Hydrogenics Corporation
TSX : HYG
NASDAQ : HYGS

Hydrogenics Corporation

March 21, 2007 06:30 ET

Hydrogenics Reports Fourth Quarter and Fiscal 2006 Results

Revenues of $9.5 million for the fourth quarter and $30.1 million for the fiscal year; $9.6 million of orders awarded in the fourth quarter

MISSISSAUGA, ONTARIO--(CCNMatthews - March 21, 2007) - Hydrogenics Corporation (TSX:HYG)(NASDAQ:HYGS), a leading developer and manufacturer of hydrogen and fuel cell products, is reporting fourth quarter and fiscal 2006 results. Results are reported in U.S. dollars and are prepared in accordance with Canadian generally accepted accounting principles.

"Our year came to a close with positive signs, including the resumption of OnSite Generation deliveries following the production delays reported earlier in 2006," said Daryl Wilson, President and Chief Executive Officer. "Unfortunately, these production delays, caused by supply chain and component quality issues in this business unit, adversely impacted our results for the year."

"We plan to be a leader amongst our peers, bringing passion, focus and discipline to our business. Today we announce a streamlining of our organization and our plans for the company. With disciplined execution, we commit to deliver meaningfully improved financial performance. Our goal is to reduce our cash consumption by at least one third on an annualized basis. We will differentiate ourselves by delivering hydrogen products to world class customers at margin," added Wilson.

The Corporation has commenced a restructuring and streamlining of its operations to reduce its overall cost structure, the majority of which is anticipated to be effected by March 31, 2007. A significant component of this restructuring and streamlining involves the workforce reduction of approximately 50 full-time equivalent positions across all business units. In order to effect this workforce reduction, the Corporation will incur a one-time pre-tax charge of approximately $2.1 million primarily in the three months ended March 31, 2007. These workforce reductions, once completed, represent approximately $4.0 million of annualized cost savings.

Results for the fourth quarter of 2006 compared to the fourth quarter of 2005

Revenues were $9.5 million, a 4% increase over the fourth quarter of 2005. Gross profit, expressed as a percentage of revenues, was negative 1% (negative 4% in 2005) and reflects higher margin deliveries in our Power Systems business unit offset by lower revenues and gross margin in our OnSite Generation business unit. Within the OnSite Generation business unit, we accrued $1.6 million of production and inventory obsolescence reserves.

Cash operating costs, a non-GAAP measure, defined as selling, general and administrative, and research and product development expenses less stock-based compensation expenses, were $10.8 million, a 64% increase reflecting costs relating to Sarbanes-Oxley Act compliance, severance costs and higher research and product development, net of third party funding.

Net loss was $22.1 million compared to $9.1 million in 2005, an increase of $13.0 million, of which $10.9 million is attributed to an impairment of intangible assets and goodwill relating to our OnSite Generation business unit recognized in the fourth quarter of 2006.

Results for the fourth quarter of 2006 compared to the third quarter of 2006

Revenues were $9.5 million, a 6% increase attributable to the phased resumption of deliveries in our OnSite Generation business and a sequential increase in revenues in both our Power Systems and Test Systems business units. Gross profit, expressed as a percentage of revenues, was negative 1% (positive 6% in the third quarter of 2006) reflecting $1.6 million of production related charges incurred in the OnSite Generation business unit in the fourth quarter as noted above.

Cash operating costs were $10.8 million, an increase of 13% primarily related to increased research and product development, net of third party funding.

Net loss was $22.1 million, a decrease of 76%.

Results for 2006 compared to 2005

Revenues were $30.1 million, a 19% decrease, due primarily to production delays in our OnSite Generation group. Gross profit, expressed as a percentage of revenues, was 2%, a decrease from 9%.

Cash operating costs were $35.5 million, a 15% increase due to consulting costs related to business strategy matters, Sarbanes-Oxley Act compliance, severance, deferred compensation costs and increased research and product development costs.

Net loss was $130.8 million, an increase of $93.4 million, primarily as a result of $90.8 million of impairment charges relating to intangible assets and goodwill.

Liquidity

Cash and cash equivalents and short-term investments were $60.3 million as at December 31, 2006. The $6.3 million sequential quarterly decrease in cash and cash equivalents and short-term investments is attributable to: (i) $5.8 million net cash outflows from operations; (ii) $0.4 million of capital expenditures; and (iii) $0.1 million of other items.

