Hudson Technologies, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. This is an annual report, not a standalone fourth-quarter report. Hudson provides refrigerant sales, reclamation and management, on-site services, and energy-efficiency services.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $162.1 million | $166.5 million |
| Gross profit (loss) | $17.2 million | $(7.4) million |
| Gross margin | 10.6% | (4.4)% |
| Operating loss | $(15.8) million | $(42.6) million |
| Net loss | $(25.9) million; $(0.61) per share | $(55.7) million; $(1.31) per share |
| Cash from operating activities | $33.8 million | $36.3 million |
- Revenue fell 2.6%. Lower refrigerant average selling prices were partly offset by higher sales volume and increased DLA contract revenue. Product and related sales were $157.5 million; RefrigerantSide services were $4.5 million.
- Cost of sales was $144.9 million, or 89% of revenue, versus $173.9 million, or 104%, in 2018. Inventory valuation adjustments were $9.2 million, down from $35.9 million. Selling down higher-cost inventory also reduced cost of sales.
- Interest expense rose to $18.9 million from $14.8 million, including financing costs related to debt amendments and higher interest-rate margins. SG&A declined to $30.0 million from $32.3 million, largely due to lower acquisition integration costs.
- Operating cash flow declined despite the smaller net loss, with inventory reductions contributing $43.5 million and receivables reductions contributing $6.1 million to operating cash flow. Capital expenditures were $1.0 million. Cash was $2.6 million at year-end.
Liquidity, debt and balance sheet
- Working capital was $28.3 million, down from $63.2 million. Inventory declined to $59.2 million from $102.0 million, and net trade receivables fell to $8.1 million from $14.1 million.
- Year-end carrying amount of short- and long-term debt was approximately $99.0 million, net of deferred financing costs; principal balances disclosed were $14.0 million under the revolver and $88.1 million under the term loan. Total liabilities were $135.0 million and stockholders’ equity was $45.1 million.
- In December 2019, Hudson replaced its PNC revolving facility with a Wells Fargo asset-based facility of up to $60 million, subject to a borrowing base; $14.0 million was outstanding at year-end. The facility matures December 2022. The term loan matures October 2023.
- The term loan amendment waived financial covenant defaults for June and September 2019, reset leverage and EBITDA covenants, required a $14 million principal repayment, and added a requirement to begin a sale or refinancing process following a future covenant or payment trigger. Hudson reported compliance with amended debt covenants at December 31, 2019; it gave no assurance of future compliance.
- The Wells Fargo facility requires minimum liquidity of $5 million, including at least $3 million of availability. If availability falls below specified levels, a fixed-charge coverage covenant may apply. Substantially all assets secure the facilities. A 1 percentage-point change in borrowing rates was estimated to affect annual interest expense by about $1.0 million.
Material changes, outlook and risks
- The $25.9 million net loss was an improvement from 2018, mainly reflecting smaller inventory write-downs, higher volume, lower SG&A and lower cost of sales, partly offset by higher interest expense and lower selling prices.
- Hudson recorded and received $8.9 million in August 2019 from settlement of an Aspen Refrigerants acquisition working-capital dispute. This was a non-recurring contributor to other income.
- Management said it expected to meet foreseeable working-capital needs using operating cash flows and Wells Fargo availability. The filing provides no formal revenue or earnings guidance.
- Key risks include volatile refrigerant prices and inventory valuations, seasonal/weather-sensitive demand, refrigerant supply and regulatory phase-downs, and customer concentration. The DLA represented 14% of revenue in 2019, compared with 11% in 2018.
- Nasdaq notified Hudson that its share price did not meet the $1 minimum bid requirement. As of the filing, the company had until July 27, 2020 to regain compliance, potentially through a reverse stock split, or face delisting proceedings.
- The filing cited potential coronavirus-related disruption to suppliers and shipments. It also highlighted substantial debt, covenant and refinancing risk, environmental and regulatory liabilities, and competition. No legal proceedings or off-balance-sheet arrangements were reported.
- Goodwill of $47.8 million was not impaired in 2019, but the company recorded approximately $0.5 million of impairment charges for facility shutdowns. A valuation allowance against deferred tax assets increased to $18.9 million.
- The auditor issued an unqualified opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor was not required to attest to internal control.
Important facts for investors to verify
- Current revolver availability and compliance with the $5 million liquidity requirement and term-loan covenants, including the minimum adjusted EBITDA tests.
- Debt principal, interest rates, upcoming amortization, and the consequences of any covenant or payment trigger requiring a sale or refinancing process.
- Whether refrigerant pricing and inventory reserves continue to stabilize, and how much operating cash flow depends on further inventory or receivables reductions.
- The sustainability of DLA contract revenue and the implications of its 14% share of 2019 revenue.
- Progress toward Nasdaq’s minimum bid-price requirement and any reverse stock split or delisting action.
- Supplier and shipment effects from the coronavirus outbreak, alongside regulatory changes affecting HCFC and HFC supply and demand.