FuelCell Energy, Inc. (FCEL) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Reports Fourth Quarter 2013 Results Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kurt Goddard, Investor Relations Vice President. Please go ahead.

Good morning, and welcome to the Fourth Quarter and Fiscal Year 2013 Earnings Call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the fourth quarter of 2013. The earnings release, as well as a presentation that will be referenced during this earnings call, is available on the Investor Relations section of the company website at www.fuelcellenergy.com. A replay of this call will be available approximately 2 hours after its conclusion on the company website. 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. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer. Now, I would like to turn the call over to Chip Bottone. Chip?

Thank you, Kurt. Good morning, everyone, and welcome. Please turn to Slide 4, Fourth Quarter 2013 Highlights. During the past year, we executed solidly on our strategic plans, achieving record quarterly revenues and expanded margins. For the fourth quarter of 2013, we posted a strong year-over-year revenue increase. Product sales were up 24%, service revenue was up 17% after excluding revenue from a new service agreement with POSCO Energy. While pleased with the revenue growth, our full year margin EBITDA performance was not as good. We expect significant improvement in 2014, as Mike will explain. We're executing our global installations. The 15-megawatt fuel cell park and the 59-megawatt fuel cell park in South Korea are on schedule. Deliveries of fuel cell kits to POSCO are also on schedule. In October, we delivered the first power plant built at our facility in Germany, and completed commissioning of the acclaimed Crown Estates project in London. During the fourth quarter, we maintained a 70-megawatt production run rate in our North American manufacturing facility. As discussed last quarter, total production capacity potential was increased to 100 megawatts. POSCO began construction on its manufacturing facility in South Korea that will ultimately be capable of up to 200 megawatts of annual production. Activity levels in our pipeline increased significantly in 2013. We are participating in a global trend towards utility scale projects, resulting in a broad and diversed opportunity landscape. Projects in our near-term pipeline are progressing towards closure. While the timing of orders is difficult to predict, the flexibility of our business model, current discussions and competitive position give us confidence in near-term order closure. I will discuss our results and outlook in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results. Mike?

