Fluence Energy(FLNC) - 2024 Q4 - Annual Report

Part I Business Overview Fluence Energy leads the global energy storage market with modular solutions, services, and digital platforms, leveraging a capital-light model and focusing on U.S. domestic supply chain development - 5.0 GW deployed, 7.5 GW contracted backlog, 115.9 GW global pipeline as of September 30, 2024[17] - Growth is driven by declining lithium-ion battery costs and favorable government policies, including the U.S. Inflation Reduction Act (IRA)[19][20] - Offerings include Energy Storage Solutions (Gridstack, Sunstack), Services (O&M), and Digital Applications (Fluence Mosaic, Nispera)[22][25] - A concentrated customer base saw the two largest customers account for approximately 50% of FY2024 revenues, with related party AES and affiliates contributing approximately 41%[35] - The company employs a capital-light manufacturing strategy, utilizing third-party regional manufacturers, including a key facility in Utah, for system assembly[42] - Significant intellectual property includes over 179 granted patents and over 108 registered trademarks worldwide as of September 2024[50] Government Regulation and Compliance Global government policies, including the U.S. IRA and EU's 'Fit for 55' package, significantly influence the business, alongside evolving trade policies like future U.S. tariffs on Chinese batteries - The U.S. Inflation Reduction Act (IRA) provides a key Investment Tax Credit (ITC) for standalone energy storage, with bonus credits for domestic content or energy community projects[56][60] - U.S. Section 301 tariffs on Chinese lithium-ion non-EV batteries are set to increase from 7.5% to 25% on January 1, 2026[61][62] - European initiatives like the 'Fit for 55' package, REPowerEU Plan, and Net Zero Industrial Act (NZIA) foster a supportive regulatory environment for clean energy and manufacturing[57] - U.S. FERC orders (841, 2222, 2023) aim to remove barriers and accelerate energy storage project grid connections[68] Risk Factors Fluence faces risks from limited operating history, profitability challenges, order fluctuations, supply chain issues, customer concentration, intense competition, regulatory changes, and an ongoing SEC investigation - The company has a limited operating history and historically incurred net losses, though it achieved profitability in FY2024[79][83] - Fluence is dependent on a small customer base, with AES and its affiliates representing approximately 41% of FY2024 annual revenue[107] - The business faces supply chain risks from reliance on limited third-party manufacturers and suppliers, alongside evolving global trade policies like the planned 2026 tariff increase on Chinese batteries[90][102][183] - Demand is highly dependent on government incentives such as the IRA; any reduction, elimination, or uncertainty could adversely affect the business[180][182] - As a "controlled company" due to Continuing Equity Owners' voting power, Fluence is exempt from certain NASDAQ corporate governance requirements, including a majority-independent board[198] - The Tax Receivable Agreement mandates substantial cash payments to Founders, reducing cash available for other corporate purposes[215][217] - The company is cooperating with a formal SEC investigation reviewing revenue recognition, internal controls, software cost capitalization, and related-party service contracts, initiated after a short-seller report[205] Cybersecurity Fluence manages cybersecurity risks via a NIST-guided ISMS, overseen by the Board's Audit Committee and a CISO, with no material incidents reported to date - The cybersecurity risk management program is based on the National Institute of Standards and Technology (NIST) Cyber Security Framework (CSF)[233] - A Cybersecurity Steering Committee, chaired by the CISO, governs the program, with primary oversight and quarterly updates provided to the Board's Audit Committee[234][236] - The CISO, with over 30 years of IT experience, reports to the CIO, and management stays informed on cyber threats through internal and external intelligence[236] Properties Fluence's corporate headquarters is a leased 17,000-square-foot office in Arlington, Virginia, supplemented by global offices and specialized facilities - Corporate headquarters is a leased office of approximately 17,000 square feet in Arlington, Virginia[237] - The company leases numerous global offices and operates an energy storage testing facility in Erlangen, Germany[237] Legal Proceedings Fluence is involved in periodic legal proceedings but currently believes none will have a material adverse effect on its business or financial condition - The company is not currently facing any legal proceedings believed to have a material adverse effect on its business, financial condition, or cash flows[241] - Refer to Note 14 of the consolidated financial statements for a description of material