FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2013 (fiscal first quarter). Balance-sheet comparisons are January 31, 2013 versus October 31, 2012. FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and continues investing in product and market development.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $36.4 million | $31.3 million |
| Gross profit (loss) | $(2.3) million | $2.1 million |
| Operating loss | $(11.1) million | $(5.4) million |
| Net loss | $(11.9) million | $(6.0) million |
| Net loss attributable to common shareholders | $(12.5) million | $(6.7) million |
| Loss per common share | $(0.07) | $(0.05) |
| Operating cash flow | $30.9 million provided | $17.8 million used |
- Revenue increased 16%, led by higher fuel-cell kit sales, Bridgeport project revenue and license and royalty income. Product sales were $29.1 million; service and license revenue was $5.0 million; advanced technologies revenue was $2.3 million.
- Gross margin deteriorated: costs of revenue rose 32% to $38.7 million, exceeding revenue. Product sales and service/license activities both recorded gross losses; advanced technology contracts generated $0.1 million of gross profit.
- Operating expenses were $8.8 million, including $5.4 million of administrative and selling expense and $3.3 million of research and development expense. Interest expense was $0.6 million.
- Operating cash flow was positive primarily because of customer collections, lower inventory and a $27.4 million increase in deferred revenue from milestone billings. It should not be read as evidence of consistently positive operating cash generation.
Financial position and liquidity
- Cash and cash equivalents were $86.3 million, up from $57.5 million at October 31, 2012. Current assets totaled $160.4 million and current liabilities $101.1 million.
- Total liabilities were $144.1 million; redeemable preferred stock was $59.9 million, with a $64.0 million liquidation preference. Shareholders’ equity was $6.3 million.
- Balance-sheet debt included $5.2 million of current long-term debt and $7.4 million of long-term debt and other liabilities; the latter line also includes items other than borrowings, so the filing does not provide a single clear total for borrowings in these balance-sheet captions.
- Deferred revenue was $66.6 million current and $22.3 million long term. Approximately $15.6 million of cash was pledged as collateral or for banking requirements; letters of credit outstanding were $14.7 million.
- Contractual obligations totaled $108.9 million, including $81.3 million of supplier purchase commitments, of which $73.6 million was due within one year. The $4.0 million revolving credit facility was due to expire April 3, 2013, subject to renewal provisions.
Material changes and developments
- Revenue grew, but costs rose faster and the company moved from gross profit to gross loss. Management attributed margin pressure to an isolated fuel-cell stack assembly quality problem, unfavorable product mix, manufacturing variances and costs incurred ahead of a planned production increase. The company reported about $2.1 million in related warranty and after-market costs and said process changes and field repairs had been implemented.
- POSCO Energy represented 69% of quarterly revenue, compared with 64% in the prior-year quarter; Dominion Bridgeport Fuel Cell represented 16%. The two customers together accounted for 85% of revenue, underscoring customer concentration. POSCO is a related party and owned approximately 16% of the company’s common shares.
- In December 2012, FuelCell Energy acquired the remaining 61% of Versa Power Systems, exchanging approximately 3.5 million common shares valued at $3.6 million. Versa adds solid oxide fuel-cell technology and was consolidated from the acquisition date; the purchase-price allocation remained preliminary.
- The company began recognizing revenue for the Bridgeport fuel-cell park project. The project involves a 14.9 MW facility sold to Dominion, with a 15-year electricity purchase agreement between Dominion and Connecticut Light & Power.
- Construction began on a 58.8 MW fuel-cell park in Hwasung City, South Korea. FuelCell Energy is to supply modules and components.
Outlook, risks and contingencies
- Management said gross profit from product sales and revenues is expected at annual production volumes of approximately 50–55 MW, while positive cash flow and net income profitability are expected at 80–90 MW. EBITDA breakeven was also estimated at approximately 80 MW. These are expectations, not guarantees, and actual results depend on volume, product mix, service costs and pricing.
- The company was preparing to raise its annual production run-rate from 56 MW to 70 MW in the second quarter of 2013; current facility capacity was stated as up to 90 MW. Management cited a 121.8 MW POSCO order, scheduled service-agreement restacks and approximately 16 MW of production backlog planned for 2013, and was targeting an additional 20–30 MW of orders in 2013.
- Management expected existing capital resources, anticipated orders, revenue and cash flows to meet financial requirements for at least the next 12 months. It also stated that consistent positive operating cash flow depends on higher order volumes and cost reductions. A 150 MW facility expansion could require $30–$40 million of additional capital.
- Subsequent to quarter-end, the company closed a $5.9 million CEFIA loan for the Bridgeport project at 5% interest. Proceeds were to repay a $0.9 million existing loan and support construction working capital; principal repayment begins eight years after provisional acceptance.
- Other significant exposures include service-agreement loss reserves of approximately $5.6 million, performance-guarantee reserves of $2.4 million, and a $4.7 million reserve for the B1200 repair and upgrade program. The company disclosed ordinary-course legal matters but said it had not accrued material amounts and did not expect a material adverse effect. It reported no material changes to the risk factors in its fiscal 2012 Form 10-K.
- Management highlighted risks from customer concentration, uncertain order timing, the ability to meet product specifications and cost-reduction goals, service and warranty costs, funding availability, competition, energy prices and technological change.
Most important facts for investors to verify
- Whether the quality issue and manufacturing variances are resolved, and whether margins improve as production scales.
- Whether the company converts backlog and targeted new orders into timely shipments, customer billings and sustainable operating cash flow.
- How much revenue and cash generation continue to depend on POSCO and other major customers, and how the related-party relationship affects commercial terms.
- Whether the 50–55 MW and 80–90 MW volume thresholds for gross profit and profitability remain achievable given actual mix, pricing and service costs.
- Whether liquidity remains adequate after considering pledged cash, the revolving facility’s renewal, preferred-stock payments, supplier commitments and Bridgeport project financing.
- Final purchase accounting for Versa and the commercial progress and funding requirements of its solid oxide technology.