Hudson Technologies, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Hudson provides refrigerant sales, reclamation and management, on-site system services, and energy monitoring and diagnostic services. Refrigerant and related product sales are the large majority of revenue.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $105.5 million | $79.7 million |
| Gross profit; gross margin | $31.1 million; 29.5% | $18.5 million; 23.2% |
| Operating income; operating margin | $18.9 million; 18.0% | $8.2 million; 10.3% |
| Net income; diluted EPS | $10.6 million; $0.30 | $4.8 million; $0.14 |
| Cash from operating activities | $9.3 million | $(10.5) million |
| Cash and cash equivalents at year-end | $33.9 million | $1.3 million |
| Working capital at year-end | $97.9 million | $38.5 million |
| Total debt at year-end | $0.35 million | $24.9 million |
Revenue rose 32%, mainly from refrigerants: higher selling prices contributed approximately $17.6 million of the increase and greater volumes approximately $8.6 million. Services revenue declined about $0.4 million. Cost of sales fell to 71% of revenue from 77%, supporting higher gross margin. Operating expenses increased $1.8 million to $12.1 million, partly due to non-cash, non-recurring stock compensation and professional fees. Interest expense was $1.1 million, up from $0.8 million.
Fourth quarter: Revenue was $7.8 million versus $7.3 million in Q4 2015; gross profit was $1.0 million versus $1.4 million. Hudson reported an operating loss of $2.2 million and a net loss of $1.9 million, compared with losses of $1.8 million and $1.0 million, respectively, in Q4 2015. The filing describes the business as seasonal, with refrigerant sales typically strongest in the first nine months.
Cash, debt and liquidity
Operating cash flow improved from a $10.5 million use in 2015 to $9.3 million provided in 2016, though inventory growth used $6.7 million of cash. Investing activities used $1.7 million, primarily for equipment. Financing activities provided $25.1 million, principally reflecting equity proceeds, offset by debt repayment and acquisition-related payments.
In December 2016, Hudson completed a public offering of 7.39 million shares at $7.00 per share, receiving $51.7 million gross and approximately $48.4 million net proceeds. It repaid borrowings under its PNC facility; the year-end balance was zero, with approximately $44 million of revolving availability and a $130,000 letter of credit outstanding. The facility, secured by substantially all assets, expires June 30, 2020 and includes covenants; Hudson reported covenant compliance at year-end. Remaining debt primarily comprises mortgage, vehicle/equipment and capital lease obligations.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management said it believes anticipated operating cash flows and available PNC capacity can meet working-capital needs for the foreseeable future, while cautioning that refrigerant costs, operating expenses, revenue shortfalls, or expansion and acquisition costs could increase capital needs.
- A five-year U.S. Defense Logistics Agency contract awarded in July 2016 includes a five-year renewal option. Annual service revenue under the contract is approximately $2.4 million; $1.3 million was recognized in 2016. The filing does not provide a quantified outlook for total contract sales.
- Refrigerant prices, demand and supply are material exposures. The business depends on sourcing refrigerants, has no firm supplier agreements, and carries substantial inventory ($68.6 million at year-end), which may require write-downs if market prices or demand weaken.
- Regulatory changes are significant: HCFC-22 production/import allowances were scheduled to decline to zero in 2020, while an international HFC phase-down agreement was not yet ratified by the United States as of the filing. Regulatory changes could affect product availability, pricing and demand.
- Two customers each represented at least 10% of 2016 revenue and together accounted for 30%; neither had an outstanding receivable at year-end. Weather, economic conditions, competition, customer concentration, and seasonal demand may affect results.
- Environmental contingency: remediation continues for a 1999 R-11 release at a former New York facility. The company reported a remaining liability of approximately $0.1–$0.15 million, exhausted available insurance proceeds, and warned that additional remediation or EPA action could increase costs.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor items to verify
- Whether refrigerant selling prices and margins remain supportive, and how inventory values respond to price or demand changes.
- Cash conversion and working-capital needs, particularly given inventory growth and the seasonal fourth-quarter loss.
- Post-offering share dilution and the use of proceeds, alongside continuing PNC availability and covenant compliance.
- Customer concentration, DLA contract economics and execution, and the status and ultimate cost of the Hillburn remediation.
- How U.S. implementation of refrigerant regulations and HFC phase-down measures affects sourcing, product mix and demand.