Hydrogenics Corporation
TSX : HYG
NASDAQ : HYGS

Hydrogenics Corporation

November 13, 2006 06:00 ET

Hydrogenics Reports Third Quarter 2006 Results

Resumption of Production in OnSite Generation Business Unit

MISSISSAUGA, ONTARIO--(CCNMatthews - Nov. 13, 2006) - Hydrogenics Corporation (TSX:HYG)(NASDAQ:HYGS), a leading developer and manufacturer of hydrogen and fuel cell products, is reporting third quarter and nine-month unaudited results. Results are reported in U.S. dollars and are prepared in accordance with Canadian generally accepted accounting principles.

"During the third quarter, we delivered on a number of key initiatives providing the basis to move forward with confidence and focus," said Pierre Rivard, President and Chief Executive Officer of Hydrogenics Corporation. "On the operational side, we resolved the substantial majority of supply chain and component quality issues identified earlier in the year in our Belgian-based OnSite Generation business. We are now initiating product deliveries on a case by case basis and anticipate returning to historical levels by the first quarter of 2007, assuming no further issues are identified. On the business development side, we completed a number of initiatives with the highlight being the signing of a three-year manufacturing and supply agreement with American Power Conversion (APC) (NASDAQ:APCC), with a commitment to deliver up to 500 HyPM® XR 12 kW Fuel Cell Power Modules for integration into APC's backup power solutions. Additionally, we also announced plans to bolster our management team by bringing in a new Chief Executive Officer at which time I will assume a new role, as Hydrogenics' Executive Chair," said Rivard.

"In the third quarter, we commenced a comprehensive assessment of our business and operating plans. As a result of this assessment and changes in strategy, we revised our previous estimates of the growth and development of our Onsite Generation business. In addition, we determined that the revenues of the Test Systems business would be lower than previously anticipated as a result of slower adoption of fuel cell technology in end user markets. Due to the significance of these changes, we recorded $79.9 million of impairment charges relating to our OnSite Generation and Test Systems businesses," added Rivard.

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

- Revenues were $9.0 million, a 15% decrease from $10.5 million, primarily due to the previously announced production delays in our OnSite Generation business unit.

- Gross profit, expressed as a percentage of revenues, was 6% (15% in 2005) and reflects higher margin deliveries in the Power Systems business unit offset by lower margins and higher overhead absorption in our OnSite Generation business unit.

- Cash operating costs, a non-GAAP measure1, defined as selling, general and administrative and research and product development expenses, excluding stock-based compensation, were $9.3 million, a 33% increase from $7.0 million reflecting $1.3 million of severance costs, including deferred compensation arrangements with certain executives, higher costs to achieve Sarbanes-Oxley Act compliance, a weakening of the U.S. dollar relative to the Canadian dollar, and other non-routine costs.

- Net loss was $90.7 million, an increase from $7.5 million of which $79.9 million is attributable to the impairment of intangible assets and goodwill.

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

- Revenues were $9.0 million, a 67% increase from $5.4 million, attributable to increased product deliveries in our OnSite Generation business unit.

- Gross profit, expressed as a percentage of revenues, was 6%, up from negative 15% due to $1.8 million of additional warranty reserves recorded in the second quarter in our OnSite Generation business unit.

- Cash operating costs were $9.3 million, an increase of 15% reflecting $1.3 million of severance costs, including deferred compensation arrangements with certain executives.

- Net loss was $90.7 million, an increase of $83.2 million, of which $79.9 million is attributable to the impairment of intangible assets and goodwill.

Results for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005

- Revenues were $20.5 million, a 27% decrease, due to production delays in our OnSite Generation group.

1 Cash operating costs is a non-GAAP measure used to assist in assessing Hydrogenics' financial performance. A description of this non-GAAP measure follows.

- Gross profit, expressed as a percentage of revenues, was 4%, a decrease of 9% due to the provision of additional warranty reserves and the adverse impact of production delays in our OnSite Generation business unit noted above.

- Cash operating costs were $24.7 million, an increase of $1.3 million, or 5%, compared with the nine months ended September 30, 2005 reflecting severance costs, higher costs to achieve Sarbanes-Oxley Act compliance, and a weakening of the U.S. dollar relative to the Canadian dollar and the other non routine costs.

- Net loss was $108.7 million, an increase from $28.2 million, of which $79.9 million is attributable to the impairment of intangible assets and goodwill.

