Hydrogenics Corporation
TSX : HYG
NASDAQ : HYGS

Hydrogenics Corporation

August 08, 2006 07:00 ET

Hydrogenics Reports Second Quarter 2006 Results

Progress on operational issues within OnSite Generation group and strengthened visibility in targeted fuel cell markets

MISSISSAUGA, ONTARIO--(CCNMatthews - Aug. 8, 2006) - Hydrogenics Corporation (TSX:HYG)(NASDAQ:HYGS), a leading developer and manufacturer of hydrogen and fuel cell products, is reporting second quarter and six-month unaudited results. Results are reported in U.S. dollars and are prepared in accordance with Canadian generally accepted accounting principles.

"As announced on July 28, 2006, over the course of the second quarter we made progress towards resolving the supply chain and component quality issues that we identified earlier this year within our OnSite Generation group," said Pierre Rivard, President and Chief Executive Officer of Hydrogenics Corporation. "However, this update also communicated that we have now identified further operational and production quality issues which we believe we are addressing through appropriate corrective measures. While optimistic that we will have these issues resolved in the latter half of the year, we cannot be definitive as to when deliveries by our OnSite Generation business unit will return to historical levels."

"During the quarter, we signed multi-year preferred supplier agreements with Linde Gas and BOC, industry leaders in the merchant gas market, thereby strengthening our market reach and sales potential."

"Our Power Systems business unit continues to make significant progress in fuel cell product and market development efforts for backup power and light mobility markets as evidenced by recent announcements," added Rivard. "These included orders from Linde AG and a major Japanese distributor totaling 5 HyPM Fuel Cell Power Packs for deployment in Class 1 forklifts and airport tow tractors, Additionally, we were pleased to announce a government-sponsored contract to further develop our fuel cell power pack technology and deploy up to 19 forklifts and tuggers at General Motors of Canada. In the area of backup power, we received our first Asian order from a leading mobile telecom company for three HyPM XR fuel cell power modules."

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

- Revenues were $5.4 million, a 15% decrease from $6.4 million primarily due to the previously announced production delays in our OnSite Generation group.

- Gross profit, expressed as a percentage of revenues, was negative 15% (positive 17% in 2005) and reflects $1.8 million of additional warranty reserves largely for deliveries within our Belgian OnSite Generation group made prior to our acquisition of Stuart Energy. The requirement for these reserves became apparent upon the discovery of operational and other production quality issues identified after the implementation of standardized testing protocols implemented to resolve the supply chain and component quality issues experienced in our OnSite Generation group.

- Cash operating costs, a non-GAAP measure(1), defined as selling, general and administrative and research and product development expenses, excluding stock-based compensation were $8.1 million, a 15% increase from $7.0 million reflecting a weakening of the U.S. dollar relative to the Canadian dollar and higher costs to achieve Sarbanes-Oxley Act compliance.

- Net loss was $9.6 million, a 1% increase from $9.5 million.

(1) Cash Operating costs is a non-GAAP measure used to assist in assessing Hydrogenics' financial performance. A description of the non-GAAP measure and reconciliation to financial statement line items follows on page 5.

Results for the second quarter of 2006 compared to the first quarter of 2006

- Revenues were $5.4 million, a 12% decrease from $6.4 million primarily due to the previously announced production delays in our OnSite Generation group.

- Gross profit, expressed as a percentage of revenues, was negative 15%, a decrease of 32% primarily due to $1.8 million of additional warranty reserves in our OnSite Generation group noted above.

- Cash operating costs were $8.1 million, an increase of 10% consistent with our business strategy to invest in targeted vertical markets, beginning in the second quarter.

- Net loss was $9.6 million, an increase of 16%, or $1.3 million.

Results for the six months ended June 30, 2006 compared to the six months ended June 30, 2005

- Revenues were $11.5 million, a 35% decrease due to production delays in our OnSite Generation group.

- Gross profit, expressed as a percentage of revenues, was 2%, a decrease of 10% due to additional warranty reserves in our OnSite Generation group noted above.

- Cash operating costs were $15.4 million, a decrease of 6% from $16.4 million.

- Net loss was $18.0 million, a decrease of 13% from $20.7 million.

Liquidity

We had $73.1 million in cash and cash equivalents and short-term investments as at June 30, 2006. The $7.7 million sequential quarterly decrease in cash and cash equivalents and short-term investments is attributable to: (i) $7.2 million net cash outflows from operations; and (ii) $0.5 million of capital expenditures.



