Hudson Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Dollar amounts are in millions unless otherwise noted.
Business context
Hudson provides refrigerant and industrial-gas sales, refrigerant reclamation and management, and on-site refrigeration services. Refrigerant sales remain the principal revenue source; the company reports one operating segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $34.930 | $21.682 | $97.701 | $72.422 |
| Gross profit | $12.040 | $4.384 | $30.052 | $17.121 |
| Gross margin | 34.5% | 20.2% | 30.7% | 23.6% |
| Operating income | $8.018 | $1.902 | $21.180 | $9.933 |
| Net income | $4.789 | $1.082 | $12.562 | $5.786 |
| Diluted EPS | $0.14 | $0.03 | $0.37 | $0.17 |
- Q3 revenue increased 61%; nine-month revenue increased 35%. Refrigerant revenue drove the gains, reflecting both higher selling prices and greater volume. Q3 increases attributed to price and volume were $8.421 million and $4.796 million, respectively; nine-month increases were $18.369 million and $6.952 million.
- RefrigerantSide Services revenue was nearly flat in Q3 and down $0.042 million for the nine months, as fewer completed jobs were partly offset by higher average selling prices.
- Cost of sales declined to 66% of Q3 revenue from 80%, and to 69% for the nine months from 76%, primarily due to improved refrigerant selling prices. Operating expenses rose to $4.022 million in Q3 and $8.872 million for the nine months, including higher share-based compensation, acquisition earnout expense and professional fees.
- Interest expense rose to $0.296 million in Q3 and $0.919 million for the nine months, which management attributed to increased borrowings. Effective tax expense was $2.933 million for Q3 and $7.699 million for the nine months.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $7.441 million, versus cash used of $5.499 million in 2015. Investing used $0.877 million; financing used $3.846 million. Cash increased $2.718 million to $3.976 million.
- At September 30, 2016, current assets were $80.838 million and current liabilities $24.579 million, giving working capital of $56.259 million, up $17.750 million since year-end. Inventory was $66.584 million and net receivables $9.232 million.
- The PNC secured facility had total borrowings of $19.022 million, $27.670 million available under the revolver, and an effective interest rate of 3.5%. The facility was amended in April 2016 to increase its maximum loan amount to $50 million and extend maturity to June 30, 2020. The company reported covenant compliance at quarter-end, including with its 1.10-to-1.00 minimum fixed-charge coverage covenant.
- Total liabilities were $28.728 million and stockholders’ equity was $65.221 million at September 30, 2016. The filing’s contractual-obligations table lists $19.425 million of principal and $2.519 million of estimated interest, plus $3.092 million of operating leases and $1.458 million of acquisition earnout/license obligations.
Changes, outlook and risks
- Compared with the prior periods, stronger refrigerant pricing and sales volumes materially improved revenue, margins and earnings. Nine-month operating cash flow also improved, while debt repayment reduced financing cash outflow.
- The filing provides no specific revenue or earnings guidance. Management says results are seasonal, with peak refrigerant sales in the first half; past seasonal slowdowns have contributed to fourth-quarter losses. Nine-month results are not necessarily indicative of full-year results.
- Key risks include refrigerant price, demand and supply fluctuations; regulatory phase-downs of virgin HCFCs; inventory valuation and saleability; weather and seasonality; and customer concentration. Two customers represented 33% of nine-month revenue, although no receivables from them were outstanding at quarter-end.
- Remaining net operating loss carryforwards were approximately $5 million and are subject to annual utilization limits of $1.3 million. The company recorded a $0.594 million increase in the 2016 acquisition earnout liability as general and administrative expense in Q3; $1.124 million remained accrued at September 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. There were no material changes to the legal proceedings previously disclosed in the 2015 Form 10-K.
Important facts for investors to verify
- Whether higher refrigerant pricing and volumes can persist, and how the HCFC phase-down and sourcing conditions affect margins and inventory value.
- Whether the company can manage its $66.584 million inventory and increased receivables while maintaining operating cash generation.
- Future compliance with PNC covenants and access to the stated revolver availability, especially if pricing, demand, weather or operating results weaken.
- The assumptions and eventual cash payments underlying the acquisition earnout, and the potential effect of customer concentration and seasonality on Q4 results.