pending legal contingencies[241] Part II Management's Discussion and Analysis (MD&A) This MD&A provides management's perspective on financial results, condition, and outlook, detailing revenue drivers, operating metrics, liquidity, capital resources, and critical accounting policies Results of Operations Fluence achieved a net income of $30.4 million in FY2024, a significant turnaround, with total revenue growing 21.7% to $2.7 billion and gross profit margin improving to 12.6% | Metric | FY 2024 | FY 2023 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $2,698.6M | $2,218.0M | +$480.6M | +21.7% | | Gross Profit | $341.1M | $141.0M | +$200.1M | +142.0% | | Gross Margin | 12.6% | 6.4% | +6.2 p.p. | - | | Net Income (Loss) | $30.4M | ($104.8M) | +$135.2M | +129.0% | - The $480.6 million revenue increase was primarily driven by higher Gridstack cube volumes and growth in services revenue from operational projects[297] - Gross profit increased by $200.1 million, with margin expansion due to operational efficiencies and improved profitability on newer Gridstack projects[299] - Operating expenses increased, with Sales & Marketing up 55.3% and General & Administrative up 26.9%, primarily due to increased headcount supporting business growth[302][303] Key Operating Metrics As of September 30, 2024, Fluence reported significant year-over-year growth in deployed energy storage (5.0 GW), contracted backlog (7.5 GW), and pipeline (25.8 GW), alongside strong services and digital contract growth Energy Storage Metrics | Metric (Energy Storage) | 2024 | 2023 | Change % | | :--- | :--- | :--- | :--- | | Deployed (GW) | 5.0 | 3.0 | +66.7% | | Contracted Backlog (GW) | 7.5 | 4.6 | +63.0% | | Pipeline (GW) | 25.8 | 12.2 | +111.5% | Services & Digital Metrics | Metric (Services & Digital) | 2024 (GW) | 2023 (GW) | Change % | | :--- | :--- | :--- | :--- | | Service Assets Under Mgmt | 4.3 | 2.8 | +53.6% | | Digital Assets Under Mgmt | 18.3 | 15.5 | +18.1% | | Service Contracted Backlog | 4.1 | 2.9 | +41.4% | | Digital Contracted Backlog | 10.6 | 6.8 | +55.9% | FY 2024 Order Intake | Category | FY 2024 Order Intake (GW) | | :--- | :--- | | Energy Storage Products | 5.2 | | Service Contracts | 3.0 | | Digital Contracts | 8.6 | Liquidity and Capital Resources Fluence's liquidity sources include cash from operations, debt facilities, and IPO proceeds, with a $500 million revolving credit facility and significant Tax Receivable Agreement obligations - Net cash provided by operating activities was $79.7 million in FY2024, a $191.6 million positive swing from a use of $111.9 million in FY2023, driven by higher net income and improved working capital management[328] - In August 2024, the ABL facility was converted into a $500 million senior secured cash flow revolver (the "2024 Revolver"), maturing November 2027, with no cash drawn but $74.9 million in letters of credit outstanding as of September 30, 2024[317] - A supply chain financing program allows early supplier payments, with $81.3 million outstanding as of September 30, 2024, supported by $100 million in guarantees from AES and Siemens[313][536] - The Tax Receivable Agreement (TRA) obligates Fluence to pay Founders 85% of certain tax benefits, resulting in a future payable of $107.4 million from past redemptions and a $1.5 million TRA expense for FY2024[215][321] Critical Accounting Policies and Estimates Revenue recognition for energy storage products, using the percentage-of-completion method, is the most critical accounting policy, requiring significant judgment in cost inclusion and variable consideration estimation - Revenue from energy storage solutions is recognized over time using the percentage-of-completion (POC) method, based on costs incurred relative to total estimated costs[333] - A critical judgment involves determining when standard inventory materials, especially assembled "cubes," are integrated or restricted to a customer's project for inclusion in the POC calculation[333][416] - The company estimates variable consideration, such as liquidated damages (LDs), using an expected value method, requiring assumptions about project delays or performance shortfalls[335][337] Market Risk Disclosures Fluence is exposed to market risks including credit risk from customer concentration, foreign currency risk from global operations, commodity price risk from raw materials, and interest rate risk from floating-rate debt - Credit Risk: Significant exposure from customer concentration, with two customers accounting for approximately 50% of FY2024 revenue, mitigated by credit policies, milestone payments, and letters of credit[339] - Foreign Currency Risk: Exposure from subsidiaries operating in Euro, British pound, and Australian dollar, partially hedged using foreign currency forward contracts, especially for intercompany inventory sales[341] - Commodity Price Risk: Subject to fluctuating raw