Summary
- Plug Power Inc. reported abysmal fourth quarter and full-year 2022 results, with excessive cash burn and product gross margins deteriorating to new multi-year lows.
- Even after lowering expectations twice over the past four months, Plug Power revenues missed revised projections by a wide margin.
- Adjusted for contributions from recent acquisitions, organic revenue growth was a paltry 3.5%. Core GenDrive unit sales were down 35% year-over-year as key customer Amazon reduced purchases significantly.
- Expectations for 100% revenue growth this year are not supported by year-end backlog numbers. Liquidity continues to deteriorate at a rapid pace.
- Given ongoing execution issues, overly aggressive financial projections and deteriorating liquidity, investors should remain on the sidelines until Plug Power Inc. lines up new financing and finally starts delivering upon its ambitious targets.
Note:
I have covered Plug Power Inc. ( PLUG ) previously, so investors should view this as an update to my earlier articles on the company.
After the close of Wednesday's regular session, Plug Power reported truly abysmal fourth quarter and full-year 2022 results.
In fact, Q4 results were so bad that management apparently decided to exclude the respective statement of operations for the three months ended December 2022 from the shareholder letter.
Even after lowering expectations twice in recent months, the company actually missed its own projections from the business update call in late January by a wide margin, which appears to be almost impossible given the fact that management already had preliminary sales numbers in front of them at the time of the call.
After being poked on the issue by analysts on the conference call , CFO Paul Middleton blamed the staggering miss on the company's recent acquisition spree:
I think a combination of some of the issues that we shared and talked about previously in addition to -- it was a meaningful chunk of activity associated with our acquisitions. And when you're moving what was effectively private companies into public company space and working through all their processes and accounting for new models, new structures, new programs, it felt -- in going through that, a little conservative to kind of error towards moving some of that into 2023 until we get all those processes finalized and finish.
While Plug Power has indeed acquired a number of companies in recent quarters, only the previously undisclosed acquisition of Alloy Custom Products and WesMor Cryogenics closed in Q4. It contributed only $3.7 million in revenue for the fourth quarter, according to information provided in the company's annual report on form 10-K:
On December 5, 2022, the Company and its wholly-owned subsidiary Plug Power Hydrogen Holdings, Inc. simultaneously entered into a definitive agreement and closed on the acquisition of two subsidiaries of Cryogenic Industrial Solutions, LLC, which are Alloy Custom Products, LLC and WesMor Cryogenics, LLC. The purchase was approximately $37.3 million, comprised of a mix of cash and the Company’s common stock, to bolster the cryogenic tanker and storage tank business.
Other meaningful acquisitions like Applied Cryo Technologies or Frames Holding already closed in Q4/2021, while the purchase of Joule Processing was executed early in Q1.
Adjusted for revenue contributions of the above-discussed acquisitions, Plug Power stock's 2022 organic growth was a paltry 3.5%.
At least in my opinion, it is far more likely that auditors didn't agree on certain revenue recognition criteria applied by the company, thus causing the large miss relative to the preliminary sales number provided on January 25.
Please keep in mind that the company previously cited issues with ramping electrolyzer production, customer project delays, as well as supply chain disruptions as the main reasons behind the massive shortfall relative to expectations.
Remember also that in my discussion of the company's initial guidance revision in mid-October, I correctly projected full-year revenues to end up " closer to $700 million " as opposed to the revised range of $825 million to $850 million forecasted by management at that time.
Investors might ask themselves why an outsider constantly has a much better handle on the company's financial performance than management itself.
Plug Power's core material handling business remains an unmitigated disaster, with GenDrive unit sales down by more than 35% year-over-year while deployed sites decreased by approximately 10%, mostly due to key customer Amazon.com, Inc. ( AMZN ) decreasing purchases by approximately 55% from 2021 levels.
Looking at the company's Q4 margin performance, all-important product margins were almost cut in half on a sequential basis and were down significantly year-over-year:
On the conference call, the CFO blamed the product margin deterioration on the ramp-up of new large-scale facilities and products while the 10-K simply refers to inflationary pressures and lower margins from products contributed by recently acquired companies. But even the latter explanation appears to be questionable, as based on numbers provided in the 10-K, aggregate gross margin from contributions of recently acquired companies was 18.7%, higher than the company's consolidated 2022 product gross margin of 16.3%.
While Plug Power's service segment appears to have reduced gross losses by almost 50% from 2021 levels, this is solely due to the company having been forced to reserve for anticipated outsized losses from poorly-negotiated multi-year service contracts with key customers like Walmart ( WMT ) and Amazon in previous quarters/years.
Adding back releases from the so-called " loss accrual for services " clearly shows that segment performance has actually worsened year-over-year:
The lack of tangible progress in service margins is also visible in the company's leasing business, which the company labels " Power Purchase Agreements " or " PPAs ." As accounting rules do not permit upfront loss recognition on service contracts attached to leased equipment, the segment's terrible gross margin performance continues to reflect the true state of the company's service business.
