Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies third quarter 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbett, IMS Investor Relations. Sir, please go ahead.
Thank you. Good afternoon, and welcome to our conference call to discuss Hudson Technologies financial results for the third quarter 2021. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer. I'll now take a moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions, and predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our business as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions, and since these elements can change and in certain cases are not within our control, we would ask you to consider and interpret them in that light.
We urge you to review Hudson's most recent Form 10-K and other subsequent SEC filings with a discussion of the principal risks and uncertainties that affect our business and our performance and other factors that could cause actual results to differ materially. With that, we'll now turn the call over to Brian Coleman. Go ahead, Brian.
Good evening, and thank you for joining us. Our third quarter delivered a very strong close to our nine-month selling season, as demonstrated by substantial revenue growth, significantly improved margins, and improved profitability. Our improved performance was primarily due to the significant increases in average sales pricing across our portfolio of refrigerants, which far outweighed the decrease we saw in volume in the third quarter. We attribute the decrease in demand largely to three factors, a greater attention to our customer value proposition and realigned sales strategy focused to prioritize long-term, higher-margin customers, a slower than anticipated reopening of certain commercial locations, and the impact from global supply chain shortages. As we conducted the final integration of Aspen Refrigerants, we enhanced and unified our sales team towards implementing a strategy which renewed Hudson's focus on higher-margin, long-term customers.
Our current leadership team has been examining the inherited Aspen sales approach that, in certain instances, focused on higher volume sales at the sacrifice of gross margin. As we previously discussed, our industry is rapidly evolving, and for some time now, we've been carefully evaluating our sales strategies to maximize value as we begin navigating the new landscape created by federal legislation, such as the AIM Act and the state-level initiatives. As we enter the initial stage of the AIM Act phasedown of virgin HFC production, it is critical that we ensure we have the inventory to best support our long-standing higher-margin customers.
Not only has our analysis been important for the 2021 season to establish a baseline of profitability, but it is a necessary step to identify the customers who we anticipate will be with us for the long haul, both as refrigerant buyers as well as sources of used gas. As it relates to commercial cooling, we believe that over time, the demand headwinds caused by COVID will be eliminated as commercial space continues reopening and volumes will return to more normal cooling demand. Lastly, the global supply chain shortages have also impacted, on occasion, our ability to meet a portion of emergency response demand from customers this quarter. We are proactively managing our inventory to mitigate the challenging supply chain issues that we and many American businesses are facing to ensure that we can provide uninterrupted service to our customers.
From a pricing perspective, during the third quarter, we saw average selling prices of many refrigerants remain strong and increase from the Q2 levels. With the end of the selling season, we believe prices will remain stable through the fourth quarter, and we believe we will see further price increases in the 2022 season as the implementation of the AIM Act phasedown begins. If we look to Europe as guidance for pricing relative to the initial steps taken under the HFC phasedown there, we could expect to see a further doubling or more in prices for HFC refrigerants in the foreseeable future. This pricing dynamic should be a stimulus for growth in reclamation. I'd like to take a minute to discuss our gross margin performance.
The significantly improved gross margin in the third quarter is primarily related to higher selling prices of certain refrigerants and the elimination of certain lower-margin sales. As you know, we take a FIFO approach to inventory accounting, and during the third quarter, we were largely selling inventory that we acquired at a lower cost. Our gross margin performance benefited from this dynamic. Moving forward, through the close of the calendar 2021 and into 2022, we expect to see a return to more historical gross margin performance in the upper 20s%-low 30% levels as we expect to acquire HFC refrigerant inventory at higher price points for next year's sales season.
We could begin to see gross margin improvement over historical levels with the growth in HFC reclamation volumes, which typically results in lower acquisition costs compared to virgin purchases. That benefit to gross margin from increased reclaimed supply will probably begin during the 2023 season. As I mentioned a moment ago, legislative activity continues as our industry adopts new regulations to drive the transition to environmentally friendly refrigerants. During the quarter, in September, the EPA published the final rule allocating allowances for the production and consumption of HFCs as mandated by the AIM Act, and introduced a step-down of 10% in 2022 from baseline levels.
As a reminder, the AIM Act, which was passed in December 2020, requires the phasedown of HFC virgin production over the next 15 years, with a cumulative 40% reduction in the baseline scheduled to take place in just over two years. Reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phasedown. As a leading reclaimer, we believe this presents a significant long-term opportunity for Hudson to act as an HFC supplier while also transitioning away from the production of virgin HFCs. Remember that Hudson reclaims all refrigerant gases, including CFCs, HCFCs, HFCs, and HFOs.
