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HDSN > SEC Filings for HDSN > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for HUDSON TECHNOLOGIES INC /NY

Form 10-Q for HUDSON TECHNOLOGIES INC /NY


31-Jul-2014

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this section and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the laws and regulations affecting the industry, changes in the demand and price for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants), the Company's ability to source refrigerants, regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements that become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration, the ability to obtain financing, any delays or interruptions in bringing products and services to market, the timely availability of any requisite permits and authorizations from governmental entities and third parties as well as factors relating to doing business outside the United States, including changes in the laws, regulations, policies, and political, financial and economic conditions, including inflation, interest and currency exchange rates, of countries in which the Company may seek to conduct business, the Company's ability to successfully integrate any assets it acquires from third parties into its operations, and other risks detailed in the Company's 10-K for the year ended December 31, 2013 and other subsequent filings with the Securities and Exchange Commission ("SEC"). The words "believe", "expect", "anticipate", "may", "plan", "should" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Several of the Company's accounting policies involve significant judgments, uncertainties and estimations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. To the extent that actual results differ from management's judgments and estimates, there could be a material adverse effect on the Company. On a continuous basis, the Company evaluates its estimates, including, but not limited to, those estimates related to its allowance for doubtful accounts, inventory reserves, and valuation allowance for the deferred tax assets relating to its net operating loss carry forwards ("NOLs") and commitments and contingencies. With respect to accounts receivable, the Company estimates the necessary allowance for doubtful accounts based on both historical and anticipated trends of payment history and the ability of the customer to fulfill its obligations. For inventory, the Company evaluates both current and anticipated sales prices of its products to determine if a write down of inventory to net realizable value is necessary. In determining the Company's valuation allowance for its deferred tax assets, the Company assesses its ability to generate taxable income in the future. The Company utilizes both internal and external sources to evaluate potential current and future liabilities for various commitments and contingencies. In the event that the assumptions or conditions change in the future, the estimates could differ from the original estimates.

Overview

Sales of refrigerants continue to represent a significant portion of the Company's revenues. The Company's refrigerant sales are primarily HCFC and HFC based refrigerants and to a lesser extent CFC based refrigerants that are no longer manufactured. Currently the Company purchases virgin HCFC and HFC refrigerants and reclaimable HCFC, HFC and CFC refrigerants from suppliers and its customers. Effective January 1, 1996, the Clean Air Act (the "Act") prohibited the production of virgin CFC refrigerants and limited the production of virgin HCFC refrigerants. Effective January 2004, the Act further limited the production of virgin HCFC refrigerants and federal regulations were enacted which established production and consumption allowances for HCFC refrigerants and imposed limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin HCFC refrigerants is scheduled to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants is scheduled to be phased out by 2030. In December 2009, the EPA issued the 2009 Rule which limited the total pounds of virgin HCFC refrigerants that could be produced and imported for the years 2010 through 2014 to levels which, based upon the EPA's estimates, would require as much as 20% of the service demand for existing equipment to be met by reclaimed or recycled HCFC refrigerants. In 2011, as a result of litigation, the 2009 Rule was vacated, and in April 2013, the EPA issued a final rule providing for further reductions in the production and importation of HCFC refrigerants in the years 2013 and 2014 when compared to the reductions originally established in the 2009 Rule. The final rule issued in April 2013 allows for the production or importation of 63 million and 51 million pounds of HCFC-22 in 2013 and 2014, respectively. In December 2013, a proposed rule was issued by the EPA to address production and consumption allowances for HCFC refrigerants for the years 2015 through 2019. In the proposed rule, the EPA discusses several alternatives for the phase down of HCFC-22 during the years 2015 through 2019, and identifies a preferred approach that would implement a linear draw down for the production or importation of HCFC-22 that would start at 30 million pounds in 2015 and reduce by approximately 6 million pounds each year and end at zero in 2020. A final rule to address production and consumption allowances for the years 2015 through 2019 has not yet been issued by the EPA. As reflected in our historical operating results, EPA rule making and its corresponding impact on supply, pricing, and market behavior has a material effect on the Company's operating results. The Company expects this final rule to have a material impact on the Company's operating results and financial position.

