HDSN attracted my attention back in July when I was doing stock screening. Here is my evalution of this stock.
What does HDSN do
Hudson Technologies, Inc. (HDSN) is a leading provider of innovative and sustainable solutions for optimizing performance and enhancing reliability of commercial and industrial chiller plants and refrigeration systems. In addition, Hudson sells refrigerants and provides traditional reclamation services for commercial and industrial air conditioning and refrigeration uses.
Refrigerant and Industrial Gas Sales
Hudson sells reclaimed and virgin (new) refrigerants (including CFC, HCFC and HFC) to a variety of customers in various segments of the air conditioning and refrigeration industry, and sells industrial gases to a variety of industry segments.
Refrigerant Management Services
Hudson provides a complete offering of refrigerant management services, which primarily include reclamation of refrigerants, laboratory testing through Hudson’s laboratory, and banking (storage) services tailored to individual customer requirements. Hudson also separates “crossed” (i.e. commingled) refrigerants and provides re-usable cylinder refurbishment and hydrostatic testing services.
Hudson provides decontamination and recovery services that are performed at a customer’s site through the use of portable, high volume, high-speed proprietary equipment, including the patented Zugibeast® system. In addition, Hudson also provides predictive and diagnostic services for its customers to predict potential problems in air conditioning and refrigeration systems before they occur. Hudson has been awarded several US patents for its SmartEnergy OPS TM , which is a system for measuring, modifying and improving the efficiency of energy systems, including air conditioning and refrigeration systems, in industrial and commercial applications.
Effective January 1, 1996, the Clean Air Act, as amended (the “Act”) prohibited the production of virgin CFC refrigerants and limited the production of virgin HCFC refrigerants.
Effective January 2004, the Act further limited the production of virgin HCFC refrigerants and federal regulations were enacted which established production and consumption allowances for HCFC refrigerants and which imposed limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin HCFC refrigerants is scheduled to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants is scheduled to be phased out by 2030.
In April 2013, the Environmental Protection Agency (“EPA”) published a final rule providing for the production or importation of 63 million and 51 million pounds of HCFC-22 in 2013 and 2014, respectively. In October 2014, the EPA published a final rule providing further reductions in the production and consumption allowances for virgin HCFC refrigerants for the years 2015 through 2019 (the “Final Rule”). In the Final Rule, the EPA has established a linear annual phase down schedule for the production or importation of virgin HCFC-22 that started at approximately 22 million pounds in 2015 and reduced by approximately 4.5 million pounds each year and ends at zero in 2020.
HFC refrigerants are used as substitutes for CFC and HCFC refrigerants in certain applications. HFC refrigerants are not ozone depleting chemicals and are not currently regulated under the Act. However, certain HFC refrigerants are highly weighted greenhouse gases that are believed to contribute to global warming and climate change and, as a result, are now subject to various state and federal regulations relating to the sale, use and emissions of HFC refrigerants. In addition, federal legislation has been proposed that, if enacted, would impose limitations on the production and importation of certain virgin HFC refrigerants. Hudson expects that HFC refrigerants eventually will be replaced by HFOs or other types of products with lower global warming potentials.
The Act also mandates the recovery of CFC and HCFC refrigerants and also promotes and encourages re-use and reclamation of CFC and HCFC refrigerants. Under the Act, owners, operators and companies servicing cooling equipment utilizing CFC and HCFC refrigerants are responsible for the integrity of the systems regardless of the refrigerant being used. In November 2015, the EPA published a proposed rule that, if enacted, will extend these requirements to HFCs and to certain other refrigerants that are approved by the EPA as alternatives for CFC and HCFC refrigerants.
Moat of HDSN
According to the industry background above, it is clear that
- The production of yesterday’s refrigerant CFC is completely prohibited;
- The production of today’s refrigerant HCFC is gradually fading and will be completely phased out by 2020;
- Limitation on the production of tomorrow’s refrigerant HCF will happen soon (from 2019 as Hudson expected).
As a consequence, the price appreciation of these refrigerants is inevitable. Using R22 (one type of HCFC) as an example, its price has increased from $11 per pound in May 2016 to $20 per pound in March 2017. On the other hand, we can also notice that reclamation of these refrigerants is significantly encouraged. This will make Hudson a strong player in the field as it has a ~25% market share in refrigerant reclamation.
