Hudson Technologies, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This filing reports annual results; it does not provide a clear standalone fourth-quarter income statement. Hudson sells refrigerants and provides reclamation, on-site system services, and energy-efficiency services.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $44.322 million | $37.273 million | +19% |
| Gross profit / margin | $8.685 million / 19.6% | $8.032 million / 21.5% | Margin down 1.9 pts |
| Operating income / margin | $2.528 million / 5.7% | $2.152 million / 5.8% | Income up 17% |
| Net income | $1.034 million | $0.701 million | +48% |
| Diluted EPS | $0.04 | $0.03 | Up $0.01 |
| Operating cash flow | $0.613 million | $3.128 million | Down $2.515 million |
Refrigerant and reclamation sales rose to $40.346 million from $33.163 million; RefrigerantSide services declined to $3.976 million from $4.110 million. Cost of sales grew 22%, faster than revenue, and was 80% of sales versus 78% in 2010. Higher refrigerant volumes drove sales growth, while higher average cost per pound pressured gross margin. Interest expense fell to $0.881 million from $1.102 million as average borrowings declined.
Liquidity, debt, and cash flows
- Cash was $3.958 million at year-end; working capital was $12.465 million, up $0.240 million. Current assets were $24.756 million and current liabilities $12.291 million.
- Inventory was $17.734 million, down $0.477 million; net trade receivables were $2.453 million, up $0.686 million.
- Total short- and long-term debt was $6.482 million, versus $6.030 million a year earlier. The company reported $2.843 million outstanding on its revolving line and $7.052 million available under it; facility interest was 6.5% at year-end. Substantially all assets secure the facility.
- The Keltic credit facility was due to expire June 26, 2012. The company was seeking renewal and possibly an increase, with no assurance of success. A further $0.636 million mortgage balloon and $0.248 million land-loan balloon were due June 1, 2012.
- Investing cash use was $0.946 million, including equipment spending in Champaign and for the European venture. Financing provided $0.365 million, primarily from net short-term borrowings. Cash increased $0.032 million.
Changes, outlook, and material risks
- Revenue growth and higher operating income lifted net income, but operating cash flow fell sharply, principally reflecting working-capital movements, including receivables and accounts payable.
- Management estimated 2012 capital expenditures of approximately $0.650 million and expected to meet foreseeable working-capital needs through operations and facility availability. The filing provides no specific earnings or revenue guidance.
- Regulatory limits on HCFC production remain a central market factor. EPA’s January 2012 proposed rule contemplated further HCFC production reductions for 2012–2014; it was not final, and interim allocation assurances allowed eligible holders to produce or import up to 55% of their 2011 amounts.
- Hudson formed Hudson Technologies Europe, S.r.l. in 2011 with two partners; Hudson owns 40%. The venture had not begun operations by year-end. Revenue from its EOS carbon-offset alliance had not been material.
- Key risks include credit-facility renewal and covenant compliance, refrigerant supply and price volatility, weather-driven seasonality, economic conditions, regulatory change, competition, and environmental or personal-injury liability. The company reported compliance with facility covenants at December 31, 2011.
- The company continued remediation related to a 1999 R-11 refrigerant release at its former Hillburn, New York site. It accrued expected costs through December 31, 2013, incurred $86,000 in 2011 remediation costs, and had exhausted applicable insurance proceeds. EPA had not withdrawn its proposed NPL listing; additional costs or listing could materially affect results.
- Management assessed internal control over financial reporting as effective; the auditor gave an unqualified opinion on the financial statements. The auditor did not attest to internal-control effectiveness.
Most important facts to verify
- Whether the credit facility was renewed or replaced before its June 2012 expiration, and how the 2012 debt and balloon maturities were funded.
- Whether subsequent refrigerant price, supply, and regulatory changes supported margins and cash generation.
- Whether the Hillburn remediation reserve remains adequate and whether EPA action changed the potential liability.
- Whether inventory can be converted to cash at carrying value and whether receivables remain collectible.
- Whether the European joint venture began operations and required further investment.