Hudson Technologies, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 16, 2018. Hudson provides refrigerant sales, reclamation and management, on-site refrigeration services, and energy-monitoring services. Results include Aspen Refrigerants (formerly Airgas-Refrigerants, Inc., or ARI) only from its October 10, 2017 acquisition date.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $140.4 million | $105.5 million |
| Gross profit / margin | $38.0 million / 27.1% | $31.1 million / 29.5% |
| Operating income / margin | $15.1 million / 10.8% | $18.9 million / 18.0% |
| Net income | $11.2 million | $10.6 million |
| Diluted EPS | $0.26 | $0.30 |
| Cash from operating activities | $18.4 million | $9.3 million |
- Revenue rose 33.1%. The acquisition contributed $14.8 million after closing; Hudson’s historical business added $20.1 million, largely from higher selling prices and sales volumes.
- Cost of sales increased to 73% of revenue from 71%, reflecting higher refrigerant costs and $0.8 million of acquired-inventory step-up amortization. Gross margin contracted.
- Operating expenses increased to $22.9 million from $12.1 million, including $6.3 million in nonrecurring acquisition-related fees and $4.0 million of added ARI operating expense. Interest expense rose to $3.2 million from $1.1 million.
- Net income increased modestly despite lower operating income, helped by income tax expense falling to $0.8 million from $6.6 million. The reduction included approximately $1.4 million from the 2017 federal tax legislation and $2.4 million in excess stock-option tax benefits.
- Fourth quarter: Revenue was $24.6 million and net loss was $5.2 million, compared with $7.8 million revenue and a $1.9 million net loss in fourth-quarter 2016. 2017 fourth-quarter operating loss was $9.6 million, including acquisition-related costs and ARI-period results.
Liquidity, debt and cash flows
- At year-end, cash was $5.0 million, inventory $172.5 million, working capital $113.6 million, and total debt $167.4 million. Cash was down from $33.9 million a year earlier; debt was up from $0.4 million.
- Operating cash flow was $18.4 million. Investing used $210.0 million, primarily the approximately $209.0 million ARI purchase. Financing provided $162.7 million, principally acquisition borrowings.
- Acquisition financing included $65 million drawn on the PNC revolving facility at year-end and a $105 million term loan. PNC availability was reported as $64.3 million. Both facilities are secured and contain financial covenants; Hudson reported compliance at December 31, 2017.
- The term loan bears interest at Eurodollar rate plus 7.25%, matures in October 2023, and requires quarterly principal payments and potentially excess-cash-flow payments. PNC commitments mature in October 2022. A 1% change in borrowing rates was estimated to affect annual interest expense by approximately $1.65 million.
Material changes, outlook and risks
- ARI broadened Hudson’s customer base, distribution reach, reclamation capacity and geographic footprint. Acquisition accounting remained preliminary, including valuation of acquired inventory and property and equipment and purchase-price working-capital adjustments. Pro forma 2017 revenue and net income, assuming ARI had been acquired January 1, were $255.7 million and $23.4 million, respectively; these unaudited figures exclude anticipated synergies and are not forecasts.
- Management said it expects to meet foreseeable working-capital needs through operating cash flow and available PNC borrowing capacity, but warned additional capital may be needed and may not be available on acceptable terms. No quantified earnings or revenue guidance was provided.
- Results are seasonal, with refrigerant sales typically strongest in the first nine months; cooler weather can reduce demand and prices. Refrigerant availability and pricing, customer concentration, competition, integration execution, debt service and covenant compliance are material risks.
- Regulatory changes are important: HCFC-22 production/import allowances were scheduled to phase down to zero in 2020, while HFC restrictions and related rules remained subject to regulatory and legal developments. Changes that weaken recovery or reclamation requirements could also reduce demand for Hudson’s services.
- Two customers each represented at least 10% of 2017 revenue and together accounted for 33%; $2.7 million was receivable from them at year-end.
- The company reported a remaining $90,000 liability for remediation related to a 1999 refrigerant release. Further testing or costs could exceed its estimate; applicable insurance proceeds were exhausted.
- Management and the auditor reported effective internal control over financial reporting, but Aspen Refrigerants—40% of year-end assets—was excluded from the control assessment because of the acquisition’s timing.
Important facts for investors to verify
- Whether ARI integration delivers the expected operating benefits and how acquisition-related costs and provisional purchase accounting change.
- Inventory valuation and liquidity exposure given $172.5 million of inventory, lower year-end cash, and refrigerant price and availability volatility.
- Debt levels, borrowing costs, revolver availability, covenant headroom and capacity to service or repay obligations.
- Whether margin pressure persists and whether reported earnings growth is sustainable apart from tax benefits and acquisition effects.
- Customer concentration and collections, refrigerant regulatory developments, and any change in the Hillburn remediation estimate.