Hudson Technologies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparative figures are for FY2019. This is an annual filing, not a report limited to Q4.
Business context
Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and management, on-site RefrigerantSide services, and energy-efficiency and diagnostic services. Refrigerant sales make up the substantial majority of revenue. Its business is affected by refrigerant prices and availability, regulation, weather, and seasonality.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $147.6 million | $162.1 million |
| Gross profit | $35.4 million | $17.2 million |
| Gross margin | 24.0% | 10.6% |
| Operating income (loss) | $5.9 million | ($15.8 million) |
| Net loss | ($5.2 million); ($0.12) per share | ($25.9 million); ($0.61) per share |
| Cash from operating activities | $11.7 million | $33.8 million |
| Cash and cash equivalents at year-end | $1.3 million | $2.6 million |
Revenue fell 9%, primarily due to lower volume amid COVID-related closures of offices, schools, gyms, and other public venues. Gross margin improved substantially as 2020 benefited from selling higher-cost inventory layers and FY2019 included a $9.2 million inventory valuation charge. SG&A declined to $26.6 million from $30.0 million. Interest expense was $12.3 million, down from $18.9 million, largely reflecting debt reduction.
Working capital was $24.4 million, down from $28.3 million. Inventory declined to $44.5 million from $59.2 million, while net trade receivables rose to $9.8 million from $8.1 million. Operating cash flow decreased by $22.1 million year over year; FY2019 included an $8.9 million cash settlement related to the Aspen acquisition and a larger cash benefit from inventory reductions.
Reported debt carrying value was $87.3 million at year-end, including $2.0 million drawn on the revolving facility and the $2.475 million PPP loan, net of deferred financing costs. The term loan balance was approximately $85.1 million before financing costs. The company reported a total leverage ratio of 5.84:1, versus 11.22:1 in 2019. Term-loan maturities include $74.6 million due in 2023. Interest-rate sensitivity was approximately $0.9 million of annual interest expense for a 1% rate change.
Material changes, outlook, and risks
- The company remained loss-making, but net loss narrowed markedly, with operating results moving from a loss to income. Improvement reflected better gross margin, lower SG&A, and reduced interest expense, partly offset by lower revenue and other income.
- COVID-19 reduced demand, though Hudson reported plants remained open and no material impact on its ability to procure or distribute products as of the filing. Management described expense reduction, liquidity monitoring, and employee and customer safety measures. The duration and full financial effects of the pandemic remained uncertain.
- Hudson received a $1.0 million key-person life insurance payment after CEO Kevin J. Zugibe died unexpectedly in June 2020. FY2019 other income included an $8.9 million Aspen working-capital dispute settlement. These items affect year-to-year comparability.
- A $2.475 million PPP loan was received in April 2020. Hudson applied for forgiveness and expected nearly all of it to be forgiven, but stated there was no assurance of full forgiveness; the process was expected to conclude in the first half of 2021.
- The company said it was compliant with amended loan covenants at December 31, 2020, but gave no revenue or earnings guidance and cautioned that future compliance was uncertain. The term loan has leverage, liquidity, and minimum adjusted EBITDA requirements; a covenant breach or missed principal payment may trigger a required sale or refinancing process.
- The $60 million Wells Fargo asset-based facility expires in December 2022; availability depends on eligible receivables and inventory. Both credit arrangements are secured by substantially all assets and restrict dividends and other actions. Management believed anticipated operating cash flows and revolver availability would meet working-capital needs for the foreseeable future, while warning that additional capital could be needed.
- The DLA contract accounted for 14% of revenue in both 2020 and 2019 and was due to expire in July 2021 unless its five-year renewal option was exercised. The filing said Hudson expected renewal but could not assure it. The customer represented $2.9 million of year-end 2020 receivables.
- Regulatory changes, refrigerant supply and price volatility, weather and seasonality, customer concentration, environmental liability, and competition are key risks. New U.S. legislation enacted in December 2020 requires a phasedown of virgin HFC production; Hudson expects this to create reclamation opportunities, but market effects remain uncertain.
- Goodwill was $47.8 million. No goodwill impairment was recorded in 2020 or 2019, but the auditor identified goodwill valuation as a critical audit matter because estimates depended on forecasts, discount rates, market multiples, and uncertain COVID-19 effects. The company maintained a $19.0 million valuation allowance against deferred tax assets.
Most important facts for investors to verify
- Whether the DLA exercised its renewal option and the subsequent effect on revenue, receivables, and customer concentration.
- PPP loan forgiveness outcome and final accounting for the loan.
- Current borrowing-base availability, liquidity covenant headroom, and compliance with term-loan leverage and EBITDA tests.
- Whether refrigerant demand, pricing, and inventory values support reported margins and avoid further write-downs.
- Cash generation and refinancing or repayment capacity ahead of the large 2023 term-loan maturities.
- Whether COVID-related demand conditions, regulatory changes, and goodwill valuation assumptions have changed since year-end.