Hudson Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate. Hudson provides refrigerants, refrigerant reclamation and related services, including RefrigerantSide services and work under a U.S. Defense Logistics Agency contract.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $45.6m | $40.5m | $136.3m | $140.8m |
| Gross profit (loss) | $7.8m | $7.7m | $12.4m | $(10.4)m |
| Gross margin | 17.1% | 19.1% | 9.1% | (7.4)% |
| Operating income (loss) | $(1.2)m | $(0.4)m | $(11.0)m | $(38.7)m |
| Net income (loss) | $2.7m | $(13.9)m | $(15.2)m | $(47.6)m |
| Net income (loss) per share | $0.06 | $(0.33) | $(0.36) | $(1.12) |
Q3 revenue rose 13%, primarily from higher refrigerant volumes and DLA contract growth, partly offset by lower selling prices. For the first nine months, revenue declined 3%: average refrigerant selling prices fell 16%, while refrigerant volume increased 4%; DLA revenue increased approximately $5.5m. Q3 cost of sales was 83% of revenue versus 81% a year earlier. Nine-month cost of sales improved to 91% of revenue from 107%, reflecting lower inventory valuation adjustments: $9.2m in 2019 versus $34.7m in 2018, which included acquisition inventory write-downs.
Q3 net income included $8.9m of other income from the settlement of an Aspen Refrigerants acquisition working-capital dispute. Nine-month other income also included that settlement and approximately $0.5m from a change in estimate of cylinder deposit liabilities. Without these items, reported net income would not reflect solely recurring operating performance. Nine-month interest expense increased to $12.9m from $10.6m, mainly following higher borrowing-rate margins. SG&A fell to $21.2m from $26.0m for the nine-month period, including a $3.9m reduction in ARI integration-related professional fees.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $29.3m, down from $35.3m. Inventory declined to $59.4m from $102.0m at year-end, contributing $42.1m to operating cash flow; receivables increased to $19.8m from $14.1m.
- Investing cash outflow was $0.9m. Financing cash outflow was $15.9m, including net repayment of $13.8m on short-term debt and $2.1m of long-term debt repayment. Cash increased by $12.4m to $14.7m.
- Total debt was approximately $114.5m at September 30, versus $129.9m at December 31, 2018. Because of covenant noncompliance, the term loan was classified as current; balance-sheet current liabilities were $143.7m and working capital was negative $45.1m, compared with positive working capital of $63.2m at year-end.
- PNC revolving borrowings were $15.2m, with approximately $23.2m of additional borrowing availability. Separately, liquidity as defined under the term loan agreement was $23.2m, below its $28m minimum. Total leverage was 13.79:1.00 versus a required maximum of 6.40:1.00; the PNC fixed-charge coverage ratio was 0.40 versus a required 1.00.
- Lease adoption added an $8.1m right-of-use asset and lease liability at January 1, 2019. Operating lease liabilities totaled $6.5m at September 30.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said it was seeking waivers and amendments to reset covenants with both lenders; there is no assurance the lenders will agree on acceptable terms, or at all. The company states that covenant defaults raise substantial doubt about its ability to continue as a going concern. Lenders issued reservation-of-rights letters and may accelerate the debt, terminate further lending or exercise other remedies. Hudson reported meeting payment obligations to date and had $14.7m cash plus approximately $23.2m of PNC borrowing availability at quarter-end, but these resources do not resolve the covenant defaults.
- Refrigerant pricing remains challenging and inventory values are sensitive to market prices. Virgin R-22 production and import allowances end in 2020, creating supply and demand uncertainty.
- Sales are seasonal, with peak refrigerant sales generally in the first nine months; the company warns that fourth-quarter losses have occurred historically. Weather, supply, prices, regulation and customer demand can materially affect results.
- One customer represented 13% of nine-month 2019 revenue and owed $3.3m at September 30; no customer represented 10% or more in the comparable 2018 period.
- Hudson tested goodwill after operating and stock-price declines and reported no goodwill impairment. It recorded approximately $0.5m of intangible-asset impairment associated with closing its Nashville and Puerto Rico facilities. The deferred-tax valuation allowance rose to $16.9m.
- The company reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether lenders granted covenant waivers or amended both facilities, and whether any acceleration, default-rate interest or other remedies followed.
- Actual borrowing availability under the PNC borrowing base and the company’s defined liquidity after any required debt payments.
- How much of Q3 earnings and cash generation is attributable to the $8.9m settlement and working-capital movements rather than recurring operations.
- Subsequent refrigerant pricing, inventory valuation adjustments, seasonal fourth-quarter performance and the R-22 phaseout’s effect on supply and demand.
- Trends in the concentrated customer relationship, DLA contract revenue, and the company’s ability to reduce leverage and meet future covenant requirements.