The Company has created and developed a service offering known as RefrigerantSideŽ Services. RefrigerantSideŽ Services are sold to contractors and end-users whose refrigeration systems are used in commercial air conditioning and industrial processing. These services are offered in addition to refrigerant sales and the Company's traditional refrigerant management services, which consist primarily of reclamation of refrigerants. The Company has created a network of service depots that provide a full range of the Company's RefrigerantSideŽ Services to facilitate the growth and development of its service offerings.

The Company focuses its sales and marketing efforts for its RefrigerantSideŽ Services on customers who the Company believes most readily appreciate and understand the value that is provided by its RefrigerantSideŽ Services offering. In pursuing its sales and marketing strategy, the Company offers its RefrigerantSideŽ Services to customers in the following industries:
petrochemical, pharmaceutical, industrial power, manufacturing, commercial facility and property management and maritime. The Company may incur additional expenses as it develops its RefrigerantSideŽ Services offering.

Results of Operations

Three month period ended June 30, 2014 as compared to the three month period ended June 30, 2013

Revenues for the three month period ended June 30, 2014 were $16,875,000, an increase of $1,107,000 or 7% from the $15,768,000 reported during the comparable 2013 period. The increase in revenues was attributable to an increase in refrigerant revenues of $1,035,000 and an increase in RefrigerantSideŽ Services revenues of $72,000. The increase in refrigerant revenue is primarily related to an increase in the number of pounds of certain refrigerants sold, which accounted for an increase in revenues of $8,468,000, offset in part by a decrease in the selling price per pound of certain refrigerants sold, which accounted for a decrease in revenues of $7,433,000. The increase in RefrigerantSideŽ Services was primarily attributable to an increase in the average revenue per job completed compared to the same period in 2013.

Cost of sales for the three month period ended June 30, 2014 was $14,673,000 or 87% of sales. The cost of sales for the three month period ended June 30, 2013 was $13,220,000 or 84% of sales. The increase in the cost of sales percentage from 84% for the three month period ended June 30, 2013 to 87% for the three month period ended June 30, 2014 is primarily due to the cost of HCFC-22 per pound, relative to the lower selling price per pound, yielding a lower gross margin on those sales for the three month period ended June 30, 2014 compared to the same period in 2013.

Operating expenses for the three month period ended June 30, 2014 were $1,545,000, a decrease of $229,000 from the $1,774,000 reported during the comparable 2013 period. The decrease in operating expenses is due to a decrease in selling expenses of $204,000, primarily due to decreased selling payroll costs, as well as a decrease in general and administrative expenses of $25,000 primarily due to a decrease in administrative payroll, investor relations and insurance expenses.

Other income (expense) for the three month period ended June 30, 2014 was ($186,000), compared to the ($243,000) reported during the comparable 2013 period. Other income (expense) consists of interest expense of $186,000 and $243,000 for the comparable 2014 and 2013 periods, respectively. The decrease in interest expense is due to decreased borrowing on the PNC credit facility.

Income tax expense for the three month period ended June 30, 2014 was $163,000 compared to income tax expense for the three month period ended June 30, 2013 of $197,000. For 2014 and 2013 the income tax expense of $163,000 and $197,000, respectively were for federal and state income tax at statutory rates applied to the pre-tax income.

Net income for the three month period ended June 30, 2014 was $308,000, a decrease of $26,000 from the $334,000 net income reported during the comparable 2013 period, primarily due to the reduction in gross profit of $346,000, partially offset by a reduction in operating expenses of $229,000 and a reduction in interest and income tax expense of $91,000.

Six month period ended June 30, 2014 as compared to the six month period ended June 30, 2013

Revenues for the six month period ended June 30, 2014 were $32,459,000, a decrease of $6,186,000 or 16% from the $38,645,000 reported during the comparable 2013 period. The decrease in revenues was primarily attributable to a decrease in refrigerant revenues of $6,602,000 partially offset by an increase in RefrigerantSideŽ Services revenues of $416,000. The decrease in refrigerant revenue is primarily related to a decrease in the selling price per pound of certain refrigerants sold, which accounted for a decrease in revenues of $20,000,000, offset in part by an increase in the number of pounds of certain refrigerants sold, which accounted for an increase in revenues of $13,398,000. The increase in RefrigerantSideŽ Services was attributable to an increase in the number of jobs completed offset by a decrease in the price of jobs completed when compared to the same period in 2013.

