FCEL

FuelCell Energy, Inc. (FCEL)

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FuelCell Energy (FCEL)

Q2 2011 Earnings Call

June 07, 2011 10:00 am ET

Executives

Kurt Goddard - Vice President of Investor Relations

Arthur Bottone - Chief Executive Officer, President, Director and Chairman of Executive Committee

Joseph Mahler - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Corporate Secretary and Treasurer

Analysts

Matthew Crews - Noble Financial Group, Inc.

Sanjay Shrestha - Lazard Capital Markets LLC

Unknown Analyst -

Walter Nasdeo - Ardour Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Reports Second Quarter 2011 Results Conference. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today, Kurt Goddard, Vice President, Investor Relations. Please begin.

Kurt Goddard

Good morning, and welcome to the Second Quarter 2011 Earnings Call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer, and Joseph Mahler, Senior Vice President and Chief Financial Officer.

The earnings release 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.

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 would like to turn the call over to Chip Bottone. Chip?

Arthur Bottone

Thank you, Kurt. Good morning, everyone, and welcome. FuelCell Energy is entering an exciting phase as the pace of growth accelerates, our fuel cell power plants providing solutions for our customers' energy, environmental and business challenges worldwide. As energy demand grows, we are intensifying the globalization of our business and the penetration of our key markets.

We are focused on driving top line revenue growth. Our products are performing well and are profitable, while products and services backlog is the highest in our company's history.

POSCO Power, our Korean partner, recently ordered 70 megawatts of fuel cell kits, equipments and services that we will deliver over a 2-year period. Valued at $129 million, this order represents initial demand under South Korea's renewable portfolio standard.

We increased our production levels during the second quarter to 56 megawatts annually, and this large order from POSCO Power enables us to sustain these higher production levels.

Service agreements executed with all of our customers are also contributing to revenue growth as our installed base grows and we move toward near-term profitability.

I will discuss these and other results after Joe Mahler, our Chief Financial Officer, reviews our financial results for the quarter. Joe?

Joseph Mahler

Thank you, Chip, and good morning, everyone. FuelCell Energy reported total revenues for the second quarter of 2011 of $28.6 million compared to $16.6 million in the same period last year.

Product sales and revenues in the second quarter were $26.7 million, almost double the $13 million reported in the prior year quarter.

The company's product sales and service backlog totaled $135.5 million as of April 30 compared to $75.5 million as of April 30, 2010. For the second quarter of 2011, product order backlog totaled $60.4 million, and backlog for long-term service agreements totaled $75.1 million.

The POSCO Power order, valued at an estimated $129 million, almost doubled our backlog, to more than $250 million, the highest in the company's history.

In the quarter, we incurred a onetime charge of $8.8 million due to our repair and upgrade program for a select group of 1.2-megawatt fuel cell modules produced between 2007 and early 2009. No additional charges are expected under this program, and the cash impact will be spread out over 12 months with an expected cash impact of $3 million to $5 million during fiscal year 2011. The charge was accounted for as an increase to cost of goods sold.

During the second quarter of 2011, the accounting classification of the Series I preferred shares was adjusted to reflect a change in the timing of payments due under the instrument. There was no material change in the future cash flows, although the revaluation of the instrument resulted in a onetime noncash charge of $9 million to additional paid in capital.

The reason for the change in the valuation of the obligation was that the original obligation had been accounted for under purchase price accounting at the time of the acquisition of Global Thermoelectric in 2003.

Under the new valuation under debt accounting, the future estimated cash flows were discounted using a dividend rate in the modified agreement and the current foreign exchange rate, resulting in the adjustment. This accounting accelerates the prior accretion model for the instrument.

My discussion of the financials from this point will exclude the repair and upgrade charge and a noncash charge related to the Series I preferred. Please note that a non-GAAP reconciliation is included at the end of the earnings release that illustrates financial results for the second quarter of 2011 and year to date, excluding the repair and upgrade charge and the charge to revalue the preferred shares.

Margins for product sales and revenues improved by $4.1 million compared to the second quarter of 2010, and the "product cost to revenue" ratio improved to 1.08:1, primarily from improved product margins and lower commissioning of warranty costs compared to the prior year period. This met our expectations.

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