Cash and cash equivalents and short-term investments decreased $25.5 million in 2006 and were attributable to: (i) $24.5 million net cash outflows from operations; (ii) $1.7 million of capital expenditures; partially offset by (iii) $0.7 million of other items.

Order backlog

Order backlog as at December 31, 2006 was $29.4 million, as follows (in $ millions):



Q3 Orders Orders Q4
Backlog Received Delivered Backlog
------------------------------------------------------------------
------------------------------------------------------------------

OnSite Generation $ 14.8 $ 3.4 $ 3.1 $ 15.1
Power Systems 8.9 2.3 2.9 8.3
Test Systems 5.7 3.9 3.5 6.1
------------------------------------------------------------------
Total $ 29.4 $ 9.6 $ 9.5 $ 29.5
------------------------------------------------------------------
------------------------------------------------------------------


We expect to deliver, and recognize as revenue in 2007 approximately three quarters of our total order backlog.

Fourth Quarter Highlights

Progress on markets:

OnSite Generation

- Delivered four hydrogen generation units for industrial applications

- Selected to provide a hydrogen fueling station for an urban demonstration in Brazil of fuel cell-powered transit buses, the first hydrogen fuel cell demonstration in South America

- Secured $3.4 million of new orders and exited the year with a $15.1 million order backlog

Power Systems

- Delivered seven fuel cell power modules (totaling 284 kW)

- Signed first distribution agreement for HyPX Power Pack products for forklift trucks with LiftOne (South Carolina)

- Signed distribution agreement with Heliocentris Fuel Cells AG for power module sales to education, scientific and demonstration markets

- Designated as fuel cell system supplier for two consortia-led bus projects selected to receive United States Federal Transit Administration (FTA) awards

- Received approved supplier status from Western States Contracting Alliance for fuel cell (backup) power systems in the 5- 30 kW power range

- Secured $2.3 million of new orders and exited the year with an $8.3 million order backlog

Test Systems

- Delivered 15 test stations including new direct methanol fuel cell test stations

- Delivered 40% of test stations to new customers, largely in Europe

- Secured $3.9 million of new orders and exited the year with a $6.0 million order backlog

Progress on products and technology:

- Released next generation HyPM products including zero-humidification HyPM XR module for backup power (optimized for reliability and cost reduction) and HyPM HD module for mobility power (optimized for durability/reliability and compactness)

- Commenced assembly of IMET Series 4000 alpha prototype electrolyzer which will represent a significant scale-up in our capacity range

Conference Call Details

Hydrogenics will hold a conference call to review results on March 21, 2007 at 10:30 a.m. (EDT). To participate in this conference call, please dial 416-695-9706 approximately ten minutes before the call. Alternatively, a live webcast of the conference call will be available on the company website at www.hydrogenics.com. Please visit the website at least ten minutes early to register and download any necessary software. Should you be unable to participate, a replay will be available on our website for two weeks.

About Hydrogenics

Hydrogenics Corporation (www.hydrogenics.com) is a globally recognized developer and provider of hydrogen generation and fuel cell products and services, serving the growing industrial and clean energy markets of today and tomorrow. Based in Mississauga, Ontario, Canada, Hydrogenics has operations in North America, Europe and Asia.

Caution Regarding Forward-Looking Statements

This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Law of 1995. These statements are based on management's current expectations and actual results may differ from these forward-looking statements due to numerous factors, including changes in the competitive environment adversely affecting the products, markets, revenues or margins of Hydrogenics' business. Readers should not place undue reliance on Hydrogenics' forward-looking statements. Investors are encouraged to review the section captioned "Risk Factors" in Hydrogenics' regulatory filings with the Canadian securities regulatory authorities and the United States Securities and Exchange Commission for a more complete discussion of factors that could affect Hydrogenics' future performance. Furthermore, the forward-looking statements contained herein are made as of the date of this release, and Hydrogenics undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release. The forward-looking statements contained in this release are expressly qualified by this cautionary statement.



