Hudson Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and related services, and facility monitoring services. The October 2017 acquisition of Airgas-Refrigerants (renamed Aspen Refrigerants, or ARI) materially changed the company’s scale and cost structure.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $42.4 million | $38.8 million |
| Gross profit / gross margin | $7.9 million / 18.6% | $12.5 million / 32.1% |
| Operating income (loss) | $(0.9) million | $9.4 million |
| Net income (loss) | $(3.1) million; $(0.07) per diluted share | $5.7 million; $0.13 per diluted share |
| Cash provided by operating activities | $9.5 million | $6.9 million |
- Cash and cash equivalents were $1.0 million at March 31, down from $5.0 million at December 31, 2017. Cash used in investing activities was $0.2 million and cash used in financing was $13.3 million, including $13.1 million of debt repayments.
- Working capital was $110.9 million, compared with $113.6 million at year-end. Current assets included $170.9 million of inventory and $26.9 million of net receivables.
- Total reported short- and long-term debt was $154.1 million, versus $167.4 million at year-end. The PNC revolver had $52 million drawn and $57 million available; the term loan had approximately $104.7 million outstanding. Both facilities are secured by substantially all company assets and carry variable-rate exposure.
Changes versus the prior-year quarter
- Reported revenue increased 9%, primarily due to ARI. Excluding ARI, revenue decreased $17.5 million: lower selling prices reduced revenue by $8.5 million and lower volumes by $10.3 million, partly offset by $1.3 million of increased DLA business.
- Gross margin contracted as refrigerant selling prices fell. Cost of sales also included $1.1 million of expense from the fair-value step-up of acquired R-22 inventory sold during the quarter.
- SG&A rose to $8.1 million from $3.0 million, including $4.2 million of additional ARI operating costs and $0.9 million of nonrecurring acquisition integration and related fees. Amortization increased to $0.7 million from $0.1 million, largely due to ARI-related intangibles.
- Interest expense increased to $3.2 million from $0.1 million, principally reflecting acquisition financing. The tax line was a $1.1 million benefit, versus $3.6 million of expense in Q1 2017; the company cited a 26% effective tax rate versus 38% in the prior-year quarter.
Outlook, risks and other notable items
- No specific earnings or revenue guidance is provided. Management believes foreseeable working-capital needs can be met through expected operating cash flows and available PNC borrowing capacity, but warns that unexpected costs, weaker sales, expansion or acquisition costs, or financing constraints could require capital sooner than expected.
- Management states that the company complied with its debt covenants at quarter-end. The term-loan leverage ratio was 4.23x versus a maximum of 4.75x; the PNC fixed-charge coverage ratio was 3.31x versus a minimum of 1.00x. Both ratios worsened from year-end (3.03x and 6.47x, respectively). Future compliance is not assured.
- Interest-rate sensitivity: a 1 percentage-point rate change would affect annual interest expense by approximately $1.6 million, based on March 31 borrowings.
- Key business risks include refrigerant price and demand volatility, availability and sourcing, regulation and HCFC phase-down, weather-driven seasonality, customer concentration, and integration of ARI. One customer represented 11% of Q1 revenue and accounted for $4.0 million of receivables at quarter-end.
- The ARI purchase-price allocation remained preliminary and subject to measurement-period and working-capital adjustments. No goodwill impairment indicators were identified in Q1. Management reported effective disclosure controls; no material changes to pending legal matters were reported.
Most important facts for investors to verify
- Whether refrigerant prices and sales volumes stabilize, and whether reported revenue growth translates into improved margins without ARI-related inventory step-up costs.
- ARI’s contribution to revenue, operating costs and cash generation, and progress in integrating the acquired business.
- Cash conversion and working-capital trends, particularly receivables and the large inventory balance, alongside the low cash balance.
- Debt reduction, variable-rate interest burden, revolver availability and headroom under both financial covenants.
- Refrigerant supply, regulatory developments, seasonal and weather effects, and exposure to the major customer.