Thank you, Chip. Good morning, and thank you for joining our call today. Please turn to Slide 5 titled Quarterly Financial Highlights. FuelCell Energy reported total revenues for the fourth quarter of 2013 of $55.2 million, compared to $35.4 million in the same period last year. Product sales for the fourth quarter totaled $36.2 million compared to $29.1 million reported in the prior year. Revenue recognized from product shipments and EPC services at the Bridgeport fuel cell park drove the increase in revenue year-over-year as construction and installation activity continued during the fourth quarter. The Bridgeport project offset lower fuel cell kit shipments, as fuel cell kit shipments were accelerated during the fourth quarter of 2012 to meet the construction schedule of the 21-unit fuel cell park in South Korea. We expect to recognize the remaining product and EPC revenue from the Bridgeport project during the first quarter of 2014. Service and license revenues for the fourth quarter totaled $15.4 million, including approximately $13.7 million derived from service, and $1.6 million from license and royalty revenue. For the comparable prior year period, service revenue totaled $4.8 million. During the fourth quarter of 2013, we announced a revised Master Service Agreement with POSCO Energy, whereby POSCO assumes additional obligation for fuel cell power plants that they build in Asia. FuelCell Energy will continue to provide technical and operation support for each plant in the Asian fleet, while POSCO is assuming a greater field service role for Asian installations, as well as all future scheduled module exchanges. Due to the revision of service obligations under the agreement, we recognize revenue and corresponding expense in the fourth quarter of 2013 on a number of fuel cell modules operating in South Korea that had residual value remaining at the time the agreement was executed. This resulted in a nonrecurring service revenue during the quarter of $10.2 million and nonrecurring service costs of $10.1 million. Advanced technology contract revenues were $3.6 million for the fourth quarter of 2013 compared to $1.6 million in the prior-year quarter, with the growth primarily reflecting the consolidation of Versa Power Systems. Total gross profit was $2.6 million for the fourth quarter of 2013 compared to $900,000 in the prior year quarter. The gross margin for the fourth quarter of 2013 was 4.7%. Excluding the revenue and cost associated with the revised Master Service Agreement, adjusted gross margin was 5.5% Manufacturing efficiencies combined with lower product costs from volume were the largest contributor to the improved margins, partially offset by the timing of scheduled module exchanges that reduced service margin year-over-year. Total operating expenses were $9.5 million for the fourth quarter of 2013, compared to $9.3 million in the prior year period. We continue to selectively invest in both growth and cost reduction opportunities. Research and development costs increased on a dollar basis, as we work to further reduce cost of multimegawatt installations by consolidating certain aspects of the power plant to achieve economies of scale. As a percent of total revenues, operating expenses decreased year-over-year as there is inherent operating leverage in the business with the existing infrastructure and employee base. Net loss to common shareholders for the fourth quarter of 2013 was $10.5 million, or $0.06 per basic and diluted share, on an adjusted basis, which excludes the noncash impact of the change in value of embedded derivatives associated with convertible debt of $1.1 million. The adjusted net loss attributable to common shareholders totaled $9.4 million, or $0.05 per basic and diluted share. This compares to $12.1 million, or $0.07 per basic and diluted share, in the fourth quarter of 2012. EBITDA, which is the measure of cash flow and is based on earnings before interest, taxes, depreciation and amortization, totaled negative $5.7 (sic)[5.6] million, an improvement from negative $7.2 million for the comparable prior year period, as a result of sales mix and higher production volume. Please turn to Slide 6 titled Fiscal Year Financial Highlights. Turning to the full year results, the company recorded total revenue of $187.7 million, compared to $120.6 million in fiscal year 2012, for a 56% year-over-year increase. Gross profit was $7.1 million for the year, which compares to $400,000 for the prior year. As depicted by the gross profit bridge at the bottom of the slide, lower manufacturing costs, as a result of volume and efficiency improvements as well as a mix towards complete power plants, drove higher gross profit in 2013. Net loss to common shareholders for fiscal year ended October 31, 2013 was $37.6 million or $0.20 per basic and diluted share. On an adjusted basis, the net loss attributable to common shareholders totaled $36.2 million, or $0.19 per basic and diluted share. This compares to $38.7 million for the comparable prior year period, or $0.23 per basic and diluted share. The financial statements include a non-GAAP reconciliation to illustrate the impact of noncash entries to account for the embedded derivatives in the 8% convertible notes. EBITDA was negative $24.8 million for fiscal 2013 compared to negative $26.6 million in the prior year. During fiscal 2013, unplanned warranty and aftermarket costs and investments in our European expansion, as well as the Versa acquisition, partially offset the progress made with further cost control, which is why the year-over-year improvement was not larger. Now I will transition to Slide 7, titled Financial Metrics. Cash and cash equivalents, including restricted cash totaled, $77.7 million on October 31, 2013. Total cash decreased by $13.7 million from the end of the third quarter. Increases in accounts receivable and inventory were the primary uses of cash above the operating loss incurred in the period. Accounts receivable was expected to decline in the first quarter of 2014 as we collect final milestone payments on the completion of the Bridgeport fuel cell park. Depreciation expense for the quarter was $1.1 million and capital expenditures totaled $2.5 million. Backlog totaled $355 million at October 31, 2013, compared to $319 million 1 year ago and $381 million sequentially at July 31, 2013. Backlog includes product sales orders of $170 million, compared to $228 million 1 year ago and $200 million at the end of the third quarter. Service backlog was $167 million at the end of the fourth quarter, compared to $79 million at October 31, 2012 and $163 million at July 31, 2013. The year-over-year increase primarily reflects the addition of the service agreement for the Bridgeport project and a growing U.S. installed base. Advanced technology contract backlog increased to $19 million at the end of the fourth quarter of 2013, compared to $12 million on October 31, 2012, and $18 million at July 31, 2013. Measured in megawatts, product backlog totaled 107 megawatts as of October 31, 2013, compared to 151 megawatts 1 year ago and 123 megawatts at the end of the third quarter. During the fourth quarter, we shipped 14.3 megawatts, including 8.4 megawatts of fuel cell kits and 6 megawatts of complete power plants. Now I will transition to Slide 8, titled 2014 Outlook. We expect continued top line growth in 2014. Operating at 70 megawatts for the full year should drive the product sales and revenues line up at least 15% with the potential for further expansion with volume and mix. We are concentrating on closing multimegawatt projects in the pipeline and are prepared to increase production levels further as demand supports. Quarterly results may vary based on the timing of order closure and shipments. On the service revenue line, excluding the 2013 impact of the revised Master Service Agreement, service revenue is expected to increase and average between $4 million to $6 million per quarter on new agreements and increased license revenue. With customer acceptance the Bridgeport project expected this month, this 15-year service agreement will begin contributing service revenues in Q1 2014. We also expect growing service revenue from other sites, including completion of the 59-megawatt fuel cell park in South Korea. Based on existing contracts, advanced technology revenue for 2014 is anticipated to be in the range of $3 million to $4 million per quarter, consistent with 2013 levels. We expect continued margin expansion, growing to the low teens in the second half of 2014, as we improve the mix and continue to reduce product costs. We are well positioned for 2014 in terms of our cost profile, including manufacturing efficiencies from process improvements, as well as decreasing product costs. As production increases beyond 70 megawatts, we see additional margin expansion coming with higher volumes, a favorable sales mix that includes complete power plants, plus EPC services and other revenues, as well as lower product costs from overhead and supply chain leverage. We will further benefit when POSCO Energy commences cell production in 2015. Increased production, whether it be in North America, Asia or Europe, will reduce product costs as we leverage our global supply chain. In conclusion, revenue and incremental operating margins are strong compared to the prior year. And continued cost reduction at our current 70-megawatt production run rate will drive further margin expansion in 2014. We are targeting positive quarterly cash flow, as measured by EBITDA, by the end of 2014 based on anticipated order flow and continued cost reduction. I will now turn the call back to Chip for a further discussion of our operations and markets. Chip?

