Analytical Essay on Hydrogenics Corporation

Brief Description of the Company

Hydrogenics Corporation is a company that designs, designs, develops, and manufactures hydrogen generation products. It is a global leader in the manufacture of Hydrogen generation, Hydrogen fuel cells and MW-scale energy storage solutions (Hydrogenics, 2018). Its operating segments are the OnSite Generation, and the Power Systems. Its products and applications include PEM and alkaline Hydrogen generators, hydrogen fuel cells for electric vehicles, Fuel cell installations, and the "Power-to-Gas" which is an innovative way of storing and transporting energy. The corporation is based in Mississauga, Canada and operates manufacturing facilities located in Germany, Belgium and United States. It is publicly listed company on the NASDAQ.

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Objective of the Paper

The paper describes the company and its management and analyses its operating environment and industry to identify factors that influence its performance. It analyses the company's competitive environment and the economic outlook. It also analyses the company's financial statements and uses financial ratios to assess the financial performance and position of the company.

Summary of Findings

The analysis indicates that Hydrogenics was not profitable in 2013 and 2012 although its profitability improved in 2013. The company's liquidity and solvency were also low as shown by the ratio analysis. With the improved economic growth and industry outlook, the performance of the company is expected to improve in the coming years.

Firm, Industry, and Environment

Description of Company and Its Management

The company deals in Hydrogen generation, MW-scale energy storage solutions, and Hydrogen fuel cells for both industrial and commercial purposes (Hydrogenics, 2018). Its products accelerate the global shift to green energy. The company's management is headed by Daryl Wilson, the Chief Executive Officer (Hydrogenics, 2018). Wilson has served in the position since 2006 (Hydrogenics, 2018). He has more than 25 years of experience in technology and industrial management. The company also has a competent board of directors chaired by Douglas Alexander (Hydrogenics, 2018). The company's board has two standing committees; the Audit, and the Human Resources and Corporate Governance committees. Members of these committees are independent directors in accordance with the adopted corporate governance principles (Hydrogenics, 2018).

Discussion of Competitive Environment: Porters Five Forces Analysis

Competitive Rivalry

Industrial Electrical Equipment industry is highly competitive with several firms providing the same products. Globalization has also increased competition in the market especially cheap manufacturers from countries like China. The stiff competition drives prices down which lowers the company's profit margins. Hydrogenics' has to improve on differentiation and cutting production costs to deal with the stiff competition in the industry.

Threat of New Entrants

The threat of new entrants in the industry is moderate. The Industrial Electrical Equipment industry is associated with disruptive innovations by new entrants. However, this is reduced by the substantial initial outlays required.

Bargaining Power of Suppliers

The bargaining power of suppliers in the Industrial Electrical Equipment industry is lows since most manufacturers source their raw materials from various suppliers. This enables Hydrogenics and other firms to purchase raw materials at lower costs.

Bargaining Power of Buyers

The bargaining power of buyers in this industry is low to moderate. Firms sell to several buyers thus lowering the bargaining power of each buyer. However, industrial buyers purchase in bulk thus enhancing their bargaining power.

Threat of Substitutes

The threat of substitutes is low because there are no close substitutes to industrial equipment products.

Balance Sheet Analysis

The analysis of Hydrogenics Corporation's balance sheet shows that currently, the company has the working capital to pay their current liabilities. Although the accounts receivable account is down from the prior year and the current portion of long-term debt is up, the company has enough liquid assets to contribute to that rise. Inventory is not a quick asset and is a good portion of the company's current assets. If you took that out of the liquidity amount available, the company would still be in good standing. The company's reduction in cash and cash equivalents since 2012, Hydrogenics will need to stay aware of their availability to sustain this or the expectations of the company to get back to what was available in the prior year to continue the daily business operations.

With Accounts Receivable staying within the thousands, the company may evaluate the ratio they are currently using to monitor the accrued amount to allowance for doubtful account each month. With the sales growth rate rising to 33.81% within a year, Hydrogenics could get into a bind if vendors go into default.

Analyzing the company's ratios, you will see that Hydrogenics assets seemed to increase and the liabilities decreased. The company invested into some property, plant and equipment this year but was still able to pay down other current liabilities. With current portion of long-term debt rising, we could assume that the investment that contributed to the rise of property, plant and equipment was the cause. With the company's growth of 33.81%, they were able to increase the company's common stock and retained earnings by a good amount. While looking into the company's commitments, contingencies and guarantees it seemed that there is some improvement in commitments and guarantees section. With their lease payment lowering, this will help Hydrogenics bottom line. Plus, the company's outstanding guarantee amount was lowered by a substantial portion that will help their credit line for future reasons. As of yearend, the company did not have any contingencies that could potentially harm their bottom line with legal fees.

