Hudson Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020 unless otherwise stated. Amounts are in U.S. dollars. Hudson is a refrigerant services company selling refrigerants and industrial gases and providing reclamation, on-site services, monitoring and diagnostic services. It reports one operating segment.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $36.35 million | $34.66 million; up 5% |
| Gross profit / margin | $8.35 million / 23.0% | $6.99 million / 20.1% |
| Operating income | $0.37 million | $0.24 million |
| Interest expense | $3.31 million | $4.21 million |
| Net loss | $2.89 million; $0.07 per share | $4.04 million; $0.09 per share |
| Cash used in operating activities | $3.60 million | $1.86 million |
| Cash used in investing activities | $0.19 million | $0.17 million |
| Cash provided by financing activities | $7.43 million | $0.93 million |
Revenue growth was mainly attributed to higher volumes of certain refrigerants. Gross margin improved primarily because inventory costs were lower. SG&A rose to $7.27 million from $6.02 million, mainly due to increased non-recurring professional fees and a higher doubtful-account allowance. Lower interest expense reflected the $14 million term-loan principal repayment in December 2019. Net loss improved year over year, but operations continued to consume cash.
Cash increased to $6.25 million from $2.60 million at year-end, supported by $8.0 million of net additional short-term borrowing. Working capital was $26.0 million, down from $28.3 million. Current assets were $84.2 million and current liabilities $58.2 million. Receivables rose to $15.5 million from $8.1 million, mainly with higher sales; inventory was $58.3 million, down slightly from $59.2 million.
Total reported short- and long-term debt was $106.6 million, versus $99.0 million at December 31, 2019. This included $22.0 million of revolving debt and $3.76 million of current long-term debt. The term loan matures in 2023 and bears interest at Eurodollar Rate plus 10.25%; the revolver facility provides up to $60 million subject to a borrowing base. A 1-percentage-point interest-rate change would affect annual interest expense by approximately $1.1 million, according to the filing.
Material changes, outlook and risks
- COVID-19: Hudson said it was operating as an essential business, keeping plants open and had experienced no material disruption to procurement or distribution as of the filing date. It was monitoring liquidity, reducing expenses, implementing safety measures and remote work. The company warned that customer shutdowns could reduce sales and impair collections, with the most significant sales impact expected in Q2 2020; supply-chain disruption and increased processing costs were also possible. The duration and overall financial impact were uncertain.
- Debt covenants: Hudson reported compliance with its Wells Fargo and term-loan covenants at March 31. Its actual total leverage ratio was 11.28x, against a 16.57x maximum for that quarter. The term-loan amendment also sets minimum liquidity and adjusted EBITDA requirements and progressively tighter leverage limits. A covenant breach or missed required principal payment can trigger a required sale or refinancing process. Management cautioned that future compliance was not assured.
- Subsequent events: On April 23, 2020, Hudson received a $2.475 million Paycheck Protection Program loan, unsecured, at 1% interest with a two-year term and initial six-month payment deferral. Some or all may be forgiven, but forgiveness was not assured. Amendments to both credit facilities authorized up to $2.5 million of CARES Act borrowing and addressed treatment of proceeds and potential forgiveness.
- Other risks: Refrigerant prices, availability and regulation can affect revenue and inventory values; sales are seasonal and weather-sensitive. One customer accounted for 13% of Q1 revenue, with $2.7 million receivable at quarter-end. Goodwill was $47.8 million; no goodwill impairment was recorded for Q1. The company carried an $18.5 million valuation allowance against deferred tax assets. Management recorded a preliminary $47,000 tax benefit for an accelerated alternative minimum tax credit refund and expected a cash benefit from evaluating NOL carrybacks, but did not quantify that expected benefit.
- Guidance: The filing provides no specific revenue or earnings guidance. Management said it believed anticipated operating cash flows and available revolver funds would meet working-capital needs for the foreseeable future, while noting that unexpected costs or weaker sales could require capital sooner than anticipated. The results for this quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether COVID-related customer closures, receivable collection risk or supply constraints materially affected Q2 and later results.
- Revolver availability and compliance with minimum-liquidity, leverage and adjusted-EBITDA covenants as thresholds tighten.
- Whether operating cash generation improves, given Q1 cash use and increased reliance on borrowing.
- Whether the PPP loan qualifies for forgiveness and whether the expected NOL carryback produces a cash refund.
- Whether refrigerant prices, inventory realizability, customer concentration or further impairment indicators change materially.