Hudson Technologies, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet amounts are as of September 30, 2015, unless otherwise noted. Hudson provides refrigerant sales, reclamation, and on-site and diagnostic refrigeration services. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $21.682 | $15.296 | $72.422 | $47.755 |
| Gross profit | $4.384 | $1.495 | $17.121 | $5.500 |
| Gross margin | 20.2% | 9.8% | 23.6% | 11.5% |
| Operating income (loss) | $1.902 | ($0.127) | $9.933 | $0.997 |
| Net income (loss) | $1.082 | ($0.108) | $5.786 | $0.360 |
| Diluted EPS | $0.03 | $0.00 | $0.17 | $0.01 |
- Revenue rose 42% in Q3 and 52% for the nine-month period. Refrigerant revenue drove the increase; Q3 growth mainly reflected higher selling prices, while nine-month growth reflected both higher prices and greater volume. RefrigerantSide Services revenue declined by $0.129 million in Q3 and $0.354 million year to date.
- Management attributed stronger gross margins primarily to higher selling prices for certain refrigerants. Operating expenses increased to $2.482 million in Q3 and $7.188 million year to date, partly reflecting acquisition-related costs, payroll, professional fees, insurance, and intangible-asset amortization.
- Interest expense increased to $0.157 million in Q3 and $0.600 million year to date, primarily due to increased borrowing, partly offset by lower interest rates. Income-tax expense was $0.663 million in Q3 and $3.547 million year to date; management said most was noncash due to use of net operating loss carryforwards.
Cash flow, liquidity, and debt
- Cash was $1.040 million, versus $0.935 million at December 31, 2014. Working capital was $40.018 million, up from $32.114 million.
- For the first nine months, operating cash flow was negative $5.499 million, compared with positive $4.654 million in 2014. Increased receivables and inventory were principal uses of cash. Investing cash outflow was $3.078 million, including $2.424 million for an acquisition; financing cash inflow was $8.682 million, primarily from short-term borrowing. Cash increased by $0.105 million.
- Inventory increased to $48.964 million from $37.017 million, and net receivables rose to $9.614 million from $3.968 million. The filing cites acquisition inventory and the timing of purchases and sales as factors in the inventory increase.
- Balance-sheet short- and long-term debt totaled $19.360 million, including $14.983 million classified as current. PNC Facility borrowings were approximately $18.6 million, with about $14.2 million available under the revolving line; the reported effective rate was 3.75%. The facility matures June 30, 2018, is secured by company assets, and has a minimum fixed-charge coverage covenant. Hudson reported compliance at September 30, 2015 but gave no assurance of future compliance.
- Management expects to meet foreseeable working-capital needs from anticipated operating cash flows and available PNC borrowing. Estimated 2015 capital expenditures were approximately $1.0 million. Contractual cash obligations totaled $25.917 million, including debt principal and interest, operating leases, and an acquisition earn-out.
Material changes, outlook, and risks
- A January 2015 asset acquisition of a refrigerant and compressed-gases supplier involved $2.424 million cash paid at closing, an assumed $0.020 million liability, and a potential earn-out of up to $3.0 million. By September 30, $0.331 million had been paid and $2.669 million accrued; purchase-price allocation remained preliminary. The acquired operations were described as not material to reported results. Separate potential employee compensation tied to 2017–2019 revenue performance could total up to $3.0 million.
- No quantified revenue or earnings guidance was provided. Management noted seasonality, with peak refrigerant sales generally in the first half and possible fourth-quarter losses in prior years; weather and refrigerant prices, demand, and availability can materially affect results.
- Regulatory phase-down of virgin HCFC-22 production/import allowances began at approximately 22 million pounds in 2015, declining by about 4.5 million pounds annually toward zero in 2020. Hudson warned that sourcing constraints or weaker refrigerant demand or pricing could materially harm results.
- Customer concentration increased: two customers represented 34% of nine-month 2015 revenue, versus 26% in the comparable 2014 period. Receivables from those customers totaled $1.1 million at September 30, 2015. The company also cited interest-rate exposure, seasonal/weather risk, supplier dependence, and potential environmental and legal liabilities. It reported no material changes to disclosed legal proceedings.
- Q3 included approximately $0.050 million of nonrecurring professional fees; nine-month expenses included approximately $0.177 million. The 2014 comparison included a one-time $0.170 million reduction in general and administrative expense from collecting a previously written-off receivable.
Most important facts for investors to verify
- Whether higher refrigerant prices and improved margins are sustainable, and how much future sales depend on price versus volume.
- Whether inventory can be sold at expected prices and converted to cash, given the $48.964 million balance and negative operating cash flow.
- Customer concentration, supplier access, and the effects of HCFC phase-down rules, weather, and refrigerant-market changes.
- PNC availability, borrowing levels, covenant headroom, and the company’s ability to service current-classified debt and other contractual obligations.
- Final acquisition purchase-price allocation, earn-out payments, and any additional performance-based employee compensation.
- Use and limitations of tax-loss carryforwards and the noncash nature of much of the reported tax expense.