Plug Power: Weak Q1/2019 Results, But All Eyes On Upcoming Strategic Announcements

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About: Plug Power Inc. (PLUG)
by: Henrik Alex
Summary

Company misses consensus expectations on both top- and bottom-line but reaffirms full-year guidance.

Negative free cash flow of $38.5 million elevated by a large increase in inventories.

Adjusted segment gross margins not as bad as they appear on first glance.

Debt continues to pile up. Discussing terms of a new $100 million credit facility with Generate Capital.

Management's advertising of upcoming major business announcements has sparked renewed momentum in the stock and will likely cause operating performance to take the backseat for the time being.

Note:

I have covered Plug Power (PLUG) previously, so investors should view this as an update to my earlier articles on the company.

Plug Power's Q1/2019 results were disappointing as the company missed consensus expectations on both the top- and bottom-line by a mile. Elevated cash usage of $38.5 million also fits well into the picture of a dismal quarter.

Photo: Plug Power-powered FedEx Delivery Van Prototype - Source: Cleantechnica.com

On the conference call, management blamed the majority of the revenue shortfall on the delayed closure of a $7 million sale-and-leaseback transaction with its financing partner Wells Fargo (WFC).

Remember, Plug Power took the sudden chance for early adoption of a new lease accounting standard in H2/2018 which re-enabled the company to recognize revenues from Walmart lease refinancings upfront. Without the resulting windfall profits, the company would have actually missed its original FY2018 projections materially.

That said, the quarter wasn't as bad as it appears on first glance. Elevated cash usage was partly the result of a whopping $17.5 million sequential rise in the company's inventory position with some of the increase obviously caused by the delayed refinancing transaction discussed above:

Source: Company's SEC-Filings, Author's own work - Note that the split between production and customer locations for Q1/2018 only represents an approximation as the company hasn't provided detailed numbers.

The elevated work-in-progress number also points to the anticipated ramp-up in second quarter deployments with revenues expected to more than double from subdued Q1 levels.

Moreover, when adjusting for the usual accounting noise around the company's 2017 warrant transactions with anchor customers Amazon (AMZN) and Walmart (WMT), gross margins for the company's adjacent business segments actually showed some improvement:

Source: Company's SEC-Filings, Author's own work

While consolidated gross margin was the weakest in two years, this was largely due to the lack of high-margin product revenues but particularly the ongoing improvement in margins for the Service and Power Purchase Agreements ("PPA") segments remains encouraging:

Source: Company's SEC-Filings, Author's own work

Remember, the "Power Purchase Agreements" segment actually reflects the performance of the Walmart leasing business which is hampered by material non-cash depreciation requirements for leased equipment. Despite this handicap, PPA margins have continued to increase likely due to materially improved refinancing conditions since securing a partial guarantee from Walmart for outstanding lease payments back in 2017, the retroactive reinstatement of the fuel cell investment tax credit in 2018 and substantially lower service costs.

On the flipside, quarterly cash flows and EBITDA were bolstered by a $3.5 million one-time payment from the supplier of the hydrogen tank that caused the fatal forklift incident at a Procter & Gamble detergent plant last year, in order for Plug Power to help facilitate a field replacement program for the remaining affected units.

Q1 was a very busy quarter from a financing perspective, as Plug Power first secured a $23.5 million direct investment from its largest, institutional shareholder, Odey Asset Management and two weeks later announced a $100 million secured term loan facility with long-standing financing partner Generate Capital LLC (emphasis added by author):

