FuelCell Energy, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing also reports fourth-quarter results. Unless otherwise noted, financial amounts are U.S. dollars.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants for distributed baseload generation. Its Direct FuelCell products serve utility, commercial, industrial and renewable-biogas markets; the company is also developing solid-oxide fuel cells and hydrogen applications. South Korea and the United States are its principal markets. The company reported an installed base and backlog exceeding 300 MW.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $187.7 million | $120.6 million |
| Gross profit and margin | $7.1 million; 3.8% | $0.4 million; 0.4% |
| Operating loss | $29.8 million | $32.1 million |
| Net loss | $35.3 million | $35.9 million |
| Net loss attributable to common shareholders | $37.6 million; $0.20 per share | $38.7 million; $0.23 per share |
| Cash used in operating activities | $16.7 million | $58.7 million |
- Fourth-quarter FY2013 revenue was $55.2 million, gross profit $2.6 million, operating loss $7.0 million and net loss $10.0 million.
- Product sales were $145.1 million, up 53%. Product gross margin improved to 5.6% from 1.1%. Service-agreement and license revenue was $28.1 million, but this category recorded a $1.5 million gross loss.
- At October 31, 2013, cash and cash equivalents were $67.7 million and restricted cash was $10.0 million. Working capital was $83.1 million; current assets were $189.3 million and current liabilities $106.3 million.
- Total debt was $54.0 million before the $3.1 million unamortized discount on the convertible notes. It included $38.0 million of 8% convertible notes and $6.5 million drawn on a revolving facility. Total liabilities were $191.0 million; total equity was negative $13.2 million. The company paid $3.2 million in Series B preferred dividends during FY2013.
- Financing activities provided $43.6 million, principally from the $38.0 million convertible-note issuance and borrowings. Capital expenditures were $6.6 million.
Material changes versus prior year
- Revenue rose 56%, driven chiefly by Bridgeport project revenue, higher product sales, and service and licensing activity. Gross profit improved to $7.1 million from $0.4 million, while the operating loss narrowed by $2.3 million.
- Operating cash use declined to $16.7 million from $58.7 million, though the company remained cash-flow negative. Receivables and inventory increased, partly offset by customer milestone billings and higher accounts payable.
- Product-sales backlog decreased to $170.1 million from $288.1 million (107.3 MW versus 150.7 MW); service backlog increased to $166.8 million from $78.5 million. Advanced-technology backlog was $18.5 million, including $5.7 million unfunded.
- POSCO Energy represented 54% of FY2013 revenue, down from 76%; Dominion Bridgeport represented 29%. The top five customers accounted for 88% of revenue.
- The company acquired the remaining 61% of Versa Power Systems in December 2012, consolidating its solid-oxide fuel-cell operations. It recorded $4.1 million of goodwill and $9.6 million of in-process research and development.
Outlook, commentary and risks
- Management said annual production of 70–80 MW could support EBITDA breakeven and 80–90 MW could support net-income profitability, subject to product mix, volumes, service costs and pricing. It targeted positive quarterly cash flow as measured by EBITDA by the end of 2014. These are targets, not assurances.
- The company reported a sales pipeline exceeding 310 MW, valued at more than $1.2 billion, and anticipated more than 30 MW of new orders in the Northeast and California in the first half of 2014. Pipeline opportunities are not contracted backlog.
- North American production was running at approximately 70 MW annualized, with capacity of 100 MW. POSCO Energy’s South Korean manufacturing facility was under construction; initial production was expected in 2015.
- Bridgeport’s 14 MW fuel-cell park received Dominion’s final acceptance on December 20, 2013, after fiscal year-end. Its 15-year service agreement was valued at approximately $69 million. The 59 MW Hwasung project in South Korea had all 21 plants installed and was delivering power and heat by year-end 2013.
- Management identified continuing losses and negative operating cash flow, dependence on higher order volumes and cost reductions, customer concentration, reliance on incentives and government funding, competition, fuel-price and grid-price exposure, and long-term service, warranty and stack-replacement obligations as significant risks. The company has not been profitable since FY1997 and stated it may never achieve profitability.
- FY2013 included increased warranty and aftermarket costs from a limited number of stack repairs. The B1200 repair-program obligation was $7.3 million at year-end, including replacement modules due to POSCO Energy. Service-contract economics depend on estimates of future maintenance and stack replacement costs.
- In December 2013, investors converted $8.0 million of the notes into 6,283,385 common shares. The filing reports 196.3 million shares outstanding at October 31, 2013 and 205.4 million at December 31, 2013.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether order conversion and backlog replenishment support the stated production, EBITDA and profitability targets; distinguish pipeline from firm orders.
- Whether product margins improve sustainably and service obligations, stack replacements and repair-program costs remain within estimates.
- Customer and geographic concentration, particularly POSCO Energy’s revenue share and dependence on South Korean demand and licensing arrangements.
- Liquidity after restricted-cash requirements, upcoming obligations and the revolving credit facility’s stated April 2014 expiration; confirm subsequent financing or renewal developments.
- Share dilution and cash obligations under the convertible notes, preferred securities and other financing arrangements, including the post-year-end note conversion.