Thank you, Mike. As I mentioned, during the fourth quarter, we maintained a 70-megawatt production run rate at our Torrington, Connecticut manufacturing facility consistent with the third quarter. Based on our projections of near term order flow, we plan to maintain the 70-megawatt rate while increasing revenue and margins as we enter 2014, and will increase our run rate as demand dictates. Maintaining this rate is advantageous. It helps us close new business by offering our customers faster execution on projects with short cycle times, and it contributes to lower project cost, mitigates risk and enhances product cost reductions. We expanded the Torrington facility annual manufacturing capacity by 11% to 100 megawatts, through a series of process and supply chain improvements that avoided the need to invest additional capital. As demonstrated during the previous production increases, our associates can smoothly increase production in response to further increases in demand. We announced the 14.9-megawatt Bridgeport fuel cell park order last December. Now, just 1 year later, this fuel cell park is on schedule and nearly fully operational. All 5 fuel cell power plants in the Organic Rankine Cycle turbine are generating power, acceptance of the project by Dominion, a project owner and a major U.S. utility is expected this month. Successful completion of this highly visible installation demonstrates the value of ultra-clean utility-scale fuel cell power for grid applications, but also the importance of selecting the right project team and partners. This project showcased our ability to develop, execute a broad and complicated project with numerous stakeholders and enable project financing. We have focused on building our capabilities to develop, construct and operate plants for our customers. The benefits are numerous. Our customers or project financiers gain by having a better value proposition with lower or no risk and high confidence of the successful project. We benefit from gaining greater revenue and margins by using our experience and ability to leverage synergies. This strong global record of accomplishment is timely and puts us in a unique position. For many of the reasons mentioned, a greater number of utility and other potential customers are looking for larger plants around the world. As an example, the service contract associated with the Bridgeport project is valued $69 million over 15 years, approximately equal to the capital cost of the plant. Our service business is beneficial to us because it generates predictable revenue for most long-term customer relationships and provides multiple opportunities to expand those relationships. In October, we marked the delivery of our first German-built power plant with a ceremony in Berlin at the future -- Federal Ministry of Education and Research complex in Berlin. The unit will be commissioned in mid-2014 as the complex nears completion. Local production is a key part of our business strategy. It supports local economics with good jobs, builds government support, speeds delivery and reduces shipping costs. In London, commissioning was completed on our project at The Crown Estates prominent Quadrant 3 redevelopment project. Our ultra-clean power plant is helping owners of the prestigious office and retail complex meet their ambitious sustainability objectives. It's also supporting their overall marketing of the building by supporting higher rent levels to clients that value sustainable business practices. POSCO is completing the 59-megawatt fuel cell park in Hwasung City in South Korea. All 21 of the DFC3000 power plants are installed, and the park is producing power. The world's largest fuel cell park, this project showcases the attributes that make our products ideal, ultra-clean distributed baseload solutions. Constructed in only 12 months, this installation demonstrates the speed at which our large-scale fuel cell plants could be deployed, reducing grid congestion and helping utilities comply with clean energy mandates. Our fuel cell's low emissions profile, small footprint, quiet operation and combined heat and power capabilities make them ideal solutions for densely populated areas where ultra-clean, highly efficient and easily cited power generation is necessary. Our operations team has become a sustainable competitive advantage for us. We have demonstrated the project development combined with our service model to drive both revenue and margin increases, satisfying our customers at the same time. Please turn to Slide 10, Dedication Events. This slide contains photos of recent dedication events, which I'd like to highlight. On the left of the large photo shows the groundbreaking ceremony for the POSCO Energy manufacturing facility in Pohang, South Korea, on November 22, attended by our Chief Operating Officer, Tony Rauseo. The smaller photo shows the groundbreaking with the foundation of fuel cell component manufacturing facility in the background. The facility is expected to be operational in 2015. Initially, it will have an annual capacity of 100 megawatts with the potential to expand to 200 megawatts as demand supports. Manufacturing complete power plants at POSCO's facility, under license with us, provides important benefits. It diversifies and strengthens our global base -- manufacturing base and leverages our global integrated supply chain, thus reducing product cost. It also accelerates global deployment by promoting the attributes of stationary, fuel cell power plants. Financed by POSCO, the facility leverages our partner's strong financial resources. It testifies to our partner's long-term commitment. The fuel cell power plant production reflects our forecast for significant market growth in Asia. The other large photo shows the dedication event of the 1.4-megawatt power plant in California State University, San Bernardino, on November 8. Southern California Edison is the utility owner of the 1.4-megawatt DFC1500 that is installed on the university's campus. Testifying to the plant's efficiency, the university reported savings and estimates $120,000 in annual power expenses from the combined heat and power configuration. Please turn to Slide 11, Business Activity Overview. I'd like to take a moment to explain our commercial closure process, short-term goals and overall activity in our pipeline in North America, Europe and Asia. Mindful that power project transactions take time to close for many reasons, including customer financing and regulatory approvals, our confidence in closure is high due to the advanced level of development of many large-scale projects in our pipeline and the strength of our offering. We carefully align our production capabilities with expected completion dates for new projects. Near term, we have the production capacity and resources to execute in at least 30 megawatts of new projects during 2014. Being able to execute quickly in this manner also allows us to minimize cost of capital, which makes projects more valuable. Examples of this are the multimegawatt projects we delivered in 12 months in Bridgeport, Connecticut, and South Korea. We focus on meeting customer expectations and maximizing revenue. We anticipate closing 30 megawatts of near-term projects, which are in our U.S. pipeline, including projects in Connecticut, California and New Jersey. These include a number of multimegawatt projects in Connecticut and California, on-site combined heat and power project in New Jersey and new markets such as the state of New York. In North America, our pipeline currently consists of more than 220 megawatts of projects, with corresponding multi-year service opportunities. Early in the fourth quarter, we signed an agreement with NRG Energy for the marketing and sale of our power plants. We are targeting significant activity in 2014 from this new alliance which should be incremental to our existing pipeline. NRG is the largest independent power producer in North America, with approximately 47,000 megawatts of power generation and more than 2 million retail customers. Our partnership with NRG validates our