As we expected, Hudson received an allocation allowance for the calendar year 2022 equal to approximately 3 million metric tons of exchange value equivalent, or 1% of the total HFC consumption, with allowances for 2023 and beyond to be determined at a later date. We expect that the reduction in virgin HFC supply will help accelerate reclamation activity in the near term. With the final HFC allowances in place, we believe we are competitively positioned through both our reclamation capabilities, our robust distribution network to capture market share as both a supplier and a reclaimer, serving the large and growing installed base of HFC equipment. We support the global efforts to transition our industry to more environmentally friendly gases, and we believe we have a unique opportunity to provide a sustainable alternative to virgin refrigerants as the HFC supply tightens.
We are also optimistic regarding opportunities associated with the state-level legislations, such as the Refrigerant Management Program established by California through CARB. Among other initiatives, the CARB program is proposing a requirement that OEMs use a minimum 10% reclaimed refrigerant in factory charged equipment. With California leading the way, we are encouraged that we will become a leader in helping companies comply with potential state-imposed refrigerant regulations. Hudson represents approximately 35% of refrigerant reclamation activity in the U.S., uniquely positioning us to support the phase out of virgin production of HFC refrigerants and to serve as a key resource in the circular economy of refrigerants. We are energized by the opportunities we are seeing, not only to grow our business, but also to provide our services to benefit the environment. Now I'll turn the call over to Nat to review the financials. Go ahead, Nat.
Thank you, Brian. For the third quarter ended September 30th, 2021, Hudson recorded revenues of $60.6 million, an increase of 46% compared to $41.5 million in the comparable 2020 period. The growth is related to increased selling prices for certain refrigerants during the quarter, as Brian mentioned. Gross margin was 39% for the third quarter of 2021, compared to 22% in the third quarter of 2020. The improved gross margin is primarily attributable to higher selling prices in the quarter, which, in the context of our FIFO approach to inventory, favorably impacted our margin performance. As we move through the close of the calendar year and the fourth quarter, which is historically our weakest quarter, we expect gross margin performance to be more consistent with historical gross margin levels.
SG&A for the third quarter of 2021 was $6.1 million or 10% of revenue, as compared to $6.2 million or 14.9% of revenue in the third quarter of 2020. We recorded operating income of $16.9 million in the third quarter of 2021 compared to operating income of $2.1 million in the third quarter of 2020. Interest expense for the third quarter of 2021 was $2.8 million compared to $3 million reported during the third quarter of 2020, mainly due to principal payments made on the term loan. The company recorded in other income a gain on forgiveness of its Paycheck Protection Program, i.e. PPP loan, of $2.5 million in the third quarter of 2021.
The company recorded net income of $15.9 million, or $0.36 per basic and $0.34 per diluted share in the third quarter of 2021, compared to net income of $39,000 or $0.00 per basic and diluted share in the same period of 2020. On September 30th, 2021, we had approximately $53 million of total availability consisting of our cash balance and revolver availability. Increased revolver availability provides the company with better opportunities to procure inventory for the upcoming selling season. We have strong liquidity, and our term loan and revolving loan credit facilities provide us with a solid financial platform and flexibility as we look forward. Our leverage ratio on September 30th, 2021 was 2.35x, as compared to 5.84x and 11.22x as of December 31st, 2020 and 2019 respectively.
This improvement is a result of both increased earnings and delevering the balance sheet. As discussed on the last call, we have initiated the process to refinance our debt. I will now turn the call back over to Brian.
Thanks, Nat. As we close out the 2021 selling season, we are excited about the opportunities ahead for 2022 and beyond. We continue to focus on growing our leadership position in the refrigerant and reclamation industry. Operator, we will now open the call to questions.
Thank you. Ladies and gentlemen, the floor is open for questions. If you have any questions or comments, please indicate so by pressing star one. Pressing star two will remove you from the queue should your question be answered. Lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, that's star one if you have a question or comment. The first question is coming from Ryan Sigdahl from Craig-Hallum Capital Group. Your line is live.
Good afternoon, Brian, Nat. Thanks for taking our questions.
Thank you, Ryan.
I'm curious if you can elaborate on the debt refi process. I know you announced you started it before, didn't give much of an update now. I'm curious how that's trending, and any more details you can share there.
Yeah, sure. Thank you. We are on schedule, as we mentioned, to finish the debt refi process by the end of this year.
Is that finished or as in everything's completed or just announce, you know, what's gonna happen?
Yeah, we wouldn't announce anything until it was completed.
Yes.
Our goal.
Got it.
As we've stated before, is to try to get everything done by year-end.
Correct.
Makes sense. On the quarter, were volumes up or down, year-over-year?
Well, volumes are down, as, I think, in my prepared remarks for primarily three reasons. One is re-examining our sales strategy and noting that, prior to the integration, there were certain sales made through the Aspen side of the business that would be higher volume but much lower margin. The elimination of that activity probably represented about 2/3 of the total decline in volume in the third quarter. We were slightly impacted by both the commercial side of cooling, seems to continue to be down, and seems to be probably mostly related to COVID closures or openings that are not really openings. Like, for example, our office building still probably has less than 50% attendance on any given day.
