Hudson Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts below are in millions of dollars unless otherwise noted. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic services.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $14.712 | $16.053 | $28.530 | $25.137 |
| Gross profit | $2.707 | $3.697 | $6.409 | $4.874 |
| Gross margin | 18.4% | 23.0% | 22.5% | 19.4% |
| Operating income | $1.529 | $2.441 | $3.519 | $2.278 |
| Net income | $0.781 | $1.327 | $1.869 | $1.057 |
| Diluted EPS | $0.03 | $0.06 | $0.07 | $0.05 |
- Q2 performance: Revenue declined 8%, and net income declined $0.546 million year over year. Lower refrigerant volumes and service revenue reduced sales; higher refrigerant cost per pound raised cost of sales to 82% of revenue, versus 77% a year earlier. Lower operating expenses and interest expense partly offset the gross-profit decline.
- First-half performance: Revenue increased 13%, mainly from higher average selling prices for refrigerants; RefrigerantSide revenue also rose modestly. Cost of sales was 78% of revenue, down from 81%, helping lift gross profit and net income. Operating expenses rose 11%, mainly from professional fees and payroll; income tax expense increased to $1.145 million from $0.648 million.
- Cash flow: First-half operating cash flow was negative $3.550 million, compared with positive $1.607 million in 2010. The principal pressures were a $7.184 million increase in receivables and a $3.899 million decrease in accounts payable and accrued expenses, partly offset by lower inventory. Investing cash use was $0.170 million; financing provided $2.715 million, primarily through short-term borrowings. Cash fell $1.005 million to $2.921 million.
- Balance sheet at June 30: Current assets were $26.169 million and current liabilities $11.844 million, yielding working capital of $14.325 million and a current ratio of about 2.2. Receivables were $8.946 million, up from $1.767 million at year-end; inventory was $13.814 million, down from $18.211 million. Total debt on the balance sheet was $8.835 million, including $8.700 million current and $0.135 million long-term, versus $6.030 million at December 31, 2010. Stockholders’ equity was $19.811 million.
- The Keltic credit facility was extended to June 26, 2012 and carried a 6.5% rate at quarter-end. Hudson reported $4.660 million outstanding and $4.900 million available on its revolving line, plus $3.000 million outstanding under term loans. Substantially all assets are collateral; the facility restricts cash dividends. The company reported compliance with its financial covenants at June 30.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management estimated 2011 capital expenditures of approximately $1.0 million and said it expected to meet foreseeable working-capital needs from operating cash flows and available facility funds.
- Management cautioned that results are seasonal, with refrigerant sales typically strongest in the first half; cool spring or summer weather, supply constraints, declining prices, and reduced demand could adversely affect results. Refrigerant availability and prices are also exposed to regulation-driven HCFC phase-outs. Hudson said it believed adequate supplies would remain available at reasonable cost for the foreseeable future.
- Liquidity risks include continued working-capital needs, the facility’s June 2012 expiration, and the possibility that financing may not be renewed or replaced. Management said unanticipated costs, weaker sales, or expansion costs could increase capital needs. The company’s NOL utilization is subject to annual limits; management expected certain state and/or federal alternative minimum taxes for the foreseeable future.
- Legal proceedings are referenced to the company’s 2010 Form 10-K; this filing text does not provide a clear description or quantified exposure. Management identifies potential environmental liability and other commitments and contingencies as risks.
- After quarter-end, directors approved aggregate executive base-pay increases of $49,000 effective August 1, 2011. On July 29, 2011, the board adopted amended and restated bylaws, including revised shareholder nomination and proposal procedures and director-removal provisions.
Most important facts for investors to verify
- Whether the sharp rise in receivables and negative operating cash flow reverse through collections and subsequent-quarter cash generation.
- Whether refrigerant pricing, product costs, and sales volumes sustain margins after Q2 gross-margin compression.
- Availability and cost of refrigerant supply under phase-out regulations, and the effects of weather and seasonality on demand.
- Debt maturities and refinancing plans ahead of the June 26, 2012 facility expiration, including continued covenant compliance and borrowing availability.
- Details and potential financial exposure of the legal proceedings referenced in the 2010 Form 10-K, and the recoverability of deferred tax assets and NOLs.