Cost of sales for the six month period ended June 30, 2014 was $28,454,000 or 88% of sales. The cost of sales for the six month period ended June 30, 2013 was $26,935,000 or 70% of sales. The increase in the cost of sales percentage from 70% for the six month period ended June 30, 2013 to 88% for the six month period ended June 30, 2014 is primarily due to the cost of HCFC-22 per pound, relative to the lower selling price per pound, yielding a lower gross margin on those sales for the six month period ended June 30, 2014 compared to the same period in 2013.

Operating expenses for the six month period ended June 30, 2014 were $2,881,000, a decrease of $650,000 from the $3,531,000 reported during the comparable 2013 period. The decrease in operating expenses are due to a decrease in selling expenses of $377,000 primarily due to decreased selling payroll costs, advertising and professional fees, and a decrease in general and administrative expenses of $273,000 primarily due to a decrease in administrative payroll, investor relations costs and professional fees and a collection of a previously written off bad debt.

Other income (expense) for the six month period ended June 30, 2014 was ($395,000), compared to the ($440,000) reported during the comparable 2013 period. Other income (expense) consists of interest expense of $395,000 and $440,000 for the comparable 2014 and 2013 periods, respectively. The decrease in interest expense is due to decreased borrowing on the PNC credit facility.

Income tax provision for the six month period ended June 30, 2014 and 2013 was $261,000 and $2,936,000, respectively. The respective income tax provisions were for federal and state income tax at statutory rates.

Net income for the six month period ended June 30, 2014 was $468,000, a decrease of $4,335,000 from the $4,803,000 net income reported during the comparable 2013 period, primarily due to decreased revenues and gross profit, partially offset by decreased income tax expenses.

Liquidity and Capital Resources

At June 30, 2014, the Company had working capital, which represents current assets less current liabilities of $34,698,000, an increase of $12,443,000 from the working capital of $22,255,000 at December 31, 2013. The increase in working capital is primarily attributable to approximately $16,000,000 of proceeds from the issuance of common stock, offset by the repayment of long term debt of approximately $4,000,000.

Inventory and trade receivables are principal components of current assets. At June 30, 2014, the Company had inventories of $24,517,000, a decrease of $9,450,000 from $33,967,000 at December 31, 2013. The decrease in the inventory balance is due to the timing and availability of inventory purchases and the sale of refrigerants. The Company's ability to sell and replace its inventory on a timely basis and the prices at which it can be sold are subject, among other things, to current market conditions and the nature of supplier or customer arrangements and the Company's ability to source CFC based refrigerants (which are no longer being produced), HCFC refrigerants (which are currently being phased down leading to a full phase out of virgin production), or non-CFC based refrigerants. At June 30, 2014, the Company had trade receivables, net of allowance for doubtful accounts, of $10,163,000, an increase of $6,457,000 from $3,706,000 at December 31, 2013. The Company's trade receivables are concentrated with various wholesalers, brokers, contractors and end-users within the refrigeration industry that are primarily located in the continental United States.

The Company has historically financed its working capital requirements through cash flows from operations, the issuance of debt and equity securities, and bank borrowings.

Net cash provided from operating activities for the six month period ended June 30, 2014, was $5,038,000 compared with net cash used by operating activities of $13,830,000 for the comparable 2013 period. Net cash provided from operating activities for the 2014 period was primarily attributable to a decrease in inventory as well as an increase in accounts payable and accrued expenses offset by an increase in trade accounts receivable and prepaid and other assets.

Net cash used by investing activities for the six month period ended June 30, 2014, was $221,000 compared with net cash used by investing activities of $540,000 for the comparable 2013 period. The net cash used by investing activities for the 2014 period was primarily related to investment in general purpose equipment for the Company's Champaign, Illinois facility.

