FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2017; filed June 8, 2017. Dollar amounts below are in U.S. dollars. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants, and is developing related energy technologies.
Financial performance and position
| Metric | Three months ended Apr. 30, 2017 | Six months ended Apr. 30, 2017 |
|---|---|---|
| Revenue | $20.4 million, down 29% year over year | $37.4 million, down 40% |
| Gross profit and margin | $0.4 million; 1.9% | $2.2 million; 5.9% |
| Operating loss | $11.5 million | $22.4 million |
| Net loss attributable to common shareholders | $14.0 million; $0.33 per share | $28.5 million; $0.71 per share |
| Operating cash flow | Not presented separately for the quarter | $(38.6) million |
| Investing cash flow | Not presented separately for the quarter | $(17.8) million |
| Financing cash flow | Not presented separately for the quarter | $22.2 million |
For the six-month period, revenue fell from $62.1 million in 2016, while gross results improved from a $0.3 million loss. Net loss was slightly lower than the prior-year $27.2 million, and common-share loss per share improved from $1.04. Quarterly common-share loss per share improved from $0.56. Operating cash use increased from $21.5 million in the prior-year six-month period.
At April 30, unrestricted cash and cash equivalents were $46.5 million; restricted cash was $37.7 million, for combined cash and restricted cash of $84.1 million. Total assets were $319.5 million and shareholders’ equity was $100.5 million. Total debt and finance obligations were $87.8 million, including $14.6 million classified as current. The company reported $40 million of undrawn availability under an NRG project-finance facility, restricted to project development. Management said available liquidity, operating cash flows, loan availability and capital-market access were expected to fund operations for at least 12 months.
Material changes versus the prior period
- Six-month product revenue declined 94% to $2.5 million, principally because a multi-year POSCO Energy module-kit order ended in fiscal 2016 and the relationship shifted toward royalties. The company said it did not expect product revenue from POSCO at prior levels in fiscal 2017.
- Service and license revenue increased 18% to $19.5 million, mainly due to more module replacements; generation revenue rose to $3.7 million as the PPA portfolio grew. Advanced-technology revenue increased 149% to $11.6 million, with improved gross profit attributed partly to contract mix and timing.
- Interest expense increased to $4.6 million for six months from $1.8 million, reflecting Hercules borrowing and finance-method sale-leaseback obligations.
- Operating cash use worsened, and investing cash use rose, including $10.2 million of project-asset spending and $8.3 million of capital expenditures. Cash and restricted cash declined $34.2 million from October 31, 2016.
- Common shares issued and outstanding rose to 47.6 million at April 30 from 35.2 million at October 31; the company raised $12.4 million net from open-market stock sales during the six months.
Outlook, management commentary and risks
- Management said the business needs higher order volumes, production and cost reductions to achieve positive operating cash flow. Its estimates indicate net-income break-even could require annual product sales of 60–70 MW; EBITDA break-even could require about 45 MW of annual product sales, or a generation fleet of approximately 60 MW. These are estimates, not formal revenue guidance.
- In November 2016 the company reduced its workforce by 96 positions, approximately 17%, and targeted at least $6 million of annualized cost savings versus fiscal 2016. Production was reduced from 50 MW to 25 MW annualized; in June 2017 it was further reduced to approximately 15 MW, described as temporary. About 110 manufacturing employees were scheduled for shortened work weeks through September.
- Backlog was approximately $434.5 million at April 30, including $188.3 million of service agreements and $184.4 million of PPAs. Production backlog was approximately 103.6 MW, with about 15 MW expected to be delivered over the next 12 months. Management targeted converting at least 70 MW of sales pipeline into incremental backlog during 2017. Advanced-technology backlog was $48.9 million, of which $28.4 million was funded.
- The company entered a POSCO Energy memorandum of understanding in March to discuss amended and new agreements, including potential module purchases and expanded FuelCell Energy marketing in Korea and Asia. Definitive agreements were expected in autumn 2017, subject to due diligence, approvals and customary conditions.
- On May 3, 2017, after quarter-end, the company completed an offering of 12 million common shares and warrants for gross proceeds of about $15.4 million and net proceeds of about $13.8 million. Exercise of all offering warrants could provide up to $34.6 million in additional proceeds, but would increase share count.
- Material risks include continuing losses and cash burn, dependence on additional capital and project financing, high inventory ($75.6 million), customer concentration and POSCO relationship uncertainty, project execution and collection timing, and performance and service-contract costs. The company disclosed that U.S. fuel cells were no longer eligible for the federal investment tax credit from January 1, 2017, and that any legislative restoration was uncertain.
- Other commitments include $35.7 million of unconditional purchase commitments and $37.7 million of restricted cash pledged for contractual and banking requirements. The company reported ordinary-course legal proceedings but said it had accrued no material amounts and did not expect a material adverse effect.
Most important facts for investors to verify
- Whether new orders convert the sales pipeline into backlog and support the targeted production ramp, given the reduction to about 15 MW annualized after quarter-end.
- Whether the company can manage cash burn and meet debt obligations; in particular, unrestricted cash, the Hercules cash covenant, and availability of project financing.
- Whether elevated inventory can be deployed without impairment or discounting, and whether unbilled receivables are billed and collected on schedule.
- Whether POSCO negotiations produce definitive agreements, module purchases and sustained Asian-market access; also monitor the effect of the prior kit-order ending on revenue.
- Potential dilution from the May offering, warrants, preferred stock and other equity awards, alongside the company’s continuing need for financing.
- Progress on service-portfolio performance, project economics and any restoration or replacement of the federal investment tax credit.