FUELCELL ENERGY INC quarterly report, Q1 FY2015

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FuelCell Energy, Inc. — Q1 FY2015 Form 10-Q

Reporting period: Three months ended January 31, 2015, compared with the three months ended January 31, 2014. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops related technologies. It reported an installed base and backlog exceeding 300 MW and operations at more than 50 locations in nine countries.

Financial results

  • Revenue: $41.7 million, down 6% from $44.4 million. Product sales were $33.4 million; service and license revenue was $3.9 million; advanced-technology contract revenue was $4.4 million.
  • Gross profit and margin: $4.0 million and 9.6%, versus $2.2 million and 4.9%. Product-sales gross margin improved to 9.2% from 4.2%; service and license margin declined to 7.8% from 16.2%; advanced-technology contracts returned to a 14.6% margin from a 0.7% loss.
  • Operating expenses and earnings: Operating expenses were $9.1 million, down from $9.8 million. Operating loss narrowed to $5.1 million from $7.6 million. Net loss was $4.2 million versus $10.8 million; net loss attributable to common shareholders was $4.9 million, or $0.02 per share, versus $11.4 million, or $0.06 per share.
  • Cash flow: Operating cash use was $2.3 million, compared with $5.1 million. Investing cash use was $1.6 million; financing provided $5.1 million, including $8.5 million of net common-stock proceeds. Cash and cash equivalents increased $1.0 million during the quarter.
  • Liquidity and debt: January 31 cash and cash equivalents were $84.7 million unrestricted and $27.3 million restricted, totaling $111.9 million. Current assets were $223.1 million and current liabilities $79.5 million. The balance sheet reports $1.5 million current debt and $13.3 million in long-term debt and other liabilities. Separately disclosed balances include a $6.1 million Connecticut Green Bank loan, a $3.0 million Connecticut Development Authority loan, and $0.9 million outstanding under the revolving credit facility. The $40 million NRG project-finance facility had no drawdowns.
  • Other key metrics: Total assets were $288.7 million; total liabilities were $126.8 million; redeemable preferred stock was $59.9 million, with a $64.0 million liquidation preference. Accounts receivable were $60.6 million, including $49.2 million unbilled; inventory was $56.6 million. Common shares outstanding were 292.0 million at quarter-end and 294.7 million as of March 6, 2015.

Changes and management commentary

  • Revenue fell mainly because engineering and construction services declined and no scheduled module replacements generated service revenue this quarter; the prior-year quarter included about $1.1 million from such replacements.
  • Gross profit improved as product costs declined and sales mix included power-plant construction, kits and modules. Advanced-technology contract profitability improved with a mix of private-industry contracts lacking cost-share components.
  • Research and development expense fell to $3.5 million from $4.9 million, while administrative and selling expense rose to $5.6 million from $4.9 million, partly due to project proposal and bidding activity.
  • Other income was $1.7 million, largely from unrealized foreign-exchange gains, compared with $1.8 million of expense in the prior year, which included a $2.7 million make-whole charge on converted convertible notes. Interest expense fell to $0.7 million from $1.4 million after conversion of that debt.
  • POSCO Energy represented 54% of revenue, down from 73%; NRG and NRG Yield represented 5%. POSCO owned approximately 11% and NRG approximately 6% of common shares. The company sold 4.68 million shares during the quarter for approximately $7.9 million net.

Outlook, risks and contingencies

  • Management said available cash, operating cash flows, credit facilities and capital-market access should be sufficient for working capital and capital expenditures for at least 12 months. It also said sustained positive operating cash flow depends on higher order volume and cost reductions; the company was not generating positive operating cash flow.
  • The company reported a $337 million contract backlog, including $207.6 million of service agreements, and a $20.5 million advanced-technology backlog, of which $17.4 million was funded. Existing backlog and scheduled module exchanges were expected to support approximately 45–50 MW of annual production; management targeted converting 30–40 MW of pipeline to incremental backlog annually. These are management expectations, not guaranteed results.
  • Annual production was approximately 70 MW against current capacity of 100 MW. Fiscal 2015 capital expenditures were expected to be $8–$15 million. A planned Torrington facility expansion was expected to be completed by early 2016; the two expansion phases could require up to $65 million over five years. A Connecticut state package contemplated up to $20 million of loans and $10 million of tax credits, subject to conditions.
  • Project development may require substantial up-front spending, and delays in construction or project sales could pressure liquidity. Other working-capital exposures include unbilled receivables, inventory, project assets, and $27.3 million of restricted cash and collateral. The company noted that restricted cash may rise with backlog and installed fleet.
  • Purchase commitments totaled $82.3 million, mostly due within one year; total listed contractual obligations were $109.7 million. Service and warranty costs depend on estimates, and government research funding may be incremental. The company reported ordinary-course legal proceedings but no material accrual; it reported no material change to previously disclosed risk factors.
  • Management identified sales execution, cost reduction, order timing, energy prices, regulation, competition and technology change among forward-looking uncertainties. No specific revenue or earnings guidance was provided.

Important facts for investors to verify

  • Whether the reported backlog converts to firm orders, deliveries, cash collections and profitable projects, particularly given customer and revenue concentration in POSCO.
  • Collection timing and billing milestones for the $49.2 million of unbilled receivables, and the recoverability of project assets and inventory.
  • Actual operating cash use, capital spending, restricted-cash requirements and financing needs relative to management’s 12-month liquidity assessment.
  • Progress on Torrington expansion, state financing conditions, production capacity utilization and targeted cost reductions.
  • Future equity issuance and dilution, preferred-stock dividend and redemption obligations, and the treatment of debt and other liabilities in the balance-sheet presentation.