solutions, leverages our resources and provides a power purchase agreement option for customers. We have been working closely with the NRG sales team, providing training on our products and exploring opportunities with their customer base. Domestic electric utilities are actively taking steps to construct large-scale, clean distributed generation. We have identified utility scale solicitations totaling more than 1 gigawatt of projects for which FuelCell is qualified. The RFPs were issued by a combination of utilities or government entities in 4 states, and include existing customers in California. We are targeting bidding more than 100 megawatts of projects in 2014 with the U.S. utility companies. Again, this is incremental to our existing 220-megawatt pipeline figure. High-profile fuel cell parks like Bridgeport in Hwasung City are demonstrating to utilities that fuel cell power plants are excellent sources of clean, efficient and reliable distributed generation. Readily dispersed throughout utility service areas, fuel cell parks enhance the reliability and security of the electric grid, avoid the need for investment in transmission lines and reduce grid congestion. Our solutions are readily scalable and can be added incrementally as needed. Because they generate ultra-clean baseload electricity continuously, fuel cell power plants are an excellent complement to intermittent generation sources such as solar and wind power. In the European Served Area, our pipeline currently consists of more than 90 megawatts of projects with corresponding multi-year service opportunities. Our acclaimed high-profile projects are receiving the attention we expected, including recent BBC television coverage that this available to view on our company website. Our active projects include a diverse list of large megawatt projects from a number of regions. The utility power markets in Europe are in transition. Our distributed generation solutions are being evaluated as an attractive solution, and the EU has shown interest in several of our solutions for project funding. Our FCES business along with our partners, Fraunhofer IKTS and Abengoa continue to work together on an increasing number of policy matters. In Asia, POSCO Energy has a pipeline in excess of 300 megawatts of projects. In South Korea, the demand for fuel cell power continues to be driven by many factors, including desire to reduce the costly imported cost of fuel, the increased energy independence, the need for clean and highly efficient distributed generation sources suitable for densely populated urban environments and compliance with the government's Green Growth economic policies and renewable portfolio standard. In Asia, the market for fuel cell power plants evolve rapidly into multimegawatt utility model. POSCO recently announced 2 significantly agreements totaling 60 megawatts. Seoul City, the capital of South Korea, signed a memorandum of understanding with Korea Hydro & Nuclear Power, an electric utility, to install 120 megawatts of stationary fuel cell power plants. The first-announced project is a 20-megawatt fuel cell park located at a former landfill that has been converted to a new and renewable energy park, along with a solar power array and hydrogen fueling station utilizing landfill gas. In addition to POSCO Energy, partners in the project include a district heating company and a gas company. The plant is expected to be operational by the end of 2014. In addition, Gwangju City has signed a memorandum of understanding with Korea Western Power, POSCO Energy and other partners for a 40-megawatt fuel cell park and a 7-megawatt solar component. The fuel cell power plants are expected to be operational by 2016. The South Korean government is evaluating potential second phase with its RPS, expanding compliance obligations to major commercial energy users with the implementation expected in 2016. As the current RPS addresses power producers, a significant additional market opportunity is expected to develop with even greater market potential. POSCO continues to actively pursue other emerging markets for fuel cell power plants, including the liquefied natural gas and commercial buildings markets. Korea Gas Corporation, the world's largest LNG importer, contracted with POSCO for a demonstration project that will utilize boil-off gas to generate ultra-clean energy. The project may lead to multimegawatt fuel cell parks LNG facilities, a potential market POSCO estimates at 600 megawatts in South Korea alone. The first phase of South Korea's renewable heat obligation begins in 2016. It requires on-site new and renewable power generation for commercial buildings that exceed 10,000 square meters. POSCO has 2 sub-megawatt products for on-site application to this market. In terms of the new markets, our strategy involves developing new geographic markets that demonstrate sizable and consistent order flow potential, forging new partnerships for our megawatt class solutions and taking advantage of the versatility of our core technologies. Our advanced technologies group is focused on multiple technologies with strong commercialization potential, including distributed hydrogen that will lower the cost of hydrogen for industrial and fueling applications and solid oxide fuel cells for sub-megawatt specialty applications. We currently entered agreement with a global chemical company to supply a demonstration solid-state electrochemical hydrogen separation unit, or EHS. This 2-year agreement, valued at approximately $1.1 million, is expected to lead to subsequent phases targeted at producing an industrial-scale EHS system. Our EHS technology is aimed at industrial companies using large quantities of hydrogen. It uses an efficient process to separate hydrogen from natural gas that is virtually emissions-free, and has the potential to reduce operating costs by more than 50% compared to existing technologies. Funding by industry is exciting as this technology has rapid commercialization potential. During the fourth quarter, we received a $6.4 million contract with the department -- U.S. Department of Energy to continue development of sub-megawatt solid oxide fuel cell power plants. The unit will provide high efficiencies to be configured for CHP, or combined heat and power outputs. Our SOFC commercialization strategy includes coals and gas opportunities with the DOE and sub-megawatt applications, including commercial buildings and smaller wastewater treatment facilities that do not have a load to support the megawatt scale power plant. We're evaluating partnerships with organizations in North America, Asia and Europe to assist and benefit from the commercialization. Please turn to Slide 12, Summary. During 2013, we executed on both short term as well as our longer-term strategy, demonstrating expanding margins of record revenues. Nearly 75 megawatts of utility scale fuel cell parks were delivered and commissioned. Our global installed base and customers continues to expand. Fuel cell parks completed on schedule in North America and Asia are leading us towards U.S. utility adoption and contributing to our largest opportunity pipeline yet. We expanded manufacturing capacity in North America at a minimum cost with process improvements, and POSCO began construction of a new capacity in Asia. As Mike stated, we expect further increases in revenue and even larger improvements in margin in 2014 as we push the profitability on a solid foundation for growth with increasing momentum. We have the manufacturing capacity in North America to operate profitably and our qualified pipeline in North America and Europe is significantly higher than the annual volume we require for profitable operations. With POSCO's expanded manufacturing capacity, our route to achieving our vision of below grid pricing has become even more clear. In summary, we are entering 2014 well positioned for profitable operation and continued growth in the future. I thank our associates for their dedication and skill, and I thank all of you for your continued support. Operator, we'd be happy to take questions at this time.