Order backlog

Our order backlog as at June 30, 2006 was $31.5 million, as follows:

Q1 Orders Product/Service Q2
Backlog Received Delivered Backlog
-------------------------------------------------
OnSite Generation $ 15.2 $ 4.3 $ 1.6 $ 17.9
Power Systems 9.4 0.6 1.0 9.0
Test Systems 3.6 3.8 2.8 4.6
-------------------------------------------------
$ 28.2 $ 8.7 $ 5.4 $ 31.5
-------------------------------------------------
-------------------------------------------------


We expect to deliver, and recognize as revenue in 2006, approximately one-third and substantially all of our June 30th order backlog in our Power Systems and Test Systems business units respectively. Our ability to deliver, and recognize as revenue, our order backlog in our OnSite Generation business unit is predicated on resolving, in a timely manner, the operational and production quality issues previously identified.

Second Quarter Highlights

Progress on markets:

OnSite Generation

- We delivered three hydrogen generation units including two for industrial applications and one for a fueling application.

- We signed multi-year preferred supplier agreements with Linde Gas and BOC.

- We secured $4.3 million of new orders including an initial order under our new BOC supply agreement for a hydrogen generation plant in New Zealand.

Power Systems

- We delivered eight Fuel Cell Power Modules (representing 180 kW).

- We secured orders for: (i) five Fuel Cell Power Packs to be integrated into forklifts and tow tractors for Linde AG and into a leading Japanese OEM's Class 1 forklift; (ii) 3 Fuel Cell Power Modules for DC backup power for a leading Asian mobile telecom company.

- We finalized a government-sponsored contract with Sustainable Development Technology Canada to further develop our HyPM Fuel Cell Power Pack and deliver up to 19 forklifts and tuggers to General Motors of Canada over a two year operational period.

- We continued market development efforts with American Power Conversion (NASDAQ: APCC), including the installation of a critical network AC unit in an urban office tower with full compliance to extensive codes and regulations.

- We delivered more fuel cell power (703 kW) in first half 2006 than the whole of 2005, with an accelerating order book.

Test Systems

- We delivered 12 test stations including three Solid Oxide Fuel Cell (SOFC) units.

- We secured $3.8 million of new orders, a significant component of which was from a leading Japanese automotive OEM.

- We established a distribution agreement with a large Japanese corporation to address increasing market potential in Japan.

Progress on products and technology:

- We made progress in resolving component quality and supply chain issues in our OnSite Generation business unit.

- We continued development of our S-4000 IMET electrolyzer for integration with large scale renewable energy installations.

- We continued advancing our next generation fuel cell product development efforts to optimize product performance, cost and certification for targeted vertical markets.

- We continued development work on advanced test station software tools and new technologies for fuel cell diagnostics.

CONFERENCE CALL DETAILS

We will hold a conference call to review our results on August 8, 2006 at 10:30 a.m. (EDT). To participate in this conference call, please dial (416)-695-9753 approximately ten minutes before the call. Alternatively, a live webcast of our conference call will be available on our website at www.hydrogenics.com. Please visit our website at least fifteen minutes early to register and download any necessary software. Should you be unable to participate, a replay as well as a podcast link will also be available on our website.

ABOUT HYDROGENICS

Hydrogenics Corporation (www.hydrogenics.com) is a leading global developer of clean energy solutions, advancing the Hydrogen Economy by commercializing hydrogen and fuel cell products. The company has a portfolio of products and capabilities serving the hydrogen and energy markets of today and tomorrow. Hydrogenics, based in Mississauga, Ontario, Canada, has operations in North America, Europe and Asia.

NON-GAAP MEASURES

Hydrogenics uses several non-GAAP measures to assist in assessing its' financial performance. Cash operating costs is defined as the sum of selling, general and administrative costs and research and product development expenditures less stock-based compensation expenses. This is a non-GAAP measure and may not be comparable to similar measures used by other companies.

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
Interim Consolidated Balance Sheets
(in thousands of U.S. dollars)
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

June 30 December 31
2006 2005
-------------------------
Assets

Current assets
Cash and cash equivalents $ 69,671 $ 5,394
Short-term investments 3,386 80,396
Accounts receivable 6,582 7,733
Grants receivable 2,733 1,909
Inventories 12,478 8,685
Prepaid expenses 1,794 2,353
-------------------------
96,644 106,470

Property, plant and equipment 5,590 5,682
Intangible assets 29,740 33,972
Goodwill 68,450 68,505
Other non-current assets 81 28
-------------------------
$ 200,505 $ 214,657
-------------------------
-------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 15,715 $ 14,918
Unearned revenue 5,368 3,772
-------------------------
21,083 18,690

Long-term debt 251 325
Deferred research and development grants 160 135
-------------------------
21,494 19,150
-------------------------

Shareholders' Equity
Share capital and other equity 320,228 318,804
Deficit (136,232) (118,274)
Accumulated other comprehensive loss (4,985) (5,023)
-------------------------
179,011 195,507
-------------------------
$ 200,505 $ 214,657
-------------------------
-------------------------