The Company borrowed $85.0 million under the Loan Agreement on the date of closing and borrowed an additional $15.0 million in April 2019. A portion of the initial proceeds of the loan were used to pay in full the Company's long-term debt, including accrued interest of $17.6 million under the loan and security agreement, dated as of July 21, 2017, by and among the Company, Emerging, Emergent and NY Green Bank, a Division of the New York State Energy Research & Development Authority (the "Green Bank Loan") and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC and repurchase the associated leased equipment. In connection with this transaction, the Company recognized a loss on extinguishment of debt of approximately $0.5 million. This loss was recorded in interest and other expenses, net in the Company's unaudited interim consolidated statement of operations. Additionally, $1.7 million was paid to an escrow account related to additional fees for the Green Bank Loan if the Company does not meet certain New York State employment and fuel cell deployment targets by March 2021. This amount paid to an escrow account is recorded in long-term other assets on the Company's unaudited interim consolidated balance sheet as of March 31, 2019. On March 31, 2019, the outstanding principal balance under the Term Loan Facility was $85.0 million. The collective balance of $32.1 million in loan proceeds will be used to fund working capital for ongoing deployments and other general corporate purposes of the Company. Advances under the Term Loan Facility bear interest of 12.00% per annum. The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. The term of the loan is three years, with a maturity date of December 13, 2022.

Frankly speaking, I would have liked to see the company raising more equity instead of turning to expensive debt once again, particularly when considering the recent 150% rally in the shares which has largely been fueled by management's clever advertising of upcoming, major strategic announcements.

On the conference call, management provided some further glimpses on these anticipated collaborations:

One of the four major announcements will be associated with our ProGen line, and will be announced in May post our customers' announcements. Contracts have already been executed for this program and we look forward to sharing more information in near future.

This will likely center around range extenders for delivery vans in Asia and/or Europe as the company's domestic DoE-sponsored project with FedEx (FDX) and WorkHorse Group (WKHS) remains far behind schedule with just one out of up to 20 units currently being deployed mostly due to ongoing financial distress at system integrator WorkHorse Group. At this point, evaluation to proceed into phase 2 of the project and deploy the remaining units is still ongoing.

Later on the call, CEO Andy Marsh stated that "the first announcement I think will be somewhere in the $35 million range" but at the same time cautioned on potential near-term revenue impact from any of the upcoming initiatives.

Management also had more to offer when asked about an anticipated global distribution announcement with a large multinational partner:

I think that where distributor is underestimating the partnership.

I would expect that that announcement will be in June. And where we are in the programs and the activities, I'd met with them enormous times and there's someone with a huge global footprint that would give us a reach that we never had in the past.

In addition, CEO Marsh hinted to upcoming news on the stationary power business:

On the stationary power front, I actually think that will happen beginning of the third quarter. Again, I've had personal meetings with them and going through with their CEO, their program. The company is much larger than Plug Power, who has been active in the fuel cell space. And looking to position products more in the third world and really excited with that. I've been quite impressed with the activity.

In sum, plenty of ammunition for management to further support the stock price over the next couple of months. That said, the company will still have to live up to its reaffirmed guidance for annual gross billings of $235-245 million and positive adjusted EBITDA for the full fiscal year 2019. Keep in mind that reported revenues will be somewhat lower due to ongoing warrant charges.

Operating cash flows for the full year are now expected to come in "somewhere between slightly negative to slightly positive, given timing on deployments and accounts receivable collections", not that bad after an outflow of $36.3 million for the first quarter.

Given expectations for cash flows to improve over the course of the year, current liquidity including the additional $15 million draw under the new credit facility in April should be sufficient to manage the anticipated ramp up of deployments starting in Q2.

Bottom Line

Not a great Q1 for Plug Power by any means but the company's underlying operational performance wasn't as bad as headline numbers suggest.

In addition, the company successfully addressed short-term debt refinancing needs and bolstered its liquidity position.

Management largely reaffirmed previous annual guidance and provided further insights into some of the "four major business announcements" eagerly awaited by investors with the first announcement expected to hit later this month.

Given market participants' current focus on the company's upcoming strategic moves, operational performance will likely take the backseat for the time being despite the company's core material handling product business apparently being in decline as evidenced by a 20% year-over-year drop in new orders and overall backlog growing just slightly according to statements made in the company's most recent 10-K filing with the SEC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.