[Operator Instructions] And our first question comes from the line of Les Sulewski with Sidoti & Company. Les Sulewski - Sidoti & Company, LLC: Can you provide a little bit more color on the revision of the servicing contract with POSCO? And then the effect of it this quarter, I see that you had a $10.2 million increase in the servicing revenue, and then it was a $10.1 million cost for that. Just give me a little bit more reasoning behind that, if you could.

Sure, Les, this is Mike Bishop. On the revised service -- Master Services Agreement with POSCO, this is really the result of the evolution of both businesses. The original service agreement with POSCO was put in place back in 2007 prior to POSCO anticipating a manufacturing facility in Korea. So now that they are going to have those capabilities, and they've built up their overall service capabilities, we're transitioning more of the underlying responsibilities to POSCO. So they will have responsibility for future module exchanges underlying the service agreements. So some of the responsibilities that we had transitioned to POSCO. We had assets on our balance sheet that they essentially have responsibility for now, and we got paid for transitioning those to POSCO. So it resulted in a onetime revenue benefit of $10.1 million at essentially cost, which came through the financial statements, and obviously, brought down the margin -- the overall margin percentage in the quarter. Les Sulewski - Sidoti & Company, LLC: Okay. And then in your guidance of $4 million to $6 million per quarter next year, is that including your past servicing agreements, as well as Bridgeport? And does that include POSCO, as well?

