Hudson Technologies (HDSN) – The Refrigerant Leader
Hudson Technologies is a small-cap refrigerant services company. They provide complete life cycle management of refrigerants from sales to reclamation services to on-site problem solving. Per their Investor Presentation, here is a breakdown of revenues:
A refrigerant is a compound typically found in either a fluid or gaseous state. It absorbs heat from the environment and can provide refrigeration or air conditioning when combined with other components such as compressors and evaporators. Basically, without refrigerant, there would be no air conditioning, refrigeration, or freezing technology.
The most common types of refrigerants, as described by Aireserv, are:
• Chlorofluorocarbons (CFCs), including R12. This is known to contribute to the greenhouse gas effect. Production of new stocks ceased in 1994.
• Hydrochlorofluorocarbons (HCFCs), including R22. Slightly less damaging to the ozone than R12, but the EPA has still mandated a phase out as a result of the Clean Air Act of 2010. R22 will phase out completely by 2020.
• Hydrofluorocarbons (HFCs), including R410A and R134. With no chlorine in the mix, this is safer for the environment and is now being used in place of R22. Air conditioners that run on R410A are more efficient, offer better air quality, increase comfort and improve reliability.
Earnings Review
On the company’s first quarter earnings call, they reported that revenues increased 38% to $38.8M as compared to $28.2M in the first quarter of 2016. The revenue increase was primarily driven by an increase in both volume and the price of certain refrigerants.
Management would go on to say that as of the end of the first quarter, R-22 prices increased to approximately $22 per pound. R-22 refrigerants remain the most widely used refrigerants and our company is clearly benefiting from the price increases associated with the ongoing phase out activity.
They remain confident that reclaimed R-22 is the best solution to meet demand and they anticipate that they will see an increase in R-22 pounds reclaimed during the cooling season which starts in the second quarter and runs through the middle of fourth quarter.
CEO Kevin Zugibe would add, “Even as the industry is transitioning away from R-22 to next-generation HFC refrigerants, HFCs have also been targeted for phase down beginning in 2019. This represents another significant opportunity for our business because nearly all new equipment as well as the equipment that is replacing R-22 units runs on HFC refrigerant.”
Mr. Zugibe’s last point was that with the change in administration, there has been some speculation by outsiders of the industry regarding regulations and the specific role of the EPA. It is important to understand that in the fourth quarter 2014, the EPA published the final rule covering years 2015 to 2019. If the administration was interested in changing the remaining two years of the phase out, the administration would have to engage Congress and amend existing legislation as currently the EPA has no authority to change the phase out.
Defense Contract
Lastly, another catalyst to keep in mind dates back last July when Hudson Technologies announced that it was awarded, as prime contractor, a five-year contract including a five-year renewal option, by the United States Defense Logistics Agency (“DLA”) with an estimated maximum value over the term of the agreement of $400 million in sales to the Department of Defense. The fixed price contract is for the management and supply of refrigerants, compressed gases, cylinders and related items to US Military Commands and Installations, Federal civilian agencies and Foreign Militaries. Primary users include the US Army, Navy, Air Force, Marine Corps and Coast Guard.
Management would comment and say, “This award was two years in the making and represents a transformative win for Hudson. While the ultimate amount of revenue will depend on order levels, this award solidifies our presence in the refrigerants and industrial gas sectors and we believe will contribute considerable future revenue and earnings growth.”
Steve Dyer of Craig Hallum, on the company’s last earnings call, wondered if there were any changes or updates to the DoD contract.
COO Brian Coleman would respond by saying, “No, there’s really no update. We may sound little bit like broken record and that we really want to get into servicing the contract which will start in our third quarter this year. It will start to kick-in at the very tail end of July into early August. And once we get through that first quarter and certainly for the second quarter, we’ll have much better feel as to the order taking sizes and then estimates about volumes and what we think we can do to possibly increase volumes go forward.”
As Fahad pointed out in the chatroom yesterday, there was some small call buying in the November 7.5 and 10 Calls. The next catalyst will be a presentation at the B. Riley Investor Conference on May 24th.
