Hudson Technologies, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Hudson provides refrigerant sales, reclamation, on-site system services, and related diagnostic and monitoring services.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $15.296 million | $15.171 million | $47.755 million | $53.816 million |
| Gross profit (loss) | $1.495 million | $(12.613) million | $5.500 million | $(0.903) million |
| Operating income (loss) | $(0.127) million | $(14.446) million | $0.997 million | $(6.267) million |
| Net income (loss) | $(0.108) million | $(9.115) million | $0.360 million | $(4.312) million |
- Gross margin was about 9.8% in Q3 and 11.5% year to date. Management reported cost of sales at 90% and 88% of revenue, respectively, versus 86% and 74% in the comparable 2013 periods before the 2013 inventory write-down.
- For the first nine months, refrigerant and reclamation sales were $44.011 million, down from $50.564 million; RefrigerantSide services were $3.744 million, up from $3.252 million. Lower refrigerant selling prices drove much of the revenue decline.
- Cash from operations was $4.654 million for the nine months, versus cash used of $5.716 million in 2013. Investing activities used $0.481 million and financing activities used $3.669 million. Cash rose to $1.173 million from $0.669 million at year-end 2013.
- At September 30, working capital was $34.364 million, up from $22.255 million at December 31, 2013. Current assets were $42.907 million and current liabilities $8.543 million.
- Total debt was $0.730 million ($0.272 million current); borrowings under the PNC facility were zero, with $25 million available under its revolver. Total liabilities were $9.001 million. The PNC facility was extended to June 30, 2018.
- In June, Hudson issued 6.9 million shares and received gross proceeds of approximately $16.129 million. Outstanding shares increased to 32,031,426 as of October 29, 2014.
Changes versus comparable periods
- Q3 revenue rose 1% year over year, while nine-month revenue fell 11%. In the nine-month period, lower refrigerant prices reduced revenue by $24.219 million, partly offset by higher volume adding $17.666 million.
- Operating expenses declined in both periods; nine-month expenses fell $0.861 million, and interest expense decreased as borrowing under the PNC facility declined.
- The significant reported improvement over 2013 net results reflects a $14.7 million lower-of-cost-or-market inventory charge in 2013. Excluding that charge, 2013 gross profit was $2.087 million for Q3 and $13.797 million for the first nine months; thus 2014 gross profit was lower in both comparable periods.
Outlook, risks, and unusual items
- Management estimated 2014 capital expenditures of approximately $1 million and said it expects to meet foreseeable working-capital needs through operating cash flow and PNC availability. No specific revenue or earnings guidance was provided.
- The EPA signed a rule on October 16, 2014 that phases down virgin HCFC-22 production/import allowances from about 22 million pounds in 2015 to zero in 2020. This may support demand for reclaimed refrigerant, but sourcing, refrigerant prices, and demand also create material risks.
- Business results are seasonal, with peak refrigerant sales generally in the first half; cool weather, supply constraints, declining prices, and customer losses can adversely affect results. Two customers represented 26% of nine-month 2014 revenue and had $2.004 million in receivables at September 30.
- The company reported compliance with amended PNC covenants at September 30, including a $1.330 million minimum EBITDA requirement for the nine-month period; reported EBITDA was $1.623 million. The fixed-charge coverage covenant was suspended through the quarter ending March 31, 2015. Future compliance is not assured.
- Approximately $10.6 million of the company’s $16 million federal NOLs are subject to annual limitations of $1.3 million. The IRS was examining 2012 and 2013 returns; management did not expect a material financial-statement effect. The filing refers to legal matters in the 2013 Form 10-K but does not describe them here. Potential environmental cleanup obligations at the former Hillburn, New York facility are referenced in the credit agreement.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported. Management was evaluating the potential effect of the new revenue-recognition standard.
Important facts for investors to verify
- Whether refrigerant pricing and gross margins stabilize, given the sharp nine-month revenue decline and lower margins.
- Inventory valuation, sell-through, and refrigerant sourcing amid the HCFC phase-down and changing market prices.
- Collections and ongoing exposure to the two largest customers, which accounted for 26% of revenue.
- Cash conversion and working-capital movements, particularly receivables and prepaid assets, and the availability and terms of PNC borrowing.
- Future covenant compliance, NOL utilization limits, and the status or cost of environmental and other legal contingencies.