Hudson Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollar amounts below are in millions unless otherwise noted. Hudson provides refrigerant products and reclamation, refrigerant-management and related services, primarily to the HVACR industry. Refrigerant sales account for most revenue.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $76.5 | $89.5 | $244.2 | $277.8 |
| Gross profit | $30.6 | $44.2 | $97.5 | $147.6 |
| Gross margin | 40.0% | 49.4% | 40.0% | 53.1% |
| Operating income | $23.1 | $36.3 | $73.4 | $124.4 |
| Net income | $13.6 | $29.4 | $48.3 | $98.7 |
| Diluted EPS | $0.29 | $0.62 | $1.02 | $2.10 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $43.5 | $60.0 |
Drivers and changes: Q3 revenue fell 14.5%; management attributed the decrease primarily to lower selling prices for certain refrigerants, partly offset by higher refrigerant sales volume and DLA program revenue. For the nine months, revenue declined 12%, reflecting lower prices and volume for certain refrigerants, partly offset by DLA and carbon-credit revenue. Cost of sales increased to 60% of revenue in both 2023 periods, from 51% in Q3 2022 and 47% in the prior-year nine-month period, due to lower selling prices and higher inventory/refrigerant costs. Net income declined 54% in Q3 and 51% for the nine months.
Q3 net interest expense was $4.4 million versus $2.4 million a year earlier, including a $3.1 million noncash write-off of deferred financing costs following debt repayment. Nine-month net interest expense was $8.1 million versus $12.3 million; the prior-year period included a $4.7 million loss on extinguishment of debt. Nine-month income tax expense was $17.0 million (26.1% effective rate), compared with $13.4 million; the company noted that federal NOLs used in 2022 no longer reduce taxable income.
Cash, debt and liquidity
At September 30, 2023, cash was $3.8 million, working capital was $141.0 million, and total debt was $5.0 million, consisting of revolving borrowings. The company repaid the remaining $32.5 million of term-loan and FILO principal during Q3; the balance sheet reported no term debt at quarter-end. Cash decreased $1.5 million from year-end 2022. Nine-month operating cash flow of $43.5 million was below the prior-year $60.0 million; investing cash use was $2.2 million and financing cash use was $42.8 million, principally reflecting debt repayments.
Net accounts receivable rose to $44.9 million from $20.9 million at year-end, mainly due to timing; inventory declined to $139.2 million from $145.4 million. The Wells Fargo revolving facility permits up to $75 million, subject to the borrowing base. Its minimum-liquidity covenant requires $5 million, including at least $3 million of availability. The company said it was covenant-compliant at quarter-end and believed operating cash flows and facility availability would meet foreseeable working-capital needs. Borrowings were variable-rate; management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $0.1 million at the reported borrowing level.
Outlook, risks and unusual matters
- No specific numerical revenue or earnings guidance is provided. Management noted that results are seasonal, with peak refrigerant sales generally in the first nine months and historical fourth-quarter losses in some years.
- Management expects to fund working capital from operating cash flows and revolver availability, but cautioned that higher refrigerant costs, weaker sales, expansion costs or other unanticipated expenses could increase capital needs; additional financing may not be available on acceptable terms.
- Key exposures include refrigerant price, supply and demand volatility; inventory valuation; regulation and the HFC phase-down; weather and seasonality; and customer concentration. One customer represented more than 10% of nine-month revenue, with $19.7 million of receivables at quarter-end.
- The EPA announced an October 2023 final rule restricting HFC use in certain new equipment, with compliance dates from 2025 to 2028, and proposed additional measures supporting leak reduction, recycling and reclamation. Hudson said reclamation is important to maintaining refrigerant supply.
- The filing refers to various legal proceedings but does not provide a clear aggregate potential liability. It reports an initial estimate of incremental refrigerant-procurement costs from supply-chain issues accrued in current liabilities, without stating a clear amount.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the risk factors in the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether refrigerant prices and margins stabilize after the substantial year-over-year gross-margin decline, and how inventory costs compare with realized selling prices.
- Customer concentration, collection of the $19.7 million receivable from the major customer, and subsequent-quarter receivable and inventory levels.
- Revolver availability and compliance with minimum-liquidity and any springing fixed-charge-coverage requirements, particularly through the seasonal fourth quarter.
- The final amount and timing of accrued supply-chain procurement costs, and any material developments in legal proceedings.
- Effects of EPA HFC rules, refrigerant sourcing, and weather or seasonal demand on future sales and reclamation opportunities.