Business context and reporting period
FuelCell Energy, Inc. filed this Form 10-K for the fiscal year ended October 31, 2012; the filing also reports the fiscal fourth quarter. The company designs, manufactures, sells, installs, operates and services stationary carbonate fuel-cell power plants. Its largest markets were the United States and South Korea. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $120.6 | $122.6 |
| Gross profit (loss) | $0.4 | $(12.6) |
| Operating loss | $(32.1) | $(45.7) |
| Net loss | $(35.9) | $(46.0) |
| Net loss attributable to common shareholders | $(38.7); $(0.23) per share | $(57.9); $(0.47) per share |
| Cash used in operating activities | $(58.7) | $(8.5) |
| Cash and cash equivalents at year-end | $57.5 | $51.4 |
| Working capital at year-end | $61.0 | $18.8 |
Fiscal Q4 2012 revenue was $35.4 million, gross profit $0.9 million, operating loss $8.4 million and net loss $11.5 million. Net loss attributable to common shareholders was $12.1 million, or $0.07 per share.
Year-end total liabilities were $117.5 million. Debt was $8.5 million, including $4.0 million drawn on a revolving credit facility. The balance sheet also included $59.9 million of redeemable Series B preferred stock and a $14.2 million Series 1 preferred-stock obligation of a subsidiary. The company had no U.S. Treasury investments at year-end. Annual Series B preferred dividends were $3.2 million.
Material changes versus the prior comparable period
- Revenue declined 2% year over year, while total cost of revenue fell 11%; gross results improved from a $12.6 million loss to a $0.4 million profit.
- Product sales revenue fell 8% to $95.0 million. Service agreement revenue rose 50% to $18.2 million, and the service gross loss narrowed to $0.9 million from $18.7 million. Product-sales gross profit declined to $1.1 million from $6.5 million, partly reflecting a greater mix of lower-margin fuel-cell kits.
- Operating loss narrowed by $13.5 million, reflecting lower product and service costs and reduced R&D expense, partly offset by higher administrative and selling costs.
- Operating cash use increased substantially to $58.7 million from $8.5 million, with the company citing lower deferred revenue and accrued liabilities, higher receivables and inventory, and timing of customer milestone payments.
- Customer concentration increased: POSCO accounted for 76% of 2012 revenue, compared with 44% in 2011. The top five customers represented 86% of revenue.
Outlook, management commentary, risks and unusual items
- Management said profitability depends on continued order growth, reliable fleet performance and further cost reductions. It estimated profitability at annual production of 80–90 MW, versus an annualized FY 2012 production rate of 52 MW and a reported current run rate of 56 MW. It expected gross profit at 50–55 MW and targeted positive quarterly operating cash flow by late 2013 or early 2014, with EBITDA break-even at about 80 MW. These are management expectations, not guarantees.
- Management said existing capital resources, anticipated orders, revenue and cash flows should meet financial requirements for at least the next 12 months, but also noted that additional financing could be pursued and that inability to raise capital could constrain growth.
- Product and service backlog was $306.6 million at year-end, including $228.1 million of product backlog (150.7 MW) and $78.5 million of service backlog. A 121.8 MW POSCO order, valued at approximately $181 million, was expected to support deliveries through October 2016. Backlog can be affected by cancellations or scope changes.
- In October 2012, the company granted POSCO rights to manufacture DFC power plants in South Korea and sell across Asia, with a 3% royalty on POSCO-built plants. Related license and amendment payments totaled $18 million; $10 million was received November 1, 2012, and further payments were scheduled. POSCO is a related party and major customer.
- After year-end, the company acquired the remaining 61% of Versa Power Systems for approximately 3.5 million FuelCell Energy shares. A $3.6 million impairment of its prior Versa investment was recorded in Q4 2012.
- After year-end, the company announced the sale of the 14.9 MW Bridgeport fuel-cell park to Dominion. The project was expected to add about $125 million to product and service backlog in Q1 2013; Connecticut Light & Power was to buy its output under a 15-year agreement.
- Key risks include sustained losses and negative operating cash flow, customer and geographic concentration, dependence on incentives and government funding, competition and energy-price changes, execution of cost-reduction and production plans, product reliability and service-contract costs, and access to financing. Service, warranty and B1200 repair-program reserves were material; the company disclosed limited operating experience over the full expected product life.
- There were no legal proceedings reported as material. KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether backlog converts to timely customer deliveries and cash collections, particularly given POSCO’s 76% revenue share and $18.1 million receivable balance at year-end.
- Whether production can rise from the 52–56 MW range to management’s 80–90 MW profitability target, and whether cost reductions and service margins continue to improve.
- Whether the company can reduce operating cash use and meet its late-2013/early-2014 cash-flow target without further equity issuance or other financing.
- The final terms, receipts and royalty economics of the POSCO license, as well as the timing and backlog contribution of the Bridgeport project and the integration and costs of Versa.
- Whether service, warranty, performance-guarantee and B1200 repair obligations remain within reserves, and how preferred-stock obligations and annual dividends affect liquidity and dilution.