Hudson Technologies, Inc. — FY2018 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2018; quarterly figures below compare Q4 2018 with Q4 2017. Hudson sells refrigerants and industrial gases and provides refrigerant reclamation, management, and on-site services. The 2017 acquisition of Airgas-Refrigerants (renamed Aspen Refrigerants) substantially expanded distribution and contributed a full year of results in 2018.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $166.5 million | $140.4 million |
| Gross profit (loss) / margin | $(7.4) million / (4.4%) | $38.0 million / 27.1% |
| Operating income (loss) | $(42.6) million | $15.1 million |
| Net income (loss) | $(55.7) million; $(1.31) per diluted share | $11.2 million; $0.26 per diluted share |
| Cash from operations | $36.3 million | $18.4 million |
| Cash and cash equivalents at year-end | $2.3 million | $5.0 million |
| Working capital | $63.2 million | $113.6 million |
| Total debt | $129.9 million | $167.4 million |
FY2018 revenue increased 18.6%, principally reflecting the acquired business. Excluding ARI, revenue declined approximately $42 million, driven by lower refrigerant selling prices (approximately $33 million) and lower volumes (approximately $9 million). Interest expense rose to $14.8 million from $3.2 million.
In Q4 2018, revenue was $25.7 million versus $24.6 million in Q4 2017; gross profit was $3.1 million versus $3.0 million; operating loss was $3.9 million versus $9.6 million; and net loss was $8.1 million versus $5.2 million.
Material changes and unusual items
- A $35.9 million inventory valuation adjustment was recorded in 2018 amid falling refrigerant prices. It included a $17.6 million write-down of acquired inventory step-up and an $18.3 million lower-of-cost-or-net-realizable-value adjustment. Inventory fell to $102.0 million from $172.5 million.
- Operating cash flow improved despite the net loss, helped by inventory sales and purchases timing and income tax refunds. Cash flow was mainly used to repay debt; net debt repayments were approximately $36.1 million.
- Net loss also reflected higher acquisition-related interest costs, margin compression, and a $11.3 million deferred-tax-asset valuation allowance. Goodwill impairment testing found no impairment.
- Debt amendments during 2018 followed covenant pressure. The term loan’s stated leverage ratio was 11.82x at year-end, against an amended maximum of 12.75x; the company reported compliance with amended covenants at December 31, 2018.
Liquidity, outlook, and risks
At year-end, the PNC revolving facility had $29.0 million drawn and approximately $34.4 million available. The term loan balance was approximately $104.2 million and matures in October 2023; the revolving facility matures in October 2022. Debt is secured by substantially all company assets. Amendments raised borrowing costs, established minimum liquidity of $28 million, and set scheduled term-loan repayments and future leverage tests. Management said it expected to meet foreseeable working-capital needs through operating cash flows and revolver availability, while warning additional capital could be needed and might not be available on acceptable terms.
The filing provides no earnings or revenue forecast. Key risks include refrigerant price and supply volatility, seasonal and weather-sensitive demand, regulatory changes and refrigerant phase-downs, competition, customer concentration, high leverage and covenant compliance, and environmental liabilities. One customer represented 11% of 2018 revenue. A $144,000 liability remained for a 1999 refrigerant release; further remediation costs are uncertain and insurance proceeds are exhausted. The company also disclosed that a finance-staff-related material weakness identified earlier in 2018 was remediated by year-end; management and the auditor reported effective internal control at December 31, 2018.
Important facts for investors to verify
- Whether refrigerant prices, sales volumes, and inventory values stabilize, and the potential for further inventory write-downs.
- Liquidity headroom against the $28 million minimum and availability under the borrowing-base revolver; confirm ongoing compliance with amended debt covenants and repayment requirements.
- The drivers and sustainability of operating cash flow, given low year-end cash and reliance on inventory reductions and tax refunds.
- Post-acquisition performance and integration, including whether the acquired business can offset weakness in Hudson’s historical operations.
- Potential additional costs from the Hillburn environmental matter and the realization of deferred tax assets subject to the recorded valuation allowance.