Hudson Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. Hudson provides refrigerant and industrial gas sales, reclamation, and related refrigeration services.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $34.605 | $28.637 | $62.772 | $50.740 |
| Gross profit / margin | $10.491 / 30.3% | $7.212 / 25.2% | $18.013 / 28.7% | $12.737 / 25.1% |
| Operating income / margin | $8.144 / 23.5% | $4.761 / 16.6% | $13.163 / 21.0% | $8.031 / 15.8% |
| Net income | $4.830 | $2.811 | $7.774 | $4.704 |
| Diluted earnings per share | $0.14 | $0.08 | $0.23 | $0.14 |
- For the first half, refrigerant and reclamation sales were $60.276 million, compared with $48.172 million; RefrigerantSide Services revenue was $2.496 million, compared with $2.568 million.
- Six-month operating cash flow was negative $4.148 million, versus negative $0.498 million a year earlier. Investing cash flow was negative $0.517 million; financing cash flow was positive $4.951 million. Cash increased $0.286 million to $1.544 million.
- At June 30, cash was $1.544 million, receivables $21.931 million, and inventory $57.774 million. Working capital was $48.408 million, up from $38.509 million at year-end 2015.
- Balance-sheet debt was approximately $30.057 million, including $25.596 million on the revolving line, $0.315 million of current debt and $4.146 million of long-term debt. PNC Facility borrowings were reported at approximately $29.596 million, with $20.404 million available; its effective rate was 3.00%.
Changes versus the prior comparable period
- Q2 revenue rose 21% and first-half revenue rose 24%. Management attributed most of the growth to higher refrigerant selling prices. In Q2, price increases added $6.409 million of revenue, partly offset by lower pounds sold; for the first half, higher prices and volume contributed $9.632 million and $2.472 million, respectively.
- Gross margin improved as cost of sales declined to 70% of revenue in Q2 from 75%, and to 71% for the first half from 75%, primarily due to higher selling prices.
- First-half net income increased $3.070 million. Interest expense also increased, to $0.623 million from $0.443 million, reflecting higher PNC borrowings.
- Receivables increased $17.517 million from December 31, 2015, while inventory declined $4.123 million. The receivable increase contributed to negative operating cash flow.
Outlook, risks and notable items
- No revenue or earnings guidance is provided. Management estimated 2016 capital expenditures at approximately $1.0 million and said it expected to remain in compliance with PNC covenants, while cautioning that future compliance is not assured.
- In April 2016, the credit facility maximum increased from $40 million to $50 million and its termination date was extended to June 30, 2020. Hudson reported covenant compliance at June 30, 2016. The facility requires a minimum 1.10:1 fixed-charge coverage ratio and is secured by specified assets.
- Refrigerant sales are seasonal, with peak sales generally in the first half. Results are exposed to weather, refrigerant prices and availability, regulatory phase-downs of HCFCs, and shifts in demand. Management warned that adverse conditions could cause lower sales, inventory write-downs or losses.
- One customer represented 25% of first-half revenue; $2.1 million was receivable from that customer at June 30. Loss of a major customer or reduced purchases could materially affect results.
- The company had approximately $5 million of remaining NOLs subject to annual utilization limits of $1.3 million. Deferred tax assets declined to $2.319 million from $3.663 million at year-end.
- A 2016 acquisition earn-out liability of $0.771 million remained at June 30; the filing also discloses up to $3 million of possible additional employee compensation for 2017–2019 tied to revenue performance. No material change in previously reported legal proceedings was disclosed.
Important facts for investors to verify
- Whether the increased revenue and margin performance is sustainable if refrigerant prices change or sales volumes weaken.
- Collection timing and credit exposure related to the sharp rise in receivables and the customer representing 25% of first-half revenue.
- Inventory valuation, turnover, and availability given refrigerant phase-downs and market-price risk.
- Future operating cash generation, revolving borrowings, interest-rate exposure, and continued compliance with facility covenants.
- Seasonality and the potential effect of weather, regulatory changes, and refrigerant supply constraints on second-half results.