Hudson Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Hudson provides refrigerant and industrial gas sales, refrigerant reclamation and related services, including on-site RefrigerantSide services. Refrigerant sales are the principal source of revenue. The company operates as one reportable segment.
Financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $34.7 million | $42.4 million; down 18% |
| Gross profit / margin | $7.0 million / 20.2% | $7.9 million / 18.6% |
| Operating income (loss) | $0.2 million | $(0.9) million |
| Interest expense | $4.2 million | $3.2 million |
| Net loss | $(4.0) million; $(0.09) per diluted share | $(3.1) million; $(0.07) per diluted share |
| Cash from (used in) operations | $(1.9) million | $9.5 million |
| Cash and cash equivalents | $1.2 million at March 31 | $2.3 million at December 31, 2018 |
| Working capital | $58.9 million at March 31 | $63.2 million at December 31, 2018 |
Revenue fell primarily because selling prices declined (about 67% of the decrease) and fewer pounds of certain refrigerants were sold (about 33%). Product and related sales were $33.2 million, down from $41.1 million; RefrigerantSide services revenue was $1.4 million, up from $1.3 million. Gross margin improved partly because Q1 2018 included $1.1 million of amortization of ARI-acquired inventory basis step-up, with no comparable charge in 2019. SG&A declined to $6.0 million from $8.1 million, including the absence of $0.9 million of prior-year ARI integration fees and lower payroll-related expenses. Higher interest expense, largely reflecting increased credit-facility margins, and the absence of the prior-year tax benefit contributed to the larger net loss.
Liquidity, debt and cash flow
At March 31, cash was $1.2 million and net receivables were $20.1 million, up $6.0 million from year-end; inventory was $99.8 million, down $2.2 million. Operating cash use was attributed to the net loss and timing of receivables and payables. Investing cash use was $0.2 million, primarily for equipment. Financing provided $0.9 million: revolver borrowings increased $2.0 million and term-loan principal repayments were $1.1 million.
Total short- and long-term debt was $131.0 million, net of deferred financing costs, compared with $129.9 million at December 31, 2018. Revolver borrowings were $31.0 million, with approximately $36.1 million of availability and a $0.13 million letter of credit outstanding. The term-loan balance was approximately $103.2 million. The term loan matures October 2023; the revolving facility expires October 2022. Lease adoption added a $7.6 million right-of-use asset and $7.6 million of operating lease liabilities at quarter-end.
The company reported compliance with amended debt covenants at March 31. Term-loan total leverage was 12.47x, against a 12.95x maximum for that quarter; the amended covenant schedule tightens substantially in subsequent quarters. The revolver’s temporary minimum-EBITDA covenant was $9.27 million for the four quarters ended March 31, 2019. A monthly minimum-liquidity requirement is $28 million, defined as cash plus undrawn revolver availability. The term-loan agreement also provides for potential excess-cash-flow repayments, subject to liquidity thresholds. Management cautioned that future covenant compliance is uncertain and may be affected by factors beyond its control.
Outlook, risks and notable items
The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that results are seasonal, with refrigerant sales generally strongest in the first nine months, and that weather can materially affect demand. Risks include refrigerant price and demand volatility, the ability to source refrigerants on commercially reasonable terms, regulatory phase-downs and phase-outs, customer concentration, and substantial debt and covenant requirements. One customer represented 15% of Q1 2019 revenue and had $3.0 million of receivables at March 31.
Interest rates are variable; management estimates that a 1% rate change would affect annual interest expense by approximately $1.6 million based on quarter-end borrowings. The company increased its deferred-tax valuation allowance to $13.3 million at March 31 because of additional losses and uncertainty about realizing deferred tax assets. No goodwill or intangible-asset impairment was recorded in Q1. The company adopted the new lease standard in January 2019, recognizing approximately $8.1 million of right-of-use assets and lease liabilities at adoption. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material changes to the legal proceedings previously reported were disclosed.
Important facts for investors to verify
- Whether refrigerant selling prices, volumes and inventory values stabilize or improve, given the revenue decline and the material inventory balance.
- Progress against the tightening term-loan leverage limits and revolver EBITDA requirements, and maintenance of the $28 million minimum-liquidity covenant.
- Ability to generate operating cash and service debt while cash balances are low and interest costs are elevated.
- Customer concentration and continued access to refrigerant supply amid regulatory phase-downs and changing market demand.