FuelCell Energy, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended July 31, 2016. The company designs, manufactures, installs, operates, and services stationary fuel-cell power plants, and develops related technologies. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $21.7M | $41.4M | $83.8M | $111.6M |
| Gross profit | $0.4M | $3.6M | $0.1M | $9.6M |
| Gross margin | 2.0% | 8.7% | 0.1% | 8.6% |
| Operating loss | $10.3M | $7.1M | $34.5M | $21.0M |
| Net loss | $11.1M | $6.6M | $38.3M | $20.8M |
| Net loss per common share | $0.38 | $0.29 | $1.41 | $0.94 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $46.5M | $35.5M |
- Revenue mix and margins: Q3 product sales were $13.7M, service and license revenue $4.5M, and advanced-technology contract revenue $3.6M. For the first nine months, service and license revenue rose 38% to $21.4M, but its gross margin fell to negative 3.5%; product-sales margin was 1.7%.
- Liquidity: At July 31, unrestricted cash and equivalents were $94.2M; restricted cash was $34.7M, for total cash and restricted cash of $128.8M. Cash and equivalents increased $35.3M from October 31, 2015, supported principally by financing.
- Debt and equity: Total debt and finance obligations were $52.5M, including $14.0M current and $38.5M long-term. Total liabilities were $145.0M. The company had $124.8M of total equity and $59.9M of redeemable preferred stock.
- Cash flow: Nine-month investing cash use was $10.5M, including $6.5M for project assets. Financing provided $92.3M, including $34.8M net proceeds from the July offering, about $33.5M from open-market share sales, and $15.0M from the Hercules loan.
Material changes versus the prior comparable period
- Nine-month revenue declined 25%, largely because POSCO Energy transitioned manufacturing to South Korea and FuelCell Energy’s kit and module sales shifted toward royalty-based revenue. POSCO accounted for 52% of nine-month revenue, versus 65% a year earlier; it accounted for 65% of Q3 revenue.
- Nine-month gross profit fell to near breakeven as product-sales margins weakened and service costs increased. Service costs included higher performance-guarantee accruals and contract-loss accruals, particularly on renewed legacy contracts.
- Nine-month operating loss widened to $34.5M from $21.0M. Research and development expense increased to $15.7M, partly for near-term products; interest expense rose to $3.2M, including Hercules borrowing costs.
- Operating cash use increased by $11.0M year over year. Working-capital pressure included higher inventories and project assets and lower deferred revenue, partly offset by collections of receivables.
- Common shares outstanding increased to 33.5M at July 31 from 26.0M at October 31, 2015. The July financing also issued 7.68M Series A warrants and 4.93M prefunded Series B warrants, creating substantial potential dilution.
Outlook, management commentary, and risks
- Revenue outlook: Management estimated FY2016 revenue of $140M–$170M, implying $56M–$86M in Q4, based on backlog, production, project-asset sales, and expected orders. The filing cautions that interim results are not necessarily indicative of full-year results.
- Production: The Torrington factory operated at an approximately 62 MW annualized run rate during the first nine months; management planned to reduce the Q4 run rate to 50 MW annualized based on delivery timing. POSCO kit production was expected to conclude in Q4, with U.S. and European turnkey projects expected to replace that volume.
- Liquidity outlook: Management believed available cash, operating cash flows, borrowing availability, and capital-market access would fund operations for at least 12 months. The company was not generating positive operating cash flow and said future liquidity depends on increasing orders and reducing costs.
- Backlog and pipeline: Contract backlog was approximately $392M, including $299M of service agreements. Management cited a potential North American and European project pipeline exceeding $2B, but stated that pipeline is not contracted backlog. Advanced-technology backlog was $60.5M, of which $36.0M was funded.
- Projects and expansion: The proposed 63.3 MW Beacon Falls project represented potential revenue exceeding $500M, contingent on an RFP award and definitive agreements. The first phase of the Torrington facility expansion was underway and expected to finish in late 2017; total two-phase expansion costs could reach $65M. FY2016 capital expenditures were forecast at $7M–$10M.
- Key risks: Project timing, awards, financing, and construction can affect cash needs and revenue recognition. The federal investment tax credit extension included solar technologies but omitted fuel cells; management expected a correction but could not assure passage or timing. Other risks include POSCO dependence, service-contract performance and costs, government contract funding, competition, and the ability to achieve volume growth and cost reductions.
- Commitments and contingencies: Unconditional purchase commitments were $48.7M. Restricted cash of $34.7M supported letters of credit and contractual obligations. The company accrued $3.1M for performance guarantees and $2.8M for service-contract losses. It also disclosed possible customer and financing-partner compensation related to reductions in the investment tax credit, but said payment was not considered probable. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Unusual subsequent event: On September 6, 2016, the company completed a PNC sale-leaseback for the Riverside plant, receiving approximately $9.9M and using about $1.4M to repay NRG construction debt. The transaction was accounted for as financing, not an upfront sale gain.
Important facts for investors to verify
- Whether the FY2016 revenue range was achieved and whether production was replaced by higher-margin turnkey demand after POSCO kit sales ended.
- Whether gross margins, especially service margins, improved as legacy contracts were renewed, exited, or repriced.
- Actual operating cash burn, project-asset funding needs, and the company’s ability to maintain liquidity while supporting project development.
- Progress on the Beacon Falls and other pipeline projects, distinguishing awarded and contracted work from prospective opportunities.
- Use of debt capacity, Hercules loan milestones and repayment terms, restricted-cash requirements, and potential dilution from warrants and future equity issuance.
- Exposure to POSCO revenue concentration and the timing and value of royalties as its Korean manufacturing operation ramps.