Hudson Technologies, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic and optimization services. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $15.171 | $14.473 | $53.816 | $51.578 |
| Gross profit (loss), reported | $(12.613) | $5.365 | $(0.903) | $21.569 |
| Operating income (loss) | $(14.446) | $3.715 | $(6.267) | $16.401 |
| Net income (loss) | $(9.115) | $2.194 | $(4.312) | $9.837 |
| Diluted EPS | $(0.36) | $0.08 | $(0.17) | $0.37 |
- Revenue rose 5% in Q3 and 4% for the nine months. Nine-month revenue comprised $50.564 from refrigerant and reclamation sales and $3.252 from RefrigerantSide services.
- A $14.700 inventory lower-of-cost-or-market charge for HCFC-22 drove the reported gross and operating losses. Excluding that charge, gross profit was $2.087 in Q3 and $13.797 for the nine months; the filing does not present these as adjusted GAAP measures.
- Operating expenses were $1.833 in Q3 and $5.364 for the nine months. Nine-month interest expense increased to $0.687 from $0.532, attributed to higher PNC borrowings.
- Nine-month operating cash use was $5.716, versus $7.059 in 2012. Investing cash use was $0.610; financing provided $6.278. Cash declined $0.048 to $3.943.
- At September 30, working capital was $23.830, down from $27.408 at year-end 2012. Current assets were $48.553 and current liabilities $24.723. Inventory was $32.378, down from $40.167; net receivables were $6.866, up from $1.956.
- Balance-sheet short-term debt and current maturities were $18.076; long-term debt was $4.748, for total balance-sheet debt of $22.824, compared with $17.656 at December 31, 2012.
Material changes, outlook, and risks
- Management attributed the inventory write-down and weaker HCFC-22 economics to oversupply following the EPA’s 2013 rule permitting production or importation of 63 million pounds of HCFC-22 in 2013 and 51 million in 2014. The EPA had not set limits for 2015–2019; management expected that rule to materially affect results and financial position. Further price declines could cause additional revenue losses or inventory impairment.
- On October 25, 2013, PNC waived the 1.10 minimum fixed-charge coverage covenant for Q3 and suspended that covenant until the quarter ending March 31, 2015. The amendment imposed minimum EBITDA tests through 2014, including $(2.154) for Q4 2013 and $1.879 for full-year 2014. Hudson said it was compliant as of September 30 after the amendment and believed future compliance was reasonably likely, but noted dependence on conditions including refrigerant pricing.
- The PNC facility was due June 22, 2015; the filing reports $4.932 of remaining revolver availability and a 2.5% effective rate at September 30. Estimated 2013 capital expenditures were approximately $1.0. Management expected working-capital needs to be met through anticipated operating cash flows and available facility funds, while warning that weaker sales, higher costs, or expansion needs could require additional capital.
- Seasonality is significant: refrigerant sales typically peak in the first half, and past fourth quarters have sometimes produced losses. Management said cool spring weather reduced 2013 second-quarter demand.
- Two customers each represented at least 10% of nine-month revenue and together accounted for 25%, versus three customers representing 40% in 2012. The company also depends on refrigerant suppliers and faces regulatory, pricing, weather, customer-concentration, financing, and environmental-liability risks. NOLs totaled approximately $13.0, of which approximately $10.6 were subject to annual utilization limits.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing references legal proceedings described in the 2012 Form 10-K but does not provide details here.
Important facts for investors to verify
- Confirm the valuation assumptions and remaining exposure in HCFC-22 inventory, including subsequent market prices and any additional write-downs.
- Track compliance with amended PNC EBITDA tests, revolver availability, debt maturity/refinancing plans, and interest-rate exposure.
- Reconcile the filing’s debt disclosures: the debt note says PNC borrowings were $21.788, while the market-risk section states the PNC Facility balance was $28.187; the text does not explain the difference.
- Assess the recoverability and timing of the $3.300 income-tax receivable and deferred tax assets, including the effect of NOL limitations.
- Monitor customer concentration, refrigerant supply and pricing, EPA rules for 2015–2019, seasonality, and any environmental or legal contingencies.