FCEL

Business Context and Reporting Period

Company: FuelCell Energy, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended January 31, 2009
Business Overview: The company develops and produces stationary fuel cell power plants (DFC®) for commercial, industrial, and utility customers. Operations include product sales, research and development (R&D) contracts, and long-term service agreements. The company is currently operating at an annual production rate of approximately 30 MW.

Key Financial Metrics

Margins: The company operates with negative gross margins on product sales. The cost-to-revenue ratio for product sales improved to 1.52 in Q1 2009 from 1.99 in Q1 2008. R&D contracts generated a margin of approximately 17% ($0.5 million) in Q1 2009.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 45% to $21.7 million, driven primarily by a 95% increase in product sales ($19.0 million vs. $9.8 million). This was offset by a 49% decrease in R&D contract revenue ($2.7 million vs. $5.3 million) due to the completion of government programs.
• Operating Loss: Loss from operations increased slightly to $19.4 million from $19.1 million. Despite higher product sales volume, the company continues to sell products below cost.
• Cash Flow Deterioration: Net cash used in operating activities more than doubled to $34.0 million. This was primarily driven by a $14.3 million increase in accounts receivable due to delayed customer milestone payments and a $1.6 million increase in inventory.
• Liquidity Position: Cash and cash equivalents decreased by $21.7 million to $16.3 million. Total liquid assets (cash + investments) stood at approximately $50.8 million.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Cost Reduction: In February 2009, the company implemented a cash management plan including a 6% workforce reduction, suspension of 401(k) employer contributions, and a salary freeze for non-production employees.
• Production Targets: The company expects to maintain a 30 MW annual production run-rate in fiscal 2009. Gross margin profitability is projected when sustained annual production reaches 35–70 MW.
• Cash Usage: Fiscal 2009 cash and investment usage is targeted between $35 million and $45 million, a reduction from the prior year's $66.7 million.
• Backlog: Product sales backlog is approximately $51.4 million (25 MW). R&D backlog is $23.1 million.

Risks and Contingencies:

• Liquidity Risk: The company is not generating positive operating cash flow and relies on equity sales, product sales, and government contracts to fund operations. Management believes current resources are adequate for the next 12 months.
• Customer Concentration: Two customers accounted for $13.7 million and $2.6 million of revenue in Q1 2009. POSCO Power accounted for 72% of product sales.
• Service Agreements: The company expects to continue incurring costs in excess of revenues for legacy service agreements due to stack replacements, though this impact is expected to decline in fiscal 2010 and 2011.
• Government Funding: R&D contracts are subject to government funding allocations and termination at the convenience of the government.

Key Facts for Investor Verification

• Cash Burn Rate: Verify the sustainability of the $34 million quarterly operating cash burn and the effectiveness of the February 2009 cost-cutting measures.
• Accounts Receivable: Confirm the collection of the $14.3 million increase in receivables, which management stated was received in February 2009.
• Margin Path: Monitor progress toward the 35–70 MW production volume required to achieve gross margin profitability on product sales.
• Preferred Stock Obligations: Note the $64.1 million liquidation preference on redeemable preferred stock and the quarterly dividend obligations ($0.8 million paid in Q1).
• Project 150 Status: Track the finalization of the Connecticut Project 150 Round 3 contracts (estimated $84 million value) approved in draft form in March 2009.