Hudson Technologies, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are with fiscal 2014. This annual filing does not provide a standalone fourth-quarter financial summary.
Business context
Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and management, on-site system decontamination, and diagnostic and energy-efficiency services. It reports one operating segment. Refrigerant sales remain its largest business; the company also expanded through acquisitions completed in late 2014 and early 2015.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $79.722 million | $55.810 million |
| Gross profit and margin | $18.489 million; 23.2% | $6.446 million; 11.5% |
| Operating income (loss) and margin | $8.181 million; 10.3% | ($0.985 million); (1.8%) |
| Net income (loss) and diluted EPS | $4.763 million; $0.14 | ($0.720 million); ($0.02) |
| Operating cash flow | ($10.503 million) | $1.701 million |
- Revenue increased 43%. Refrigerant revenue rose $24.694 million: higher selling prices contributed $17.374 million and increased volume contributed $7.320 million. RefrigerantSide services revenue declined $0.782 million to $4.568 million.
- Cost of sales was 77% of revenue, versus 88% in 2014. Operating expenses increased $2.877 million to $10.308 million, primarily from payroll, including acquired operations, and acquisition-related intangible amortization.
- Cash used in operations reflected a $23.430 million increase in inventory, partly offset by net income and higher payables and accrued expenses. Investing cash use was $3.325 million; financing provided $14.151 million, primarily from increased credit-facility borrowings.
- Cash was $1.258 million at year-end. Working capital was $38.509 million, up from $32.114 million. Inventory rose to $61.897 million from $37.017 million.
- Total debt was $24.866 million, including $24.227 million borrowed under the secured PNC facility; approximately $15.773 million remained available. The facility’s effective rate was 3.75%, and it matures June 30, 2018. The company reported covenant compliance at year-end and a 1.10-to-1.00 minimum fixed-charge coverage covenant.
- Income tax expense was $2.944 million, compared with a $0.906 million benefit in 2014. The company had approximately $9 million of tax net operating loss carryforwards, some subject to annual limitations.
Material changes and unusual items
- In January 2015, Hudson acquired assets from a refrigerant and compressed-gas supplier. Final purchase accounting reduced the recorded earn-out by approximately $1 million; a $0.302 million adjustment was reported as other income. The 2015 acquisition cash payment was $2.424 million, with further earn-out obligations.
- Revenue growth and improved gross margin drove the return to profitability, while operating costs and interest expense increased. Interest expense rose to $0.776 million from $0.641 million, reflecting higher PNC borrowings.
- Two customers each represented at least 10% of revenue and together accounted for 33% in 2015, versus 25% in 2014. No year-end receivables were due from these customers in 2015.
- The filing reports an unqualified audit opinion on the financial statements and an unqualified opinion on internal control over financial reporting.
Outlook, risks and contingencies
- Management estimated 2016 capital expenditures of approximately $1.75 million and expected to meet foreseeable working-capital needs through anticipated operating cash flows and available PNC borrowing capacity. It provided no specific revenue or earnings guidance.
- Management said it expected continued compliance with credit covenants but could not assure future compliance. The secured facility is subject to borrowing limits, covenants and events of default; the company identifies possible need for additional financing as a risk.
- Refrigerant demand, pricing and supply are exposed to seasonality, weather, economic conditions, customer concentration and competition. EPA restrictions are phasing down virgin HCFC-22 production or imports to zero in 2020; the filing also describes a broader HCFC phaseout schedule and possible additional HFC regulation. Changes to regulation or refrigerant markets could affect sales, margins and inventory values.
- Hudson is responsible for ongoing groundwater remediation and testing related to a 1999 R-11 release at its former Hillburn, New York facility. Costs were accrued through December 31, 2018, but the filing does not provide a clear value for the remaining accrual. No remediation costs were incurred in 2015; additional costs or EPA action remain possible, and applicable insurance proceeds have been exhausted.
- Inventory valuation, refrigerant availability, environmental liability, debt and covenant compliance, acquisition integration, and the loss of key management are among the disclosed risks. The company reported no impairment of goodwill or intangible assets in 2015.
Important facts for investors to verify
- Whether the sharp improvement in gross margin and refrigerant pricing can persist, and how much of 2015’s revenue growth came from acquired operations.
- Inventory composition, sell-through and recoverability, given the $24.880 million year-over-year increase and the risk of refrigerant price declines or supply changes.
- Operating cash generation and borrowing needs, including the current classification of most PNC borrowings, covenant headroom and the 2018 facility maturity.
- Customer concentration and the actual amount and timing of acquisition earn-outs and other contingent compensation.
- The remaining Hillburn remediation accrual and potential exposure, which is not quantified clearly in the filing text.