Hudson Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results exclude Airgas-Refrigerants, Inc. (ARI), acquired October 10, 2017. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Business context
Hudson is a refrigerant services company. Its business includes refrigerant and industrial gas sales, refrigerant reclamation and on-site services, and monitoring and diagnostic services. Refrigerant sales account for a significant majority of revenue. The company reports one operating segment.
Financial highlights
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $24.7 | $34.9 | $115.8 | $97.7 |
| Gross profit | $5.1 | $12.0 | $35.0 | $30.1 |
| Gross margin | 20.5% | 34.5% | 30.2% | 30.7% |
| Operating income | $1.5 | $8.0 | $24.8 | $21.2 |
| Net income | $2.1 | $4.8 | $16.4 | $12.6 |
| Diluted EPS | $0.05 | $0.14 | $0.38 | $0.37 |
- Q3 revenue fell 29% year over year: lower selling prices reduced revenue by $6.5 million and lower volumes by $3.7 million. Cost of sales was 79% of revenue, versus 66%, compressing gross margin.
- Nine-month revenue increased 18%, driven by higher selling prices ($13.5 million contribution) and higher volumes ($4.6 million). Cost of sales rose faster than revenue, leaving gross margin slightly lower.
- Q3 operating expenses were $3.6 million, down $0.4 million; they included $1.0 million of nonrecurring ARI acquisition fees. Nine-month operating expenses rose $1.3 million to $10.2 million, including $2.4 million of ARI-related fees.
- Interest expense declined to $0.02 million in Q3 and $0.17 million for nine months, following repayment of the prior PNC borrowings in December 2016.
- Q3 income tax benefit was $0.65 million, including $1.2 million of excess tax benefits from nonqualified option exercises. Nine-month tax expense was $8.2 million.
Cash flow, liquidity and debt
- At September 30, cash was $44.0 million, working capital $115.2 million, current assets $128.3 million, and current liabilities $13.2 million. Cash increased $10.1 million from year-end 2016.
- Nine-month operating cash flow was $12.1 million, investing cash use $0.9 million (primarily equipment), and financing cash use $1.2 million. Operating cash flow less capital expenditures was approximately $11.3 million.
- At September 30, reported short- and long-term debt totaled approximately $0.18 million; the old PNC facility had no borrowings and approximately $50 million of availability, subject to its terms. The company said it was in covenant compliance.
- After quarter-end, Hudson paid approximately $209 million net cash consideration for ARI, funded with available cash, $80 million drawn under a new $150 million asset-based revolver, and a $105 million term loan. The term loan bears interest at LIBOR plus 7.25%, matures in October 2023, and includes leverage and cash-flow payment provisions. The revolver matures in October 2022. The term lenders may provide an additional $25 million delayed-draw commitment for permitted acquisitions.
- Unaudited pro forma results assuming Hudson and ARI were combined from January 1, 2016 show nine-month 2017 revenue of $228.1 million and net income of $26.3 million, versus $205.2 million and $15.3 million in 2016. These figures are not forecasts and exclude anticipated synergies.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management notes operating results are seasonal, with peak refrigerant sales generally in the first half and possible fourth-quarter losses.
- Key risks include refrigerant price, demand and sourcing; regulatory phase-downs of HCFCs and HFCs; weather; supplier and customer concentration; and successful integration of ARI. Two customers represented 37% of nine-month 2017 revenue, with $4.3 million of receivables from them at September 30.
- Inventory was $63.8 million and receivables were $13.9 million at September 30. Changes in refrigerant prices, demand or availability could affect sales and inventory valuation. Management reported no goodwill or long-lived-asset impairment indicators in the period.
- ARI’s acquisition materially changed the company’s financing and leverage after quarter-end. The new facilities are secured by substantially all borrower assets and include financial covenants, restrictions and default provisions; the term loan has a high stated interest rate.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed legal proceedings were reported.
Important facts for investors to verify
- ARI’s final purchase-price adjustments, acquired assets and liabilities, and integration costs and results after closing.
- Post-acquisition cash, net debt, borrowing availability, covenant headroom, interest expense and required term-loan repayments.
- Whether the Q3 decline in refrigerant prices and volumes continued, and how margins and inventory values respond to market conditions.
- Customer concentration, collection of the $4.3 million receivable balance from the two major customers, and ongoing customer demand.
- The recurring versus nonrecurring components of earnings, particularly acquisition costs and the Q3 excess tax benefit from stock-option exercises.