Hudson Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Hudson provides refrigerant sales, reclamation and related services, primarily to the HVACR industry. Refrigerant sales make up most of revenue. The filing is unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $103.9m | $60.5m | $188.3m | $94.3m |
| Gross profit | $57.5m | $21.8m | $103.3m | $31.0m |
| Gross margin | 55.3% | 36.1% | 54.9% | 32.8% |
| Operating income | $49.8m | $14.4m | $88.1m | $16.1m |
| Net income | $39.8m | $11.3m | $69.4m | $10.2m |
| Diluted EPS | $0.84 | $0.24 | $1.48 | $0.22 |
- Management attributed revenue growth mainly to higher refrigerant selling prices, which it linked to the AIM Act and virgin HFC allocation system. Six-month revenue doubled year over year.
- Cost of sales was 45% of revenue in both Q2 and the first half of 2022, versus 64% and 67%, respectively, in the comparable 2021 periods. Management cited higher prices and, for the first half, lower costs for certain refrigerants.
- SG&A was $7.0m for Q2 and $13.8m for six months, modestly above prior-year levels; management cited higher commissions, travel and marketing.
- Net interest expense was $2.6m in Q2 and $9.9m for six months. First-half expense included $4.7m related to extinguishing the former term loan.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $33.9m, versus cash used of $8.4m in 2021. Receivables and inventory absorbed $30.7m and $23.4m, respectively, before other working-capital movements.
- Cash was $20.7m at June 30, up from $3.5m at year-end. Working capital was $133.6m, up from $55.5m.
- Inventory was $118.7m, up $24.5m from year-end; net receivables were $43.7m, up $29.5m, primarily reflecting increased sales.
- Total debt was $84.9m, versus $93.4m at December 31, 2021; cash less total debt was approximately $64.2m. The company refinanced in March 2022 with an $85m term loan and a Wells Fargo facility of up to $90m, including a $15m FILO borrowing and up to $75m in revolving loans subject to a borrowing base. No revolving balance was reported at June 30.
- Debt is floating-rate. The company estimated that a 1 percentage-point rate change would affect annual interest expense by about $0.9m. It reported compliance with debt covenants at June 30: term-loan fixed-charge coverage ratio of 5.30 against a 1.10 minimum, and leverage ratio of approximately 0.73 against a 4.00 maximum.
Material changes, outlook and risks
- A key tax item was an $11.6m valuation allowance release in the first half, based on management’s conclusion that deferred tax assets were more likely than not realizable. The company had fully used its federal NOLs by June 30 and expected to release a further $3.5m of valuation allowance over the next two quarters. The first-half tax provision was $8.8m.
- The March refinancing replaced the prior term loan, which had been repaid along with fees and expenses. The extinguishment generated $4.7m of first-quarter interest expense. The new facilities mature in March 2027 and include collateral, financial covenants and restrictions, including limits on dividends.
- Management said it expects to meet foreseeable working-capital needs through operating cash flows and available facility capacity, but warned that higher refrigerant costs, weaker sales, operating expenses or expansion costs could increase funding needs; additional capital may not be available on acceptable terms.
- The AIM Act HFC phase-down and reclamation requirements may support reclaimed refrigerant demand, but sourcing, availability, pricing and demand remain material risks. Hudson received a 2022 allowance of about 3 million metric tons exchange value equivalents, approximately 1% of total HFC consumption; future allocations were not yet determined.
- The business is seasonal, with peak refrigerant sales generally in the first nine months and potential fourth-quarter losses. Weather, regulation, refrigerant prices and supply, competition, customer demand, and supply-chain costs could materially affect results. Management reported no material impact to its ability to procure or distribute products as of the filing date, while noting COVID-19 uncertainty.
- No specific financial guidance was provided. Management stated that operating results for the first six months are not necessarily indicative of full-year results. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether high refrigerant selling prices and margins persist as HFC allocations, supply and demand evolve.
- Inventory valuation and turnover, and collection of the sharply higher receivables balance.
- Future borrowing availability, floating-rate interest costs and continued covenant compliance.
- Whether forecast taxable income supports the deferred-tax-asset realization and remaining valuation allowance release.
- Seasonal performance, refrigerant sourcing costs, and any changes in regulatory allocations or customer demand.