Net cash used by financing activities for the six month period ended June 30, 2014, was $3,593,000 compared with net cash provided by financing activities of $12,753,000 for the comparable 2013 period. The net cash used by financing activities for the 2014 period was primarily due to repayment of short term debt and long term debt, offset by proceeds from the issuance of common stock.

At June 30, 2014, the Company had cash and cash equivalents of $1,893,000. The Company continues to assess its capital expenditure needs. The Company may, to the extent necessary, continue to utilize its cash balances to purchase equipment primarily for its operations. The Company estimates that the total capital expenditures for 2014 will be approximately $1,000,000.

The following is a summary of the Company's significant contractual cash obligations for the periods indicated that existed as of June 30, 2014 (in 000's):

                                                                           Twelve Month Period Ended June 30,
Long and short term debt and capital lease                                                 2019 &
obligations:                                  2015      2016      2017      2018       Thereafter       Total
Principal                                    $ 278     $ 282     $ 246     $   0     $          0     $   806
Estimated interest (1)                          25        16         5         0                0          46
Operating leases                               614       298       128       110               18       1,168

Total contractual cash obligations           $ 917     $ 596     $ 379     $ 110     $         18     $ 2,020

(1) The estimated future interest payments on all debt other than revolving debt are based on the respective interest rates applied to the declining principal balances on each of the notes.

On June 22, 2012, a subsidiary of Hudson entered into the PNC Facility. Under the terms of the PNC Facility, Hudson could initially borrow up to $27,000,000 consisting of a term loan in the principal amount of $4,000,000 and revolving loans in a maximum amount up to the lesser of $23,000,000 and a borrowing base that is calculated based on the outstanding amount of Hudson's eligible receivables and eligible inventory, as described in the PNC Facility. On February 15, 2013, the PNC Facility was amended. As a result of this amendment, Hudson may borrow up to a maximum of $40,000,000 consisting of a term loan in the principal amount of $4,000,000 and revolving loans in a maximum amount up to $36,000,000. Amounts borrowed under the PNC Facility may be used by Hudson for working capital needs and to reimburse drawings under letters of credit. At June 30, 2014, total borrowings under the PNC Facility were none, and there was $24,300,000 available to borrow under the revolving line of credit. The effective interest rate under the PNC Facility was 3.0% at June 30, 2014.

Interest on loans under the PNC Facility is payable in arrears on the first day of each month with respect to loans bearing interest at the domestic rate (as set forth in the PNC Facility) and at the end of each interest period with respect to loans bearing interest at the Eurodollar rate (as set forth in the PNC Facility) or, for Eurodollar rate loans with an interest period in excess of three months, at the earlier of (a) each three months from the commencement of such Eurodollar rate loan or (b) the end of the interest period. Interest charges with respect to loans are computed on the actual principal amount of loans outstanding during the month at a rate per annum equal to (A) with respect to domestic rate loans, the sum of (i) a rate per annum equal to the higher of
(1) the base commercial lending rate of PNC, (2) the federal funds open rate plus .5% and (3) the daily LIBOR plus 1%, plus (ii) .5% and (B) with respect to Eurodollar rate loans, the sum of the Eurodollar rate plus 2.75%.

Hudson granted to PNC, for itself, and as agent for such other lenders as thereafter may become a lender under the PNC Facility, a security interest in Hudson's receivables, intellectual property, general intangibles, inventory and certain other assets.

The PNC Facility contains certain financial and non-financial covenants relating to Hudson, including limitations on Hudson's ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.

The PNC Facility contains a financial covenant to maintain at all times a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00, tested quarterly on a rolling twelve month basis. Fixed Charge Coverage Ratio is defined in the PNC Facility, with respect to any fiscal period, as the ratio of (a) EBITDA of Hudson for such period, minus unfinanced capital expenditures (as defined in the PNC Facility) made by Hudson during such period, minus the aggregate amount of cash taxes paid by Hudson during such period, minus the aggregate amount of dividends and distribution made by Hudson during such period, minus the aggregate amount of payments made with cash by Hudson to satisfy soil sampling and reclamation related to environmental cleanup at the Company's former Hillburn, NY facility during such period (to the extent not already included in the calculation of EBITDA as determined by the Agent) to (b) the aggregate amount of all principal payments due and/or made, except principal payments related to outstanding revolving advances with regard to all funded debt (as defined in the PNC Facility) of Hudson during such period, plus the aggregate interest expense of Hudson during such period. EBITDA as defined in the PNC Facility shall mean for any period the sum of (i) earnings before interest and taxes for such period plus (ii) depreciation expenses for such period, plus
(iii) amortization expenses for such period, plus (iv) non-cash charges.

