Hudson Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions. Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and related services, and on-site system services.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $56.0 | $57.8 | $90.7 | $100.3 |
| Gross profit (loss) | $(2.4) | $(26.1) | $4.6 | $(18.2) |
| Gross margin | (4.2%) | (45.1%) | 5.1% | (18.1%) |
| Operating loss | $(10.0) | $(37.4) | $(9.7) | $(38.3) |
| Net loss | $(13.8) | $(30.6) | $(17.8) | $(33.7) |
| Loss per share | $(0.32) | $(0.72) | $(0.42) | $(0.79) |
Q2 refrigerant average selling prices fell approximately 19%, offset by a 12% increase in volume; DLA revenue increased about $2.3 million. For the first half, prices declined approximately 19%, partly offset by 3% higher refrigerant volume, and DLA revenue increased about $4.1 million. Product and related sales were $55.0 million in Q2 and $88.2 million for the first half; RefrigerantSide services contributed $1.1 million and $2.5 million, respectively.
Cost of sales included inventory net realizable value adjustments of $9.2 million in Q2 2019 versus $34.7 million in Q2 2018. The prior-year charge included a $17.6 million write-down of acquisition-related inventory basis and a $17.1 million other inventory write-down. SG&A declined to $6.8 million in Q2 and $12.9 million for the first half, mainly due to lower ARI integration-related professional fees and reduced payroll, advertising and other professional expenses. Higher interest expense and substantially smaller tax benefits partly offset the improvement in net loss.
Cash, debt and liquidity
- Cash was $1.3 million at June 30, 2019, down from $2.3 million at year-end 2018. First-half operating cash flow was negative $3.1 million, compared with positive $8.7 million in 2018; investing outflow was $0.3 million and financing inflow was $2.4 million.
- Total debt was $132.7 million. Term-loan debt was classified as current because of covenant-default uncertainty; current maturities included $99.7 million on the balance sheet, net of deferred financing costs. Revolver borrowings were $33.0 million, with approximately $21.2 million of additional borrowing availability.
- Working capital was negative $50.2 million, compared with positive $63.2 million at December 31, 2018. The filing attributes much of the change to reclassification of the term loan as current; inventory fell to $75.2 million from $102.0 million, while net receivables rose to $28.1 million from $14.1 million.
- Hudson breached the Term Loan Facility leverage and minimum-liquidity covenants and the PNC Facility minimum-EBITDA covenant. Reported leverage was 14.20:1 versus an 8.25:1 limit; defined liquidity was $21.2 million versus a $28 million minimum; trailing-twelve-month covenant EBITDA was $9.6 million versus a $14.195 million requirement. Lenders had rights to accelerate debt and suspend further lending.
- Management said debt payments were current and described the defaults as primarily a leverage/covenant-structure issue, while seeking waivers and covenant amendments. The filing nevertheless states that the defaults raise substantial doubt about the company’s ability to continue as a going concern.
Outlook, risks and notable events
- No formal financial guidance is provided. Management cited challenging refrigerant pricing, weaker first-quarter demand and seasonality; peak refrigerant sales generally occur in the first nine months, and cool weather or lower prices can materially affect results.
- Management did not believe goodwill was impaired at June 30, but said it would reassess pricing and volume trends through the September selling season, ahead of the annual October 1 impairment test. Goodwill was $47.8 million; no impairment charge was recorded in the first half.
- Refrigerant supply, demand and prices are exposed to regulation and the HCFC phase-down, as well as weather and market conditions. One customer represented 13% of first-half revenue and owed $2.8 million at quarter-end.
- Debt is variable-rate; the filing estimates a 1 percentage-point rate change would affect annual interest expense by approximately $1.4 million. First-half net interest expense was $8.5 million, up from $6.6 million.
- After quarter-end, Hudson and Airgas settled the ARI working-capital dispute on August 7, 2019. Airgas agreed to pay $8.9 million, compared with Hudson’s approximately $9.5 million claimed entitlement. The settlement includes the litigation.
- The company recorded a $17.3 million valuation allowance against deferred tax assets as of June 30, 2019, citing losses and uncertainty about future realization. Disclosure controls were assessed as effective; no material internal-control changes were reported for the quarter.
Investor verification priorities
- Confirm whether lenders waived the covenant defaults, amended requirements on acceptable terms, or exercised any remedies; monitor subsequent liquidity and going-concern disclosures.
- Verify receipt and use of the $8.9 million Airgas settlement payment and its effect on liquidity and debt repayment.
- Track refrigerant pricing, inventory reserves, sell-through and the October 1 goodwill impairment assessment.
- Assess whether operating cash flow, customer concentration and seasonal working-capital needs are improving, and whether the company can maintain required liquidity.