Perma-Fix Environmental Services, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Unless otherwise indicated, amounts are in thousands of dollars.
Business context
The company provides waste treatment and environmental services through its Treatment and Services segments. Its Medical segment conducts medical-isotope research and development (R&D) and had no revenue. Government-related work remains significant: services involving federal-government-generated waste accounted for 73.8% of revenue, versus 63.4% in Q1 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $12,707 | $10,038; up 26.6% |
| Gross profit and margin | $2,719; 21.4% | $34; 0.3% |
| Operating loss | $(520) | $(3,601) |
| Continuing-operations loss, after tax | $(675) | $(3,846) |
| Net loss attributable to common stockholders | $(727); $(0.06) per share | $(3,840); $(0.33) per share |
| Operating cash flow | $1,872, including $2,011 from continuing operations | $138 total |
| Cash at period end | $134 | $798 at March 31, 2016 |
| Total debt | $6,978 | $8,833 at December 31, 2016 |
| Working capital | $1,696 | $(2,131) at December 31, 2016 |
Treatment revenue rose 39.3% to $10,034, primarily on higher waste volumes, including government waste. Services revenue declined 5.7% to $2,673. Treatment gross margin improved to 26.8% from negative 1.9%; Services gross margin fell to 1.2% from 6.1%. SG&A declined 6.7% to $2,850, and R&D fell to $389 from $575, mainly because Medical R&D was curtailed.
Quarter-end debt comprised $2,243 on the revolving facility and $4,735 on the term loan. The facility matures March 24, 2021; stated first-quarter effective rates were 3.9% on the revolver and 4.3% on the term loan. Revolver availability was $2,350 at March 31, subject to borrowing-base limits and lender restrictions. The company reported meeting its first-quarter covenants: fixed-charge coverage was 3.13:1 against a 1.15:1 minimum, and tangible adjusted net worth was $30,148 against a $26,000 minimum.
Operating cash flow benefited in part from collections and working-capital movements. Investing activities used $40, including $22 of capital expenditures; financing activities used $1,864. The company had budgeted approximately $1,000 of 2017 capital expenditures.
Material changes and unusual items
- The gross-profit turnaround was driven mainly by higher Treatment revenue and volume; cost of goods sold was nearly unchanged year over year.
- Management attributed higher Treatment fixed costs partly to approximately $296 of additional depreciation following a reassessment of M&EC facility asset lives in light of its planned closure.
- Q1 2016 interest expense included a $68 loss on debt extinguishment; lower financing-fee expense in 2017 also reflected prior debt amendments and the payoff of a separate $3,000 loan in August 2016.
- At March 31, the company reclassified $5,949 of PFNWR finite-risk sinking funds to a current receivable while awaiting regulatory releases. In April, releases enabled recovery of approximately $5,951. The proceeds were used to repay revolving borrowings, with the remainder intended for working capital. A $2,500 standby letter of credit was issued as collateral for replacement bonds, and the lender added a $750 borrowing-availability restriction; the company reported that net borrowing availability increased by approximately $2,701 after these steps.
Outlook, risks and contingencies
Management said cash from operations, credit-facility availability and the released sinking funds should be sufficient to fund operations through the remainder of 2017 and into the first half of 2018, while cautioning there is no assurance. Expected cash needs include working capital, debt service, remediation, capital spending and approximately $2,906 of M&EC closure costs. The company intends to close M&EC by the end of its lease term in January 2018 and is transitioning work to other facilities, subject to customer needs and regulatory approval.
PF Medical’s prior letter of intent for a proposed $8,000–$12,000 investment expired, although negotiations continued. The contemplated transaction could provide funding for R&D and repayment of at least $2,300 owed to the company; it is not assured. Management said substantial Medical R&D will not resume without funding and noted the Polish subsidiary’s audit could include a going-concern opinion if the funding is not completed.
Key risks include reliance on government contracts and funding, which may be terminated or renegotiated on 30 days’ notice; project timing and margins; customer collections; covenant compliance and restricted borrowing capacity; permits and environmental regulation; closure and remediation costs; and the ability to raise capital. Environmental remediation liabilities were $924, including $676 current. Management reported no litigation expected to have a material adverse effect and no material change to previously disclosed risk factors. The quarter’s results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether Treatment revenue and margins remain stronger, and whether Services revenue and margins recover.
- Actual cash generation, revolver availability and covenant compliance after the April sinking-fund release, debt repayment and new restrictions.
- Progress, definitive terms and closing status of the proposed PF Medical financing, including implications for ownership and Medical R&D.
- Whether M&EC closure, related costs and other environmental obligations remain within recorded estimates and schedule.