Hudson Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Hudson supplies and reclaims refrigerants and provides related services to the HVACR industry; refrigerant sales make up most revenue. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $60.6m | $41.5m | $155.0m | $125.5m |
| Gross profit / margin | $23.7m / 39.0% | $9.0m / 21.6% | $54.6m / 35.3% | $30.0m / 23.9% |
| Operating income | $16.9m | $2.1m | $33.0m | $7.7m |
| Net income (loss) | $15.9m | $0.04m | $26.1m | $(0.5)m |
| Diluted EPS | $0.34 | $0.00 | $0.56 | $(0.01) |
- Management attributed higher revenue primarily to higher selling prices for certain refrigerants, partly offset by lower volumes. Gross margin benefited from higher prices, lower costs for certain refrigerants, and sales of lower-cost inventory tiers.
- At September 30, cash was $9.5m; working capital was $50.6m, up from $24.4m at year-end 2020. Inventory was $58.8m and net receivables were $22.1m.
- Nine-month operating cash flow was $8.0m, compared with $19.9m a year earlier. The filing attributes the decline chiefly to timing of receivables and inventory as sales increased and inventory was replenished. Capital expenditures were $0.7m. Cash increased $8.2m to $9.5m.
- Reported debt at carrying value was $86.5m: $7.0m on the revolving facility and $79.5m of term-loan debt, including current maturities. The term loan’s stated balance before deferred financing costs was approximately $81.2m. Total leverage ratio was 2.35:1, versus 5.84:1 at December 31, 2020. The company reported compliance with its debt covenants at quarter-end.
Material changes and unusual items
- Revenue rose 46.0% in Q3 and 23.5% for the nine-month period year over year; profitability improved substantially from the prior comparable periods.
- Q3 and nine-month 2021 other income included $2.475m from forgiveness of the company’s Paycheck Protection Program loan. The 2020 comparison included $1.0m of key-person life-insurance proceeds.
- Net interest expense declined year over year, which management attributed to term-loan principal repayments. The filing reports nine-month interest expense of $8.5m, versus $9.4m.
- During Q3, use of $16.3m of gross net operating losses accompanied a $4.9m reduction in the tax valuation allowance; the ending allowance was $14.1m. The filing also describes a full valuation allowance, so investors should review the tax note and related presentation.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management said it expects to meet foreseeable working-capital needs through operating cash flows and available revolving-credit funds, but cautioned that additional capital could be needed sooner than expected and may not be available on acceptable terms.
- The EPA’s September 2021 HFC allowance rule begins a phase-down; Hudson received an allocation for 2022 of approximately 3 million Metric Tons Exchange Value Equivalents, or 1% of total HFC consumption. Allocations for 2023 and later were not yet determined. Management said reclamation will be important to maintaining supply.
- Key risks include refrigerant sourcing, price and demand volatility; supply-chain costs; inventory valuation; seasonal and weather-driven demand; customer concentration; and regulatory changes. One customer represented 10% of nine-month 2021 revenue. The business typically has peak refrigerant sales in the first nine months, and past fourth quarters have sometimes produced losses.
- The company cited potential workforce and operating effects from COVID-19 vaccination requirements affecting employees and government-contract work. It reported no material COVID-related impact on its ability to procure or distribute products as of the filing date.
- Debt is secured by substantially all assets. The revolving facility matures in December 2022 and the term loan in October 2023; the term loan bears interest at Eurodollar Rate plus 10.25%. A 1 percentage-point interest-rate increase would raise annual interest expense by approximately $0.9m. Covenant compliance and borrowing availability remain important given minimum-liquidity requirements and a springing fixed-charge-coverage covenant.
- The company reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors other than the vaccination-mandate risk described in the filing.
Most important facts for investors to verify
- Whether improved refrigerant pricing and gross margins persist, and how lower sales volumes affect future revenue.
- Quarter-end revolver availability and headroom against liquidity and debt covenants; the filing does not provide a clear quarter-end undrawn-availability figure.
- Inventory recoverability and the effect of changing refrigerant prices, sourcing costs, and HFC phase-down allocations.
- The sustainability of operating cash generation given increased receivables and inventory, and the timing of debt maturities and repayments.
- The tax valuation allowance and the realizability of federal and state NOLs, including the $16.3m of NOLs used in the quarter.
- Whether vaccination requirements or supply-chain disruptions affect staffing, government-contract execution, or refrigerant procurement.