Yes. So just to be clear, the guidance for service and license revenue for 2014 is in the range of $4 million to $6 million per quarter and that does include the new Bridgeport contract, as well as our current responsibilities under the POSCO agreement and any incremental orders which we expect in the year. Les Sulewski - Sidoti & Company, LLC: Okay, great. Thank you. And you mentioned NRG briefly, but any updates that you can provide us with, any progress as of late?

Yes, I'll -- this is Chip. Yes, the -- we started that several months ago here with the kickoff. And I would say that we've been both getting involved in some projects that we have started, as well as getting some opportunities from their side. They have produced -- we've had a bunch of training. They have produced a bunch of documents to support that effort as well. And I can just tell you that we are actively pursuing several projects using that PPA model with their support, as we speak. So I would expect here we would have some success here in the near term with that.

Our next question comes from the line of Jeff Osborne with Stifel. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple of quick questions. Mike, I wanted to understand on the Korean services side, just going back to that for a second. Is there any revenue that you recognize this year that for service that you would not incur next year? So is there any shift of immediate service responsibilities or was this just kind of a true-up of future projects? I'm just trying to understand that $4 million to $6 million, that seemed a little bit lower than I was expecting given Bridgeport would be ramping up.

There was a shift in responsibility, Jeff. POSCO is taking on more of the total responsibility in Korea in essentially replacing stacks during the course of the service agreement. So originally, it was FuelCell's responsibility. We had stacks on our books, which, as I just described, transition to POSCO. So the overall -- on an individual site, the overall revenue by -- for FuelCell, maybe FuelCell Energy, may be lower going forward, but it's services that we can essentially do with our team in the U.S. and a limited number of folks on the ground. So really using our engineering resources and our service capabilities that we have here with some folks over there, high-margin business, we will touch every plant that's in Korea, but thought it made sense that since POSCO now has the manufacturing capability that they take on that responsibility. I would say as far as the $4 million to $6 million guidance into next year, again, that does include Bridgeport. It does include additional POSCO sites coming on online during the year. And as we execute new contracts, we expect to be at the higher end of that range towards the end of fiscal 2014. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that makes sense. Maybe it would just be helpful to get a sense of how much POSCO revenue will be going away with the shift? Can you just comment what the POSCO services revenue was for this fiscal year that you will no longer be responsible for, so we can get a sense of scope?

As far as an exact number, Jeff, I don't have that number right in front of me. But I'd say it's probably in the range of 30% of quarterly revenue. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: The services piece? Okay. And then on the slides on the business model highlights, is it a subtle shift of 70 to 80 megawatts of EBITDA breakeven? I think in the past, you typically had a point estimate of 80 at EBITDA and positive net income at 90. Now, you have a range shading to the lower end of that, which is definitely a positive. But was that intended or am I just reading too much into that?

No, that was intended, and it is a subtle shift. As we operate at the 70-megawatt run rate, we do see additional efficiencies at this run rate. And it is a target of the business to get to EBITDA positive at 70 megawatts, so we don't have to ramp again to achieve that. So it's in our plan this year, that's our absolute focus. The goal is obviously to add backlog above that run rate and ramp and have further margin expansion. But at this level, we would like to get EBITDA positive at a 70-megawatt run rate.

Jeff, if I can just add to what Mike said, we -- I think there's 2 benefits there besides, obviously, a lower level of achieving that EBITDA positive. I mean, we've worked hard at cost reduction in a lot of different areas -- in leverage in a lot of different areas in '13. We spent what I would call some investments in things like Europe and things, which I think will pay dividends. But obviously, we're seeing a mix change. So the combination of us continue to look for process improvements and cost reductions and leverage combined with the positive mix change is really why that change has occurred. So... Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: One last one for Mike, and then 2 quick ones for Chip. Mike, on the services mix -- so if roughly 30% of services is going away with the POSCO piece changing and then Bridgeport ramping up, how do we think about the margin trajectory both at the start of the year and through the year as that $4 million to $6 million per quarter plays out? Is the EPC service contract a higher-margin piece than what you were doing in Korea?

