Hudson Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; interim financial statements are unaudited. Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and on-site services, and energy monitoring and related services. Refrigerant sales make up a significant majority of revenue. The company operates as one reportable segment.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $90.5 | $103.9 | $167.7 | $188.3 |
| Gross profit / margin | $36.6 / 40.5% | $57.5 / 55.3% | $67.0 / 39.9% | $103.3 / 54.9% |
| Operating income / margin | $27.7 / 30.6% | $49.8 / 47.9% | $50.3 / 30.0% | $88.1 / 46.8% |
| Net income / margin | $19.2 / 21.2% | $39.8 / 38.3% | $34.7 / 20.7% | $69.4 / 36.8% |
| Diluted EPS | $0.41 | $0.84 | $0.73 | $1.48 |
| Net interest expense | $1.9 | $2.6 | $3.7 | $9.9 |
- Q2 revenue fell 12.9% year over year, primarily due to lower selling prices for certain refrigerants. First-half revenue declined 11%, reflecting lower prices and volume.
- Cost of sales rose to 59% of Q2 revenue and 60% for the first half, versus 45% in each comparable 2022 period. Management attributed the margin contraction to higher purchase costs for certain refrigerants and lower selling prices.
- SG&A was $8.3 million in Q2 and $15.3 million for the first half, up from $7.0 million and $13.8 million, respectively, primarily due to increased headcount and stock compensation. First-half stock compensation expense was $1.8 million versus $0.6 million.
- First-half 2022 interest expense included a $4.6 million charge related to extinguishment of prior debt. Interest expense was also lower in 2023 following debt repayment.
Cash flow, liquidity and debt
- First-half operating cash flow was $21.2 million, down from $33.9 million. Investing cash outflow was $0.8 million, similar to 2022; financing cash outflow was $14.3 million versus $15.9 million.
- Cash increased by $6.1 million from year-end to $11.4 million at June 30, 2023. Working capital was $151.7 million, up from $124.2 million. Current assets were $205.3 million and current liabilities $53.6 million.
- Inventory was $134.4 million, down from $145.4 million at year-end. Net receivables rose to $49.1 million from $20.9 million, mainly due to increased sales.
- Reported debt, net of deferred financing costs, was $29.3 million, down from $43.2 million at year-end. Scheduled debt and lease obligations totaled $32.5 million, including $4.25 million due in each of 2024, 2025 and 2026 and $19.7 million in 2027. The company reported approximately $68 million of debt paydown between April 2022 and June 2023.
- The Wells Fargo facility permits up to $75 million of revolving borrowing, subject to a borrowing base, plus a $15 million FILO term loan; the company reported $15 million outstanding under the facility and a $0.9 million letter of credit. Actual unused borrowing availability is not stated in the filing text.
- At June 30, the company reported compliance with debt covenants: term-loan fixed-charge coverage ratio of 3.13:1 versus a 1.10:1 minimum, and leverage ratio of approximately 0.32:1 versus a 4.00:1 maximum. Management said expected operating cash flows and facility availability should meet foreseeable working-capital needs, while cautioning that additional capital could be needed sooner if costs rise or revenue underperforms.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management notes that refrigerant sales are seasonal, generally peaking in the first nine months, and that unseasonably cool spring or summer weather can reduce demand; prior seasonal declines have contributed to fourth-quarter losses.
- The AIM Act phases down virgin HFC production and consumption; the filing describes a 10% reduction from baseline in 2022 and 2023 and a cumulative 40% reduction in 2024. Hudson received allowances of approximately 3 million Metric Tons Exchange Value Equivalents annually for 2022 and 2023, about 1% of total HFC consumption; future allocations were not yet determined. Management sees reclamation as important to maintaining supply.
- Key exposures include refrigerant sourcing, availability and price; inventory valuation; regulatory changes; weather and seasonality; customer concentration; and interest-rate movements. A 1% interest-rate change would affect annual interest expense by approximately $0.3 million, according to the filing.
- One customer accounted for more than 10% of first-half 2023 revenue and represented $14.6 million of receivables at June 30; the customer’s exact revenue share is not specified. The filing also records estimated incremental refrigerant procurement costs in accrued liabilities, but does not provide a clear amount.
- The company is involved in various legal proceedings, but the filing text does not provide a clear quantified exposure. Goodwill impairment was not recorded for the first half. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether refrigerant selling prices and purchase costs stabilize, and how inventory values and gross margins respond.
- Customer concentration, collection of the $14.6 million receivable, and changes in receivable balances after quarter-end.
- Actual revolver availability and ongoing compliance with liquidity and debt covenants, particularly under weaker seasonal demand or adverse weather.
- Future HFC allowance allocations, regulatory implementation, and the effect of phasedown on refrigerant supply, pricing and reclamation demand.
- The amount and final resolution of accrued supply-chain costs and any material developments in legal proceedings.