On October 25, 2013, we entered into the Second PNC Amendment which, among other things, waived our requirement to comply with the minimum fixed charge coverage ratio covenant of 1.10 to 1.00 for the fiscal quarter ended September 30, 2013, under the PNC Facility. The covenant waiver was required primarily because of the adverse impact on our results of operations from the significant reduction in the selling price of HCFC-22 following the EPA's final ruling allowing for the production or importation of 63 million and 51 million pounds of HCFC-22 in 2013 and 2014, respectively.

The Second PNC Amendment also redefined the "Revolving Interest Rate" as well as the "Term Loan Rate" (as defined in the Facility) as follows:

"Revolving Interest Rate" shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one percent (1.00%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three quarters of one percent (2.75%) with respect to the Eurodollar Rate.

"Term Loan Rate" shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one percent (1.00%) with respect to the Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three quarters of one percent (2.75%) with respect to Eurodollar Rate Loans.

The Second PNC Amendment suspended the minimum fixed charge ratio covenant until the quarterly period ending March 31, 2015 and set the minimum EBITDA for the quarters ended December 31, 2013 through December 31, 2014.

On July 2, 2014, we entered into the Third Amendment to the PNC Facility (the "Third PNC Amendment") which, among other things, extended the term of PNC Facility. Pursuant to the Third PNC Amendment, which was effective June 30, 2014, the Termination Date of the Facility (as defined in the Facility) has been extended to June 30, 2018. The Third PNC Amendment also amended the Minimum EBITDA covenant in the Facility to require that the Company maintain, on a trailing 12 month basis, tested quarterly, minimum EBITDA for the quarters ending June 30, 2014 through December 31, 2014, as follows:

                               Period                        Amount
               Six month period ending June 30, 2014       $ 1,123,000
            Nine month period ending September 30, 2014    $ 1,330,000
            Twelve month period ending December 31, 2014   $   802,000

EBITDA for the six month period ended June 30, 2014 was $1,535,000, which was in compliance with the EBITDA covenant, as amended by the Third PNC Amendment, for the period. The EBITDA was calculated as follows:

                                                    For the six months
                                                   ended June 30, 2014
            Net income                           $             468,000
            add: income tax provision                          261,000
            Income before income taxes                         729,000
            add: interest expense                              395,000
            add: depreciation and amortization                 411,000

            Earnings before interest, taxes,
            depreciation, and amortization       $           1,535,000

EBITDA, which represents a non-GAAP measurement of certain financial results, does not represent and should not be considered as an alternative to net income or cash provided by operating activities as determined by GAAP. We make no representation or assertion that EBITDA is indicative of our cash provided by operating activities or results of operations. We have provided a reconciliation of the net loss to EBITDA solely for the purpose of complying with SEC disclosure requirements and not as an indication that EBITDA is a substitute measure for income from operations.

The Company was in compliance with all covenants, as amended by the Third PNC Amendment, under the PNC Facility as of June 30, 2014. The Company's ability to comply with these covenants in future quarters may be affected by events beyond the Company's control, including general economic conditions, weather conditions, regulations and refrigerant pricing. Although we expect to remain in compliance with all covenants in the PNC Facility, as amended by the Third PNC Amendment, depending on our future operating performance and general economic conditions, we cannot make any assurance that we will continue to be in compliance.

The commitments under the PNC Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on June 30, 2018, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated sooner following an event of default.

On June 1, 2012, the Company entered into a mortgage note with Busey Bank for $855,000. The note bears interest at the fixed rate of 4% per annum, amortizing over 60 months and maturing on June 1, 2017. The mortgage note is secured by the . . .

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