Ballard Power Systems Inc. Financial Health Analysis

According to a Ballard press release, the company is “…building the capability for strong revenue growth in clean energy fuel cell products and driving aggressively to profitability.” [1] After analyzing Ballard’s financial statements for the past three years, it does not look like they will be profitable anytime soon. First of all, their stock performance has been quite poor. Over the past three years the stock price has decreased by 66.14%, a drop of $2.91. [2] (See Figure 2) In fact, Ballard’s stock price has been gradually decreasing for the past seven years and has had no significant rebound periods. (See Figure 3) Ballard’s Return on Equity (ROE) and Return on Capital Employed (ROCE) were equally unimpressive. (See Figure 1) Both ratios were negative in 2007 and 2009 due to net losses. There would have been a net loss in 2009 as well if Ballard had not gained $94 million from sale of assets. [4] These ratios make it clear that Ballard is currently unable to generate a profit from its use of equity and capital employed. On the other hand, Ballard has maintained strong liquidity and solvency positions over the past three years and currently holds cash reserves of $79.2 million, over double their current liabilities. [1] Ballard’s liquidity ratio has been dropping since 2007 but is still significantly higher than average at 3.54. Their solvency is also impressive as it has been between 3.85-12.8% which is much lower than the nominal value of 30%. This liquidity enables them to enter and exit markets very quickly and to take advantage of any opportunities that arise. It also helps to offset some of the risk that is involved in these frequent corporate and strategic changes.

As mentioned above, Ballard is constantly re-positioning and altering their strategies to adapt to market changes or to minimize financial deficits. These major changes can often be found in their press releases. For example, they sold off $94 million in assets in 2008 and $34.4 million in 2009 in order to concentrate on commercial fuel cell markets. The $94 million came from the sale of their automotive fuel cell assets and the $34.4 million from monetizing its equity interest in the Automotive Fuel Cell Cooperation Corp. [3][4][5] In 2009, Ballard went through an organizational restructuring process to streamline their cost base which resulted in the elimination of 85 positions, or 20% of its total workforce. [6] In addition to this, the EBARA Ballard Corp. joint venture that focused on the residential cogeneration market in Japan was dissolved in 2009. This was because of an “increasing investment requirement for continued system development work.” [7] These examples make it clear that Ballard’s corporate culture is one of constant change and uncertainty which is definitely reflected in their financial statements.

Access to Capital

In February of this year, Ballard completed a sale-and-leaseback transaction for its head office for cash proceeds of $20.8 million. According to Ballard’s CFO this was done to fortify their strong balance sheet and extract cash from a non-core asset. [8] Financing activities in 2008 included a $41 million non-dilutive financing with Superior Plus Income Fund. [9] Ballard’s financing principle is to have six quarters of operating cash consumption available at all times. [14] These financing activities have provided Ballard with enough capital to satisfy this principle. They currently have cash reserves of $79.2 million which they believe is sufficient to fund their planned development activities and growth for the foreseeable future. No public market financing is currently needed. [14] Ballard’s long term debt is small so they would have no problem in securing public financing if additional capital is required.

Figure 1: Financial health analysis (in millions of dollars) [2]

Figure 2: Ballard Power Systems’ stock price over the last 3 years [2]

Figure 3: Ballard Power Systems’ stock price over the last 10 years [2]

Project Review

In 2008 Ballard entered into a high volume fuel cell supply agreement with ACME Group and IdaTech LLC. The agreement stated that the companies would purchase 1,000 net 5kW natural gas fuel cell units from Ballard in 2009 and 9,000 units in 2010. These units would then be integrated into natural gas-fuelled backup power systems for wireless base stations in India. The agreement made Ballard the exclusive provider of fuel cells for this project and has the option to be extended into 2012. Unfortunately, due to the nature of the agreement and the fact that Ballard sells their products directly to other companies and not to the general public, it is hard to determine what Ballard’s financial contribution to the project is. For this reason, this review will focus on the implications of the project.

According to the CEO of Ballard this project was a big step forward for the company and will enable significant cost reductions that will accelerate the adoption of these products in other stationary power markets. [10] [11] Providing backup power systems for wireless telecom systems in developing countries is a rapidly growing market and is expecting a market size 50,000 fuel cell units per year. [12] Ballard’s partnership puts them in a great position to take advantage of this emerging market and to make it a primary focus of their operations. There have been some recent complications that have set the project back six months, but all three companies are confident that the market opportunity is still substantial and are staying committed to the market. [13]

Company Attractiveness

After analyzing the financial position of Ballard Power Systems Inc. over the past three years, the group has chosen not to invest in the company. Ballard is a leader in the development and manufacturing of fuel cell technologies and has a lot of potential for future success, but their stock price has shown few signs of growth in recent years and has been slowly decreasing ever since interest in fuel cell technology spiked in 2000. (See Figure 2) They have also been unable to turn a profit in the last few years without selling off assets. In addition to their unimpressive stock market performance and profitability, Ballard’s constant “strategic re-positioning” and corporate restructuring greatly increases the risk associated with investing in the company. Even though we are choosing not to invest at this time, Ballard could experience massive growth if public interest in fuel cell technology returns and is definitely a company worth keeping an eye on.
Change is a large part of Ballard’s corporate culture. They are on the leading edge of fuel cell technology and are actively seeking new markets and opportunities while adapting as fast as they can to the markets they are invested in. While we may not want to invest in the company, the group would like to be employed by Ballard because it would be a challenging, dynamic workplace that would put our skills to the test and provide an opportunity to gain some great experience.

References

[1] Ballard Reports Third Quarter 2010 Results http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1488277&highlight= December 1, 2010
[2] Google Finance – Ballard Power Systems Inc. http://www.google.ca/finance?client=ob&q=TSE:BLD December 1, 2010
[3] Corporate Milestones http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-homeProfile December 1, 2010
[4] Ballard Confirms Close of Transaction to Sell Automotive Fuel Cell Assets; Company to Concentrate on Commercial Markets http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1102838&highlight= December 1, 2010
[5] Ballard Monetizes Non-Core Investment for $44.5 Million http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1368579&highlight= December 1, 2010
[6] Ballard Restructuring Streamlines Cost Base http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1318239&highlight= December 2, 2010
[7] Ballard Announces Plans to Dissolve EBARA Ballard Corporation Joint Venture http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1291866&highlight= December 2, 2010
[8] Ballard Announces Sale-Leaseback for Cash Proceeds of C$20.8 Million http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1385168&highlight= December 2, 2010
[9] Ballard Confirms Close of Transaction to Strengthen Balance Sheet Through C$41M Non-Dilutive Financing http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1239980&highlight= December 2, 2010
[10] Ballard Announces High Volume Fuel Cell Supply Agreement For Telecom Backup Power in India http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1208043&highlight= December 2, 2010
[11] 2008 Annual Report http://media.corporate-ir.net/media_files/irol/76/76046/2008ARBLDP.pdf December 2, 2010
[12] Backup Power Fuel Cells http://www.fuelcellseminar.com/media/5229/dem42-1_colbow.pdf December 2, 2010
[13] Ballard Announces Update to Supply Agreement for Telecom Backup Power Solution in India http://phx.corporate-ir.net/phoenix.zhtml?c=76046&p=irol-newsArticle&ID=1334567&highlight= December 2, 2010
[14] 2009 Annual Report http://media.corporate-ir.net/media_files/irol/76/76046/2009ARBLDP.pdf December 2, 2010