FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2013. Dollar figures are in millions unless otherwise noted.
Business context
The company designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops additional fuel-cell technologies. It reported an installed base operating at more than 50 locations and backlog exceeding 300 MW. Its largest markets were South Korea and the United States.
Financial performance
| Metric | Three months ended Apr. 30, 2013 | Prior-year quarter | Six months ended Apr. 30, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $42.4 | $24.2 | $78.8 | $55.5 |
| Gross profit | $2.3 | $0.2 | $0.003 | $2.3 |
| Gross margin | 5.5% | 0.8% | Approximately 0% | 4.2% |
| Operating loss | $7.2 | $7.8 | $18.3 | $13.2 |
| Net loss | $7.6 | $8.4 | $19.5 | $14.4 |
| Net loss attributable to common shareholders | $8.2 | $9.1 | $20.6 | $15.8 |
| Loss per common share | $0.04 | $0.06 | $0.11 | $0.11 |
Quarterly revenue rose 76%, led by higher fuel-cell kit sales and about $8.9 million of Bridgeport project revenue. Six-month revenue rose 42%, but costs of revenue grew faster, leaving gross profit nearly zero versus $2.3 million in the prior-year period. The six-month product, service and license gross result was a $0.3 million loss, including costs associated with repairs to a select batch of stacks. Quarterly gross profit improved year over year, with management citing sales mix and complete-power-plant construction revenue.
- Cash flow: Operating activities provided $16.1 million in the first six months, versus $30.1 million used in the prior-year period. The 2013 inflow reflected higher deferred revenue from customer milestone billings, customer collections and increased accounts payable; it should not be read as proof of consistently positive operating cash flow.
- Cash and liquidity: Cash and cash equivalents were $56.0 million at April 30, compared with $46.9 million at October 31, 2012. Restricted cash was $15.6 million, bringing cash plus restricted cash to $71.7 million. Current assets were $153.8 million and current liabilities $104.9 million.
- Debt and capital structure: Total debt was $11.3 million, including $4.0 million drawn on an $8.0 million revolving facility. The company also reported $59.9 million of redeemable Series B preferred stock, with a $64.0 million liquidation preference. Total liabilities were $150.2 million and total equity was a $2.6 million deficit.
- Contract obligations: Reported future commitments totaled $123.6 million, including $94.0 million of purchase commitments; $89.4 million was due in less than one year. The table excludes annual Series B preferred dividends of $3.2 million.
Material changes and notable items
- The company acquired the remaining 61% of Versa Power Systems in December 2012, issuing approximately 3.5 million common shares. Versa is now consolidated; the acquisition added $4.2 million of goodwill and $9.6 million of in-process research and development assets.
- License and royalty income was reclassified into service agreements and license revenues beginning in fiscal 2013 under a revised POSCO agreement. This affects comparability with prior periods.
- POSCO accounted for 63% of second-quarter revenue and 66% of six-month revenue. POSCO and Dominion Bridgeport Fuel Cell together represented 84% of quarterly revenue and 85% of six-month revenue.
- The company increased its Torrington facility’s annual production run-rate to 70 MW effective May 1, from 56 MW during the quarter. Engineering and assembly also began at its German FCES facility.
- Management reported repair and after-market costs from a select stack quality issue, said it had investigated the issue and implemented process changes, and noted field repairs for affected customers. The filing reports reserves for warranty costs, service-agreement losses, performance guarantees and the B1200 repair/upgrade program.
Outlook, risks and contingencies
Management said gross profit from product sales and revenues is expected at annual production volumes of 50–55 MW, and estimated positive cash flow and net-income profitability at 80–90 MW; EBITDA breakeven was expected at approximately 80 MW. Outcomes depend on product mix, volume, service costs and market pricing. These are management expectations, not a guarantee. The company said existing capital resources, anticipated orders, revenues and cash flows were expected to meet financial requirements for at least the next 12 months, while also noting that additional financing may be needed for growth or expansion. A potential expansion of Torrington capacity to about 150 MW was estimated to require $30–$40 million in capital investment.
Key risks include continued operating losses and dependence on higher order volumes and cost reductions; significant customer concentration, particularly POSCO; service, warranty and stack-repair costs; execution of large projects; and access to financing. The company had $13.1 million of outstanding letters of credit backed by restricted cash and disclosed ordinary-course legal proceedings, which management did not expect to have a material adverse effect. No material risk-factor changes from the 2012 Form 10-K were reported.
Important facts for investors to verify
- Whether the higher production rate and backlog convert into shipments, collections and sustained gross-margin improvement.
- Whether operating cash flow remains positive when customer advances, deferred revenue and other working-capital movements are considered.
- The status and cost effects of the stack quality issue, field repairs and related warranty and service reserves.
- POSCO’s continuing share of sales, receivables and royalties, and progress on customer diversification.
- Project timing and execution for Bridgeport, Hwasung and European installations, along with financing needs and preferred-stock obligations.