FuelCell Energy, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016; filed June 9, 2016. The company designs, manufactures, installs, operates, and services stationary fuel-cell power plants, with related product, service, and advanced-technology activities.
Key financial metrics
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $28.6 million | $62.1 million | $28.6 million / $70.3 million |
| Gross profit (loss); margin | $(0.2) million; (0.5)% | $(0.3) million; (0.5)% | $2.0 million; 7.1% / $6.0 million; 8.6% |
| Operating loss | $(12.7) million | $(24.2) million | $(8.8) million / $(13.9) million |
| Net loss | $(15.4) million | $(27.2) million | $(10.0) million / $(14.2) million |
| Net loss per common share | $(0.56) | $(1.04) | $(0.44) / $(0.65) |
| Operating cash used | Not provided for quarter | $(21.5) million | $(12.3) million for six months |
Six-month investing cash use was $7.0 million; financing provided $51.4 million, including $26.6 million from common-stock sales and proceeds from debt and project financing. Cash and cash equivalents at April 30 were $82.0 million unrestricted and $34.7 million restricted. Total debt was $52.4 million, including $11.6 million current debt. Total assets were $309.9 million and total liabilities were $155.9 million.
Changes versus prior period
- Six-month revenue declined 12%, mainly reflecting lower product sales, particularly Asian module/component sales and engineering and construction services; service and license revenue rose 99%.
- Gross margin deteriorated from 8.6% to (0.5%) for the six-month period. Product sales margin fell from 9.7% to 2.4%; service and license activities moved from a 5.7% margin to a 5.6% loss, while advanced-technology contracts shifted from profit to loss.
- Six-month net loss increased to $27.2 million from $14.2 million. Higher operating expenses, including R&D, and weaker gross results contributed; interest expense also increased.
- Operating cash use increased by $9.2 million year over year, reflecting project-asset investment and lower deferred revenue, partly offset by collections and lower receivables.
- Debt increased from $16.3 million at October 31, 2015 to $52.4 million, including new Hercules and Connecticut financing and project-related obligations. The company also sold 4.25 million common shares during the six months.
Outlook, commentary, and risks
- Management forecast FY2016 revenue of $140–$170 million. The company expected an annualized manufacturing run rate of approximately 64 MW in the first half and 50 MW in the second half, subject to customer demand and timing.
- Management said available cash, operating cash flows, borrowing capacity, and capital-market access were expected to fund operations for at least 12 months. However, the company was not generating positive operating cash flow and said sustained liquidity depended on higher order volumes and cost reductions.
- Reported contract backlog was approximately $410.7 million, including $294.8 million of service agreements; advanced-technology backlog was $64.9 million, of which $40.4 million was funded. The company cited a potential project pipeline exceeding $2 billion in North America and Europe, which is not contracted backlog.
- Service-contract costs and accruals increased: service loss accruals were $2.7 million and performance-guarantee accruals were $3.4 million at April 30. Management attributed pressure to module exchanges, legacy-contract renewals/exits, and certain plants falling short of output requirements.
- POSCO Energy accounted for 48% of six-month revenue (59% in 2015), creating significant customer concentration. POSCO’s Asian kit production was expected to ramp up, while FuelCell Energy anticipated replacing related volume with higher-margin turnkey projects.
- The company entered a joint development agreement with ExxonMobil Research and Engineering on carbon-capture applications. Commercialization, project awards, and expected benefits remain uncertain.
- Fuel-cell eligibility for the U.S. investment tax credit after 2016 depended on legislative correction of an omission; the company stated there was no assurance of timing or passage. Other risks include project delays or sales, funding availability, government contract funding/termination, technology commercialization, and foreign-exchange exposure.
- Additional commitments included $58.8 million of purchase commitments. The company disclosed potential tax-credit indemnification obligations but did not consider payments probable; ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether revenue guidance, expected project awards, and conversion of pipeline into contracted backlog were subsequently achieved.
- Whether operating cash use, service-contract losses, and performance-guarantee accruals improved, and whether unrestricted liquidity remained sufficient after restricted cash and debt obligations.
- Actual timing and terms of project financing, Hercules milestone-based loan tranches, and the Torrington expansion, including conditions for loan forgiveness and tax credits.
- Whether POSCO-related revenue concentration and planned changes in Asian production materially affected product sales and margins.
- The MD&A cash discussion states cash and restricted cash totaled $116.7 million “as of October 31, 2016,” although the balance sheet and other disclosures identify $116.7 million at April 30, 2016; confirm the apparent date inconsistency against the filed statements.