Hydrogenics Corporation
Consolidated Balance Sheets
As at December 31, 2006 and December 31, 2005
(in thousands of U.S. dollars)
(unaudited)
----------------------------------------------------------------------
----------------------------------------------------------------------

2006 2005
ASSETS

Current assets
Cash and cash equivalents $ 5,937 $ 5,394
Short-term investments 54,350 80,396
Accounts receivable 9,740 7,733
Grants receivable 1,901 1,909
Inventories 12,718 8,685
Prepaid expenses 1,539 2,353
----------- ------------
86,185 106,470

Property, plant and equipment 5,435 5,682
Intangible assets 500 33,972
Goodwill 5,025 68,505
Other non-current assets 28 28
----------- ------------
$ 97,173 $ 214,657
----------- ------------
----------- ------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 21,380 $ 14,918
Unearned revenue 8,809 3,772
----------- ------------
30,189 18,690

Long-term debt 94 325
Deferred research and development grants 133 135
----------- ------------
30,416 19,150

Shareholders' Equity
Share capital and other equity 321,094 318,804
Deficit (249,033) (118,274)
Foreign currency translation adjustment (5,304) (5,023)
----------- ------------
66,757 195,507
----------- ------------
$ 97,173 $ 214,657
----------- ------------
----------- ------------



Hydrogenics Corporation
Consolidated Statements of Operations
(in thousands of U.S. dollars)
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended Twelve months ended
December 31 December 30
2006 2005 2006 2005
--------------------------------------------------
Revenues $ 9,547 $ 9,057 $ 30,059 $ 37,191

Cost of revenues 9,672 9,420 29,360 33,881
--------------------------------------------------
(125) (363) 699 3,310
--------------------------------------------------
Operating expenses
Selling, general and
administrative 7,544 5,276 27,891 24,616
Research and product
development 3,504 1,886 9,379 7,745
Amortization of property,
plant and equipment 358 271 1,285 1,365
Amortization of
intangible assets 785 2,125 7,139 8,429
Impairment of
intangible assets
and goodwill 10,938 - 90,834 -
Integration costs - 14 - 1,123
--------------------------------------------------
23,129 9,572 136,528 43,278
--------------------------------------------------
Loss from operations (23,254) (9,935) (135,829) (39,968)
--------------------------------------------------

Other income (expenses)
Sale of asset 477 - 477 -
Provincial capital tax
expense (recovery) 36 149 (42) (91)
Interest, net 731 1,091 3,551 2,936
Foreign currency gains (222) (555) 904 (251)
--------------------------------------------------
1,022 685 4,890 2,594
--------------------------------------------------

Loss before income taxes (22,232) (9,250) (130,939) (37,374)
Current income tax
expense (recovery) (163) (114) (180) 0
--------------------------------------------------
Net loss for the period $ (22,069) $ (9,136) $ (130,759) $ (37,374)
--------------------------------------------------
--------------------------------------------------

Net loss per share
Basic and diluted $ (0.24) $ (0.10) $ (1.42) $ (0.41)

Shares used in
calculating basic
and diluted net loss
per share 91,916,466 91,679,966 91,816,049 91,226,912



Hydrogenics Corporation
Interim Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended Twelve months ended
December 31 December 31
2006 2005 2006 2005
----------------------------------------------
Cash and cash equivalents
provided by (used in)
Operating activities
Net loss for the period $ (22,069) $ (9,136) $ (130,759) $ (37,374)
Items not affecting cash
Amortization of property,
plant and equipment 539 498 1,948 2,267
Amortization of intangible
assets 785 2,125 7,139 8,429
Impairment of intangible
assets and goodwill 10,938 0 90,834 0
Unrealized foreign exchange
(gains) losses 20 193 (74) 210
Imputed interest on
long-term debt 0 2 1 21
Non-cash consulting fees 0 20 39 76
Stock-based compensation 294 469 1,832 2,262
Sale of asset (477) 0 (477) 0
Net change in non-cash
working capital 3,700 873 5,029 (5,012)
----------------------------------------------
(6,270) (4,956) (24,488) (29,121)
----------------------------------------------

Investing activities
Increase (decrease) in
short-term investments (828) 1,166 26,046 9,052
Purchase of property, plant
and equipment (379) (16) (1,701) (333)
Business acquisitions, net
of cash acquired 0 0 - (343)
Sale of asset 477 0 477 0
----------------------------------------------
(730) 1,150 24,822 8,376
----------------------------------------------

Financing activities
Repayment of long-term debt (73) (47) (193) (180)
Deferred research and
development grant (38) (24) (17) (39)
Common shares issued, net of
issuance costs 0 0 419 149
----------------------------------------------
(111) (71) 209 (70)
----------------------------------------------

Increase (decrease) in cash
and cash equivalents
during the period (7,111) (3,877) 543 (20,815)

Cash and cash equivalents -
Beginning of period 13,048 9,271 5,394 26,209
----------------------------------------------
Cash and cash equivalents -
End of period $ 5,937 $ 5,394 $ 5,937 $ 5,394
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