Hudson Technologies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with Q1 2014 for operating results and December 31, 2014 for balance-sheet movements. Hudson provides refrigerant sales and reclamation, on-site RefrigerantSide services, and related monitoring and diagnostic services. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $22.103 | $15.584 | Up 42% |
| Gross profit / margin | $5.525 / 25.0% | $1.802 / 11.6% | Margin up 13.4 percentage points |
| Operating income / margin | $3.270 / 14.8% | $0.467 / 3.0% | |
| Net income | $1.893 | $0.160 | |
| Diluted EPS | $0.06 | $0.01 | |
| Operating cash flow | $(0.812) | $3.059 |
Refrigerant and reclamation sales were $20.487 million, up from $14.172 million; RefrigerantSide services were $1.616 million, up from $1.412 million. Management attributed the refrigerant sales increase mainly to higher selling prices ($3.720 million of revenue increase) and greater volume ($2.595 million). Cost of sales declined to 75% of revenue from 88%, primarily reflecting higher selling prices. Operating expenses rose to $2.255 million from $1.335 million, including acquisition-related costs and higher payroll, professional fees, insurance, and amortization. Q1 2014 general and administrative expense included a one-time $0.170 million benefit from collecting a previously written-off receivable.
Balance sheet, liquidity, and debt
- At March 31, 2015, cash was $0.461 million; working capital was $33.236 million, versus $32.114 million at year-end 2014.
- Inventory was $41.532 million, up $4.515 million from year-end; net receivables were $8.135 million, up $4.167 million.
- Current and long-term debt totaled $13.481 million, compared with $10.709 million at December 31, 2014. Total liabilities were $24.579 million.
- The PNC secured credit facility had $12.877 million outstanding and $17.585 million available to borrow; its effective interest rate was 4.25%. The facility matures June 30, 2018. Hudson reported covenant compliance at quarter-end and said it expected to meet working-capital needs through operating cash flows and available facility funds, while cautioning that future covenant compliance is not assured.
- Operating cash use reflected increases in receivables and inventory, partly offset by higher payables, net income, and deferred-tax-asset utilization. Investing cash use was $2.483 million, principally for an acquisition; financing provided $2.821 million, mainly from short-term borrowing. Cash declined by $0.474 million during the quarter.
Material changes, outlook, and risks
- On January 16, 2015, Hudson acquired assets of a refrigerant and compressed-gases supplier for $2.424 million cash, assumed a $0.020 million liability, and recorded a maximum $3.0 million performance-based earnout. The preliminary purchase allocation included $2.338 million goodwill and $1.5 million intangible assets; acquired results were not material to the quarter. Additional employee compensation for 2017–2019 could total up to $3.0 million, based on revenue performance.
- Management estimated 2015 capital expenditures at approximately $1.0 million. It gave no specific revenue or earnings guidance and noted that Q1 results are not necessarily indicative of full-year results.
- Seasonality is significant: refrigerant sales typically peak in the first half, and historically weaker fourth-quarter sales have sometimes resulted in losses. Weather, refrigerant prices and availability, and customer demand can materially affect results.
- Regulatory phase-down of virgin HCFC-22 was scheduled to begin at approximately 22 million pounds in 2015, decline by about 4.5 million pounds annually, and reach zero in 2020. Supply constraints or falling refrigerant demand or prices could materially affect results.
- Two customers represented 42% of Q1 2015 revenue; receivables from those customers totaled $2.325 million at quarter-end. Loss of a major customer is a stated risk.
- Other exposures include variable interest rates, inventory valuation and recoverability, acquisition integration, and potential legal or environmental liabilities. The filing reported no material change in pending legal matters and no material change in internal control over financial reporting. Management assessed disclosure controls as effective.
Important facts for investors to verify
- Whether Q1’s higher refrigerant pricing and volume, and the improved gross margin, persist through the seasonal peak and later quarters.
- How inventory levels and receivables convert to cash, given the $0.812 million operating cash outflow and low quarter-end cash balance.
- Acquisition performance and final purchase accounting, including the earnout and potential future employee compensation.
- Customer concentration, refrigerant sourcing and pricing, and the effects of HCFC regulatory phase-downs.
- Availability under the PNC facility, variable-rate exposure, and continued compliance with its financial covenants.