Analysis of the Income Statement

The analysis of Hydrogenics Corporation's income statement compared to the previous year (2012), the company's gross profit increased and the net profit (loss) has decreased. The company's expenses did not contribute to this increase due to majority of their expenses increasing but the company has a whole grew throughout the year allowing this to not affect the company's bottom line. Currently Hydrogenics Corporations operates in two reportable segments. OnSite Generations and Power Systems. Looking into OnSite Generations income contribution to the corporation, there has been a gradual decrease in profit compared to previous years. This is not due to expenses, those as well have decreased to reflect the decrease in sales. Hydrogenics explains that the reason behind the decrease of $3.3 million or 12% over the previous year is because of a decrease in in order bookings. As of December 31, 2013, there were confirmed orders of $22.5 million that will be recognized as revenue in 2014.

Analyzing Power Systems income contribution to the corporation, there has been substantial profit over previous years. There was an increase in revenue by $14.0 million or 320% compared to 2012. Power Systems has a contract and a major order of fuel cell modules that contributes to the substantial profit year over year. As of December 31, 2013, there is $34.5 million of confirmed orders that will be recognized as revenue in 2014.

The corporation's expenses with the gross profit increase went up $0.4 million compared to the previous year. There was an increase in marketing efforts, commercial activities, compensation costs resulting from the increase in business sales and employee benefit expense by doubling the number of employees (73) compared to previous year (62). Hydogenics Corporation will have a bright future because of the growing community throughout the country. Each state will have to think about conserving utilities and grid stabilization as each cities community grows. Hydrogenics is taking the correct steps currently to improve their business financially which will help if there were to be any form of changes in the global economic condition.

Cash Flow Analysis

When analyzing Hydrogenics Corporation's cash flow statement starting with the operating activities, the first topic to notice was the net loss for the year. There is a good margin difference from the prior year. This could be a result of the company growth between the two companies that Hydrogenics has, OnSite Generation and Power Systems. There was an increase as well in items that did not affect cash, there was an increase instead of a decrease like the prior year. There is a good margin difference as well for other finance losses, net. It could be a result in writing down an asset or disposal of one. There was not as much of a gain this year in their foreign exchange operating activity as prior year. This could be due to the company not having as much business in foreign states as prior year. Hydrogenics accreted non-cash interest for the long-term debt liability that the corporation has increased. The maturity of the loan is a result of this. Another good margin difference would be the liabilities for compensation indexed to share price. That liabilities increased four times the previous years amount. The growth of the company is a result of this. The employees of the company have the opportunity to invest and notice how fast the company is growing. They see that their employer could be worth investing in. Cash used in operating activities compared to the previous year (2012), there is a dramatic difference. The company has improved their operating cash from the growth of the past year.

There seemed to have been a purchase of property, plant or equipment throughout the year. Although there was an asset attained, the asset did not cost the company that much up front. The intangible asset increased a small amount which could be the company requesting a trademark or copyrights because of the growth the company has seen from prior years to this year.

Hydrogenics did not do a lot of financing activity throughout the year. It seems that the corporation did decide to borrow a small amount from operating proceeds but paid the amount back prior to end of year. This was also done the previous year. There could be an assumption that instead of borrowing from an institution and having interest cost, they borrow in house to avoid this. There was an increase in common shares issued and warrants exercised, net of issuance costs. The corporation's growth could have been a result of this. Altogether, the corporation's cash and cash equivalents ended as a positive unlike the beginning of the year. With the continuous growth, the company will be able to continue this if they continue to operate at their current standards.

Ratio Analysis: Profitability Ratios

Gross Profit Margin

Hydrogenics' gross profit margin for 2013 was 28.44% indicating that it made a gross profit of 28.44 cents for every dollar of total revenue it generated in 2013 (Weygandt, Kieso & Kimmel, 2013). The ratio increased from 16.56% in 2012 to 28.44% in 2013 indicating that the profitability of Hydrogenics improved in 2013.

Operating Profit Margin

The operating margin for 2013 was -15.99% indicating that the company made an operating loss of 15.99 cents per dollar of revenue earned during the year (Weygandt, Kieso & Kimmel, 2013). The negative sign indicates that Hydrogenics' operations were not profitable in 2013. The ratio increased from -38.57% in 2012 to -15.99% indicating that the profitability of the firm improved in 2013. This is because the company's operating loss in 2013 was smaller than the operating loss it made...