Hudson Technologies, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance sheet compared with December 31, 2011. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic and energy-optimization services. Refrigerant and reclamation sales accounted for $34.8 million of first-half 2012 revenue; services contributed $2.3 million.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $22.251m | $14.712m | $37.105m | $28.530m |
| Gross profit | $10.237m | $2.707m | $16.205m | $6.409m |
| Gross margin | 46.0% | 18.4% | 43.7% | 22.5% |
| Operating income | $8.469m | $1.529m | $12.687m | $3.519m |
| Net income | $5.135m | $0.781m | $7.644m | $1.869m |
| Diluted earnings per share | $0.20 | $0.03 | $0.29 | $0.07 |
- Q2 revenue rose 51%; first-half revenue rose 30%. Management attributed the increase primarily to higher selling prices per pound for certain refrigerants, partly offset by lower sales volume. First-half service revenue increased modestly, reflecting higher average job prices despite fewer jobs.
- Gross margin improved substantially as selling prices increased relative to product costs. Operating expenses increased 50% in Q2 and 22% for the first half, primarily from selling costs, payroll and professional fees.
- First-half interest expense decreased to $0.358m from $0.517m, which management attributed to lower average borrowings. Income tax expense increased to $4.686m from $1.145m; the company said NOL utilization is limited and it expects certain state and/or federal alternative minimum taxes.
Cash flow, liquidity and debt
- At June 30, cash was $4.008m, working capital was $27.829m, and current assets and liabilities were $49.117m and $21.288m, respectively. Working capital increased from $12.465m at year-end 2011.
- First-half operating cash flow was negative $3.537m, broadly comparable to negative $3.550m a year earlier. Growth in inventory ($15.403m increase) and receivables ($5.733m increase) absorbed cash; higher payables partly offset this use.
- Investing cash outflow was $0.556m, including equipment spending. Financing cash inflow was $4.143m, including $4.387m of long-term debt issuance. Cash increased by $0.050m over the period.
- Total balance-sheet debt was $10.510m at June 30, versus $6.482m at December 31, 2011. The June debt balance included $9.127m borrowed under the new PNC facility.
- On June 22, Hudson refinanced its expiring Keltic facility with a PNC facility of up to $27m: a $4m term loan plus revolving availability up to the lesser of $23m and a borrowing base. It is secured by receivables, inventory, intellectual property and other assets, and matures June 22, 2015. The facility requires a minimum 1.10-to-1.00 fixed-charge coverage ratio, tested quarterly. Hudson reported compliance at June 30 and expected to remain compliant.
- Management estimated 2012 capital expenditures of approximately $0.850m and said it expected to meet foreseeable working-capital needs from operating cash flows and available PNC borrowing capacity.
Changes, outlook and risks
- The main year-over-year change was stronger revenue and profitability, driven principally by refrigerant pricing rather than increased volumes. Inventory and receivables rose sharply, contributing to continued negative operating cash flow despite higher earnings.
- Three customers each represented at least 10% of first-half revenue and together accounted for 40%; no customer reached 10% in the first half of 2011.
- The business is seasonal, with peak refrigerant sales generally in the first half; cool weather, supply constraints, lower demand or declining refrigerant prices could materially hurt results. Refrigerant availability and pricing are also exposed to changing HCFC phase-down rules. An EPA proposal contemplated further HCFC production reductions, but was not final at the filing date.
- Inventory valuation and saleability are exposed to changing refrigerant prices, supply, regulation and market demand. Loss of a major customer, inability to source refrigerants, or inability to obtain additional capital could adversely affect results and liquidity.
- The company reported that its European joint venture had not begun operations as of June 30, 2012. It also disclosed various legal proceedings by reference to its 2011 Form 10-K; this filing does not provide a clear summary of their status or potential exposure.
- On July 27, 2012, directors approved aggregate executive base-pay increases of $86,000 effective August 1, and authorized a potential fiscal-2012 bonus pool of up to $1m, conditional on earnings exceeding a benchmark. The benchmark and any eventual awards were not specified.
- No specific revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether higher refrigerant selling prices and improved margins can be sustained, particularly given lower sales volumes and regulatory changes.
- How the company will convert its elevated inventory and receivables into cash, and whether operating cash flow improves after the seasonal peak.
- The concentration, payment performance and ongoing purchasing behavior of the three customers representing 40% of first-half revenue.
- PNC borrowing-base availability, interest costs, covenant headroom and compliance as working-capital needs change.
- Potential tax consequences of limited NOL use, and the status and possible costs of environmental matters and other legal proceedings.