FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2014. Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops additional fuel-cell technologies. It reported an installed base and backlog exceeding 300 MW, with plants operating at more than 50 locations. The company said it was not generating net income and depended on sales, contracts and financing to fund operations.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $38.3 | $42.4 | $82.7 | $78.8 |
| Gross profit (margin) | $1.6 (4.2%) | $2.3 (5.5%) | $3.8 (4.6%) | $0.0 (approximately 0%) |
| Operating loss | $(8.8) | $(7.2) | $(16.3) | $(18.3) |
| Net loss | $(16.0) | $(7.6) | $(26.9) | $(19.5) |
| Net loss attributable to common shareholders | $(16.6) | $(8.2) | $(28.0) | $(20.6) |
| Loss per common share | $(0.07) | $(0.04) | $(0.13) | $(0.11) |
- Q2 revenue fell 10%, mainly from lower power-plant equipment sales, construction services and fuel-cell kit shipments. Six-month revenue rose 5%, led by service and advanced-technology contracts.
- At April 30, unrestricted cash was $64.3 and restricted cash was $25.1, for combined cash and restricted cash of $89.4. Total assets were $229.0; total liabilities were $128.1.
- Operating cash flow was $(15.7) for the six months, versus $16.1 provided in the prior-year period. Investing used $1.9; financing provided $14.0. Financing included net stock-sale proceeds, partly offset by increased restricted cash, debt repayments and preferred payments.
- Total debt was $11.7, down from $54.0 at October 31, 2013, principally after conversion of $37.0 of convertible-note principal. The remaining note principal was $1.0. Preferred stock remained outstanding, with a $64.0 liquidation preference.
- Working capital was $87.2 (current assets of $168.1 less current liabilities of $80.9). The company reported a $8.0 revolving credit facility, with $0.9 drawn and an August 1, 2014 expiration date.
Material changes versus prior periods
- Six-month gross profit improved to $3.8 from nearly breakeven, including a service-agreement and license gross profit of $1.2 versus a $1.3 loss. Product-sales gross profit rose to $2.5 from $1.0.
- Despite the six-month operating-loss improvement, net loss worsened, partly reflecting higher interest expense and an $8.5 six-month make-whole charge associated with convertible-note conversions. The charge contributed to other expense of $8.1 for the six months.
- Research and development expense increased to $9.6 from $7.4 for the six months, while administrative and selling expense declined to $10.6 from $10.9.
- Shares issued and outstanding increased to 256.4 million at April 30, from 196.3 million at October 31, reflecting note conversions and equity sales. The company also reported 260.0 million shares outstanding at June 2.
Outlook, risks and contingencies
- Management said the company expected existing resources, anticipated orders, revenues and cash flows to cover financial requirements for at least the next 12 months. This depends on order flow and operating performance; the company stated sustained positive operating cash flow requires higher order volume and cost reductions.
- Management targeted positive cash flow and net income at annual production of 80–90 MW, and EBITDA break-even at the current 70 MW run-rate. It targeted quarterly revenue of $50–$60 at current production levels, with timing dependent on customer orders and deliveries. These are targets, not guarantees.
- Management expected increasing quarterly revenue in the second half of fiscal 2014 and into 2015, based on anticipated project activity and orders. It said backlog and scheduled service work supported approximately 50 MW of annual production through 2016 and targeted adding 30–40 MW of backlog annually.
- POSCO Energy, a related party holding approximately 12% of common shares, accounted for 75% of six-month revenue, versus 66% in the prior-year period. POSCO receivables were $21.7 at April 30. Customer concentration, contract renewals or cancellations, and POSCO-related exposure are material risks.
- Restricted cash rose to $25.1, including $15.0 held in a grantor trust to secure obligations under a 15-year service agreement. Purchase commitments totaled $74.5, of which $71.8 was due within one year.
- Advanced-technology contract backlog was $14.3, of which $9.0 was funded; funding is often incremental and contracts may require cost sharing. Service, warranty and performance obligations also expose the company to uncertain future costs.
- The company announced a 5.6 MW award from United Illuminating and a University of Bridgeport project expected to be sold to a project financier before completion or commissioning. The filing reported no material change in previously disclosed risk factors and no legal proceedings expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether new orders, deliveries and production mix support management’s revenue and 70 MW EBITDA break-even targets.
- Whether service margins continue to improve and whether warranty, module-exchange and performance-guarantee costs remain within reserves.
- POSCO Energy’s share of revenue, receivables, future orders and the implications of its related-party relationship.
- Availability of unrestricted cash after considering restricted funds, near-term purchase commitments, preferred obligations and renewal of the revolving credit facility.
- The effects of continued operating cash use, future financing needs and further share issuance on liquidity and shareholder dilution.