Fueling margins worsened even further year-over-year, as recent geopolitical events caused natural gas prices to explode over the course of 2022. That said, natural gas prices have reversed course in recent months. Accordingly, management expects Q1 third-party hydrogen supply costs to decrease by approximately 15% sequentially, with substantial further progress anticipated over the course of the year:
As a result, we are seeing a decrease of 15% for the prices paid for the bulk of our third-party hydrogen in the first quarter of 2023 and expect this downward trend to continue in the balance of the year if natural gas continues to drop. This dynamic, along with our green hydrogen plant commissioning, gives us increasing confidence to exit 2023 with break-even margins in the fuel segment.
Quite frankly, even when taking into account much lower natural gas prices and some of the company's own hydrogen plants coming online later this year, it is difficult to envision fueling segment margin moving from negative 256% to break-even exiting the year, particularly not when taking a closer look at the company's updated construction schedule:
Shareholder Letter
With only the Georgia plant expected to reach full-scale production in the first half of the year, and construction permits still lacking for the projects with strategic partner Olin Corporation ( OLN ) in Louisiana and Tennessee, it is difficult to see these plans producing at full capacity before next year.
In fact, on its recent Q4 conference call , Olin management pointed to the end of the year for starting production at the new Louisiana facility, in contrast to Plug Power management still projecting the plant to ramp up to full production capacity in Q3.
Given these issues, I would expect the fueling segment margin to remain firmly in the red exiting the year.
Turning to cash flow and liquidity, things don't look rosy, either.
Plug Power recorded negative free cash flow of approximately $1.4 billion in 2022. In combination with higher restricted cash levels and debt repayments, liquidity deteriorated by more than $1.7 billion over the course of last year:
Considering ongoing losses from operations, projected capital expenditures of $1.0 billion, and materially increased working capital requirements to support forecasted 100% revenue growth this year, I would estimate free cash flow to be negative between $1.5 billion and $2.0 billion in 2023.
Keep in mind that the company's massive restricted cash position is mostly related to sale-and-leaseback transactions for material handling equipment which are predominantly entered for revenue recognition purposes (as opposed to liquidity relief, which remains limited by the requirement to provide large amounts of cash collateral).
With the company having extended its lease offerings beyond core customer Walmart in recent years, the amount of restricted cash on the balance sheet has grown exponentially and is likely to increase even further going forward, particularly given management's expectations for material handling customer site deployments to almost double year-over-year.
Assuming no debt financings or equity offerings over the course of the year, Plug Power's remaining liquidity could be close to zero at year-end.
That said, management remained optimistic regarding its application for a Department of Energy ("DoE") loan guarantee and also hinted to the possibility of leveraging the company's green hydrogen plants subsequent to completion.
That said, with only one green hydrogen plant likely to operate at full capacity at the end of this year, the company should better hope for the DoE to approve its application in the second half as otherwise market participants might become increasingly concerned with Plug Power's rapidly diminishing liquidity position.
Now let's take a closer look at management's expectations for the company to achieve 100% sales growth this year with revenues being heavily weighted towards the second half again.
Not surprisingly, these projections aren't really backed by the company's backlog at the end of last year:
While total backlog increased by more than 70% year-over-year to almost $1.2 billion, approximately 50% of this number relates to long-term leases, maintenance and hydrogen supply agreements with revenue being recognized over up to ten years.
Even the company's $303 million in electrolyzer backlog is unlikely to ship completely in 2023 despite management expectations for electrolyzer sales exceeding $400 million this year.
Please note also that the company will be facing an estimated $100 million revenue headwind this year due to the discontinuation of sales of engineered oil and gas equipment by recent acquisition Frames Holding.
Considering these issues, I would estimate approximately $500 million to $600 million of the company's year-end 2022 backlog to be recognized this year, which leaves management with the Herculean task to secure up to $900 million in new business suited for revenue recognition this year.
Lastly, I was somewhat perplexed to learn about the company having started to pursue project-based business in the electrolyzer segment as stated by management in the question-and-answer session of the conference call:
Again, I think the way we are managing and running our electrolyzer business, right, is essentially there's two pieces to that business. One, we have a project business and we have a product business where we're really focusing on standardization, turnkey products. Now within our project business, there's a lot of synergies that we can draw from our internal projects as well as things that we're doing for the external customer like the work we have going on with New Fortress Energy. That's our project business, which I think, given the scope and size of that, that ends up becoming more on a percent of the completion accounting and timing of how the project ramps and rolls out.
Given the inherent uncertainties and considerably higher risk profile of project-based work, as well as considering the company's long-standing execution issues, I would expect nothing short of disaster from this latest endeavor.
Bottom Line
After more than a decade of overpromising and underdelivering, and given the sheer magnitude of improvements projected by management for this year, investors would be well-served to prepare for Plug Power Inc. underperforming expectations by a very wide margin again.
In addition, the company's liquidity is depleting quickly. Under a worst case scenario, Plug Power Inc. might be running out of funds in early 2024, but the company still has a number of levers to pull.
Given ongoing execution issues, overly aggressive financial projections and deteriorating liquidity, investors should remain on the sidelines until Plug Power Inc. lines up new financing and finally starts delivering upon its ambitious targets.
For further details see:
Plug Power: Credibility At All-Time Low After Stunning Q4 Miss