Perma-Fix Environmental Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise. The company provides waste treatment and environmental services, with Treatment, Services and Medical reporting segments. Medical had no revenue and remained in research and development.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $11.758 | $12.921 | $37.179 | $37.768 |
| Gross profit / margin | $1.745 / 14.8% | $1.807 / 14.0% | $6.817 / 18.3% | $3.657 / 9.7% |
| Operating loss | $(1.873) | $(1.378) | $(3.491) | $(16.195) |
| Net loss | $(2.122) | $(1.691) | $(4.314) | $(14.102) |
| Loss per common share | $(0.17) | $(0.13) | $(0.34) | $(1.18) |
For the first nine months, cash used in operating activities was $0.109, including $0.355 provided by continuing operations and $0.464 used by discontinued operations. Investing activities provided $5.704, largely reflecting release of PFNWR insurance sinking funds; financing activities used $4.717. Cash was $1.055 at September 30, up from $0.163 at year-end 2016.
Total debt was $4.143, including $1.184 current and $2.959 long-term; there were no revolver borrowings at quarter-end. Revolving-credit availability was $4.257, subject to eligible receivables and lender-imposed availability reductions. Working capital remained negative at $(1.020), improved from $(2.131) at December 31, 2016. Total assets were $58.704 and stockholders’ equity was $26.853.
Changes versus prior comparable periods
- Q3 revenue declined 9.0%; nine-month revenue declined 1.6%. Treatment revenue rose 22.4% in Q3 and 27.1% year to date, supported by increased government waste volume and average pricing.
- Services revenue fell 54.5% in Q3 and 45.4% year to date, chiefly because a major nuclear-services project ended in December 2016. A delayed project affected by government funding uncertainty restarted at the end of August 2017.
- Nine-month gross profit increased $3.160 million. The improvement was primarily in Treatment, while Services gross profit declined. Q3 gross profit was down $0.062 million, including $0.550 million of additional M&EC closure costs; excluding those costs, management reported gross profit increased $0.488 million.
- Nine-month net loss improved substantially versus 2016, which included $8.288 million of intangible impairment and a related tax benefit. In Q3 2017, the company recorded a $0.672 million impairment of M&EC tangible assets.
Outlook, risks and unusual items
- The company planned to close its M&EC facility by the end of its lease term, January 21, 2018. It reported $2.927 million of accrued M&EC closure liabilities at September 30, including a $0.550 million Q3 increase due to revised cost estimates. Management anticipated approximately $2.927 million in closure spending and said it expected to fund operating needs, debt payments, remediation, capital expenditures and closure costs from operations and credit availability.
- Management said cash flows and available credit should be sufficient for the next 12 months, while cautioning that there are no assurances. It expected to meet credit covenants over that period; the company met its first-, second- and third-quarter 2017 requirements. A covenant breach could permit the lender to accelerate debt, and management cautioned it might lack liquidity to repay accelerated borrowings.
- The lender imposed an indefinite $2.0 million reduction in revolver availability. PFNWR’s $5.951 million released sinking funds were used to repay the revolver, with remaining funds intended for working capital. New bonds of approximately $7.0 million replaced the PFNWR policy; a $2.5 million standby letter of credit supported those bonds.
- Demand is materially exposed to government funding and contracts, which may be terminated or renegotiated on 30 days’ notice. Federal-government-related work represented 72.2% of Q3 continuing-operations revenue and 73.9% for the nine-month period.
- Medical R&D had been substantially reduced for lack of capital. Management said activity would remain limited until financing or additional equity was obtained; the program could be further reduced, delayed or eliminated.
- Other risks include environmental compliance and remediation obligations, potential third-party disposal-site liabilities, customer collections, project timing and margins, permits, and closure-cost estimates. Environmental remediation liabilities totaled $0.883 million. Outstanding standby letters of credit were approximately $2.675 million and bonds approximately $8.253 million.
- Mark Duff became CEO in September 2017; former CEO Louis Centofanti became EVP of Strategic Initiatives and remained on the board. The company reported disclosure controls were effective at September 30, 2017 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Treatment growth and the restarted Services project continued, and how project timing, government funding and customer concentration affected revenue and margins.
- Actual M&EC closure costs, spending timetable, final closure obligations and whether the facility closed as planned.
- Current borrowing availability after lender restrictions, covenant headroom, cash generation and ability to fund working capital and debt service.
- Progress in obtaining capital for Medical R&D and the implications if funding is unavailable.
- Changes in environmental remediation, insurance, bonding and other contingent obligations, as well as the assumptions underlying closure-cost estimates.
- Expected effects of adopting the new revenue-recognition standard in 2018; the filing said the impact was still under evaluation.