Hydrogenics Corporation
Interim Consolidated Statement of Shareholders' Equity
(in thousands of U.S. dollars, except for share and per share amounts)
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------


Common shares
-------------------- Contributed
Number Amount surplus

Balance at Dec. 31, 2005 91,679,670 $ 306,957 $ 11,847

Comprehensive loss:

Net loss - - -

Foreign currency
translation adjustments - - -
Comprehensive loss

Shares issued:
Issuance of common shares
on exercise of options 116,796 388 -
Stock-based consulting
expense - - 39
Stock-based compensation
expense - - 997
------------------------------------------
Balance at Jun. 30, 2006 91,796,466 $ 307,345 $ 12,883
------------------------------------------
------------------------------------------

Accumulated
other Total
comprehensive shareholders'
Deficit income (loss) equity

Balance at Dec. 31, 2005 $ (118,274) $ (5,023) $ 195,507

Comprehensive loss:

Net loss (17,958) - (17,958)

Foreign currency
translation adjustments - 38 38
--------------
Comprehensive loss (17,920)
--------------
Shares issued:
Issuance of common shares
on exercise of options - - 388
Stock-based consulting
expense - - 39
Stock-based compensation
expense - - 997
------------------------------------------
Balance at Jun. 30, 2006 $ (136,232) $ (4,985) $ 179,011
------------------------------------------
------------------------------------------



Hydrogenics Corporation
Interim Consolidated Statements of Operations
(in thousands of U.S. dollars, except for share and per share amounts)
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------
Revenues $ 5,376 $ 6,293 $ 11,512 $ 17,597

Cost of revenues 6,170 5,215 11,253 15,497
------------------------------------------------
(794) 1,078 259 2,100
------------------------------------------------
Operating expenses
Selling, general and
administrative 6,586 5,875 13,224 12,552
Research and product
development 1,967 1,698 3,182 4,951
Amortization of
property, plant and
equipment 266 362 530 736
Amortization of
intangible assets 2,118 2,065 4,236 4,203
Integration costs - 313 - 1,037
------------------------------------------------
10,937 10,313 21,172 23,479
------------------------------------------------
Loss from operations (11,731) (9,235) (20,913) (21,379)
------------------------------------------------

Other income (expenses)
Provincial capital tax (60) (86) (86) (132)
Interest 1,060 496 2,006 1,166
Foreign currency gains
(losses) 1,118 (663) 1,053 (328)
------------------------------------------------
2,118 (253) 2,973 706
------------------------------------------------
Loss before income taxes (9,613) (9,488) (17,940) (20,673)
Current income tax
expense 13 11 18 48
------------------------------------------------
Net loss for the period $ (9,626) $ (9,499) $ (17,958) $ (20,721)
------------------------------------------------
------------------------------------------------

Net loss per share
Basic and diluted $ (0.11) $ (0.10) $ (0.20) $ (0.23)

Shares used in
calculating basic and
diluted net loss per
share 91,781,393 91,675,121 91,743,525 90,766,791



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

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------
Cash and cash
equivalents provided by
(used in)
Operating activities
Net loss for the period $ (9,626) $ (9,499) $ (17,958) $ (20,721)
Items not affecting cash
Amortization of
property, plant and
equipment 447 436 893 1,032
Amortization of
intangible assets 2,118 2,065 4,236 4,203
Unrealized foreign
exchange (gains) losses 15 (141) (12) (11)
Imputed interest on
long-term debt - 8 1 16
Non-cash consulting fees 20 18 39 37
Stock-based compensation 495 563 997 1,059
Net change in non-cash
working capital (709) (1,467) (422) (2,959)
------------------------------------------------
(7,240) (8,017) (12,226) (17,344)
------------------------------------------------

Investing activities
Decrease in short-term
investments 14,002 49,687 77,010 46,375
Purchase of property,
plant and equipment (540) (59) (805) (298)
Business acquisitions,
net of cash acquired - - - (343)
------------------------------------------------
13,462 49,628 76,205 45,734
------------------------------------------------

Financing activities
Repayment of long-term
debt (30) (54) (93) (81)
Deferred research and
development grant (25) (9) 3 (17)
Common shares issued,
net of issuance costs 165 11 388 146
------------------------------------------------
110 (52) 298 48
------------------------------------------------

Increase in cash and
cash equivalents during
the period 6,332 41,559 64,277 28,438
Cash and cash
equivalents - Beginning
of period 63,339 13,088 5,394 26,209
------------------------------------------------
Cash and cash
equivalents - End of
period $ 69,671 $ 54,647 $ 69,671 $ 54,647
------------------------------------------------
------------------------------------------------


Supplemental disclosure
Interest paid $ 1 $ 24 $ 2 $ 30
Income taxes paid - 10 5 66


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