FuelCell Energy, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended April 30, 2015. Dollar amounts below are in millions unless noted. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants and is not yet generating net income from operations.
Financial performance and liquidity
| Metric | Three months ended April 30, 2015 | Six months ended April 30, 2015 |
|---|---|---|
| Revenue | $28.6 | $70.3 |
| Gross profit / margin | $2.0 / 7.1% | $6.0 / 8.6% |
| Operating loss | $8.8 | $13.9 |
| Net loss | $10.0 | $14.2 |
| Net loss attributable to common shareholders / diluted loss per share | $10.7 / $0.04 | $15.6 / $0.05 |
| Cash used in operating activities | Not presented separately | $12.3 |
- At April 30, unrestricted cash and equivalents were $83.0; restricted cash was $27.3, for total cash including restricted balances of $110.3. Restricted funds include $15.0 held in a trust for a service-agreement obligation.
- Current assets were $225.8 and current liabilities $83.1. Accounts receivable were $43.5, including $32.3 of unbilled receivables; inventory was $71.9 and project assets $9.9.
- Total debt was $13.6, including $4.5 current debt; the $3.9 JPMorgan revolving facility was close to its $4.0 limit. The separate NRG project-finance facility provided up to $40.0; no amount had been drawn by April 30. The first $3.3 draw occurred May 14, after quarter-end.
- Six-month investing cash outflow was $3.3, principally capital expenditures. Financing provided $15.2, including $16.8 net proceeds from common-stock sales. Cash and equivalents declined $0.7 during the period, excluding restricted cash.
Material changes versus prior year
- Quarterly revenue fell 25% to $28.6 from $38.3; six-month revenue fell 15% to $70.3 from $82.7. Lower fuel-cell kit and module sales were a key factor.
- Gross margin improved to 7.1% from 4.2% for the quarter and to 8.6% from 4.6% for the six-month period. Management cited manufacturing efficiencies and cost reductions; six-month product-sales gross profit also benefited from lower warranty and quality expenses and higher profit on power-plant sales.
- Six-month operating loss narrowed to $13.9 from $16.3, and net loss narrowed to $14.2 from $26.9. The comparison includes a prior-year $8.5 make-whole charge on conversion of convertible notes; 2015 other income included $0.9 of unrealized foreign-exchange gains.
- Service and license revenue declined 30% for the six-month period, with no scheduled module-replacement revenue in 2015 versus approximately $3.8 in the prior-year period. Six-month R&D expense decreased to $8.1 from $9.6, while administrative and selling expense increased to $11.9 from $10.6.
- Operating cash use improved to $12.3 from $15.7 for the six months, but inventory increased $16.0 and project assets increased $9.2. Common shares outstanding rose to 301.0 million from 287.2 million at October 31, 2014, in part reflecting open-market stock sales.
Outlook, management commentary and risks
- Management said available cash, operating cash flows, credit facilities and capital-market access should be sufficient for working capital and capital expenditures for at least 12 months. The company also stated that sustained positive operating cash flow depends on higher order volumes and lower product costs.
- Contract backlog was approximately $312.2, including $203.8 of service agreements, with service terms averaging more than ten years and contracts extending as far as 2034. Advanced-technology backlog was $16.9, of which $13.8 was funded.
- The Torrington facility was producing approximately 70 MW annually against current configured capacity of 100 MW. Management cited a production base of approximately 45–50 MW annually from existing backlog and scheduled service exchanges, and a target of converting 30–40 MW of sales pipeline into incremental backlog annually.
- Fiscal 2015 capital expenditures were expected to be $8–15. The planned two-phase Torrington expansion could require up to $65 over five years; construction of the first-phase expansion was expected to finish in 2016. A Connecticut state financing package was subject to definitive agreements and conditions.
- Liquidity risks include upfront project-development and construction spending, delays in project completion or sale, customer billing milestones and collection of unbilled receivables, working-capital needs for inventory, and cash pledged for letters of credit and contractual security. The company reported approximately $27.3 of restricted cash and $9.2 of outstanding letters of credit.
- POSCO Energy, a related party and approximately 10% shareholder, represented 66% of quarterly revenue and 59% of six-month revenue. This concentration makes revenue dependent on a significant customer relationship.
- Management reported no material change in previously disclosed risk factors. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether order conversion, production volumes and cost reductions can improve margins and reduce operating cash use.
- Collection timing for the $32.3 of unbilled receivables, and the recoverability and sale timing of inventory and project assets.
- POSCO Energy’s continued purchasing levels and the company’s ability to diversify customer and revenue concentration.
- Availability and terms of project financing, the post-quarter $3.3 NRG draw, and completion of definitive Connecticut expansion-financing agreements.
- Funding requirements for the planned expansion and project pipeline, including any need for additional equity or debt financing and the effect of further share issuance.
- Performance and cost obligations under long-term service and warranty agreements, and the extent to which restricted cash may increase with backlog.