Yes, certainly service agreements that we've entered into, including Bridgeport, over the last couple of years are much higher margin than we had entered into in the past. It's using, obviously, the current technology, 5-year stacks and this higher-revenue profile. So we would expect, as these newer sites come online, margin percentage increasing certainly over what we had this year, and that's happening during the course of the fiscal year. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Okay, perfect. And then just for Chip, 2 questions. One is, if you could address POSCO outside of Korea. Think about 1 year ago, you talked about an IPP opportunity, or a focus of theirs, in particular in Southeast Asia, just wanted to get an update on that side of the coin. And then domestically, you've been highlighting a pipeline of kind of 30 to 35 megawatts here for the past quarter or 2. And just maybe talk about the dynamics and the market as to what the challenges are and getting pipeline converted over. Clearly, seeing a 500 to 600-megawatt pipeline evolving for you folks is fantastic to see. But I just want to get a sense of it. Is that the debt side of the coin or tax equity appetite or regulatory approvals? What are the kind of the key bottlenecks relative to maybe your prior expectations in getting that conversion done?

Okay, Jeff, on the POSCO thing, let me start out a little bit. I mean, they -- POSCO, and we've had some -- we have ongoing meetings with those guys but recently. I mean, they have very strong expectations on growth in Asia. I mean, very, very strong. So just -- and their putting resources to it. The market, frankly, in Korea has grown so fast and the demand is so high that it's probably slowed our efforts outside of Korea a bit. But back -- after the first of the year, we're going to get back at that. I mean, the markets obviously in Japan continue to be an opportunity for us. We have to do some things there in terms of policy and mobilizing some efforts, but we're in the process of doing that. We're committed to doing that. I just talked to those guys last month, and we have a plan to do that. Southeast Asia, again, is a great opportunity. Some of the things there just have gone a little bit slower than originally planned. But it is no question that -- we're not going to let the tremendous demand at home in South Korea stop the expansion throughout the rest of the region. It's just taking us a little bit longer than we perhaps thought. Relative to the pipeline we have, yes, I did mention, I think it was -- the first time was in Q3 call about this 30-megawatt target. And I think, as Mike said or I said, we've got a lot more opportunities on the plate to just get 30. Some things have taken a little bit longer. It's not so much financing, frankly, that has been the issue. I think Mike and the other guys have done a good job of attracting financing partners. It's really just about finishing up some development, some final negotiation and, in some cases, its regulatory approval. So I would say that it may have taken us a little bit longer, but it's not the financing aspect of this right now. And in fact, we've set up our production plan for next year so that we can still allow ourselves the ability to get those contracts and deliver those in 2014 tax equity environment, Jeff.

Our next question comes from the line of Adam Krop with Ardour Capital.

Most of my questions have been answered, but if we could talk a little bit about the balance sheet and your cash requirements for the first half of 2014. I see that inventory was up pretty significantly in the quarter. I guess, how should we think about inventory as you're ramping up volume and capacity in the first half? And then if you could just talk about your comfort level on your cash as you're trying to execute on the 30 megawatts of projects in the pipeline.

Good morning, Adam, this is Mike. As far as the balance sheet, so we ended the fiscal year with $77.7 million of total cash on the balance sheet, with an EBITDA use in the $5 million to $6 million range. We're comfortable with the cash balance. When you look at the accounts receivable that we have on our balance sheet, that is up from prior quarters and certainly the last fiscal year end. That's a function of some large milestone payments that come with the completion of the Bridgeport project. So as that project is completed here in the first quarter, we would expect to get -- to drive that number down and get cash inflows from that. On the inventory side, we did see a build over last year and the end of last quarter. And you will see some more builds going into -- going in the first quarter as we are making sure that we have the inventory available to execute on project deadlines in 2014. As Chip said, we're focused on closing 30 megawatts of projects in the first half of this year. Many of those projects do have delivery dates on the -- during 2014. So as those come through, inventory will come down as we continue -- as we execute on those and put plants in the field.

Okay, appreciate that. And in terms of the product revenue growth that you talked about in the outlook, can you talk a little bit about how we should think about the power -- the mix, the product mix between power plant versus kits? Is it going to remain in that 60 to -- 60-40 range, or how should I think about that for 2014?

