FuelCell Energy, Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018. Comparatives are for the three months ended January 31, 2017; balance-sheet comparisons are to October 31, 2017. Amounts below are in U.S. dollars.
Business context and financial results
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops related technologies. It reported operations in more than 50 locations across three continents. Management says achieving positive operating cash flow depends on increasing order volume and production and reducing costs.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $38.6 million | $17.0 million |
| Gross profit; gross margin | $4.6 million; 12.0% | $1.8 million; 10.7% |
| Operating loss | $5.6 million | $10.9 million |
| Net loss | $4.2 million | $13.7 million |
| Net loss attributable to common stockholders; loss per share | $8.4 million; $0.12 | $14.5 million; $0.39 |
| Cash from (used in) operations | $40.0 million | $(24.8) million |
| Investing cash flow | $(7.4) million | $(8.8) million |
| Financing cash flow | $(4.7) million | $16.7 million |
Product revenue rose to $29.5 million from $1.8 million, primarily reflecting equipment deliveries for a 20 MW project for Hanyang Industrial Development (HYD) and Korea Southern Power (KOSPO). Product gross margin improved to 11.5% from a loss-making 124.4% margin. Service and license revenue declined 41% to $4.1 million; generation revenue was $1.9 million, with gross profit down to $0.3 million from $1.0 million; Advanced Technologies revenue fell 50% to $3.1 million. Total revenue increased 127% year over year.
Operating loss narrowed primarily on higher gross profit, lower research and development expense, and no repeat of the prior-year restructuring charge. The $3.0 million income-tax benefit reflected the Tax Cuts and Jobs Act; it included deferred tax effects and did not indicate recurring operating profitability. Series C preferred conversions generated $3.5 million of deemed dividends, widening the difference between net loss and loss attributable to common stockholders.
Liquidity, debt and balance sheet
At January 31, 2018, unrestricted cash and equivalents were $76.8 million; restricted cash was $38.7 million, for total cash, equivalents and restricted cash of $115.4 million. Current assets were $193.5 million and current liabilities $94.1 million. Total debt, including sale-leaseback financing obligations, was $82.5 million, compared with $87.8 million at October 31, 2017. Total assets were $374.9 million and total liabilities were $187.8 million.
Operating cash generation was driven chiefly by a $26.6 million reduction in receivables and a $14.8 million reduction in inventory, principally from cash receipts and inventory deliveries under the HYD contract—not by net income. The company repaid $6.3 million of debt during the quarter. Restricted cash is pledged to contractual and banking requirements, including $15.0 million for a service agreement and $17.5 million supporting PNC sale-leaseback obligations.
The $16.8 million Hercules loan carried a 10.0% interest rate at quarter end, with principal payments underway and the balance plus accrued interest due by October 1, 2018; a $1.7 million end-of-term charge is also due in October 2018. The facility requires a minimum unrestricted-cash covenant. The company also had a $40.0 million NRG project-financing facility available, subject to project conditions, with no balance outstanding.
Outlook, developments and risks
- Management said available cash, operating cash flows, loan-facility availability and capital-market access would be sufficient for at least the next 12 months. It also said future liquidity depends on higher order and contract volumes, cash generation from projects and services, and cost reductions. No specific revenue or earnings guidance was provided.
- Backlog was approximately $638.5 million, including $414.5 million of PPAs, $178.7 million of service agreements, $43.1 million of Advanced Technologies contracts and $2.2 million of product contracts. Backlog excludes the 39.8 MW LIPA project awards and the 20 MW KOSPO award; the company estimated about $936 million of potential future revenue from those awards, subject to definitive agreements and, for LIPA, an assumption that the company retains ownership.
- The operating portfolio was 11.2 MW, with another 21.7 MW under development or construction. The company forecast fiscal 2018 capital expenditures of $11 million to $13 million. It reported an approximately 25 MW annualized production rate in Q1, below 35 MW in the prior-year quarter.
- The February 2018 reinstatement of the federal investment tax credit (after quarter end) provides a 30% credit for qualifying fuel-cell projects placed in service through 2019, with phase-downs for later-starting projects. The company expected the change to support U.S. market development and project financing.
- In February, the company signed a 20-year PPA with a Campbell Soup subsidiary for a 5 MW installation at Bolthouse Farms in California. The HYD project was expected to begin commissioning in spring 2018 and become operational in late summer 2018.
- Key risks include project award and construction timing, upfront project investment, dependence on financing and capital markets, production volumes and cost reductions, customer and strategic-partner relationships (including POSCO Energy), government contract funding, service-performance obligations, and technology commercialization. The company had $48.9 million of unconditional purchase commitments and $38.7 million of restricted cash. Management did not consider payments under certain investment-tax-credit indemnities probable; ordinary-course litigation was not expected to have a material adverse effect, and no material legal accrual was recorded.
Most important facts for investors to verify
- Whether operating cash flow remains positive after the temporary receivables and inventory reductions associated with HYD deliveries.
- Repayment and covenant compliance for the Hercules loan due in October 2018, and the availability of refinancing or other capital if needed.
- Conversion and installment terms of Series C preferred stock, including dilution: 9,099 shares converted in the quarter, and 35.8 million potentially dilutive securities were excluded from diluted loss per share as antidilutive.
- Whether the LIPA and KOSPO awards become definitive contracts, and whether the company can finance construction and meet project schedules.
- Whether service-fleet performance, maintenance requirements and related guarantees affect margins and cash needs; the performance-guarantee accrual rose to $2.6 million.
- How much of the $115.4 million reported cash total is available for general use, given $38.7 million is restricted, and whether management’s 12-month liquidity assessment remains valid.