FuelCell Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Third quarter and nine months ended July 31, 2013; compared with the corresponding 2012 periods. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops fuel-cell technologies.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $53.7m | $29.7m | $132.5m | $85.2m |
| Gross profit (loss) | $4.5m | $(2.7)m | $4.5m | $(0.4)m |
| Gross margin | 8.4% | (9.2)% | 3.4% | (0.5)% |
| Operating loss | $(4.6)m | $(10.5)m | $(22.9)m | $(23.7)m |
| Net loss | $(5.8)m | $(10.0)m | $(25.3)m | $(24.4)m |
| Net loss attributable to common shareholders; loss per share | $(6.4)m; $(0.03) | $(10.7)m; $(0.06) | $(27.1)m; $(0.14) | $(26.6)m; $(0.17) |
| Operating cash flow | Not provided for the quarter | $2.1m | $(45.2)m |
Q3 revenue growth was principally from Bridgeport fuel-cell-park construction, partly offset by lower fuel-cell kit sales. For the nine-month period, product sales rose 65% to $108.9m; service and license revenue was $12.8m, down 5%, while advanced-technology contract revenue rose 84% to $10.8m. Nine-month operating losses improved modestly, but net losses widened slightly, including higher interest expense.
Liquidity, debt and balance sheet
- At July 31, unrestricted cash and equivalents were $81.4m; restricted cash was $10.0m. Total cash and restricted cash was $91.4m, versus $57.5m at October 31, 2012.
- Current assets were $182.3m and current liabilities $102.6m. Accounts receivable was $40.4m, including $19.2m of unbilled commercial recoverable costs.
- Total debt was $50.1m before a $3.1m unamortized discount; the balance sheet reported $4.4m current debt and $42.5m long-term debt. Debt increased from $8.5m at October 31, 2012.
- The June issuance of $38.0m of 8% senior unsecured convertible notes provided approximately $35.5m net proceeds. Notes mature in June 2018 and are initially convertible at approximately $1.55 per share. The $8.0m revolving facility had $4.0m outstanding and was due to expire April 2, 2014, subject to renewal provisions.
- Shareholders’ equity was a deficit of $8.1m; total equity, including noncontrolling interests, was a deficit of $8.6m. Redeemable preferred stock had a $59.9m carrying value and a $64.0m liquidation preference.
Nine-month operating cash generation reflected higher deferred revenue ($14.8m) and accounts payable ($9.2m), plus lower inventory ($3.1m); it should not be interpreted as evidence of sustained operating cash generation. Financing activities provided $36.0m, mainly from the convertible notes and CEFIA loan advances.
Material changes and operating developments
- Q3 gross profit turned positive, with total gross margin improving to 8.4%; nine-month gross margin also turned positive at 3.4%. Management attributed improvement to higher production, better fixed-overhead absorption and sales mix. Service-agreement and license revenue still generated a nine-month gross loss of $1.0m.
- Production at Torrington was maintained at an annualized run-rate of about 70.8 MW; Q3 component production was 17.7 MW. The company expected to maintain that run-rate for the rest of 2013.
- The Versa Power Systems acquisition was completed in December 2012 through issuance of approximately 3.5m shares. Consolidation contributed to higher advanced-technology revenue and research and development expenses.
- Bridgeport commissioning had begun, with full power targeted by year-end 2013. The 59 MW Hwasung project in South Korea was generating approximately 29 MW during staged commissioning, with full power expected by year-end 2013 or early 2014.
- Revenue presentation changed in fiscal 2013: license and royalty income was included in service and license revenue. Comparisons with 2012 are affected by this classification change.
Outlook, risks and contingencies
- Management said gross profit from product sales was expected at annualized production of 50–55 MW, and expected positive cash flow and net income at 80–90 MW; EBITDA break-even was estimated at approximately 80 MW. Outcomes depend on order volume, product mix, service costs and pricing.
- Backlog and scheduled restacks were expected to support about 50 MW of annual Torrington production through 2016. Management targeted adding 20–30 MW of backlog annually. The filing also cites backlog exceeding 300 MW, including a 121.8 MW POSCO order.
- Customer concentration is substantial: POSCO represented 34% of Q3 revenue and 53% for the nine months; Dominion Bridgeport Fuel Cell represented 51% and 32%, respectively. The three largest disclosed customer groups together represented 89% of Q3 revenue and 90% year to date.
- Purchase commitments totaled $103.5m, including $91.8m due within one year. Other obligations include the notes, revolver, preferred-share payments, leases, warranty and service commitments, and performance guarantees. Approximately $10.0m of cash was pledged; outstanding letters of credit were $7.7m.
- Management anticipated existing resources and expected orders and cash flows would meet financial requirements for at least twelve months, but said inability to raise additional capital could adversely affect growth plans. A potential expansion of Torrington capacity to 200 MW was estimated to require $30–$40m of capital.
- A select number of fuel-cell stacks required repair; the company reported that it investigated the issue, implemented process changes and undertook field repairs. The B1200 repair and upgrade program was described as complete, with a $4.7m accrued balance remaining, primarily for future replacement modules.
- Ordinary-course legal matters were not expected by management to have a material adverse effect, and no material amounts were accrued. The company reported no material changes to its previously disclosed risk factors. Management reported disclosure controls were effective.
Key facts for investors to verify
- Whether production, new orders and project commissioning support the stated 80–90 MW profitability and cash-flow targets.
- Whether positive operating cash flow is repeatable without reliance on customer milestone billings and supplier-payment timing.
- Customer concentration, POSCO-related receivables and the collection of the increased unbilled receivable balance.
- The cost and duration of service, warranty and stack-repair obligations, including whether the remaining reserves are adequate.
- Liquidity and refinancing needs given near-term purchase commitments, the revolver’s stated expiration, preferred obligations and the 2018 convertible-note maturity.
- Whether the convertible notes’ conversion features and potential share issuance materially affect future dilution.