Yes, sure, Adam. When -- just to be clear on the line that we're talking about on the P&L, we're talking about the product sales and revenues line on the P&L. We do expect growth on that line because we'll be operating at 70 megawatts for the full year. Recall, going into 2013, we started off at 50 plus, and we ramped during the year. So we'll get revenue growth from that. When you think about the mix from POSCO and complete power plants, deliveries to POSCO in the year will be in the 35 to 40-megawatt range. So the other half of revenue coming through will be from complete power plants in the U.S. So strong mix there, as well as module replacements for service agreement.

Okay, that helps a lot, appreciate that. And then in terms of the -- just a little bit -- if we could talk a little bit about the solid oxide development and the new products there, can you talk about the timeline for maybe when we might see some product revenues come out of that -- come out of the R&D there and what are some of the major steps that you have to take to get there? Is that more of a 2015 event or farther out?

This is Chip, let me take that. As I mentioned in the script here, we're targeting the commercialization of that in really 2 buckets. One is what I would call sub-megawatt stationary applications, the other one is called the specialty applications. Specialty applications, for example, are projects that we have, for example, with Boeing and some others along that line. So we will see from these projects, both of these 2, the ones I mentioned for the development part of those, we'll see some increase in that, which I think Mike referenced in the earnings call in '14. But the true commercialization of those things are at a 2016, 2017 kind of a timeframe. So I think on subsequent calls, I can give you folks a little more color on that. I would say that we are going to be working with partners around the world here to help us with that effort. So we can both minimize use of cash, as well as minimize time-to-market.

Our next question comes from the line of Rob Stone with Cowen and Company.

I wanted to go back to the service component for a minute. As you think about building service volume in the various markets, what are the factors that will drive increased margin potential there? Is it a function of more volume across your existing infrastructure, driving down stack replacement costs, pricing on new contracts? How should we think about the margin drivers for service?

Rob, good morning, it's Mike Bishop. So just going back to service, the -- we'll see margin drivers in a couple of different ways. So just to be clear, on that line on our P&L, it also includes royalty revenue from POSCO, which is essentially 100% margin. So as POSCO ramps up installations in the field, and the 60-megawatt project is an example, we get margin opportunities right there. Each plant that gets installed, we get 3% of net sales, so there's an increased opportunity right there. We are very focused in driving costs out of the individual service agreements as we do multimegawatt projects, the lends itself to cost reduction versus having a bunch of small projects around the U.S., around the world, having larger parks has inherent cost efficiencies. And I guess, the third thing is -- that I would mention is, there is additional revenue opportunity that -- at each site. Beyond servicing just the core power plant, there's ancillary equipment, such as cleanup gear and that type of thing, which the company has expertise in doing and can increase our revenue and margin opportunity there. So we're very focused on both growing that top line but, more importantly, generating margins off of our services.

Mike, of the $4 million to $6 million range that you're targeting for next year, how much might royalty contribute to that?

On a quarterly basis, right now, royalty is in the $1 million to $1.5 million range.

Okay, with respect to the trend in RFPs -- and it sounds like several times you alluded to the fact that you want to be prepared to execute on incremental volume, do you see kind of an acceleration in the sales cycle here, the timing from RFP to executing on contracts? And might you be able to actually build backlog in 2014?

Rob, this is Chip. Let me take that. The answer is yes. I would say this. If you go back a couple of years, we didn't have the demonstrated confidence to do some of these big projects that we have see in these RFPs, and as a result, we probably may not have even quoted them at that time. We've come a long way in that regard. So I think when you talk about cycle, we probably wouldn't even have looked at these. The sales cycle on some of these things is actually shorter because they're RFPs. But more important, the execution cycle we've shortened to, obviously, reduce cost and reduce risk in the projects. So I would say it fits well with our strategy of building bigger and bigger plants. And to Mike's point, you're much better off building a bigger plant in one place than having smaller plants in different places, and so I think it feeds into our strength. We just have to have the capability to do it, and I think we do. So as we get these projects, and we just -- and we're bidding them as we speak, assuming that we get awards for these things, they would certainly be added to the backlog for '15. Some of them -- most of them wouldn't be actually executed in '14, but more targeted for '15 and beyond.

Excellent. The final question for Mike, if I may. You talked about the operating leverage that you achieved on expenses this year, how should we think about where you may need to invest or where you can get further leverage in OpEx for the next year?

On the operating expense line, Rob, we're -- the level that we ended the fiscal year at around the $37 million range is the target going into next year. So we did increase that a little bit coming off of last year with adding Versa, adding the business in Germany. But at this level, we feel comfortable that we can operate at the range that we're currently at. And obviously, with revenue growth, you're getting additional leverage there.

At this time, I'd like to turn the call back over to management for closing remarks.

Well, I'd like to thank everybody for joining the call today, and wish everybody and their family a very happy holiday, and we'll talk to you on the next call. Take care.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.