Hudson Technologies, Inc. — Q2 2021 Form 10-Q
Business context and period. Hudson supplies and reclaims refrigerants and provides refrigerant management and related services to the HVACR industry. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods. Refrigerant sales account for most revenue.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $60.5 million | $47.7 million | $94.3 million | $84.0 million |
| Gross profit | $21.8 million | $12.7 million | $31.0 million | $21.0 million |
| Gross margin | 36.1% | 26.6% | 32.8% | 25.0% |
| Operating income | $14.4 million | $5.2 million | $16.1 million | $5.6 million |
| Net income (loss) | $11.3 million | $2.4 million | $10.2 million | $(0.5) million |
| Diluted EPS | $0.24 | $0.06 | $0.22 | $(0.01) |
Q2 revenue increased 26.8%; first-half revenue increased 12.3%. Management attributed growth mainly to higher selling prices, with higher volumes also contributing. Gross margin improved as selling prices rose, costs for certain refrigerants declined, and lower-cost inventory tiers were sold. First-half SG&A declined to $13.5 million from $14.0 million, primarily due to lower non-recurring professional fees. First-half net interest expense was $5.7 million, down from $6.4 million.
Cash flow and liquidity. First-half operating cash flow was a use of $8.4 million, versus $2.6 million provided in 2020, mainly reflecting the timing of receivables and inventory as sales increased and inventory was replenished. Investing cash use was $0.4 million; financing provided $9.4 million, including $12.0 million of net revolving borrowings, partly offset by term-loan repayments. Cash was $1.9 million at June 30, 2021, versus $1.3 million at year-end 2020. Working capital was $34.8 million, up from $24.4 million.
Debt. Reported short- and long-term debt totaled $97.1 million, compared with $87.3 million at December 31, 2020. This included $14.0 million drawn on a revolving facility with a $60 million stated maximum (subject to a borrowing base) and approximately $82.5 million of term-loan principal. The term loan bears interest at Eurodollar Rate plus 10.25% and matures October 2023; the revolver matures December 2022. The reported total leverage ratio was 4.18:1, down from 5.84:1 at year-end. A 1 percentage-point change in borrowing rates was estimated to affect annual interest expense by approximately $0.9 million.
Changes, outlook and risks
- Management said COVID-19 had negatively affected demand and end markets, but reported no material impact on the company’s ability to procure or distribute products as of the filing date. The business continued operating as an essential provider.
- The company reported compliance with its Wells Fargo and term-loan covenants at June 30, 2021. It must maintain minimum liquidity of $5 million under the revolver; a fixed-charge coverage covenant can apply if undrawn availability falls below $7.5 million. The term-loan agreement includes leverage and minimum EBITDA tests and a requirement to begin a sale or refinancing process after certain trigger events.
- Management believed anticipated operating cash flows and revolver availability would meet working-capital needs for the foreseeable future, while cautioning that higher refrigerant costs, weaker sales, or other unexpected spending could increase capital needs. No numerical revenue or earnings guidance is provided.
- Risks include refrigerant supply, pricing and demand; regulatory phase-downs of refrigerants; weather and seasonality; customer concentration (one customer represented 10% of first-half revenue); and the ability to maintain financing covenant compliance. Sales are seasonal, with peak refrigerant sales generally in the first nine months.
- The company recorded a $14.0 million valuation allowance against deferred tax assets. It had $38.5 million of federal NOLs and $31.3 million of state NOLs at June 30, 2021. A $2.475 million PPP loan remained on the balance sheet; the company had applied for forgiveness, but full forgiveness was not assured.
- Inventory was $48.3 million, including a $7.4 million net realizable value reserve. Management said Q2 and first-half margins benefited from selling lower-cost inventory tiers, a factor that may not recur at the same level.
Important facts for investors to verify
- Current revolver availability and compliance with minimum-liquidity, leverage and EBITDA covenants, including the effect of seasonal working-capital needs.
- Whether improved refrigerant pricing and gross margins can be sustained as inventory costs and market prices change.
- Collection of the $33.3 million net receivables balance and management of inventory levels and reserves.
- Outcome and accounting treatment of the PPP forgiveness application, and the company’s ability to realize deferred tax assets despite the valuation allowance.
- Exposure to customer concentration, refrigerant sourcing and regulatory phase-downs, and seasonal or weather-related demand swings.