compared with 58% a year earlier. POSCO was also a related party and owned approximately 17% of the company’s common shares.
- The company raised approximately $32 million net in a public offering of 23 million shares at $1.50 per share. POSCO agreed to buy 20 million additional shares at $1.50, recorded as a $30 million receivable at quarter-end; the filing gives inconsistent subsequent receipt dates of May 2 and May 3.
- Inventory increased to $52.7 million from $40.1 million, including $7.5 million of completed standard components awaiting customer orders.
Outlook, risks, and contingencies
- Management estimated profitability at annual production of 80–90 MW, gross-margin break-even at approximately 50–55 MW, and EBITDA break-even at approximately 80 MW. The first-half annualized production rate was 53 MW. Management expected positive quarterly cash flow, measured by EBITDA, by late 2013 or early 2014; these are expectations, not guarantees.
- A POSCO memorandum of agreement contemplated a 120 MW multi-year order and a cell-licensing arrangement. Management expected execution by the end of fiscal Q3 2012. A separate modification accelerated deliveries under an existing 70 MW order. These anticipated arrangements were subject to execution and were not yet included in backlog.
- Management anticipated $3–$5 million of production-asset upgrades and maintenance in fiscal 2012. Expanding Torrington capacity to approximately 150 MW could require $30–$40 million of additional investment, depending on demand.
- Product sales depend heavily on a limited number of customers. Management warned that lost or reduced sales, contract cancellations or renegotiations, and inability to replace completed contracts could materially harm results. Cash generation also depends on higher order volumes and continued cost reductions; additional financing might be needed if plans or demand change.
- Accrued liabilities included an $8.5 million service-agreement loss reserve, a $2.2 million performance-guarantee reserve, and a $4.9 million B1200 program reserve. More than 90% of B1200 repair activity was complete, with conclusion expected by early summer 2012. Purchase commitments totaled $57.7 million, mostly due within one year; letters of credit totaled $9.0 million.
- The company reported ordinary-course legal proceedings and no material change to the risk factors in its prior Form 10-K. Management said disclosure controls were effective.
Key facts for investors to verify
- Whether the POSCO 120 MW order and licensing agreement were executed, and the resulting delivery, royalty, and production schedule.
- Whether production, order flow, and product margins reached management’s stated break-even thresholds, and whether the EBITDA-based cash-flow target was met.
- Cash use, inventory deployment, and financing needs, including the availability of cash subject to collateral restrictions.
- Customer concentration and POSCO-related revenue and receivable exposure.
- Actual costs and completion of the B1200 program, service obligations, performance guarantees, and preferred-stock payments.
- The timing discrepancy in the filing for receipt of POSCO’s $30 million share-purchase payment.