FuelCell Energy, Inc. — Q1 2017 Form 10-Q
Business context and period. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops related technologies. This filing covers the three months ended January 31, 2017, compared with the same period in 2016; balance-sheet comparisons are with October 31, 2016.
Financial results and position
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Revenue | $17.0 million | $33.5 million |
| Gross profit (loss) and margin | $1.8 million; 10.7% | $(0.2) million; (0.5)% |
| Operating loss | $(10.9) million | $(11.5) million |
| Net loss | $(13.7) million | $(11.8) million |
| Net loss attributable to common shareholders; loss per share | $(14.5) million; $(0.39) | $(12.5) million; $(0.48) |
| Cash from operating activities | $(24.8) million | $8.6 million provided |
| Cash, cash equivalents and restricted cash | $101.3 million, including $57.6 million unrestricted | $118.3 million total; $84.2 million unrestricted at October 31, 2016 |
| Total debt | $88.0 million | $81.8 million at October 31, 2016 |
Cash used in investing activities was $8.8 million, primarily for capital expenditures and project assets. Financing activities provided $16.7 million, including sale-leaseback proceeds and common-stock sales. Current assets were $180.5 million and current liabilities were $46.2 million. Restricted cash totaled $43.6 million and was pledged for contractual and other obligations.
Revenue mix shifted materially: product revenue fell to $1.8 million from $25.1 million, while service and license revenue was $6.9 million, generation revenue $2.1 million and advanced technologies revenue $6.2 million. Product gross loss was $2.2 million; service and license gross profit was $0.7 million, generation gross profit $1.0 million and advanced technologies gross profit $2.4 million.
Material changes versus the prior period
- Revenue declined 49%, mainly because POSCO Energy’s multi-year fuel-cell kit order ended and kit sales shifted to a royalty-based model. The company reported POSCO revenue equal to 10% of consolidated revenue, versus 45% a year earlier.
- Gross profit improved from a small loss, helped by higher advanced-technology and generation contributions and service margins. However, the net loss increased, and operating cash flow swung from cash generation to substantial use, including inventory growth and reductions in payables and accrued liabilities.
- Interest expense increased to $2.3 million from $0.8 million, reflecting Hercules borrowing and sale-leaseback financing costs.
- The company sold 2.2 million common shares during the quarter, raising approximately $4.9 million net. Outstanding common shares were 41.2 million at quarter-end, up from 35.2 million at October 31, 2016.
Outlook, risks and unusual items
- Management said available cash, operating cash flows, loan availability and capital-market access were expected to fund operations for at least 12 months. This is management’s assessment, not a guarantee; unrestricted cash declined by $26.5 million during the quarter.
- A November 2016 restructuring affected 96 employees, approximately 17% of the workforce, and reduced the production rate from 50 MW to 25 MW annually. The company recorded $1.3 million of restructuring expense and targets at least $6.0 million in annualized operating-cost reductions versus fiscal 2016. Management described the lower production level as temporary and subject to order flow.
- Management estimated that net-income-positive operations could require annual production of 60–70 MW, assuming the anticipated sales mix and growth in service, PPA and advanced-technology contributions. The company targeted converting at least 70 MW of sales pipeline into incremental backlog in 2017. No specific revenue or earnings guidance was provided.
- Contract backlog was approximately $437.3 million, including $199.8 million of service agreements and $169.9 million of PPAs. Advanced-technology backlog was $54.1 million, of which $33.6 million was funded. Backlog is not equivalent to near-term cash receipts.
- The operating PPA portfolio was 11.2 MW; management estimated it would generate approximately $7.0 million of annual revenue. The company expected fiscal 2017 capital expenditures of $9–$12 million and had $40.0 million of NRG project-financing availability, subject to facility terms.
- Key exposures include continued operating cash use, project-construction and working-capital needs, unbilled receivables, inventory deployment, order delays, and dependence on financing and incentives. Inventory was $82.3 million, including $55.3 million of work in process; purchase commitments were $43.7 million. Hercules debt carries a 9.5% interest rate and includes an unrestricted-cash covenant.
- Service agreements may require performance payments or module repairs/replacements. Accruals included $3.1 million for performance guarantees and $1.0 million for service-contract losses. The company also disclosed contingent obligations tied to potential reductions in U.S. investment tax credits, but said payment was not considered probable. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether order intake and pipeline conversion can support production above 25 MW and progress toward the stated 60–70 MW profitability range.
- Whether cash burn moderates, and how much reported cash is actually available after restricted balances, debt covenants and project commitments.
- Backlog timing, funding and conversion into deliveries, billings and cash collections, especially for PPAs and advanced-technology contracts.
- Inventory realization and project-development funding needs, alongside the company’s ability to control costs after restructuring.
- The financial impact of the POSCO kit-sales transition, ongoing dilution and debt-service obligations.