Hudson Technologies, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Hudson supplies refrigerants and reclamation, onsite system services, and related diagnostics and monitoring. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $16.875 | $15.768 | $32.459 | $38.645 |
| Gross profit | $2.202 | $2.548 | $4.005 | $11.710 |
| Gross margin | 13.0% | 16.2% | 12.3% | 30.3% |
| Operating income | $0.657 | $0.774 | $1.124 | $8.179 |
| Net income | $0.308 | $0.334 | $0.468 | $4.803 |
| Diluted EPS | $0.01 | $0.01 | $0.02 | $0.18 |
- Q2 revenue increased 7%, with refrigerant revenue up $1.035 million and RefrigerantSide Services revenue up $0.072 million. Higher unit volumes were partly offset by lower selling prices.
- Six-month revenue fell 16%, mainly because lower refrigerant prices reduced revenue by $20.0 million, partly offset by higher volume adding $13.398 million. RefrigerantSide Services revenue increased $0.416 million.
- Gross margin contracted sharply in both comparisons. Management attributed the decline to HCFC-22 costs relative to lower selling prices. Six-month operating income and net income also fell substantially year over year.
- Operating expenses declined to $1.545 million in Q2 and $2.881 million for the six months. Interest expense was $0.186 million and $0.395 million, respectively.
Cash flow, liquidity and debt
- Six-month operating cash flow was positive $5.038 million, versus negative $13.830 million in 2013. The 2014 cash generation reflected lower inventory and higher payables, partly offset by increased receivables and prepaid assets.
- Investing cash outflow was $0.221 million; financing cash outflow was $3.593 million, including debt repayments and proceeds from the stock offering. Cash increased $1.224 million to $1.893 million.
- At June 30, working capital was $34.698 million, versus $22.255 million at year-end 2013. Current assets were $41.821 million and current liabilities $7.123 million. Inventory was $24.517 million; net receivables were $10.163 million.
- Balance-sheet short- and long-term debt totaled $0.806 million. PNC Facility borrowings were zero; the filing reports revolving availability as $24.0 million in one disclosure and $24.3 million in another, so the precise available amount is unclear. The Champaign mortgage balance was $0.520 million.
- Hudson sold 6.9 million shares in June for gross proceeds of $16.129 million. The share count rose from 25.070 million at December 31, 2013 to 32.031 million at June 30, 2014.
- Management estimated 2014 capital expenditures of approximately $1.0 million and said it expected working capital needs to be met by operating cash flow and available PNC borrowing capacity. No revenue or earnings guidance was provided.
Material developments, outlook and risks
- A July 2, 2014 PNC amendment extended the facility termination date to June 30, 2018 and revised minimum EBITDA tests for 2014. Six-month EBITDA, a non-GAAP covenant measure, was $1.535 million against a $1.123 million minimum. The company reported compliance with amended covenants at June 30; it cautioned that future compliance depends on operating performance and external conditions. The fixed-charge coverage covenant was suspended until the quarter ending March 31, 2015.
- The EPA had not yet finalized HCFC production and consumption allowances for 2015–2019. Its proposed HCFC-22 phase-down approach would reduce production or imports from 30 million pounds in 2015 to zero in 2020. Hudson expected the final rule to materially affect operating results and financial position.
- Key risks include refrigerant price, supply and demand volatility; regulatory changes; seasonal and weather-driven demand; and customer concentration. Two customers represented 28% of six-month 2014 revenue, and receivables from them totaled $1.230 million.
- The company noted possible future financing needs if costs rise or expected revenues are not achieved, and that additional capital may not be available on acceptable terms. Legal proceedings are referenced to the 2013 Form 10-K; this filing does not provide a clear update on their status or potential exposure.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether HCFC-22 prices, gross margins and inventory values stabilize as EPA rules and market supply evolve.
- Whether Hudson meets the amended PNC EBITDA tests in later 2014 periods and maintains access to sufficient borrowing capacity.
- The actual revolver availability, given the inconsistent $24.0 million and $24.3 million figures in the filing.
- Whether refrigerant and service sales diversify away from the two large customers, and whether receivables remain collectible.
- The status and potential financial exposure of legal and environmental matters referenced elsewhere in the company’s filings.