Hudson Technologies, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results. Hudson supplies refrigerants and provides reclamation, on-site refrigerant services, and monitoring and diagnostic services; refrigerant sales are the substantial majority of revenue.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $28.637m | $16.875m | $50.740m | $32.459m |
| Gross profit / margin | $7.212m / 25.2% | $2.202m / 13.0% | $12.737m / 25.1% | $4.005m / 12.3% |
| Operating income / margin | $4.761m / 16.6% | $0.657m / 3.9% | $8.031m / 15.8% | $1.124m / 3.5% |
| Net income | $2.811m | $0.308m | $4.704m | $0.468m |
| Diluted EPS | $0.08 | $0.01 | $0.14 | $0.02 |
Cash flow and liquidity: Six-month operating cash flow was negative $0.498m, versus positive $5.038m a year earlier, primarily reflecting higher receivables and inventory, partly offset by increased payables, earnings, and deferred-tax-asset utilization. Investing cash flow was negative $2.973m, including the acquisition; financing cash flow was positive $4.019m, mainly from short-term borrowings. Cash was $1.483m at June 30. Working capital was $37.826m, compared with $32.114m at year-end 2014. Receivables were $14.675m and inventory was $44.953m.
Debt: Total short- and long-term debt on the balance sheet was $14.731m. PNC Facility borrowings were $13.942m, with $19.063m available under the revolver; its effective interest rate was 4.25%. The facility matures June 30, 2018. Hudson reported compliance with its covenants at quarter-end, including a 1.10-to-1.00 minimum fixed-charge coverage covenant. The company said it expected operating cash flows and facility availability to meet foreseeable working-capital needs, while noting future covenant compliance was not assured.
Material changes and management commentary
- Q2 revenue grew 70%; first-half revenue grew 56%. Management attributed the increases mainly to higher refrigerant selling prices and greater pounds sold. First-half refrigerant and reclamation sales were $48.172m, versus $29.666m; RefrigerantSide Services revenue declined to $2.568m from $2.793m.
- Gross margin improved as selling prices for certain refrigerants rose. Management noted operating expenses increased, including acquisition-related costs; Q2 included approximately $0.100m of non-recurring G&A expense. First-half G&A included approximately $0.127m of non-recurring expenses; the prior-year comparison benefited from a one-time $0.170m receivable collection.
- On January 16, 2015, Hudson acquired assets of a refrigerant and compressed-gases supplier for $2.424m cash, assumed a $0.020m liability, and agreed to a potential $3.000m earn-out. Approximately $0.300m had been paid and $2.700m accrued at June 30. Purchase-price allocation remained preliminary; acquired operations were not material to reported results, according to the filing.
- Management estimated 2015 capital expenditures of approximately $1.000m. The filing gives no specific revenue or earnings guidance and cautions that first-half results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Seasonality is significant: refrigerant sales typically peak in the first half, and past seasonal declines have contributed to fourth-quarter losses. Unseasonably cool weather could reduce demand.
- Refrigerant sourcing, pricing, and demand are material risks. EPA phase-down rules reduce virgin HCFC-22 production/import allowances from approximately 22 million pounds in 2015 by about 4.5 million pounds annually, reaching zero in 2020. Supply constraints or lower prices could materially affect results.
- Customer concentration increased: two customers each represented at least 10% and together represented 35% of first-half 2015 revenue, versus 28% in the prior-year period. Receivables from these customers totaled $2.309m at June 30.
- Inventory and receivables rose substantially, contributing to negative operating cash flow. Inventory valuation depends on future demand and selling prices; collection and customer credit risks also remain.
- The PNC Facility has variable-rate exposure and is secured by receivables, inventory, intellectual property, and other assets. The company identified economic conditions, weather, regulation, and refrigerant pricing as factors that could affect future covenant compliance.
- Approximately $7.3m of the company’s $9.0m net operating loss carryforwards are subject to annual limitations of $1.3m. Most income-tax expense was non-cash due to NOL utilization. The IRS began examining the 2012 and 2013 federal returns; management did not expect a material effect.
- The filing reports commitments and contingencies and refers to existing legal proceedings, with no material change during the six months. The contractual-obligations table includes $2.700m of acquisition earn-out payments and $2.105m of operating leases.
Key facts for investors to verify
- Whether revenue and margin gains from refrigerant pricing and volumes persist, particularly as seasonal demand eases and HCFC supply rules tighten.
- Whether receivables and inventory convert to cash on expected terms; first-half operating cash flow was negative despite higher net income.
- Customer concentration, including the two customers’ 35% share of first-half revenue and related receivables.
- Final acquisition accounting, earn-out payments, and any performance-based employee compensation tied to 2017–2019 revenue.
- Available revolver capacity, debt maturities, variable-rate exposure, and ongoing compliance with PNC covenants.
- Inventory recoverability, NOL utilization limits, and the outcome of the IRS examination.