material prices (steel, aluminum, lithium) affecting component costs, with no direct hedging arrangements for these materials[342] - Interest Rate Risk: Exposure from floating-rate borrowings under the 2024 Revolver, with low risk as of September 30, 2024, due to no outstanding cash borrowings[343] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2022-2024, including balance sheets, income statements, cash flows, and notes, along with Ernst & Young LLP's audit report Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on financial statements but an adverse opinion on internal controls over financial reporting due to a material weakness in revenue recognition - The auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[352] - An adverse opinion was issued on the company's internal control over financial reporting as of September 30, 2024[353][364] - The adverse opinion stemmed from a material weakness in revenue recognition controls, specifically inconsistent application in evaluating contract terms for cost inclusion in progress measurement[365] - The Critical Audit Matter involved the high judgment required to determine when "cubes" (assembled battery systems) costs are restricted to a customer project and included in percentage-of-completion revenue calculation[357][358] Consolidated Financial Statements The consolidated financial statements show total assets of $1.90 billion, liabilities of $1.30 billion, and equity of $607.1 million, with FY2024 revenue of $2.70 billion and net income of $30.4 million Consolidated Balance Sheet (in thousands) | Metric | Amount (in thousands) | | :--- | :--- | | Total Assets | $1,902,188 | | Total Liabilities | $1,295,049 | | Total Stockholders' Equity | $607,139 | Consolidated Statement of Operations (in thousands) | Metric | Amount (in thousands) | | :--- | :--- | | Total Revenue | $2,698,562 | | Gross Profit | $341,080 | | Net Income | $30,367 | | Basic EPS | $0.18 | Consolidated Statement of Cash Flows (in thousands) | Metric | Amount (in thousands) | | :--- | :--- | | Net cash from operating activities | $79,685 | | Net cash used in investing activities | ($18,975) | | Net cash used in financing activities | ($8,676) | Notes to Consolidated Financial Statements The notes provide detailed disclosures on revenue recognition, debt facilities, commitments, contingencies, related-party transactions, and stock-based compensation, supplementing the financial statements - As of September 30, 2024, the company had $4.5 billion in remaining performance obligations (backlog), with approximately 50% expected to be recognized as revenue within the next 12 months (Note 3)[455] - The company has minimum purchase commitments of $3.86 billion, primarily for battery modules, extending through 2029 and beyond (Note 14)[490][491] - Legal contingencies include an unresolved 2021 overheating event, 2023 project-related litigation, and an ongoing formal SEC investigation (Note 14)[502][503][504] - Revenue from related parties (primarily AES and Siemens affiliates) totaled $1.1 billion in fiscal year 2024 (Note 15)[509][514] - Total stock-based compensation expense for fiscal year 2024 was $23.9 million (Note 17)[533] Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of September 30, 2024, due to a material weakness in revenue recognition controls, with remediation efforts underway for fiscal year 2025 - Management concluded that disclosure controls and procedures were not effective as of September 30, 2024[563] - A material weakness was identified in internal control over revenue recognition due to inconsistent application of controls in evaluating contract terms for cost inclusion in progress measurement[569] - The company has enhanced controls and is working to remediate the material weakness, with expected completion in fiscal year 2025[569] Part III & IV Corporate Governance and Compensation Information for Items 10-14 (directors, compensation, governance, related parties, accountant fees) is incorporated by reference from the forthcoming 2025 Proxy Statement, and a Code of Conduct and Ethics has been adopted - Detailed information for Items 10-14 (Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Related Transactions, Principal Accountant Fees) is incorporated by reference from the forthcoming 2025 Proxy Statement[578][580][581][582][583] - The company has adopted a Code of Conduct and Ethics applicable to all directors, officers, and employees, available on its website[579] Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key corporate governance, financing, and material related-party agreements - This section lists all exhibits filed with the 10-K, including key corporate governance and financing documents[586][587] - Key agreements listed include the 2024 Credit Agreement (as amended), the Tax Receivable Agreement, and various license and purchase agreements with founders AES and Siemens[587][596]