Hudson Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Hudson provides refrigerants, refrigerant-management services, and related products and services; refrigerant sales make up most revenue. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $47.7 | $56.0 | $84.0 | $90.7 |
| Gross profit (loss) | $12.7 | $(2.4) | $21.0 | $4.6 |
| Gross margin | 26.6% | (4.2%) | 25.0% | 5.1% |
| Operating income (loss) | $5.2 | $(10.0) | $5.6 | $(9.7) |
| Net income (loss) | $2.4 | $(13.8) | $(0.5) | $(17.8) |
| Net income (loss) per share, diluted | $0.06 | $(0.32) | $(0.01) | $(0.42) |
- Q2 revenue fell 15% year over year as refrigerant volume declined about 26%; an 11% increase in average pricing partly offset the volume decline. For the six-month period, revenue declined 7%, with volume down 10% and average refrigerant selling price up 3%.
- Q2 cost of sales was 73% of revenue, versus 104% a year earlier; six-month cost of sales was 75%, versus 95%. The 2019 comparison included a $9.2 million inventory write-down in Q2, primarily following refrigerant selling-price declines. Hudson also reported selling higher-cost inventory layers in 2019 and 2020.
- Q2 SG&A was approximately $6.8 million, nearly unchanged year over year. Six-month SG&A increased $1.1 million to $14.0 million, reflecting nonrecurring professional fees, including a Chief Restructuring Officer, and higher doubtful-account provisions. The company said it would no longer need the Chief Restructuring Officer after its first two quarters’ performance and expected those fees to cease beginning August 2020.
- Net interest expense was $3.1 million in Q2 and $6.4 million for the first half, down from $4.3 million and $8.5 million, respectively, in 2019. Hudson attributed the decrease primarily to a $14 million term-loan principal payment in December 2019.
Cash flow, liquidity, and debt
- For the first six months, operating cash flow was positive $2.6 million, compared with negative $3.1 million in 2019; investing cash outflow was $0.6 million and financing cash inflow was $3.3 million. Cash increased by $5.3 million to $7.9 million.
- Working capital was $30.0 million at June 30, up from $28.3 million at year-end 2019. Receivables rose to $25.3 million from $8.1 million, mainly due to seasonal timing and increased sales; inventory declined to $48.6 million from $59.2 million.
- Total short- and long-term debt was $102.7 million at June 30, including $2.5 million borrowed under the Paycheck Protection Program (PPP). The balance sheet reports $15.9 million of short-term debt, $5.7 million of current long-term debt, and $81.0 million of long-term debt, net of deferred financing costs.
- The Wells Fargo revolver permits borrowings up to $60 million, subject to a borrowing base. Term-loan interest is Eurodollar rate plus 10.25%; the company disclosed that a 1 percentage-point change in borrowing rates would affect annual interest expense by approximately $1.0 million.
- Hudson reported compliance with its amended debt covenants at June 30. Its term-loan total leverage ratio was 7.24:1, compared with 11.22:1 at December 31, 2019; the June covenant maximum was 10.87:1. The company also had a $5 million minimum-liquidity requirement and a June minimum trailing adjusted EBITDA covenant of $11.745 million; the filing text does not provide the corresponding actual covenant EBITDA or revolver availability.
Changes, outlook, and risks
- COVID-19 reduced demand, particularly from closed offices, schools, gyms, and public venues. Hudson said it remained operational as an essential business and, as of the filing date, had no material disruption to procuring or distributing products. It was monitoring liquidity, reducing expenses, maintaining safety measures, and working with customers and suppliers. The duration and financial impact of the pandemic remained uncertain.
- Management said it expected to meet foreseeable working-capital needs through operating cash flows and available Wells Fargo facility funds, but warned that unexpected costs, weaker sales, or failure to meet expectations could require additional capital that might not be available on acceptable terms. No specific revenue or earnings guidance was provided.
- The $2.475 million PPP loan bears 1% interest, with a two-year term and initial six-month payment deferral. Hudson expected almost all of it to be forgiven, but stated that forgiveness was not assured and the process was not expected to be finalized until the end of 2020.
- Debt agreements carry significant covenant and default risk. A financial-covenant breach or missed required principal payment can trigger a process to sell businesses or assets and/or refinance, with a transaction required within 18 months of the trigger. The company cautioned that future covenant compliance cannot be assured.
- Key operating risks include refrigerant price, demand and availability; regulation and HCFC phase-downs; seasonality and weather; customer concentration; and potential inventory write-downs. One customer represented 12% of first-half 2020 revenue. Hudson had $10.9 million of inventory net-realizable-value adjustments at June 30.
- Chairman and CEO Kevin J. Zugibe died unexpectedly on June 23, 2020. Hudson was evaluating a company-owned life insurance policy with a $1.0 million face value; any proceeds would be recorded only if received.
- The CARES Act generated reported tax benefits, including $0.380 million in Q2 related to alternative minimum tax credits. A $17.8 million valuation allowance remained against deferred tax assets, reflecting uncertainty about future realization.
Most important facts for investors to verify
- Actual revolver availability and headroom against the $5 million minimum-liquidity requirement and the springing fixed-charge-coverage covenant.
- Actual adjusted EBITDA and compliance headroom against the amended term-loan covenant schedule, including the next required thresholds.
- Receivables collection and customer concentration, especially given the sharp seasonal increase in receivables and the 12% revenue share from one customer.
- Whether the PPP loan is forgiven, and the amount and timing of any CARES Act tax refunds or other cash benefits.
- Whether COVID-19-related demand weakness, refrigerant pricing or availability, and inventory valuation assumptions change materially after June 30.
- Leadership succession and any material insurance proceeds following the former CEO’s death.