FuelCell Energy, Inc. — Q1 Fiscal 2012 10-Q
Reporting period: Three months ended January 31, 2012; comparisons are with the three months ended January 31, 2011 unless otherwise noted. Amounts are in U.S. dollars.
Business context and operating performance
FuelCell Energy develops, manufactures, sells, installs and services stationary fuel-cell power plants. It reported an installed base operating at more than 50 locations and product and service backlog exceeding 180 MW. The company said it is not yet generating consistent positive operating cash flow and needs higher order volumes and further cost reductions to achieve it.
Financial and operating metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $31.3 million | $28.1 million; up 12% |
| Product sales and revenue | $29.6 million | $25.8 million; up 15% |
| Research and development contract revenue | $1.7 million | $2.3 million; down 25% |
| Gross profit (loss) | $2.1 million | $(2.3) million |
| Gross margin | 6.7% | (8.2)% |
| Operating loss | $(5.4) million | $(10.6) million |
| Net loss attributable to FuelCell Energy | $(5.9) million | $(10.9) million |
| Net loss to common shareholders / diluted loss per share | $(6.7) million / $(0.05) | $(11.7) million / $(0.10) |
| Net cash used in operating activities | $(17.8) million | $(2.2) million |
Product cost-to-revenue improved to 0.93 from 1.09. Management attributed the improved product economics to a greater mix of higher-margin fuel-cell kits, lower full-plant production costs and more installation activity. Operating expenses fell to $7.5 million from $8.3 million.
At January 31, 2012, cash and cash equivalents were $37.0 million and U.S. Treasury securities were $4.5 million, totaling $41.5 million, versus $63.4 million at October 31, 2011. Current assets were $118.2 million and current liabilities $105.5 million. Total liabilities were $128.9 million; the balance sheet reported $5.1 million of current debt and $4.1 million of long-term debt and other liabilities. Redeemable Series B preferred stock was carried at $59.9 million, with a $64.0 million liquidation preference. Shareholders’ deficit was $17.8 million.
Operating cash use included a $6.2 million inventory increase and a $6.2 million decrease in deferred revenue. Investing activities provided $6.6 million, primarily from Treasury maturities; financing activities used $3.2 million, including preferred payments, partly offset by $1.2 million of common-stock proceeds. The company had $4.0 million outstanding under its revolving credit facility. It also reported $73.3 million of purchase commitments, mostly due within one year.
Material changes versus the prior period
- Revenue rose 12%, while total cost of revenue fell 4%; gross profit improved by $4.4 million.
- Operating loss narrowed by $5.2 million, and common-shareholder loss per share improved from $0.10 to $0.05.
- Operating cash use increased to $17.8 million from $2.2 million, and cash plus Treasury investments declined $21.9 million from October 31, 2011.
- Product and service backlog increased to $184.1 million from $156.9 million a year earlier. Product-order backlog was $107.9 million, representing 62 MW; the quarter added 0.3 MW of orders and shipped 11.2 MW.
- Inventory increased to $46.3 million from $40.1 million, including $7.2 million of substantially complete power plants awaiting customer orders.
Outlook, risks and unusual items
- Management estimated profitability at annual production of 80–90 MW, compared with an annualized first-quarter rate of 56 MW. Current capacity is up to 90 MW. It expected 2012 production-asset upgrades and maintenance to cost $3–5 million; expansion to approximately 150 MW could require another $30–40 million, depending on demand.
- Management said existing resources, anticipated orders, revenues and cash flows should meet requirements through at least the next 12 months. This outlook depends on order growth, cost reductions and financing access; the company warned that inability to raise capital could constrain growth or require plan changes.
- Customer concentration is significant: POSCO, a related party, generated 64% of quarterly revenue; the four largest named customers collectively generated 80%. The filing cautions that loss or reduced sales to major customers could materially harm results.
- Fuel-cell service and warranty costs remain important estimates. Accrued reserves included $8.6 million for loss-making service agreements, $2.6 million for performance guarantees and $5.3 million for the B1200 repair and upgrade program. The company incurred $2.6 million of B1200 repair and upgrade costs in the quarter.
- The December 2011 Series 1 preferred-share return-of-capital and dividend payment was $3.5 million. Scheduled quarterly payments were expected to decrease to Cdn.$0.3 million beginning in Q2 2012. Series B preferred dividends were $0.8 million for the quarter; the company noted annual dividends of $3.2 million.
- Research and development contract backlog was $14.1 million, of which $7.6 million was funded; government funding may be incremental. The filing identifies risks from energy prices, competition, technology change, customer concentration and contract performance.
- Management reported no material change to the prior annual report’s risk factors. Ordinary-course legal proceedings were not expected to have a material adverse effect, and no material amounts were accrued. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether order intake and deployments convert the $184.1 million backlog and $7.2 million of finished inventory into customer payments and sustained revenue.
- Whether production growth and cost reductions can achieve the stated 80–90 MW profitability threshold before cash resources are materially depleted.
- How much of the reported $41.5 million in cash and Treasury securities is available after collateral requirements, preferred payments and near-term commitments.
- POSCO’s continued contribution to revenue and the potential effects of customer concentration or related-party dealings.
- Whether service, warranty and B1200 repair costs remain within reserves, and whether the $73.3 million of purchase commitments align with actual orders.