Hudson Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless noted otherwise, dollar amounts are in millions. Hudson provides refrigerant sales and refrigerant-management and related services; refrigerant sales constitute most revenue.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $41.5 | $45.6 | $125.5 | $136.3 |
| Gross profit / margin | $9.0 / 21.6% | $7.8 / 17.1% | $30.0 / 23.9% | $12.4 / 9.1% |
| Operating income (loss) | $2.1 | ($1.2) | $7.7 | ($11.0) |
| Net income (loss) | $0.04 | $2.7 | ($0.5) | ($15.2) |
| Net interest expense | $3.0 | $4.4 | $9.4 | $12.9 |
Q3 diluted and basic earnings per share were reported as $0.00; nine-month loss per share was $0.01, versus a $0.36 loss in 2019.
- Cash flow: Nine-month operating cash flow was $19.9, versus $29.3 in 2019; investing cash flow was $0.004, versus a $0.9 outflow; financing cash flow was a $13.2 outflow, versus a $15.9 outflow. Cash increased $6.6 from year-end to $9.2.
- Liquidity: Working capital was $30.4, versus $28.3 at December 31, 2019. Current assets were $67.9 and current liabilities $37.4. Inventory declined $18.9 to $40.4; net receivables rose $6.6 to $14.7, which management attributed mainly to seasonal factors.
- Debt: Reported debt was $86.4, versus $99.0 at year-end; the balance sheet shows $79.5 long-term debt net of financing costs and $6.9 current debt. No Wells Fargo revolving balance was outstanding at September 30. The term loan bears interest at Eurodollar rate plus 10.25% and matures October 2023. Management estimated a 1 percentage-point rate change would affect annual interest expense by about $0.8.
Changes and management commentary
- Q3 revenue fell 9% year over year and nine-month revenue fell 8%, primarily from lower volume. Management attributed demand weakness to COVID-19-related closures of offices, schools, gyms, and other public venues.
- Margins improved: cost of sales declined to 78% of Q3 revenue from 83%, and to 76% for the nine months from 91%. Management cited sales of higher-cost inventory layers and the prior-year $9.2 inventory valuation adjustment as factors in the comparison.
- SG&A declined to $6.2 in Q3 from $8.3, and to $20.2 for the nine months from $21.2, reflecting lower payroll, commissions, travel, professional fees, and payment-processing costs. The Chief Restructuring Officer role ended in August after performance metrics were achieved through the first two quarters.
- Nine-month net loss narrowed substantially versus 2019, principally reflecting improved gross profit and the absence of the prior-year inventory write-down. Lower interest expense also helped; reduced other income partly offset these improvements.
- Q3 included $1.0 of key-person life-insurance proceeds following the June 2020 death of Chairman and CEO Kevin J. Zugibe. Q3 2019 included $8.9 from settlement of an acquisition working-capital dispute. These unusual items affect period comparisons.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said it expects to meet foreseeable working-capital needs through operating cash flows and available Wells Fargo facility funds, but cautioned that future capital needs and access to financing are uncertain.
- Management reported the company was in compliance with amended debt covenants at September 30, 2020. The term-loan total leverage ratio was 5.79:1, versus a maximum of 8.89:1 for that date. A separate $12.021 minimum trailing adjusted EBITDA covenant applied for September 30; the filing excerpt does not state the measured EBITDA value. Covenant compliance in future periods is not assured. A financial covenant breach or missed required principal payment can trigger a required sale or refinancing process, with a transaction due within 18 months of the trigger.
- The Wells Fargo facility requires minimum liquidity of $5.0, including at least $3.0 of revolving availability; a fixed-charge coverage covenant may spring into effect if undrawn availability falls below $7.5. The company also has a $60.0 asset-based revolving commitment, subject to borrowing-base limits.
- The $2.475 PPP loan bears 1% interest and may be forgiven in whole or part; forgiveness was not assured. Management expected almost the entire balance to be forgiven, but said the process was not expected to conclude until year-end 2020.
- COVID-19 had not materially disrupted the company’s ability to procure or distribute products as of filing, but could further reduce demand, weaken collections, disrupt supply chains, or impair operations. Other material exposures include refrigerant price and availability, seasonality and weather, customer concentration, regulation and phaseouts, inventory valuation, and covenant compliance.
- One customer represented 13% of nine-month revenue. The company reported no goodwill impairment through September 30, 2020 and no off-balance-sheet arrangements. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify actual revolver availability and minimum-liquidity headroom, as well as continuing compliance with all debt covenants and required term-loan payments.
- Assess whether refrigerant demand, prices, and inventory values recover or deteriorate as pandemic effects, seasonality, and refrigerant phaseouts continue.
- Check the status and final amount of PPP loan forgiveness and the cash benefit expected from CARES Act tax provisions.
- Reconcile the filing’s NOL disclosures: the tax note states approximately $44.7 of federal NOLs, while MD&A states approximately $45.5; both report a $18.0 deferred-tax valuation allowance.
- Review the subsequent treatment of the $1.0 insurance proceeds and the effect of prior-year $8.9 settlement income on comparisons.