FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2017. Financial amounts below are in U.S. dollars; statement amounts are converted to millions where shown. The filing is unaudited.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and also develops advanced fuel-cell technologies. Its revenues include equipment sales, service and licensing, electricity generation from retained projects, and advanced-technology contracts. The company reported operations in more than 50 locations and an operating project portfolio of 11.2 MW.
Financial performance
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Nine months ended July 31, 2017 | Nine months ended July 31, 2016 |
|---|---|---|---|---|
| Revenue | $10.4 million | $21.7 million | $47.8 million | $83.8 million |
| Gross profit (loss) | ($2.6 million) | $0.4 million | ($0.4 million) | $0.1 million |
| Gross margin | (25.4%) | 2.0% | (0.9%) | 0.1% |
| Operating loss | ($14.3 million) | ($10.3 million) | ($36.8 million) | ($34.5 million) |
| Net loss | ($17.0 million) | ($11.1 million) | ($43.9 million) | ($38.3 million) |
| Net loss attributable to common shareholders | ($17.8 million) | ($11.8 million) | ($46.3 million) | ($40.5 million) |
| Loss per common share | ($0.31) | ($0.38) | ($1.01) | ($1.41) |
- Nine-month revenue fell 43%, chiefly because POSCO’s multi-year module-kit order had ended and POSCO shifted to local manufacturing and a royalty-based arrangement. Revenue from retained project assets is recognized as generation revenue over time rather than as an upfront equipment sale.
- Product revenue fell 94% in the nine-month comparison; product operations recorded an $8.4 million gross loss, which management attributed in part to under-absorption of fixed costs at lower production levels.
- Service and license revenue increased 17% to $24.3 million for the nine months, with service revenue helped by more module replacements. Advanced-technology revenue increased 81% to $14.9 million, and generation revenue rose to $5.4 million as the owned operating portfolio expanded.
- Interest expense increased to $6.9 million for the nine months from $3.2 million, reflecting Hercules borrowing and financing-method sale-leasebacks. Nine-month restructuring expense was $1.4 million.
Cash flow, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $73.8 million at July 31, 2017, down from $118.3 million at October 31, 2016. Unrestricted cash was $35.7 million; $38.1 million was restricted, including cash pledged for contractual and financing obligations.
- For the nine months, operating cash use was $57.8 million, investing cash use was $22.6 million, and financing provided $35.7 million. The resulting net decrease in cash, cash equivalents and restricted cash was $44.5 million.
- Total debt and finance obligations were $87.8 million, including $21.7 million classified as current. The balance included a $47.0 million PNC sale-leaseback finance obligation and $21.2 million owed under the Hercules facility. Hercules principal payments were scheduled to begin November 2017, with the loan due by October 2018. The company reported no outstanding balance on its $40 million NRG project-finance facility at quarter-end.
- Management stated that available cash, operating cash flows, financing availability and capital-market access were expected to fund operations for at least 12 months. This assessment should be considered alongside ongoing operating cash burn, restricted cash and financing requirements.
- Inventory was $72.0 million, project assets were $67.2 million, and total assets were $317.3 million at July 31. The company reported $26.4 million in unconditional purchase commitments.
Material developments, outlook and risks
- Production was reduced to approximately 15 MW annualized in June 2017, from a previously reduced 25 MW rate, to manage inventory, prepare for product introductions and complete facility expansion work. Management described the lower rate as temporary and dependent on order flow; about 110 manufacturing employees worked shortened weeks through September.
- Management estimated that annual product sales of 60–70 MW could support net income positivity; approximately 45 MW of annual product sales, or an owned generation fleet of about 60 MW, could support EBITDA positivity. These are management estimates, not formal guidance. Fiscal 2017 capital expenditures were forecast at $11–13 million.
- After quarter-end, the company contracted to sell 20 MW of equipment for a South Korean project, with expected product revenue exceeding $60 million; product revenue recognition was expected to begin in fourth-quarter 2017 and continue into fiscal 2018. Management also expected a 20-year service agreement exceeding $130 million, but said it expected to sign it.
- The July award of 39.8 MW of LIPA projects was subject to further development steps, including executing PPAs; the projects were not yet contracted backlog at quarter-end. The filing gives differing estimates for their potential 20-year contracted revenues: more than $700 million in one passage and more than $800 million in another.
- Reported contract backlog was approximately $437 million at July 31, excluding the recent Korean and U.S. project awards. The company said backlog could increase by more than $1 billion once awards became definitive agreements. Advanced-technology contract backlog was $48.8 million, of which $28.0 million was funded.
- In September 2017, the company completed an offering of convertible preferred stock for approximately $30 million gross and $27.9 million net proceeds. The securities carry a $1.84 conversion price and mandatory bimonthly redemption provisions. The filing describes cash-payment, covenant, potential redemption and dilution risks, and says stockholder ratification of the 2015 reverse split is relevant to the company’s ability to use shares for certain payments.
- Key risks include continued losses and cash burn; dependence on new orders, financing and production scale; customer concentration and the evolving POSCO relationship; project execution and funding needs; inventory deployment and potential impairment; service performance obligations; and changes in government incentives. The filing states that U.S. fuel cells were no longer eligible for the federal investment tax credit as of January 1, 2017, and that any legislative reinstatement was uncertain.
- Management said ordinary-course legal matters were not expected to have a material adverse effect and no material amounts were accrued. Potential payments under certain investment-tax-credit indemnification provisions were not considered probable at the reporting date.
Important facts for investors to verify
- Whether the Korean equipment contract, anticipated service agreement and LIPA awards convert into executed agreements and recognized revenue on the expected schedule.
- Whether production and order levels rise enough to improve factory utilization, margins and cash generation, and whether existing inventory and project assets can be deployed without impairment.
- Available unrestricted liquidity after restricted-cash needs, near-term debt payments and project-financing requirements; also monitor compliance with Hercules covenants and the preferred-stock redemption terms.
- The dilution potential from outstanding common-stock warrants and convertible preferred stock, and the outcome and consequences of the reverse-split ratification vote.
- The filing’s inconsistent LIPA revenue estimates and the status, funding and conversion terms of reported backlog.