Perma-Fix Environmental Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Amounts below are in U.S. dollars, generally millions, unless stated otherwise. The company provides waste treatment, nuclear and environmental technical services through its Treatment and Services segments.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $21.877 | $18.472 | $67.016 | $53.842 |
| Gross profit / margin | $4.549 / 20.8% | $3.070 / 16.6% | $12.074 / 18.0% | $7.590 / 14.1% |
| Operating income (loss) | $0.496 | ($0.928) | $0.765 | ($3.691) |
| Continuing operations, net | $0.246 | $0.824 | $0.448 | ($1.682) |
| Net income (loss) | $0.341 | $0.664 | $0.404 | ($2.124) |
| Diluted EPS | $0.02 | $0.05 | $0.03 | ($0.16) |
- Revenue drivers: Q3 Treatment revenue rose 21.6% to $10.795 million and Services revenue rose 15.5% to $11.082 million. For nine months, Treatment grew 34.2% to $33.223 million and Services grew 16.2% to $33.793 million.
- Profitability: Q3 gross margin improved overall, but Treatment margin fell to 13.8% from 22.2%, reflecting lower average prices from revenue mix and higher fixed costs. Services margin increased to 27.6% from 11.5%, reflecting project mix and improved margins. Nine-month segment margins were 15.8% for Treatment and 20.2% for Services.
- Cash flow, nine months: Continuing operating activities provided $0.452 million; discontinued operations used $0.478 million, leaving total operating cash use of $0.026 million. Investing used $1.386 million; financing provided $1.890 million. Cash and restricted finite-risk funds together increased $0.478 million to $13.914 million.
- Liquidity: September 30 cash was $1.988 million; working capital was $4.748 million, versus $0.818 million at year-end 2022. The company reported approximately $10.378 million of revolving-credit availability, a figure the filing says includes cash. No revolving-credit balance was outstanding.
- Debt: Total debt was $2.995 million, including $0.880 million current and $2.115 million long-term, compared with $1.039 million at December 31, 2022. The July 2023 amendment added a $2.5 million term loan and extended the facility maturity to May 15, 2027. The company met its second- and third-quarter financial covenants.
- Balance sheet: Total assets were $79.504 million and total liabilities $40.673 million. Accounts receivable was $15.342 million and unbilled receivables $9.336 million. Accrued closure costs totaled $8.066 million, current and long-term combined.
Changes versus prior period and unusual items
- Revenue grew 18.4% in Q3 and 24.5% year to date, which management attributed to higher waste volumes, project activity and productivity, and contracts won during the first half of 2023. Management also cited delayed shipments and projects in 2022 related partly to lingering COVID-19 effects.
- Q3 net income declined year over year despite stronger operating results. The 2022 comparison included approximately $1.975 million of Employee Retention Credit (ERC) income, recorded in other income. The company received the ERC refund, plus approximately $0.060 million interest, in March 2023; the interest was recorded in 2023 interest income.
- Year-to-date continuing operations returned to profitability from a prior-year loss. The 2022 comparison also included the ERC income. Nine-month 2023 income taxes on continuing operations were $0.482 million, with an effective tax rate of 51.8%, affected by nondeductible expenses and state taxes.
- Deferred revenue increased to $7.765 million. It includes a $2.5 million customer invoice for a waste-treatment project expected to begin and be completed in 2024. Unbilled receivables increased 54.0% from year-end.
Outlook, risks and contingencies
- Management expected steady improvement in waste receipts and project work during the balance of 2023, supported by existing contracts, 2023 contract wins and bids awaiting awards. It said operations, available credit and cash on hand should fund the next 12 months; this is management’s expectation, not a guarantee.
- Management warned that an extended U.S. government shutdown could delay procurement, waste shipments and new projects. Government-related work represented 74.2% of Q3 revenue and 82.6% of nine-month revenue. Government contracts may generally be terminated for convenience, and reduced government funding could materially affect results.
- PF Canada had $2.287 million of unpaid receivables and $1.056 million of contractual holdback due from Canadian Nuclear Laboratories. The parties reached an agreement in principle for payment, subject to signing a written settlement agreement.
- The lender’s facility has a $12.5 million revolving-credit limit and a $0.750 million indefinite reduction in borrowing availability. Rates are variable; the reported effective rates for the first nine months included 9.7% on the revolver, 9.1% on Term Loan 1 and 9.9% on Term Loan 2. Covenant failure could permit acceleration of debt and termination of further credit.
- Other risks include inflation, labor and supply costs, higher interest rates, competition limiting price increases, permits and regulatory compliance, disposal-site liabilities, and collection or timing risks on receivables. Outstanding letters of credit were approximately $3.2 million and bonds approximately $36.428 million. Accrued environmental remediation liabilities were $0.861 million.
- A proposed U.K. nuclear-waste treatment partnership with Springfields Fuels Limited remains conditional on contract award, definitive agreements, approvals, facility design and updated economic analysis; the company expects to invest if finalized, but the amount and funding are undetermined.
- The company disclosed ongoing Tetra Tech litigation; most claims were dismissed, two claims remain, and the company says it believes it has no liability exposure. Its insurer is providing a defense subject to a $0.100 million self-insured retention and policy terms.
Important facts for investors to verify
- Whether the PF Canada settlement is executed and the receivables and holdback are collected.
- Whether operating cash generation and working-capital collection support management’s 12-month liquidity assessment, particularly as receivables and unbilled balances have grown.
- Whether Treatment margins recover from Q3’s decline and Services project margins remain strong.
- Compliance with quarterly credit covenants, borrowing availability and the effect of variable interest rates.
- Timing and potential funding needs for the proposed U.K. partnership, planned capital expenditures and the $2.5 million project billed in advance.
- Exposure to government funding or shutdown delays, environmental obligations and the unresolved Tetra Tech claims.