Hudson Technologies (HDSN) reported seemingly mixed Q3 results last night. Specifically, due to lower selling prices for certain refrigerants, revenues for the period of $76.5 million fell $8.0 million short of the $84.5 million analysts had been projecting. But even as the gap between its inventory costs and sales prices continued to narrow as expected, the company reported adjusted earnings of 34 cents per share, which comfortably exceeded the 31-cent consensus estimate. This was driven by the favorable shift in mix it experienced towards higher margin carbon sales and sales related to its program with the Defense Logistics Agency, which helped HDSN maintain its gross margin at the solid 40% level it had recovered to in Q2 (from just 32% in Q4 of 2022 and 39% in Q1) and well above its long-term target of 35%.

More importantly, even as the late arrival of warmer weather to many parts of the U.S. during this year’s cooling season impacted demand for certain refrigerants, this solid operating performance also led to the production of another $21.9 million in cash flow from its operations, enabling it to fully repay its term loan during the quarter. Together with the additional payoff of the last $5 million in revolver debt it had at quarter’s end in Q4, HDSN is currently debt free and should see a significant lift in profitability going forward as it no longer has to pay interest on this debt. And when you consider that refrigerant prices and demand for HDSN’s high-margin reclaimed refrigerants should only rise as we approach the next stepdown in HFC production and consumption levels under the AIM Act to 60% of baseline levels scheduled for 2024 (from 90% currently), I think the potential for further significant outperformance in the periods ahead remains. As this begins to play out, I expect the stock to resume its recent momentum in short order.