FuelCell Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2014. Unaudited results; dollar amounts below are in U.S. dollars and millions unless otherwise noted.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops related technologies. It reported an installed base and backlog exceeding 300 MW; POSCO Energy, a related party holding approximately 11% of common shares, accounted for 68% of nine-month revenue, up from 53% in the comparable period.
Financial results
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Revenue, 2014 / 2013 | $43.2 / $53.7 | $125.9 / $132.5 |
| Gross profit, 2014 / 2013 | $4.0 / $4.5 | $7.8 / $4.5 |
| Gross margin, 2014 / 2013 | 9.2% / 8.4% | 6.2% / 3.4% |
| Operating loss, 2014 / 2013 | $6.0 / $4.6 | $22.3 / $22.9 |
| Net loss, 2014 / 2013 | $7.1 / $5.8 | $34.0 / $25.3 |
| Loss attributable to common shareholders, 2014 / 2013 | $7.8 / $6.4 | $35.8 / $27.1 |
| Loss per common share, 2014 / 2013 | $0.03 / $0.03 | $0.15 / $0.14 |
- Quarterly revenue fell 20%, mainly reflecting higher power-plant sales and construction services in the prior-year Bridgeport project period. Nine-month revenue declined 5%, as lower product sales offset growth in service and advanced-technology revenue.
- Nine-month service and license revenue rose 50% to $19.2 million; its gross result improved to a $1.7 million profit from a $1.0 million loss. Product-sales gross margin also improved, to 5.9% from 4.5%.
- Nine-month R&D expense rose to $13.9 million from $11.3 million. The company remained loss-making and said it was not generating positive operating cash flow.
Cash, debt and liquidity
- At July 31, unrestricted cash was $107.9 million and restricted cash was $25.1 million, for total cash and restricted cash of $133.1 million. Restricted cash included $15.0 million held in a trust for service-agreement obligations. Current assets of $216.7 million exceeded current liabilities of $74.7 million.
- Nine-month operating cash flow was negative $31.6 million, compared with positive $2.1 million in 2013; investing outflow was $4.1 million. Financing provided $75.9 million, principally from equity issuance, partly offset by increased restricted cash, debt repayments and preferred payments.
- Total debt was $10.8 million, versus $54.0 million at October 31, 2013. The $38.0 million of 8% convertible notes was fully converted into common stock during the period. NRG provided a separate $40.0 million project construction and term facility; it had no drawdowns as of July 31.
- The company raised $35.0 million from NRG’s July share purchase, $29.5 million net from a public offering and approximately $34.7 million net through open-market share sales during the nine months. These issuances increased the share count materially.
Outlook, commentary and risks
- Management reported production at an annualized 70 MW rate and targeted average quarterly revenue of $50–$60 million at that production level, with higher quarterly revenue anticipated in Q4 fiscal 2014 and into 2015, subject to order and delivery timing.
- Management estimated positive cash flows at annual production of 70–80 MW and net-income profitability at 80–90 MW. It described break-even cash flow measured by EBITDA as a target at the current 70 MW rate. These are forward-looking expectations, not guarantees.
- Backlog and scheduled service work were expected to support approximately 50 MW of annual production through 2016; management targeted adding 30–40 MW of backlog annually. Actual performance depends on orders, product mix, service costs and pricing.
- Key exposures include reliance on a concentrated customer base, especially POSCO Energy; the need to increase orders and reduce costs; service, warranty and performance-guarantee costs; and the possibility that project timing or funding changes. Supplier purchase commitments totaled $61.0 million. The company said no material risk-factor changes had occurred since its prior 10-K.
- An $8.4 million make-whole charge related to conversion of the convertible notes drove most of the nine-month increase in other expense; the obligation was primarily settled in shares. Management reported ordinary-course legal matters with no material amounts accrued and no expected material adverse effect.
Important facts for investors to verify
- Whether new orders and project deliveries support the $50–$60 million quarterly revenue target and planned backlog additions.
- Whether operating cash use improves without further substantial equity financing, and the availability and project conditions attached to NRG’s $40.0 million facility.
- How POSCO Energy’s share of revenue evolves and whether customer concentration declines.
- Whether service-agreement profitability and warranty/performance obligations improve as the installed fleet changes.
- The effect of continued share issuance and preferred-stock obligations on common shareholders.