Hudson Technologies, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2012, compared with Q1 2011. Hudson sells refrigerants and provides refrigerant reclamation, on-site RefrigerantSide services, and related diagnostic and optimization services. Results are seasonal; Q1 performance is not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $14.854 million | $13.818 million; up 7% |
| Gross profit / margin | $5.968 million / 40.2% | $3.702 million / 26.8% |
| Operating income / margin | $4.218 million / 28.4% | $1.990 million / 14.4% |
| Net income | $2.509 million; $0.11 basic and $0.10 diluted per share | $1.088 million; $0.05 basic and $0.04 diluted per share |
| Operating cash flow | $(2.130) million | $(5.517) million |
| Investing / financing cash flow | $(0.173) million / $(1.507) million | $(0.085) million / $5.410 million |
| Cash | $0.148 million at March 31, 2012 | $3.958 million at December 31, 2011 |
| Working capital | $17.503 million | $12.465 million at December 31, 2011 |
| Debt | $4.975 million total; $4.830 million current | $6.482 million total at December 31, 2011 |
Revenue growth reflected a $0.899 million increase in refrigerant sales and a $0.137 million increase in RefrigerantSide services. Refrigerant sales benefited from higher average selling prices, partly offset by lower pounds sold. Cost of sales fell 12%, chiefly because fewer pounds were sold and certain refrigerants achieved higher average selling prices. Operating expenses increased 2%; interest expense declined to $0.171 million from $0.243 million. Income tax expense was $1.538 million versus $0.667 million.
Cash used in operations was primarily driven by a $6.431 million increase in receivables, partly offset by lower inventory; inventory decreased $1.110 million and accounts payable and accrued expenses decreased $0.995 million. The company reported $8.884 million in net receivables and $16.624 million in inventory at quarter-end. Working capital increased partly due to deferred-tax-asset reclassification and utilization. The filing reports net deferred tax assets of $1.548 million at March 31, 2012, versus $3.086 million at year-end.
Outlook, risks and notable items
- Management estimated 2012 capital expenditures of approximately $0.650 million. No revenue or earnings guidance was provided.
- The $15 million credit facility expires June 26, 2012. Hudson was seeking renewal and possibly an increase, but gave no assurance of success. At March 31, it had $1.573 million drawn on the revolver and $8.677 million available; $2.250 million of term loans was also outstanding. The facility bears 6.5% interest, is secured by substantially all assets, and restricts cash dividends. The company reported covenant compliance.
- Contractual obligations included $4.830 million of principal due within twelve months and a total $6.585 million of listed debt, estimated interest, and operating lease obligations. Two property loans had balloon payments due June 1, 2012, totaling $0.884 million as disclosed in the filing.
- Hudson depends on refrigerant availability, pricing, and demand. HCFC production is being phased down; an EPA proposal in January 2012 would further reduce production allowances, but was not final. Supply constraints, price changes, or reduced demand could materially affect results.
- One customer represented 14% of Q1 2012 revenue; no customer represented at least 10% in Q1 2011. Losing a major customer could adversely affect results.
- Results are seasonal and sensitive to weather, refrigerant prices and availability, customer demand, and service activity. Management cited potential financing needs if the facility is not renewed or replaced, among other risks.
- The company’s 40%-owned European joint venture had not begun operations by March 31, 2012. The filing refers readers to the 2011 Form 10-K for pending legal matters and provides no details here.
- Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Key facts for investors to verify
- Whether the credit facility was renewed or replaced before its June 26, 2012 expiration, and the resulting terms, availability, and covenant requirements.
- Repayment or refinancing of near-term debt, including the June 1 property-loan balloon payments.
- Collection of the sharp quarter-end receivables increase and the company’s ability to convert inventory into cash while maintaining liquidity.
- Exposure to the customer contributing 14% of quarterly revenue and any changes in customer concentration.
- Final EPA rules and their effects on refrigerant supply, pricing, and demand; also monitor weather and seasonal operating patterns.
- Recoverability of deferred tax assets and use of net operating losses, which are subject to annual limits.