- $1 billion non-reclaim refrigerant aftermarket
- $1 billion reclamation opportunity by 2020
- Department of Defense contract with maximum value of $400M
- 5-year contract with 5-year renewal option
- start from July 2017
- add 40M to yearly revenue (40% of FY2016 revenue)
Record revenues of $52.2 million, up 51% YOY
“During the second quarter, which is the midpoint of our nine-month refrigerant sales season, our results were particularly strong as we saw increased sales volume for refrigerants and benefitted from incremental increases in the average selling price for R-22 (one type of HCFC) refrigerant as well as a temporary increase in pricing for HFC refrigerants.”
“In addition to the evident gains we are realizing through our sales of virgin refrigerants, we also see a tremendous opportunity associated with our ability to reclaim refrigerants as we enter the final years of the R-22 production phase out, which will be completed by the end of 2019, and look toward the anticipated phase-down of HFC refrigerants. As the industry transitions to new technology and next generation refrigerants, Hudson, as a leading reclaimer, is well positioned to apply our reclamation capabilities to help fill demand for refrigerants as virgin production is phased down and eliminated. We remain focused on leveraging our expansive distribution network, decades of experience and long-standing customer relationships to capitalize on opportunities that arise from the evolving industry landscape.”
Quarter Financial Highlights
Revenue: $52.2 million, up 51% YOY.
Gross margin: 33%, compared to 30% in the prior year period.
Adjusted EPS: $0.20, up 43% YOY.
Recurring Revenue: ~10% of total revenue
More on revenue and EPS
Revenue (in millions)
Q1 Q2 Q3 Q4 2015 22.1 28.6 21.7 7.3 2016 28.2 34.6 34.9 7.8 2017 38.8 52.2
Q1 Q2 Q3 Q4 2015 0.06 0.08 0.03 -0.03 2016 0.09 0.14 0.14 -0.05 2017 0.13 0.2
TTM EPS growth: 82%
In the Q2 conference call, the CEO of Hudson spent a lot of time to introduce their acquisition of Airgas-refrigerants, Inc. The transaction is expected to close in later 2017. He said, “we’re very pleased to announce our agreement to acquire Airgas-Refrigerants (or ARI), which we believe represents a major milestone for our company. The addition of Airgas-Refrigerants is expected to double the size of our business (~250 million), provide a complimentary product portfolio, significantly grow our customer base and enhanced our sales and distribution capabilities.”
I summarize the importance of the acquisition as below:
- It will help Hudson to get fully prepared before the phase-down of HFCs as ARI is ahead of Hudson on HFC sales.
- It will expand the geographic foot point of Hudson. ARI has 30 refrigerant stocking points over US while Hudson has none.
- It will provide large audience (come from ARI’s customers) of energy management tools for Hudson. This will help to improve recurring revenue.
From the acquisition I have mentioned above, we might feel that the management team of HDSN is prudent and forward-looking. I believe the ship is well armed and ready for a fight as refer to the HCFC phase-out and big HFC market.
Adverse weather or economic downturn could adversely impact our financial results. Cooling season will generate pressure on both price and demand of refrigerants. Our business and financial condition is substantially dependent on the sale and continued environmental regulation of refrigerants. Changes in government regulations relating to the emission of refrigerants into the atmosphere could have a material adverse effect on Hudson’s services and products.
Our business is subject to significant regulatory compliance burdens. The refrigerant reclamation and management business is subject to extensive, stringent and frequently changing federal, state and local laws and substantial regulation under these laws by governmental agencies, including the EPA, the OSHA and DOT.
Issues relating to potential global warming and climate change could have an impact on our business. Refrigerants are considered to be strong greenhouse gases that are believed to contribute to global warming and climate change and are now subject to various state and federal regulations relating to the sale, use and emissions of refrigerants. Climate change or related legislation and/or regulations may impose additional compliance burdens on us and on our customers and suppliers which could potentially result in increased administrative costs, decreased demand in the marketplace for our products, and/or increased costs for our supplies and products.
HDSN seems understand the current and future refrigerant market very well and has been fully prepared for the challenges ahead. As long as the Ice Age does not come, I believe their revenue will continue grow, so as the stock price.