FCEL

FuelCell Energy, Inc. (FCEL)

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FuelCell Energy (FCEL)

Q3 2012 Earnings Call

September 06, 2012 10:00 am ET

Executives

Kurt Goddard - Vice President of Investor Relations

Arthur A. Bottone - Chief Executive Officer, President, Director, Chairman of Executive Committee and Member of Government Affairs Committee

Michael S. Bishop - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer and Corporate Secretary

Analysts

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Jacob W. Hughes - FBR Capital Markets & Co., Research Division

Walter Nasdeo - Ardour Capital Investments, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Welcome to FuelCell Energy Reports Third Quarter 2012 Results. [Operator Instructions] Later we will conduct a question and answer session with instructions following at that time. [Operator Instructions] And as a reminder, this conference is being recorded. Now I'll turn the conference over to Kurt Goddard, Vice President of Investor Relations. Please begin.

Kurt Goddard

Good morning, and welcome to the third quarter 2012 earnings call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer.

The earnings release, as well as an accompanying slide presentation, is posted on our website at www.fuelcellenergy.com, and a replay of this call will be posted 2 hours after its conclusion. The telephone numbers for the replay are listed in the press release. Once again, for those of you listening to this call via the dial-in phone number rather than via the Internet, management will be referencing a Q3 2012 slide presentation that is available on the Investor Relations section of our website at www.fuelcellenergy.com.

Before proceeding with the call, I would like to remind everyone that this call is being recorded, and that the discussion today will contain forward-looking statements, including the company's plans and expectations for the continuing development and commercialization of our fuel cell technology. I would like to direct listeners to read the company's cautionary statement on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission.

Now I'd like to turn the call over to Chip Bottone. Chip?

Arthur A. Bottone

Thank you, Kurt. Good morning, everyone, and welcome. I ask you to please turn to Slide 4 titled Third Quarter 2012 Highlights. Our expansion into Europe is progressing well and according to plan. During the third quarter, we completed the acquisition of select fuel cell assets at no cost to us and concluded our joint venture with Fraunhofer IKTS. This new partnership is already paying dividends for us. Within just a few months of announcing our partnership, we received an order for our first fuel cell power plant that will be installed in the Federal Ministry's new state-of-the-art office complex in Berlin. An ideal first customer for this market, the German governor -- government is a strong proponent of clean distributed generation. It will be difficult for me to overstate how well this illustrates Fraunhofer's extensive influence and their potential to help us develop this market.

While our third quarter financial results were below our expectations with lower sales and margin than desired, our near-term global sales pipeline is strong to support the increasing production levels, resulting in a return to growing positive gross margin as we progressed to profitability. As announced last month, I will explain more fully later in the call discussions with POSCO Energy are progressing, and we expect to finalize agreements pertaining to the 120-megawatt order and cell licensing agreement during 2012. Essentially, given the importance of this decision and the scale of our effort to develop it, planning and discussions have simply taken longer than estimated.

We have returned to a 56-megawatt run rate, which will enable product margin expansion. Our technology is versatile, and I will discuss new programs, potential commercialization opportunities arising from our advanced technology initiatives.

We continue to deepen existing relationships and develop new relationships with local, state and federal legislators as we share the attributes of our power plants and job creation potential of our business model.

I will discuss our performance and activity in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

Michael S. Bishop

Thank you, Chip. Good morning, and thank you for joining our call today. Please turn to Slide 5 titled Financial Highlights. FuelCell Energy reported total revenues for the third quarter of 2012 of $29.7 million compared to $31.2 million in the same period last year. Product sales and revenues for the third quarter totaled $27.6 million compared to $29.4 million reported in the prior year. Research and development contract revenue was $2.1 million for the third quarter of 2012 compared to $1.8 million for the prior year quarter.

For the third quarter of 2012, our gross loss of $2.7 million was realized compared to a gross profit of $100,000 for the prior year quarter. Annualized production volume in the third quarter of 2012 was approximately 45 megawatts compared to 56 megawatts in the prior year period. The company expects to generate profits at a rate of 50 to 55 megawatts. Thus, the reduced run rate in the quarter combined with a mix heavily weighted towards kits sales drove negative gross margin. In addition, a $1.1 million inventory obsolescence charge was taken in the third quarter of 2012 for some early generation sub-megawatt balance-of-plant parts.

Total operating expenses were $7.8 million for the third quarter of 2012 compared to $7.5 million in the prior year. Although operating expenses are down sequentially from $8 million in the second quarter of 2012, G&A expenses are up over the prior year as a result of higher business development activity and the addition of our business entity in Germany.

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