Hudson Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic and optimization services. Amounts below are in millions of dollars except per-share data and percentages.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $14.473 | $11.935 | $51.578 | $40.465 |
| Gross profit | $5.365 | $1.470 | $21.569 | $7.879 |
| Gross margin | 37.1% | 12.3% | 41.8% | 19.5% |
| Operating income | $3.715 | $0.007 | $16.401 | $3.526 |
| Net income (loss) | $2.194 | ($0.113) | $9.837 | $1.756 |
| Diluted EPS | $0.08 | ($0.00) | $0.37 | $0.07 |
Q3 revenue rose 21%; nine-month revenue rose 27%. Management attributed refrigerant revenue growth primarily to higher selling prices, partly offset by lower pounds sold. For the nine months, refrigerant and reclamation sales were $48.639 million, versus $37.455 million; RefrigerantSide services were $2.939 million, versus $3.010 million. Cost of sales declined as a percentage of revenue to 63% from 88% in Q3 and to 58% from 81% for the nine months, primarily reflecting higher selling prices per pound. Operating expenses increased 13% in Q3 and 19% year to date.
Cash flow, balance sheet and financing
- Nine-month operating cash flow was negative $7.059 million, compared with positive $3.832 million in 2011, despite net income of $9.837 million. Increased inventory and receivables and lower accounts payable were key uses of cash; financing cash flow was positive $7.197 million.
- Cash was $3.437 million at September 30, down from $3.958 million at year-end. Investing cash outflow was $0.659 million, including equipment spending. Management estimated 2012 capital expenditures of approximately $0.850 million.
- Working capital was $29.900 million, versus $12.465 million at December 31, 2011. Current assets were $44.151 million and current liabilities $14.251 million. Inventory rose to $34.682 million from $17.734 million; net receivables rose to $5.094 million from $2.453 million.
- Total debt was approximately $13.518 million ($8.527 million current and $4.991 million long term), compared with $6.482 million at year-end. The June 2012 PNC facility replaced the Keltic facility; at quarter-end, borrowings were $12.224 million, $9.240 million remained available on the revolving line, and the effective rate was 3.7%. The facility matures June 22, 2015, is secured by specified assets, and includes a minimum 1.10:1 fixed-charge coverage covenant. Hudson reported compliance with all covenants.
- A separate $0.855 million mortgage was entered into in June 2012, fixed at 4%, secured by the Champaign, Illinois property and maturing in 2017.
Outlook, risks and other notable items
- No revenue or earnings guidance was provided. Management believed foreseeable working-capital needs could be met from expected operating cash flows and available PNC borrowing capacity, while cautioning that higher refrigerant costs, weaker sales, increased expenses or expansion costs could require additional capital.
- Business is seasonal, with peak refrigerant sales generally in the first half; cool weather, supply constraints, falling prices, or lower demand can materially affect results. Regulatory changes and the scheduled HCFC production phaseout create uncertainty around supply, cost and demand. The EPA had proposed additional HCFC production reductions; the proposal was not final.
- Inventory increased substantially, which management attributed to higher HCFC costs and the timing and availability of purchases and sales. Hudson’s ability to sell inventory promptly and at favorable prices is a material operating and liquidity consideration.
- Customer concentration increased: three customers each represented at least 10% of nine-month 2012 revenue and together accounted for 40%; no customer accounted for at least 10% in the comparable 2011 period.
- Nine-month income tax expense was $6.033 million, versus $1.077 million in 2011. The deferred tax asset declined from $3.086 million at year-end to zero at September 30. Net operating loss utilization is subject to annual limits, and the company expected certain state and/or federal alternative minimum taxes.
- The filing refers readers to the 2011 Form 10-K for pending legal matters and describes potential environmental liabilities, including Hillburn-site cleanup costs, without providing a clear quantified exposure here. Management reported disclosure controls effective and no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether improved gross margins and earnings are sustainable if refrigerant prices or supply conditions change; growth was substantially price-driven while pounds sold declined.
- How the large inventory balance converts to sales and cash, and whether operating cash flow improves after the nine-month cash use.
- Customer retention and purchasing trends given the three customers’ 40% share of nine-month revenue.
- Availability and cost of refrigerants under evolving HCFC rules, and the effect of regulation on inventory values and future demand.
- PNC borrowing-base availability, covenant compliance and debt-service capacity, including the impact of seasonal results and any environmental cleanup costs.
- The basis and future implications of the $6.033 million nine-month tax provision and the reduction of the deferred tax asset to zero.