FCEL - FuelCell Energy: Strong Q1 Headline Numbers Don't Hold Up To Scrutiny

2023-03-09 23:26:10 ET

Summary

• Company reports quarterly results well ahead of consensus expectations.
• Unfortunately, the outperformance was solely due to a large one-time benefit related to the non-exercise of module purchase options by Korea Fuel Cell.
• Negative cash flow of $63.3 million marked a new all-time high. Aggressive growth investments are likely to result in cash outflows of up to $350 million this year.
• FuelCell Energy is seeking approval for doubling authorized common shares from 500 million to 1 billion on the upcoming annual meeting next month.
• Given the company's ongoing execution issues and elevated risk of further dilution, investors should continue to avoid the common shares.

Note: I have covered FuelCell Energy ( FCEL , OTCPK:FCELB ) previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, FuelCell Energy's common shares rallied more than 20% in early trading following the release of perceived strong first quarter results with revenues will above consensus expectations and the highest gross margin reported in several years:

Unfortunately, both revenues and margins were boosted by a $9.1 million one-time benefit which was actually the result of a rather negative development as disclosed in the company's quarterly report on Form 10-Q (emphasis added by author):

Our December 2021 Settlement Agreement with POSCO Energy Co., Ltd. and its subsidiary, Korea Fuel Cell Co., Ltd. (“KFC”), included an option to purchase an additional 14 modules (in addition to the 20 modules that were purchased by KFC during fiscal year 2022). This option included a material right related to an extended warranty obligation for the modules. The option was not exercised by KFC as of the expiration date of December 31, 2022 and, as a result, the Company recognized $9.1 million of product revenues, which represents the consideration allocated to the material right if the option had been exercised.

Adjusted for the windfall profit, revenues would have been roughly in line with analyst expectations while consolidated gross margin would have been negative 13.8% rather than the positive 14.1% number reported.

Even worse, quarterly cash burn of $63.3 million reached a new all-time high and resulted in unrestricted cash and short-term investments declining by approximately 15% quarter-over-quarter to $390.8 million.

For the first time in many quarters, the company abstained from offsetting elevated cash burn by selling large amounts of new common shares into the open market.

With close to $400 million in unrestricted cash and short-term investments and 76.5 million shares still available for issuance under the company's most recent open market sale agreement, liquidity remains sufficient to fund the company's ambitious growth investment plans in FY2023:

That said, with up to $225 million in projected capital expenditures and research and development ("R&D") expenses as well as an estimated up to $150 million in negative cash flow from operations not related to R&D, investors will likely have to prepare for additional dilution this year.

Please note that FuelCell Energy is looking to double the amount of authorized common shares from 500 million to 1 billion on the upcoming annual meeting next month.

In Q1, the company recorded $9.9 million in capital expenditures and $12.7 in R&D thus leaving up to $202.4 million for the remainder of the year.

Looking at the company's core generation business, segment performance rebounded from depressed fourth quarter levels and after adjusting for depreciation, amortization and certain charges related to the Toyota Tri-Generation project in Long Beach, gross margin was roughly stable on a year-over-year basis:

During the quarter, the heavily-delayed Groton Submarine Base project finally became operational albeit at a reduced output of approximately 6 MW as compared to the plant's nameplate capacity of 7.4 MW. The ongoing technical issues have also resulted in the company incurring substantial amendment and performance guarantee fees related to the existing offtake agreement:

As previously disclosed, the Groton Project achieved commercial operations on December 16, 2022. On December 16, 2022, the Company entered into an amended and restated power purchase agreement (“Amended and Restated PPA”) which modified and replaced the existing power purchase agreement with Connecticut Municipal Electric Energy Cooperative (“CMEEC”) to allow the Groton Project to operate at a reduced output of approximately 6 MW while a Technical Improvement Plan (“TIP”) is implemented with the goal of bringing the platform to its rated capacity of 7.4 MW by December 31, 2023. (...)

The Company is incurring and will continue to incur performance guarantee fees under the Amended and Restated PPA as a result of operating at an output below 7.4 MW during implementation of the TIP. Although the Company believes it will successfully implement the TIP and bring the plant up to its design rated output of 7.4 MW by December 31, 2023, no assurance can be provided that such work will be successful. In the event that the plants do not reach an output of 7.4 MW by December 31, 2023, the Amended and Restated PPA will continue in effect, and the Company will be subject to ongoing performance guarantee fees.

As a result, the rated capacity of the company's operating Generation portfolio has increased from 36.3 MW to 43.7 MW sequentially:

Management currently expects the Toyota Tri-Generation project in Long Beach to become operational in Q3/FY2023 while the large-scale plant in Derby, Connecticut is projected to commence commercial operations in the company's fiscal fourth quarter.

Backlog continues to go down as FuelCell Energy recognizes revenue from existing service contracts and under the joint development agreement with a subsidiary of Exxon Mobil ( XOM ) related to the company's carbon capture technology:

On the conference call , management again touted potential benefits from last year's Inflation Reduction Act ("IRA"):

That said, investors should not expect any near-term revenue impact from potential IRA incentives as market participants are still waiting for additional guidance from the Treasury Department and the Internal Revenue Service.

In addition, product sales are likely to remain limited this fiscal year due to Korea Fuel Cell having abstained from ordering additional modules and the company still being in the process of rebuilding its Korean sales channel.

Bottom Line

Adjusted for a sizeable one-time benefit related to the non-exercise of a significant module purchase option by Korea Fuel Cell, FuelCell Energy reported another less-than-stellar quarter with cash burn reaching new all-time highs.

In addition, the company has committed to aggressive growth investments which in combination with anticipated losses from operations might result in negative free cash flow of up to $350 million this year.

As a result, investors better prepare for further, aggressive utilization of open market share sales as a means to replenish the company's cash reserves.

Given ongoing execution issues and elevated risk of further dilution, investors should continue to avoid the common shares.

Investors looking for a somewhat less risky investment in FuelCell Energy should consider taking a position in the company's Series B Preferred Shares ( OTCPK:FCELB ) which trade around 51% of face value despite ranking senior to common stock and paying a rather juicy 9.8% cash dividend on an annual basis.

For further details see: