Hudson Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The unaudited consolidated statements cover Hudson Technologies and its subsidiaries. The company supplies and reclaims refrigerants and provides related services to the HVACR industry.
Financial performance and position
- Revenue: $33.8 million, down 7% from $36.4 million in Q1 2020. Management attributed the decline mainly to lower sales volume, partly offset by higher selling prices for certain refrigerants.
- Gross profit and margin: $9.1 million and 27.1%, versus $8.3 million and 23.0%. Cost of sales fell to 73% of revenue from 77%, reflecting higher selling prices and lower costs for certain refrigerants.
- Operating income: $1.7 million, compared with $0.4 million; operating margin was 5.0%, versus 1.0%.
- Net loss: $1.1 million, or $0.02 per diluted share, compared with a $2.9 million loss, or $0.07 per share. Lower cost of sales, SG&A, and interest expense drove the improvement. Interest expense was $2.8 million versus $3.3 million.
- Cash flow: Operating activities used $5.0 million, versus $3.6 million used a year earlier. Investing activities used $0.3 million, mainly for capital expenditures. Financing activities provided $6.7 million. Cash increased by $1.4 million to $2.8 million.
- Liquidity: Working capital was $23.4 million at March 31, down from $24.4 million at year-end 2020. Current assets were $71.8 million and current liabilities were $48.3 million. Cash was $2.8 million; accounts receivable were $13.9 million and inventory was $47.6 million.
- Debt: Total short- and long-term debt was $94.2 million, up from $87.3 million at December 31, 2020. This included $10.0 million outstanding under the revolving facility and a $2.475 million PPP loan. The term loan balance was approximately $83.8 million. The company reported a total leverage ratio of 6.18:1, compared with 5.84:1 at year-end.
- Other metrics: SG&A was $6.7 million, down from $7.3 million. The company recorded a $0.1 million income tax benefit. One customer represented 14% of quarterly revenue.
Material changes versus Q1 2020
- Revenue decreased by $2.6 million, while gross profit increased by $0.8 million and gross margin improved by about 4.1 percentage points.
- Net loss narrowed by $1.8 million. SG&A decreased by $0.6 million, and interest expense decreased by $0.5 million.
- Operating cash use increased by $1.4 million, primarily due to timing of receivables and inventory. Cash at quarter-end was $2.8 million, compared with $6.3 million a year earlier.
- Debt increased from year-end 2020; management cited required term-loan principal payments and working-capital financing in the period.
Outlook, risks, and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management believes foreseeable working-capital needs can be met with anticipated operating cash flows and funds available under the revolving facility, but cautions that additional capital could be needed sooner than expected. Actual undrawn availability under the facility is not stated clearly in the filing text.
- Debt and covenants: The company reported compliance with its Wells Fargo and term-loan covenants at March 31, 2021. The revolving facility requires minimum liquidity of $5 million, including at least $3 million of availability. The term-loan maximum leverage covenant for the quarter was 7.75:1, and the company reported 6.18:1. Future compliance is subject to business and market conditions; a covenant breach can trigger a required sale or refinancing process.
- COVID-19: Management said the pandemic had negatively affected end markets and refrigerant demand, but reported no material impact on the ability to procure or distribute products and services as of the filing date. The company continued operating its plants and implemented safety and continuity measures.
- Contract and market exposure: The DLA contract was due to expire in July 2021 unless its five-year renewal option was exercised. Management expected renewal but gave no assurance. Results are exposed to seasonal demand and weather, refrigerant prices and availability, regulatory phase-downs, and supplier and customer concentration. CFC and HCFC sourcing is constrained by phase-outs, while HFCs are being phased down.
- Other contingencies: The company applied for forgiveness of its $2.475 million PPP loan; full forgiveness was not assured. Its $21.0 million valuation allowance reflects uncertainty about realizing deferred tax assets. No goodwill impairment was recorded in the quarter. The company reported no off-balance-sheet arrangements and no material changes to risk factors from its 2020 Form 10-K.
Important facts for investors to verify
- Whether the DLA renewed its contract after the July 2021 expiration date, and the resulting revenue impact.
- Actual borrowing-base availability and liquidity headroom under the revolving credit facility, along with subsequent covenant compliance.
- Debt reduction capacity and the effect of variable interest rates; the filing estimates a 1% rate change would alter annual interest expense by approximately $0.9 million.
- Whether refrigerant demand, pricing, inventory values, and customer collections improved after quarter-end.
- The SBA decision on PPP loan forgiveness and any changes in the company’s deferred-tax valuation allowance.