Hudson Technologies, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The company operates as one reportable segment, providing refrigerant sales, reclamation and management services, on-site system services, and related industrial gases. Refrigerant and product sales account for most revenue.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $192.7 million | $147.6 million |
| Gross profit | $71.7 million | $35.4 million |
| Gross margin | 37.2% | 24.0% |
| Operating income | $42.3 million | $5.9 million |
| Net income (loss) | $32.3 million | $(5.2) million |
| Diluted EPS | $0.69 | $(0.12) |
| Cash from (used in) operating activities | $(1.2) million | $11.7 million |
| Cash and cash equivalents at year-end | $3.5 million | $1.3 million |
| Working capital at year-end | $55.5 million | $24.4 million |
- Revenue rose 30.6%, primarily because of higher selling prices for certain refrigerants, partly offset by lower sales volume as Hudson was more selective in sales.
- Cost of sales was $121.1 million, or 63% of revenue, versus $112.2 million, or 76%, in 2020. The lower cost ratio reflected higher selling prices and lower costs for certain refrigerants.
- SG&A was essentially unchanged at $26.6 million. Interest expense declined to $11.4 million from $12.3 million, reflecting term-loan principal repayments.
- Operating cash flow turned negative mainly because inventory investment increased. Inventory reached $94.1 million, up from $44.5 million; trade receivables were $14.2 million, up from $9.8 million.
- Year-end reported debt was $93.4 million, including $15.0 million of short-term revolving debt and approximately $79.9 million of term-loan principal. The company reported a total leverage ratio of 1.93x, compared with 5.84x in 2020.
- Product and related sales were $187.8 million; RefrigerantSide services revenue was $4.9 million, compared with $4.4 million in 2020.
Material changes and notable items
- Performance improved substantially year over year: gross margin expanded, operating income increased, and the company moved from a net loss to net income.
- The $2.475 million Paycheck Protection Program loan was forgiven in 2021 and recorded as other income. In 2020, other income included $1.0 million of key-person life insurance proceeds following the death of the former chairman and CEO.
- Inventory increased sharply, consistent with higher refrigerant costs and selling prices. The company cautions that inventory resale value and availability depend on market conditions, pricing, and sourcing.
- Hudson recorded a $15.1 million valuation allowance against deferred tax assets at year-end, after reducing it by $3.9 million in 2021. It reported approximately $29.3 million in federal NOLs and $21.0 million in state NOLs.
- Goodwill was $47.8 million; the annual qualitative impairment assessment found no impairment. The auditor issued an unqualified opinion on the financial statements and internal controls; goodwill impairment assessment was identified as a critical audit matter.
Liquidity, debt and subsequent refinancing
At December 31, 2021, cash was $3.5 million and working capital was $55.5 million. Management said it expected to meet foreseeable working-capital requirements from anticipated operating cash flows and available credit, while cautioning that unanticipated costs, weaker sales, or expansion needs could require additional capital. The company reported compliance with its existing debt covenants at year-end.
On March 2, 2022, after the reporting date, Hudson refinanced its term debt and amended its revolving facility. It borrowed $85 million under a new term loan, repaid the prior term loan (approximately $63.9 million principal after a $16.0 million excess-cash-flow payment, plus $3.3 million in fees and expenses), and established a Wells Fargo facility with up to $90 million of capacity: a $15 million FILO tranche and up to $75 million in revolving loans subject to a borrowing base. Both facilities mature in 2027 and are secured by company assets. The new term loan includes quarterly principal payments, cash-flow sweep provisions, and quarterly leverage and fixed-charge coverage covenants. The filing does not provide post-refinancing outstanding balances or borrowing availability.
Outlook, risks and contingencies
- No formal earnings guidance is provided. Management identifies refrigerant sales prices, sourcing, demand, weather, seasonality, competition, regulations, and operating costs as key variables. Refrigerant sales are seasonal, with peak sales generally in the first nine months of the year.
- The AIM Act and EPA rules phase down virgin HFC production and consumption. Hudson received a 2022 allowance of approximately 3 million Metric Tons Exchange Value Equivalents, or 1% of total HFC consumption; future allocations were undetermined. Management expects reclamation to be important to maintaining supply.
- The Defense Logistics Agency contract, extended through July 2026, generated 10% of 2021 revenue, versus 14% in 2020. Loss of this customer could materially affect results.
- COVID-19 affected the economy and demand, but the company reported no material impact on its ability to procure or distribute products and services as of the filing date. Potential future impacts include weaker demand, supply-chain disruption, collection risk, and workforce disruption.
- Other material risks include refrigerant price and inventory exposure, regulatory change and compliance costs, environmental or personal-injury liability, debt covenants and financing access, adverse weather, and customer or supplier concentration. Environmental impairment insurance is $10 million per occurrence and $10 million aggregate; the company warns coverage may not suffice for all claims.
- The filing reports no legal proceedings and no off-balance-sheet arrangements. The company declared no cash dividends and does not expect to pay them in the foreseeable future.
Key facts investors should verify
- Whether higher refrigerant prices and margins are sustainable, and how inventory valuation and sales volume develop.
- Actual operating cash conversion and working-capital needs, particularly after the significant 2021 inventory build.
- Post-refinancing debt outstanding, borrowing-base availability, interest costs, and compliance with the new loan covenants.
- Future HFC allowance allocations and how the phase-down affects refrigerant supply, reclamation demand, and pricing.
- DLA contract performance and renewal/customer concentration, as well as any lasting effects of COVID-19 or supply-chain constraints.