Hudson Technologies, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic and optimization services.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $22.877 million | $14.854 million | +54% |
| Gross profit | $9.162 million | $5.968 million | +53% |
| Gross margin | 40.0% | 40.2% | Approximately flat |
| Operating income | $7.405 million | $4.218 million | +76% |
| Net income | $4.469 million | $2.509 million | +78% |
| Diluted EPS | $0.17 | $0.10 | +70% |
| Cash used in operating activities | $7.335 million | $2.130 million | Greater cash use |
Revenue growth was driven by refrigerant and reclamation sales, which rose to $21.810 million from $13.662 million. Management attributed the increase primarily to higher selling prices, contributing $9.023 million, partly offset by lower volume, which reduced revenue by $875,000. RefrigerantSide services revenue declined to $1.067 million from $1.192 million. Cost of sales was 60% of revenue in both periods. Operating margin was approximately 32.4%, versus 28.4%; net margin was approximately 19.5%, versus 16.9%.
Liquidity, debt, and balance sheet
- At March 31, 2013, cash was $1.437 million; working capital was $32.921 million, up from $27.408 million at year-end 2012.
- Inventory increased to $51.534 million from $40.167 million, and net receivables rose to $6.517 million from $1.956 million. These working-capital increases were the principal drivers of operating cash outflow.
- Total debt was approximately $22.075 million, including $17.230 million classified as current. PNC Facility borrowings were $20.953 million; $16.313 million remained available under the revolving line. Its effective rate was 2.5%, and it matures June 22, 2015.
- The PNC Facility was expanded in February 2013 to a maximum of $40 million. It is secured by receivables, inventory, intellectual property, and other assets. The company reported covenant compliance at quarter-end, including the 1.10-to-1.00 fixed-charge coverage requirement.
- Financing activities provided $5.026 million, principally from increased short-term borrowing and proceeds from stock-option exercises. Cash declined by $2.554 million during the quarter.
Material changes and management outlook
- Net income rose substantially year over year, while operating expenses were nearly flat at $1.757 million. Interest expense increased to $197,000 from $171,000 due to increased borrowing, partly offset by a lower effective rate.
- Management estimated 2013 capital expenditures of approximately $2.5 million and expected to meet foreseeable working-capital needs from operating cash flows and PNC availability. This is not formal earnings guidance; management cautioned that additional capital could be needed sooner if costs rise, revenue expectations are missed, or expansion costs increase.
- Management noted the business is seasonal, with refrigerant sales typically strongest in the first half; cool spring or summer weather, supply constraints, lower demand, or falling prices could materially hurt results.
Risks, contingencies, and unusual items
- Two customers each represented at least 10% of Q1 2013 revenue and together accounted for 44%; receivables from them totaled $2.923 million. Customer loss or reduced purchases could materially affect results.
- Refrigerant supply, demand, and pricing are exposed to regulation and sourcing conditions. The EPA’s March 2013 rule set HCFC-22 production or import allowances of 63 million pounds for 2013 and 51 million pounds for 2014; future allowances for 2015–2019 had not been set.
- Inventory valuation and recoverability are important estimates given the rising refrigerant costs and regulatory phase-down. NOL use is limited to $1.3 million annually; the company also may owe certain state taxes and federal alternative minimum tax.
- The filing refers readers to legal proceedings disclosed in the 2012 Form 10-K but does not provide details here. Hudson also identifies possible environmental liabilities related to cleanup at its former Hillburn, New York facility.
- Two joint ventures remained early-stage: Hudson Technologies Europe had limited operations, while Safety Hi-Tech USA had not begun operations.
- Share-based compensation expense was $33,000 versus none in Q1 2012. Common shares issued and outstanding increased to 24.682 million from 24.125 million at December 31, 2012.
Key facts for investors to verify
- Whether higher refrigerant selling prices and elevated inventory costs can be sustained without margin compression or inventory write-downs.
- Customer concentration, collection of the $2.923 million due from the two largest customers, and subsequent receivables levels.
- Available borrowing capacity under the borrowing-base facility, covenant headroom, interest-rate exposure, and ability to manage current debt obligations.
- Regulatory changes and refrigerant supply, pricing, and demand trends, including forthcoming HCFC-22 allowances.
- Progress against the estimated $2.5 million 2013 capital-expenditure plan and management’s cash-flow assumptions.
- Details and potential exposure from legal and environmental matters referenced but not quantified in this filing text.