Hudson Technologies, Inc. — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017; filed May 4, 2017. Hudson provides refrigerant sales, reclamation and related services. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $38.8 million | $28.2 million | +38% |
| Gross profit / margin | $12.5 million / 32.1% | $7.5 million / 26.7% | Margin +5.4 percentage points |
| Operating income / margin | $9.4 million / 24.2% | $5.0 million / 17.8% | — |
| Net income / margin | $5.7 million / 14.8% | $2.9 million / 10.5% | — |
| Diluted EPS | $0.13 | $0.09 | — |
| Cash from operating activities | $6.9 million | $(5.7) million | Improved |
Revenue growth primarily reflected higher selling prices for certain refrigerants ($9.6 million contribution) and increased volumes ($1.4 million). Cost of sales declined to 68% of revenue from 73%, mainly due to higher selling prices. Operating expenses rose to $3.1 million from $2.5 million, primarily because of nonrecurring corporate-development fees. Net interest expense declined to $0.1 million from $0.3 million after the company repaid its PNC borrowings in December 2016 and raised equity. Income tax expense was $3.6 million versus $1.8 million.
Financial position and liquidity
- Cash was $40.2 million at March 31, 2017, up from $33.9 million at December 31, 2016. Working capital was $104.6 million, versus $97.9 million at year-end.
- Current assets were $139.5 million and current liabilities $35.0 million. Receivables increased to $20.7 million from $4.8 million, while inventory rose to $72.4 million from $68.6 million.
- Total debt, including current maturities, was approximately $0.3 million; PNC Facility borrowings were zero. The secured PNC facility has a $50 million maximum loan amount, including a $46 million revolving advance limit, and expires June 30, 2020. The filing reports approximately $50 million of availability and a $130,000 letter of credit outstanding.
- Operating cash flow benefited from higher earnings and timing of accounts payable and accrued expenses. Receivables and inventory used cash. Investing cash outflow was $0.4 million, and financing cash outflow was $0.3 million, including $0.5 million paid for deferred acquisition costs.
- Contractual cash obligations totaled $3.7 million, primarily operating leases; reported debt and capital-lease principal totaled $0.3 million.
Material changes, outlook and risks
- Management gave no quantified revenue or earnings guidance. It cautioned that Q1 results are not necessarily indicative of full-year results.
- Sales are seasonal, with refrigerant sales typically strongest in the first half; past fourth quarters have sometimes produced losses. Weather, refrigerant prices and availability, and customer demand can materially affect results.
- Two customers generated 39% of Q1 2017 revenue, compared with 44% in Q1 2016; receivables from those customers totaled $4.7 million at quarter-end. Losing a major customer could adversely affect results.
- Regulatory phase-downs of HCFCs and HFCs, the ability to source refrigerants on commercially reasonable terms, and possible inventory write-downs pose risks. Customer concentration, supplier reliance, litigation and potential environmental liabilities are also identified risks.
- The company reported compliance with PNC covenants at March 31, 2017, including a minimum 1.10-to-1.00 fixed-charge coverage ratio. Management expects continued compliance but gives no assurance; operating performance, weather, regulation and refrigerant pricing could affect compliance.
- No material changes to previously reported legal proceedings were disclosed. No goodwill impairment indicators were reported for Q1.
Important facts for investors to verify
- Whether the sharp increase in refrigerant prices and gross margin is sustainable, and how much results depend on price versus volume.
- Collection of receivables and inventory turnover, especially given the quarter-end increases in both working-capital items and the reliance on favorable payment timing for operating cash flow.
- Exposure to the two large customers and the company’s ability to maintain refrigerant supply and pricing amid regulatory phase-downs.
- Actual borrowing availability under the PNC facility, covenant headroom, and any potential costs or liabilities related to environmental matters or the acquisition earn-out.