Liquidity

We had $66.6 million in cash and cash equivalents and short-term investments as at September 30, 2006. The $6.5 million sequential quarterly decrease in cash and cash equivalents and short-term investments is attributable to: (i) $6.0 million net cash outflows from operations; and (ii) $0.5 million of capital expenditures.

Order backlog

Our order backlog as at September 30, 2006 was $29.4 million, as follows:



Q2 Orders Product/Services Q3
Backlog Received Delivered Backlog
-------------------------------------------
OnSite Generation $ 17.9 $ 1.9 $ 5.0 $ 14.8
Power Systems 9.0 1.8 1.9 8.91
Test Systems 4.6 3.2 2.1 5.7
-------------------------------------------
$ 31.5 $ 6.9 $ 9.0 $ 29.4
-------------------------------------------


We expect to deliver, and recognize as revenue in 2006, approximately one-third of our September 30, 2006 order backlog in each of our Power Systems and Test Systems business units and approximately one-quarter of our September 30, 2006 order backlog in our OnSite Generation business unit as we re-establish production activities in that business unit. The balance of our September 30, 2006 order backlog is anticipated to be delivered and recognized as revenue in 2007.

This section contains certain forward-looking statements. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. Please refer to the caution regarding forward-looking statements contained in this press release and the discussion of risks and uncertainties in our 2005 Annual Report.

Third Quarter Highlights

Progress on markets:

OnSite Generation

- We delivered 7 hydrogen generation units.

- We continued to pursue a number of compelling business opportunities and secured $1.9 million of new orders for a variety of applications for delivery in 2007.

Power Systems

- We delivered 14 Fuel Cell Power Modules (totalling 196 kW).

- We signed a three-year manufacturing and supply agreement with APC for up to 500 HyPM XR fuel cell power modules.

- We secured $1.8 million of new orders, including four orders for power modules to be installed in battery-dominant hybrid buses and electric vehicle projects in Europe.

Test Systems

- We delivered 11 test stations including initial delivery of our next generation solid oxide and direct methanol fuel cell test equipment.

- We secured $3.2 million of new orders, including repeat orders from Japanese, Asian, North American and European customers, demonstrating strong customer satisfaction.

- We secured orders from two new customers with global activities.

Progress on products and technology:

- We continue to advance next generation products with optimized durability, reliability, and reduced costs for release in November at the Fuel Cell Seminar.

- We completed the design of our S-4000 electrolyzer and commenced assembly of an alpha prototype.

- We continue research and development efforts to develop advanced test station software tools.

CONFERENCE CALL DETAILS

We will hold a conference call to review our results on November 13, 2006 at 10:30 a.m. (EST). 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 globally recognized developer and provider of hydrogen 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.

NON-GAAP MEASURES

Hydrogenics uses several non-GAAP measures to assist in assessing its financial performance. Cash operating costs are 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 obligation 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)
-------------------------------------------------------------------
-------------------------------------------------------------------

September 30 December 31
2006 2005
--------------------------

Assets

Current assets
Cash and cash equivalents $ 13,048 $ 5,394
Short-term investments 53,522 80,396
Accounts receivable 7,823 7,733
Grants receivable 2,555 1,909
Inventories 11,653 8,685
Prepaid expenses 1,635 2,353
--------------------------
90,236 106,470

Property, plant and equipment 5,592 5,682
Intangible assets 3,188 33,972
Goodwill 14,063 68,505
Other non-current assets 81 28
--------------------------
$ 113,160 $ 214,657
--------------------------
--------------------------

Liabilities

Current liabilities
Accounts payable and
accrued liabilities $ 18,703 $ 14,918
Unearned revenue 5,445 3,772
--------------------------
24,148 18,690

Long-term debt 207 325
Deferred research and development grants 150 135
--------------------------
24,505 19,150
--------------------------

Shareholders' Equity
Share capital and other equity 320,800 318,804
Deficit (226,964) (118,274)
Accumulated other comprehensive loss (5,181) (5,023)
--------------------------
88,655 195,507
--------------------------
$ 113,160 $ 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 Deficit
Balance at Dec. 31,
2005 91,679,670 $ 306,957 $ 11,847 $ (118,274)

Comprehensive loss:

Net loss - - - (108,690)
Foreign currency
translation
adjustments - - - -

Comprehensive loss


Shares issued:

