Hudson Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Hudson sells refrigerants and provides refrigerant reclamation, on-site services, and diagnostic and optimization services.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $15.768 | $22.251 | $38.645 | $37.105 |
| Gross profit / margin | $2.548 / 16.2% | $10.237 / 46.0% | $11.710 / 30.3% | $16.205 / 43.7% |
| Operating income / margin | $0.774 / 4.9% | $8.469 / 38.1% | $8.179 / 21.2% | $12.687 / 34.2% |
| Net income | $0.334 | $5.135 | $4.803 | $7.644 |
| Diluted EPS | $0.01 | $0.20 | $0.18 | $0.29 |
| Operating cash flow | Not separately provided for the quarter | $(13.830) | $(3.537) |
For the six months, refrigerant and reclamation sales were $36.268 million, while RefrigerantSide services generated $2.377 million. Cost of sales rose to 70% of revenue for the six-month period from 56% a year earlier. In Q2, it rose to 84% from 54%.
Liquidity, debt, and balance sheet
- At June 30, cash was $2.374 million; working capital was $33.654 million, up from $27.408 million at year-end 2012. Current assets were $68.763 million and current liabilities $35.109 million.
- Inventory increased to $51.298 million from $40.167 million at December 31, 2012; net receivables rose to $11.866 million from $1.956 million.
- Balance-sheet short- and long-term debt totaled $29.299 million. Borrowings under the amended PNC facility were $28.187 million, with $7.179 million available to borrow; its effective rate was 2.5%. The facility’s maximum capacity was increased to $40 million in February 2013 and matures June 22, 2015. Hudson reported compliance with its covenants at June 30.
- Six-month cash used in operations of $13.830 million primarily reflected increased receivables and inventory, partly offset by income and higher payables. Financing provided $12.753 million, mainly from net short-term borrowing and stock-option exercises. Cash declined by $1.617 million from year-end.
- Management estimated 2013 capital expenditures of approximately $2.5 million and said it expected to meet foreseeable working-capital needs with operating cash flow and available PNC borrowing, while cautioning that additional capital could be needed sooner if costs rise or revenue falls.
Changes and management commentary
- Q2 revenue fell 29% year over year, primarily because fewer pounds of refrigerants were sold; RefrigerantSide service revenue increased $0.173 million. Cool spring weather also reduced refrigerant demand.
- Q2 cost of sales increased 10% despite lower revenue, primarily due to higher refrigerant cost per pound. Net income fell to $0.334 million from $5.135 million.
- Six-month revenue increased 4%, as higher selling prices for certain refrigerants added $8.610 million, more than offsetting a $7.118 million decline from lower volumes. Higher cost per pound drove a 29% increase in cost of sales; net income declined 37%.
- Six-month operating cash use increased from the prior year, reflecting working-capital investment. Interest expense also rose, which management attributed to increased PNC borrowing.
- Management said EPA rules permitted production or importation of 63 million pounds of HCFC-22 in 2013 and 51 million in 2014, creating what it viewed as an oversupply during the 2013 cooling season and pressure on market prices. EPA had not set HCFC-22 limits for 2015–2019; management expected those rules to materially affect results and financial position.
Risks, contingencies, and unusual items
- HCFC-22 price declines could reduce revenue and impair the value of the company’s substantial refrigerant inventory. The company also cited sourcing constraints, changing regulation, seasonality, weather, and customer and supplier concentration as risks.
- Two customers each represented at least 10% of six-month 2013 revenue and together accounted for 29%; receivables from them totaled $1.8 million. Loss of a major customer could materially affect results.
- The PNC facility is secured by receivables, intellectual property, inventory, and other assets, includes financial and other covenants, and restricts dividends. Future covenant compliance may be affected by economic conditions and refrigerant pricing.
- The filing refers readers to the company’s 2012 Form 10-K for pending legal matters; this filing does not provide a clear account of those proceedings. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether HCFC-22 oversupply and pricing pressure continue, and how they affect inventory valuation, margins, and cash generation.
- Whether receivables and inventory convert to cash on schedule, given the $13.830 million six-month operating cash outflow and increased PNC borrowing.
- Current borrowing-base availability, covenant headroom, interest-rate exposure, and the ability to refinance or repay debt due at the PNC facility’s 2015 maturity.
- Customer concentration, major-customer collections, refrigerant sourcing, and the execution and economics of RefrigerantSide services and joint ventures.
- Actual capital spending versus management’s approximately $2.5 million 2013 estimate, and any updates to expected funding needs or EPA rules for 2015–2019.