Then lastly, there were some missed opportunities during the period relative to primarily emergency calls for refrigerant, whether the supply chains are at raw materials or disruptions because of hurricanes. Really the intercontinental, you know, United States freight logistics has been very challenging. We've had months this year and some cases in the third quarter, where on-time delivery rates are below 80%. It's been a little bit of frustration. We've certainly improved, and we're well over 90% now. In recent weeks, we've had actually 100% on-time delivery, which is really a testament to our folks in customer service and shipping. It's been a very difficult year.
Brian, on number one on the sales strategy change, or I guess examining that, how much more work do you think is to be done there? Do you think you've cut out what you needed to, and this is the right base to kind of build off of and then assume seasonality on that?
Yeah. Our new leadership team that have coalesced now under one Hudson, meaning the final integration of both the Hudson sales business and the Aspen sales business that we intentionally kept separate in the initial years of the acquisition. Then I think we announced late last year that we were looking at merging it all into one, really gives us an opportunity to examine the entire business as one and do so in a critical way, but it also to think about long-term growth initiatives and value propositions and sort of really taking the Aspen business and evolving it into or merging it into or making it the same as the Hudson value proposition, caused this examination and the decision to walk away from some business that, again, was very low margin, had very little benefit to the operating line.
We feel like we make the right decision. We feel that allows our sales force more time to spend on areas that could provide more profitability. We think, again, it was an important step. It should be completed this year, but it's a step that's a platform for 2022 and beyond.
One more follow-up on that, and then I'll move on. Does that drop or, I guess, reduction in low margin sales or business, does that impair your reclamation volume at all, t hinking they buy some, they bring back dirty gas where it helps the feedstock?
If that was the case, we probably wouldn't have made that decision because we would have looked at these customers in a more holistic way. I think we would have to go back in time, but I think we mentioned that one of the opportunities we were hoping to achieve out of the acquisition of Aspen was the ability to acquire more used gas. That, I think is true then and is still true today. However, when you look at some of these high volume, low margin sales, they typically were with entities that were not ever going to return used gas. For us, it just was a business that didn't make sense when you think about the energy we spend on that holistic relationship on the buy and sell with most of our customers.
Makes sense. I guess I'm curious on the gross margin commentary, given pricing remains strong, exiting the seasonally strong period into Q4. Q4 is low volume, so I guess I would have assumed some of that transitory price benefit would help gross margin in Q4 and even into early next year. Can you walk through and talk through, I guess, the pricing of where your inventory is in that gross margin into Q4?
Well, our cost and inventory, let's say, lags the sale price by, you know, a couple of quarters. We've had two strong quarters that, if you will, we benefited on increased sale price under a FIFO methodology that slowly will catch up to the increases in sale price at some point and bring us back to somewhat more normal gross margin percentages. Now, the dollars per unit will be higher, therefore, the gross profit dollars will be higher, but the percentage is probably gonna go backwards towards that upper 20s%, probably more likely to lower 30s%, but not necessarily, you know, the upper 30s% that we've achieved, particularly in Q3.
Last question from me. You mentioned the HFC allocation. Nice to see you guys get that this time around. How do you feel about the 1%? I guess, is that really equivalent to 1% effectively of the HFC allocations?
It's a tough question to ask, but a good question. Because you're dealing with these metric tons of CO2e equivalent, you don't really know how you necessarily stack up to the other folks in the group. Because you could have someone in the group that was importing high GWP refrigerant. As a result, they need more CO2e equivalent allocations, which could result in fewer pounds than someone else. It's opaque, if you will, as to what exactly this means in a per pound basis. But it could be some people that have a higher allowance could end up with fewer pounds just because they're dealing with higher GWP gases. But at the end of the day, we're very pleased. As you said a moment ago, we were shut out under the ozone depleting substance phase outs.
We have a long way to go yet in the AIM Act. There's a whole refrigerant management section where the EPA ought to find ways to help grow and promote reclamation. We think it's necessary, obviously, with the very aggressive phase out. We're really looking forward to the next set of rulemaking that likely will be issued sometime next year.
Great. Thanks, guys. Good luck.
Thank you.
If there are any remaining questions or comments, please indicate so now by pressing star one on your touch tone phone. Okay, we have no remaining questions in queue. I'd like to turn the floor back to management for any closing remarks.
Thank you, operator. I'd like to thank our employees for their continued support and dedication to our business through both the COVID challenges and particularly as we complete our final integration. I wanna, again, thank our longtime shareholders and those that recently joined us for their support. Thank you to everyone for participating in today's conference call, and we look forward to speaking with you after the fourth quarter results. Have a good night, everybody.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.