Hudson Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related diagnostic services. Financial amounts below are in U.S. dollars; “$m” means millions.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $11.935m | $7.996m | $40.465m | $33.133m |
| Gross profit / margin | $1.470m / 12.3% | $1.804m / 22.6% | $7.879m / 19.5% | $6.678m / 20.2% |
| Operating income / margin | $0.007m / 0.1% | $0.398m / 5.0% | $3.526m / 8.7% | $2.676m / 8.1% |
| Net income (loss) | ($0.113m) | $0.200m | $1.756m | $1.257m |
| Net income (loss) per diluted share | ($0.00) | $0.01 | $0.07 | $0.05 |
Quarterly comparison: Revenue rose 49%, driven mainly by increased refrigerant volume. Cost of sales grew faster, rising 69%; management attributed weaker gross margin chiefly to lower average selling prices for certain refrigerants. Operating expenses increased 4%, and the quarter moved from net income to a $113,000 loss.
Nine-month comparison: Revenue increased 22%; refrigerant and reclamation sales were $37.455m and RefrigerantSide services were $3.010m. Net income increased 40%, reflecting higher revenue and gross profit, partly offset by higher operating expenses and income taxes. Cost of sales was 81% of revenue, versus 80% a year earlier.
Cash flow and liquidity: Nine-month operating cash flow was $3.832m, versus $3.628m; investing cash outflow was $0.420m, versus $0.273m; financing cash outflow was $2.149m, versus $0.426m provided in 2010. Cash rose to $5.189m from $3.926m at year-end 2010. Working capital was $14.064m, up from $12.225m. Inventory fell $8.203m to $10.008m, while net receivables rose $2.850m to $4.617m.
Debt: Balance-sheet short- and long-term debt totaled $3.971m at September 30, 2011, compared with $6.030m at December 31, 2010. The Keltic facility carried a 6.5% rate and expires June 26, 2012. The company reported $37,000 outstanding on the revolver, $7.274m of revolver availability, and $2.750m outstanding under term loans. Substantially all assets secure the facility.
Outlook, risks and other matters
- Management estimated 2011 capital expenditures of approximately $1.0m and said it expected to meet foreseeable working-capital needs through operating cash flow and available facility funds. No specific revenue or earnings forecast was provided.
- Hudson was in compliance with all facility covenants at quarter-end and said it believed future compliance was reasonably likely. It was seeking to renew and possibly increase the facility; success was not assured, and the company cautioned that failure to renew or replace it could adversely affect capital needs.
- The business is seasonal, with peak refrigerant sales generally in the first half; the filing notes seasonal downturns have resulted in fourth-quarter losses in past years. Weather, demand, selling prices, supply availability, and service growth may affect results.
- Regulation is phasing out virgin HCFC refrigerants over time. Hudson cited risks from supply constraints or costs, refrigerant pricing and demand, competition, customer or supplier changes, financing, litigation, and potential environmental liabilities. No customer represented 10% or more of nine-month revenue.
- Deferred tax assets, net, declined to $2.640m from $3.669m. Use of tax loss carryforwards is subject to annual limitations; the company expects certain state and/or federal alternative minimum taxes for the foreseeable future.
- The filing refers to pending legal matters described in the 2010 Form 10-K but does not provide their details here. Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control was reported for the quarter.
Key facts for investors to verify
- Whether refrigerant selling prices and gross margins recover after the sharp Q3 margin decline.
- Receivables collection and the sustainability of cash generation as inventory is sold and replenished.
- Renewal or replacement of the credit facility before its June 26, 2012 expiration, including borrowing availability and covenant terms.
- Refrigerant sourcing, regulation, weather and seasonality effects, particularly fourth-quarter performance.
- Recoverability of deferred tax assets and the status and potential exposure of legal proceedings referenced in the filing.