Hudson Technologies, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Hudson sells and reclaims refrigerants and provides on-site decontamination, diagnostic, and energy-optimization services. Refrigerant sales accounted for most revenue.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $58.634 million | $56.447 million |
| Gross profit (loss) | $(0.730) million | $22.542 million |
| Operating income (loss) | $(8.485) million | $14.880 million |
| Net income (loss) | $(5.842) million; $(0.24) per diluted share | $12.801 million; $0.49 per diluted share |
| Cash from operations | $(6.417) million | $(9.266) million |
| Cash and cash equivalents at year-end | $0.669 million | $3.991 million |
| Total debt at year-end | $20.038 million | $17.656 million |
- Revenue increased 4%: refrigerant and reclamation sales rose to $54.293 million from $52.220 million, while RefrigerantSide services increased to $4.341 million from $4.227 million.
- Cost of sales included a $14.7 million lower-of-cost-or-market inventory adjustment related to HCFC-22. Excluding this adjustment, cost of sales was $44.664 million, or 76% of revenue; reported gross margin was approximately negative 1.2%, compared with approximately 39.9% in 2012.
- The write-down followed an approximately 50% decline in HCFC-22 prices from April to September 2013 after EPA rulemaking. Higher refrigerant costs and lower selling prices also pressured margins.
- Working capital was $22.255 million, down from $27.408 million. Inventory was $33.967 million, down from $40.167 million; net trade receivables were $3.706 million, up from $1.956 million.
- Investing activities used $0.397 million; financing activities provided $3.492 million, primarily from increased short-term borrowing. Capital expenditures for 2014 were estimated at approximately $1 million.
- The PNC facility had $19.080 million outstanding and $8.349 million available to borrow at year-end; its effective interest rate was 3.0%. The facility is secured by substantially all assets and is due June 22, 2015. The Champaign property mortgage balance was $0.603 million.
Material changes and unusual items
- Hudson swung from $12.801 million net income in 2012 to a $5.842 million net loss in 2013, primarily because gross profit was sharply reduced by the HCFC-22 inventory adjustment.
- Fourth-quarter 2013 net loss was $1.530 million and covenant-defined EBITDA was negative $2.010 million. The EBITDA measure is non-GAAP.
- Operating cash outflow improved from $9.266 million to $6.417 million, but cash declined by $3.322 million during 2013.
- The 2013 income tax benefit was $3.576 million, compared with a $1.395 million tax expense in 2012. The 2012 result included release of a $4 million deferred-tax valuation allowance.
- Two customers represented 23% of 2013 revenue, down from 28% in 2012; year-end receivables from those customers were $344,000.
Outlook, covenants, and risks
- The EPA’s April 2013 rule allowed production or importation of 63 million pounds of HCFC-22 in 2013 and 51 million pounds in 2014. A December 2013 proposal discussed a preferred phase-down beginning at 30 million pounds in 2015 and reaching zero in 2020; the final 2015–2019 rule had not been issued. Management expected the final rule to materially affect results and financial position.
- In October 2013, PNC waived the fixed-charge coverage covenant for the quarter ended September 30, 2013 and suspended that covenant until the quarter ending March 31, 2015. Interim minimum-EBITDA tests apply. Hudson reported compliance with amended covenants at year-end, but future compliance is not assured. The fourth-quarter EBITDA was only $144,000 above the amended minimum.
- Management said it expected to meet foreseeable working-capital needs through anticipated operating cash flows and PNC availability, while warning that additional capital might be needed and might not be available.
- Key risks include refrigerant price, supply and regulatory changes; weather and seasonality (including cool spring weather that weakened 2013 demand); customer concentration; competition; debt maturity and covenant compliance; and environmental, regulatory, and patent risks. The principal U.S. refrigerant-reclamation patent was due to expire in May 2014, with foreign patents expiring May–December 2014.
- A 1999 R-11 release at the former Hillburn, New York facility remains subject to remediation. Hudson accrued estimated costs through 2018, but the amount is not stated in the provided filing text. The company incurred $100,000 of remediation costs in 2013; additional costs or EPA action on possible National Priorities List designation could be material. Applicable insurance proceeds were exhausted.
- No specific revenue or earnings guidance was provided. Management estimated 2014 capital expenditures at approximately $1 million. Hudson paid no common-stock dividends and did not expect to do so in the foreseeable future.
Most important facts to verify
- Reconcile the $14.7 million inventory write-down reported in the income statement and notes with the $5.714 million “allowance for lower of cost or market” adjustment shown in the cash-flow statement.
- Review subsequent HCFC-22 pricing, inventory carrying values, and the final EPA production/import allowances for 2015–2019.
- Confirm covenant compliance, borrowing availability under the borrowing base, and the refinancing or repayment plan ahead of the June 2015 PNC maturity.
- Assess the recoverability and timing of the $33.967 million inventory balance, given price volatility and refrigerant phase-downs.
- Review the Hillburn remediation accrual, remaining cleanup obligations, and any potential EPA listing or uninsured exposure.