FuelCell Energy, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended October 31, 2011. Although the request references 2011 Q4, this filing is an annual report; fourth-quarter results are also summarized below. Amounts are in U.S. dollars unless noted.
Business context
The company designs, manufactures, installs and services stationary fuel-cell power plants for distributed baseload generation. It reported operations at more than 50 locations and an installed base and backlog exceeding 180 MW. South Korea and the United States were its principal markets.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $122.6 million | $69.8 million |
| Product sales and revenue | $115.1 million | $59.2 million |
| Research and development contract revenue | $7.5 million | $10.6 million |
| Gross loss | $12.6 million | $18.7 million |
| Operating loss | $45.7 million | $54.4 million |
| Net loss | $46.0 million | $56.3 million |
| Net loss attributable to common shareholders | $57.9 million | $58.9 million |
| Loss per common share | $0.47 | $0.63 |
| Cash used in operating activities | $8.5 million | $35.0 million |
- Product cost-to-revenue ratio improved to 1.11 from 1.32; excluding the B1200 repair and upgrade charge, it was 1.03. Product sales remained below cost overall.
- Fourth-quarter revenue was $34.7 million, gross profit $0.4 million, operating loss $7.9 million and net loss $7.1 million. Common-shareholder loss was $7.9 million.
- At year-end, cash and cash equivalents were $51.4 million and short-term Treasury investments were $12.0 million, or $63.4 million combined. Working capital was $18.8 million, down from $48.2 million.
- Total debt was $8.7 million, including $4.0 million drawn on a $5.0 million revolving facility. The Series 1 preferred-share obligation was $16.7 million, split between current and long-term liabilities. Series B preferred stock had a $59.9 million carrying value and $64.0 million liquidation preference.
- Product and service backlog was $209.9 million, up from $154.3 million; R&D contract backlog was $15.8 million, including $6.8 million unfunded.
Material changes versus FY2010
- Revenue increased 76%, mainly from higher product sales tied to Korea and California orders and increased production. Product revenue rose 94%; R&D contract revenue fell 29%.
- Gross loss narrowed by $6.0 million and operating loss by $8.7 million, reflecting improved product margins, higher volume and lower operating expenses.
- Operating cash use fell by $26.5 million, aided by customer milestone payments and accrued liabilities, including the B1200 reserve. The company still used cash in operations.
- Product and service backlog grew, with product backlog increasing to 72.9 MW from 33.5 MW. The 70 MW POSCO Power order was a key contributor.
- Liquidity included significant equity financing: FY2011 net proceeds from common-stock sales were $32.9 million. Weighted-average shares outstanding increased to 124.5 million from 93.9 million.
Outlook, commentary and risks
- Management estimated company profitability at annual sales volume of 80–90 MW, subject to product mix, service costs and pricing. The production run rate was 56 MW; FY2011 production was 46 MW.
- For FY2012, management expected product sales and revenue of approximately $31–34 million per quarter at the current run rate. The filing does not provide a specific net-income or EPS forecast. Management stated existing resources, anticipated orders, revenue and cash flows should meet requirements for at least the next 12 months.
- Capacity was up to 90 MW annually. Management expected $3–5 million of FY2012 production-asset upgrades and maintenance; expansion to approximately 150 MW was estimated to require $30–40 million of additional investment.
- Unusual items: the B1200 repair and upgrade program generated an $8.8 million FY2011 charge, partly offset by a $0.5 million fourth-quarter estimate reduction; the program was expected to conclude by mid-2012. Modification of the Series 1 preferred-share agreement caused a $9.0 million charge in determining loss to common shareholders, as well as increased interest expense.
- Key risks: the company had not been profitable since FY1997 and expected continued losses until sufficient volume and cost reductions; customers were concentrated, with POSCO representing 44% of FY2011 revenue and the top four customers 71%; results depend on incentives, government funding, market acceptance, fuel and electricity economics, manufacturing execution, product reliability and long-term service costs. Preferred-share payments and potential equity issuance also affect cash flow and dilution.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion. No legal proceedings were reported in Item 3.
Important facts for investors to verify
- Whether the POSCO 70 MW order converts to scheduled shipments and cash collections, and whether backlog cancellations or timing changes occur.
- Whether product margins improve enough to close the gap between the current production run rate and the stated 80–90 MW profitability threshold.
- Actual costs and completion timing for the B1200 repairs, and whether service, warranty and performance-guarantee reserves prove adequate.
- Cash burn, working-capital needs, upcoming preferred-share payments and access to further financing; assess potential dilution from equity issuance and preferred-stock conversion rights.
- Customer concentration, dependence on renewable-energy incentives and government contracts, and the commercial impact of new partnerships and markets.