Issuance of common
shares
on exercise of
options 236,796 419 - -
Stock-based
consulting
expense - - 39 -
Stock-based
compensation
expense - - 1,538 -
--------------------------------------------
Balance at Sep. 30,
2006 91,916,466 $ 307,376 $ 13,424 $ (226,964)
--------------------------------------------
--------------------------------------------

Accumulated
other Total
Comprehensive shareholders'
Income (loss) equity
Balance at Dec. 31,
2005 $ (5,023) $ 195,507

Comprehensive loss:

Net loss - (108,690)
Foreign currency
translation
adjustments (158) (158)
-----------
Comprehensive loss (108,848)
-----------
Shares issued:
Issuance of common
shares
on exercise of
options - 419
Stock-based
consulting
expense - 39
Stock-based
compensation
expense - 1,538
--------------------------
Balance at Sep. 30,
2006 $ (5,181) $ 88,655
--------------------------



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

Three months ended Nine months ended
September 30
2006 2005 2006 2005
-----------------------------------------------------
Revenues $ 9,000 $ 10,537 $ 20,512 $ 28,134
Cost of revenues 8,435 8,964 19,688 24,461
-----------------------------------------------------
565 1,573 824 3,673
-----------------------------------------------------
Operating expenses
Selling, general and
administrative 7,123 6,788 20,347 19,340
Research and product
development 2,693 908 5,875 5,859
Amortization of
property, plant and
equipment 397 358 927 1,094
Amortization of
intangible assets 2,118 2,101 6,354 6,304
Impairment of
intangible assets
and goodwill 79,896 - 79,896 -
Integration costs - 72 - 1,109
-----------------------------------------------------
92,227 10,227 113,399 33,706
-----------------------------------------------------
Loss from operations (91,662) (8,654) (112,575) (30,033)
-----------------------------------------------------

Other income
(expenses)
Provincial capital
tax expense
(recovery) 8 (109) (78) (241)
Interest 814 679 2,820 1,845
Foreign currency
gains 73 632 1,126 304
-----------------------------------------------------

895 1,202 3,868 1,908
-----------------------------------------------------

Loss before income
taxes (90,767) (7,452) (108,707) (28,125)
Current income tax
expense (recovery) (35) 65 (17) 113
-----------------------------------------------------
Net loss for the
period $ (90,732) $ (7,517) $ (108,690) $ (28,238)
-----------------------------------------------------
-----------------------------------------------------

Net loss per share
Basic and diluted $ (0.99) $ (0.08) $ (1.18) $ (0.31)

Shares used in
calculating basic
and diluted
net loss per share 91,858,314 91,678,279 91,782,208 91,073,959



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

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------

Cash and cash
equivalents
provided by (used
in)
Operating activities
Net loss for the
period $ (90,732) $ (7,517) $ (108,690) $ (28,238)

Items not affecting
cash
Amortization of
property, plant and
equipment 516 737 1,409 1,769
Amortization of
intangible assets 2,118 2,101 6,354 6,304
Impairment of
intangible assets
and goodwill 79,896 - 79,896 -
Unrealized foreign
exchange (gains)
losses (82) 28 (94) 17
Imputed interest on
long-term debt - 3 1 19
Non-cash consulting
fees - 19 39 56
Stock-based
compensation 541 734 1,538 1,793
Net change in
non-cash working
capital 1,751 (2,926) 1,329 (5,885)
---------------------------------------------
(5,992) (6,821) (18,218) (24,165)
---------------------------------------------

Investing activities
Increase (decrease)
in short-term
investments (50,136) (38,489) 26,874 7,886
Purchase of
property, plant and
equipment (517) (19) (1,322) (317)
Business
acquisitions, net
of cash acquired - - - (343)
---------------------------------------------
(50,653) 38,508 25,552 7,226
---------------------------------------------
Financing activities
Repayment of
long-term debt (27) (52) (120) (133)
Deferred research
and development
grant 18 2 21 (15)
Common shares
issued, net of
issuance costs 31 3 419 149
---------------------------------------------
22 (47) 320 1
---------------------------------------------
Increase (decrease)
in cash and cash
equivalents
during the period (56,623) (45,376) 7,654 (16,938)
Cash and cash
equivalents -
Beginning of
period 69,671 54,647 5,394 26,209
---------------------------------------------
Cash and cash
equivalents - End
of period $ 13,048 $ 9,271 $ 13,048 $ 9,271
---------------------------------------------
---------------------------------------------


Supplemental
disclosure
Interest paid $ 34 $ 35 $ 36 $ 65
Income taxes paid 19 5 24 71



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