Hudson Technologies, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; the filing text does not provide a clear standalone fourth-quarter financial summary. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Hudson sells virgin and reclaimed refrigerants and provides refrigerant reclamation, on-site system decontamination, diagnostic, and energy-efficiency services. Refrigerant sales remained the dominant business. The company describes itself as the largest U.S. refrigerant reclaimer.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $55.810 million | $58.634 million |
| Refrigerant and reclamation sales | $50.460 million | $54.293 million |
| RefrigerantSide services revenue | $5.350 million | $4.341 million |
| Gross profit (loss) | $6.446 million | $(0.730) million |
| Operating expenses | $7.431 million | $7.755 million |
| Operating loss | $(0.985) million | $(8.485) million |
| Interest expense | $0.641 million | $0.933 million |
| Net loss | $(0.720) million | $(5.842) million |
| Net loss per share, basic and diluted | $(0.02) | $(0.24) |
| Cash from (used in) operating activities | $1.701 million | $(6.417) million |
| Cash and cash equivalents at year-end | $0.935 million | $0.669 million |
| Total debt at year-end | $10.709 million | $20.038 million |
- 2014 gross margin was approximately 11.6%. The 2013 gross loss included a $14.7 million lower-of-cost-or-market inventory charge; excluding that charge, 2013 gross profit was $13.970 million, or approximately 23.8% of revenue.
- Working capital was $32.114 million, up from $22.255 million. Inventory was $37.017 million, up $3.050 million, partly reflecting the Polar acquisition.
- Investing activities used $8.031 million, primarily for the Polar acquisition and equipment. Financing activities provided $6.596 million, including net common-stock proceeds of $15.925 million, partly offset by debt repayments.
- The PNC facility had $10.056 million outstanding, a 4.25% effective interest rate, and $15 million available to borrow at year-end. Total debt includes the PNC facility and other obligations.
Changes versus 2013
- Revenue fell 5%, as refrigerant revenue decreased $3.833 million; RefrigerantSide revenue increased $1.009 million. Lower selling prices reduced refrigerant revenue by $24.157 million, partly offset by greater volume, which added $20.324 million.
- Cost of sales was 88% of revenue in 2014 versus 76% in 2013 before the prior-year inventory charge. Management attributed the higher 2014 ratio to selling more pounds at lower prices.
- Net loss narrowed by $5.122 million, primarily because gross profit improved and operating and interest expenses declined. The income tax benefit also decreased, from $3.576 million to $0.906 million.
- Operating cash flow improved by $8.118 million, with the company citing lower income taxes receivable as a principal contributor; inventory growth partially offset the improvement.
Outlook, risks and unusual items
- Management estimated 2015 capital expenditures of approximately $1 million and said it expected to meet working-capital needs through anticipated operating cash flow and available PNC borrowings. It gave no revenue or earnings guidance.
- The EPA’s October 2014 rule phases down virgin HCFC-22 production or imports from approximately 22 million pounds in 2015, declining about 4.5 million pounds annually, to zero in 2020. Changes in refrigerant supply, prices, regulation, weather, demand, and competition could materially affect results.
- Hudson acquired certain Polar Technologies refrigerant reclamation assets and facilities on November 5, 2014 for $8.035 million, including deferred consideration; the purchase-price allocation was preliminary. A further west-coast refrigerant and compressed-gas business acquisition closed in January 2015 for cash consideration described as not material.
- The 2013 $14.7 million inventory write-down followed a sharp HCFC-22 price decline. No such charge was recorded in 2014. Inventory valuation remains sensitive to market prices and demand.
- Debt covenants were amended; the fixed-charge coverage covenant was suspended through the quarter ending March 31, 2015. The company reported compliance with covenants at December 31, 2014 and reported 2014 covenant-defined EBITDA of $1.116 million against a $0.802 million minimum. Future compliance is not assured.
- The company continues groundwater remediation related to a 1999 refrigerant release at its former Hillburn, New York facility. It incurred $53,000 of remediation costs in 2014; insurance proceeds have been exhausted, and additional costs or EPA action concerning proposed National Priorities List status could be material.
- Two customers each contributed at least 10% of 2014 revenue and together accounted for 25%, versus 23% in 2013. Year-end receivables from these customers were $688,000.
- Hudson reported effective disclosure controls and internal control over financial reporting. Its independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal controls.
Most important facts for investors to verify
- Whether refrigerant prices and margins stabilize, particularly given the HCFC-22 phase-down and the large inventory balance.
- Whether the service business can continue growing and offset pressure on refrigerant sales.
- Cash generation and access to borrowing capacity, including covenant requirements and upcoming debt obligations.
- Final Polar acquisition accounting, integration results, and the contribution of acquired operations.
- Potential additional Hillburn remediation costs and any change in the EPA’s position on the site.
- Customer concentration, refrigerant sourcing, and the effect of weather and regulatory changes on demand.