Hudson Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. Hudson provides refrigerants, refrigerant reclamation and related services, primarily to the HVACR industry. Refrigerant sales account for most revenue. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Revenue: $84.3 million, up 149% from $33.8 million in Q1 2021.
- Gross profit and margin: $45.8 million and 54.3%, versus $9.1 million and 27.0%. Operating income was $38.3 million, compared with $1.7 million.
- Net income: $29.6 million, or $0.66 per basic share and $0.63 diluted, versus a $1.1 million loss, or $0.02 loss per share, a year earlier. Interest expense was $7.3 million, including a $4.7 million charge associated with extinguishing prior debt.
- Cash flow: Operating activities provided $5.1 million, versus $5.0 million used in Q1 2021. Receivables and inventory absorbed cash, including a $24.6 million increase in receivables in the cash flow reconciliation. Investing activities used $0.03 million; financing activities used $3.4 million.
- Liquidity: Cash was $5.2 million at March 31, up from $3.5 million at year-end. Working capital was $105.5 million, versus $55.5 million. Current assets were $152.3 million and current liabilities $46.9 million.
- Debt: Reported debt, net of deferred financing costs, was $95.8 million, compared with $93.4 million at December 31. The new facilities carried $100 million of principal at quarter-end: an $85 million term loan and $15 million FILO tranche. Debt is variable-rate and secured; the facilities mature in March 2027, subject to earlier repayment or acceleration provisions.
- Other balance-sheet items: Inventory was $101.3 million, up from $94.1 million, and net receivables were $38.2 million, up from $14.2 million. Stockholders’ equity increased to $100.9 million from $70.9 million.
Changes versus Q1 2021
Revenue growth reflected higher selling prices for certain refrigerants, supported by increased demand and limited industry supply, as well as increased volume. Cost of sales rose in dollars but fell to 46% of revenue from 73%, driving the higher gross margin. SG&A was broadly flat at $6.8 million. Net income turned positive, while interest expense increased from $2.8 million, principally because of the prior-debt extinguishment charge.
Outlook, financing, and risks
- Management said it expects to meet foreseeable working-capital needs from operating cash flows and funds available under its amended Wells Fargo facility. It provided no specific revenue or earnings guidance in the filing.
- On March 2, 2022, the company amended its revolving facility, providing up to $75 million of revolving loans, subject to a borrowing base, and drew a $15 million FILO tranche. It also borrowed $85 million under a new term loan, repaid the prior term loan, and recorded $4.7 million of debt-extinguishment interest expense. The company reported compliance with its debt covenants at March 31; future compliance is not assured.
- The facilities impose minimum-liquidity requirements and springing or quarterly financial covenants. The company reported $5 million minimum liquidity under the revolving facility, including at least $3 million of availability; actual unused borrowing availability is not stated clearly in the filing text.
- Refrigerant prices, supply, demand, inventory valuation, and regulation are key exposures. The EPA’s AIM Act framework phases down virgin HFCs; Hudson received a 2022 allowance of approximately 3 million metric tons exchange value equivalents, about 1% of total HFC consumption. Allowances for 2023 and later were to be determined subsequently.
- The business is seasonal, with peak refrigerant sales generally in the first nine months; cool spring or summer weather, supply constraints, falling prices, or lower demand could affect results. Management also cited supply-chain cost exposure and possible COVID-19 impacts, though it reported no material effect on its ability to procure or distribute products as of the filing.
- The company reported a $9.1 million deferred-tax valuation allowance at March 31, down from $15.1 million at year-end following NOL utilization. Management said a significant portion, potentially all, might be released within 12 months if sufficient positive evidence emerges; timing and amount remain uncertain.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to the risk factors previously disclosed in the 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether higher refrigerant prices and margins are sustainable, and how much revenue growth reflects volume versus pricing.
- Receivables collection and inventory turnover, given the substantial quarter-over-quarter increases and the related cash use.
- Actual borrowing-base availability, interest rates, covenant headroom, and the ability to service the new variable-rate debt.
- Whether refrigerant supply, market prices, seasonality, or regulatory phase-downs affect inventory values and future demand.
- The evidence and timing for any further release of the deferred-tax valuation allowance.