Hudson Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 9, 2017. Hudson is a refrigerant services company, with one reportable segment. Refrigerant sales comprise the significant majority of revenue.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $52.2 million | $34.6 million | $91.1 million | $62.8 million |
| Gross profit | $17.4 million | $10.5 million | $29.9 million | $18.0 million |
| Gross margin | 33.3% | 30.3% | 32.8% | 28.7% |
| Operating income | $13.9 million | $8.1 million | $23.3 million | $13.2 million |
| Net income | $8.5 million | $4.8 million | $14.3 million | $7.8 million |
| Diluted EPS | $0.20 | $0.14 | $0.33 | $0.23 |
| Operating cash flow | Not separately stated | Not separately stated | $0.7 million | $(4.1) million |
Q2 revenue increased 50.9%; first-half revenue increased 45.1%. Management attributed the first-half increase mainly to higher selling prices, contributing $19.5 million, and higher volume, contributing $7.5 million. Gross margin improved primarily because of higher selling prices. Q2 operating expenses rose to $3.5 million from $2.3 million, and first-half expenses rose to $6.6 million from $4.9 million, principally due to nonrecurring corporate-development fees. Lower debt following the December 2016 debt repayment and equity offering reduced first-half interest expense to $0.1 million from $0.6 million.
Liquidity, cash flow and debt
- At June 30, cash was $33.7 million, versus $33.9 million at year-end 2016. Working capital was $113.5 million, up from $97.9 million; current assets were $129.1 million and current liabilities $15.6 million.
- First-half operating cash flow was only $0.7 million despite $14.3 million net income. The company reported a $19.8 million increase in receivables and a $5.5 million increase in prepaid and other assets, partly offset by inventory reductions and increases in payables and accrued items. Cash declined by $0.3 million overall.
- Capital expenditures were $0.6 million. Financing cash outflow was $0.3 million, including the final earnout payment related to the 2015 acquisition.
- Hudson had repaid its PNC borrowings in December 2016. At June 30, debt was approximately $0.2 million, with about $50 million of PNC facility availability and a $0.13 million outstanding letter of credit. The facility expires June 30, 2020; Hudson reported covenant compliance at quarter-end.
Material changes, outlook and risks
- Subsequent event: On August 9, 2017, Hudson agreed to acquire Airgas Refrigerants for approximately $220 million, subject to adjustments and closing conditions. Planned financing includes cash, up to $150 million from an enhanced PNC asset-based facility, and a $95–110 million term loan from GSO Capital Partners. No new Hudson equity was planned. Closing was expected during 2017; completion and financing were not assured.
- No formal earnings or revenue guidance is provided. Management cautioned that first-half results are not necessarily indicative of full-year results. The business is seasonal, with peak refrigerant sales in the first half; weak demand or unfavorable weather can weigh on results, particularly later in the year.
- Customer concentration increased: two customers represented 41% of first-half 2017 revenue, with $6.5 million of receivables due from them at June 30. Loss of a major customer or deterioration in its credit could materially affect results.
- Key exposures include refrigerant price, demand and supply; regulation and phasedowns of HCFCs and HFCs; inventory valuation; weather and seasonality; and covenant compliance. The PNC facility’s fixed-charge coverage covenant requires at least 1.10:1.00. Hudson warned that future compliance could be affected by operating performance and external conditions.
- Management reported no goodwill impairment indicators in Q2, no material change in disclosed legal proceedings, and effective disclosure controls. The company’s prior Hillburn, New York environmental cleanup obligations remain referenced in its credit-covenant terms.
Investor verification points
- Track whether higher refrigerant prices and volumes persist, and how price changes affect gross margins and inventory values.
- Assess collections and working-capital needs: receivables rose sharply, and operating cash generation lagged net income.
- Monitor the two major customers’ purchases and payments, given their 41% first-half revenue share.
- Verify ARI acquisition closing, final purchase adjustments, financing terms, resulting debt, and integration performance.
- Review refrigerant regulatory changes, supply availability, seasonality, and continued compliance with lender covenants.