FuelCell Energy, Inc. is a global leader in delivering clean, efficient fuel cell solutions for the supply, recovery and storage of energy. The company designs, manufactures, undertakes project development, installs, operates and maintains megawatt-scale fuel cell systems as well as developing solutions for carbon capture and local hydrogen production. The global fleet of SureSource™ power plants operates on three continents with more than 8 million MWh generated by more than 100 plants at more than 50 sites around the world. Leading geographic markets of the company are the United States and South Korea. The company is planning to expand its opportunities in other countries around the world.
According to its Annual Financial Report, total revenues for the year ended October 31, 2018 decreased by $6.2 million, or by 7%, to $89.4 million from $95.7 million in 2017. Total revenues for the year 2018 decreased by $6.6 million, or 7%, to $86.3 million from $92.9 million in 2017. The company's gross margin was 3.5% in 2018, as compared to the prior year gross margin of 2.9%.
Reportable segments of the company are the following four: Product Sales, Service and License Agreements, Generation, and Advanced Technologies Contracts.
Product revenues for the year 2018 included $49.4 million of power plant revenue and $3.1 million of revenue related to engineering and construction services. This compares to product revenues for the year 2017, which included $41.0 million of power plant revenue and $2.0 million of revenue related to engineering and construction services. The increase in product revenues in 2018, when compared to the previous year period, was primarily due to the 20 MW order from Hanyang Industrial Development Co., Ltd. (“HYD”), pursuant to which FuelCell Energy provided equipment to “HYD” for a fuel cell project with Korea Southern Power Co., Ltd. (“KOSPO”), which resulted in $28.5 million in revenue recorded in fiscal year 2018.
Cost of revenues from Product Sales increased by $4.7 million or by 9% in 2018 to $54.5 million, compared to $49.8 million in 2017. Overall gross loss from product revenues was $2.0 million in 2018 compared to gross loss of $6.8 million in 2017. The gross loss decrease was primarily due to the favourable margins realized for the “HYD” contract and the sale of certain project assets. Both periods were impacted by fixed overhead costs due to low production volumes of approximately 25 MW in each fiscal year.
In 2018 product sales backlog totalled approximately $1.0 thousand compared to $31.3 million in 2017.
Revenues from Service and License Agreements decreased by 42% or by $11.3 million to $15.8 million in 2018 from $27.1 million in 2017. Service agreement revenue decreased primarily due to lower revenue from fewer module replacements in 2018 as compared to the same period in 2017. Revenue from license, royalty and material management fees decreased by 18% or by $0.5 million to $2.2 million in 2018 from $2.7 million for the prior year period due to lower royalties recognized.
Cost of revenues from Service and License Agreements decreased by $10.2 million to $15.1 million in 2018 from $25.3 million in 2017. Cost of service agreements includes maintenance and operating costs, module exchanges, and performance guarantees. The decrease over the previous year period relates to lower expenses associated with module replacements and lower operating costs in 2018. Gross profit from service and license revenues was $0.7 million or 4.4% in 2018, compared to 6.5% in 2017. Service margins were negatively impacted by costs associated with a terminated legacy service contract during 2018.
Service backlog from service totalled approximately $316.0 million in 2018 compared to $182.3 million in 2017. Service backlog does not include future royalties or license revenues. This backlog is for service agreements of up to twenty years and is expected to generate positive margins and cash flows based on current estimates.
Revenues from generation totalled $7.2 million in 2018, which is generally consistent with generation revenues achieved in 2017. Cost of generation revenues totalled $6.4 million in 2018, compared to $5.1 million in 2017. The decrease in gross profit from generation revenues from 29.8% in 2017 to 10.5% in 2018 was primarily a result of the $0.5 million impairment of a 1.4 MW project in development that was terminated in 2018 and higher maintenance activities at certain installations during 2018.
Advanced Technologies contract revenue in 2018 was $14.0 million, which reflects a decrease of $4.3 million when compared to $18.3 million of revenue in 2017.
Administrative and selling expenses were $24.9 million and $25.9 million in 2018 and 2017, respectively.
Research and development expenses increased to $22.8 million in 2018 compared to $20.4 million in 2017. This increase is primarily due to timing of research and development activities related to new products including the SureSource 4000.
Total loss from operations was $44.6 million in 2018 compared to $44.9 million in 2017. The decrease was due to higher gross profit realized in 2018, lower administrative and selling expense.
Net cash used in investing activities was $51.3 million during fiscal year 2018 compared to net cash used in investing activities of $31.4 million during fiscal year 2017. Net cash used in investing activities during fiscal year 2018 included a $41.2 million investment in project assets to expand operating portfolio and $10.0 million for capital expenditures. Net cash used in investing activities during 2017 included a $19.7 million investment in project assets to expand the operating portfolio and $12.4 million for capital expenditures.
FuelCell Energy has worked hard during 2018 to implement transition to market leading energy as a service model, and the company has never been better positioned for success. FuelCell Energy has more than $2 billion in project backlog, world-class business partners, and a verifiable business strategy to achieve positive financial results by growing power generation portfolio with progress in carbon capture, hydrogen production and energy storage.