Perma-Fix Environmental Services, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context and reporting period
Perma-Fix provides treatment and disposal of hazardous, radioactive and other waste, as well as environmental and nuclear-related services. It reports Treatment and Services segments. The company sold its Services-segment subsidiary Schreiber, Yonley and Associates (SYA) on July 29, 2014; under its early adoption of new discontinued-operations guidance, SYA remains in continuing operations in the periods presented.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $16.905 million | $19.072 million | $40.106 million | $61.685 million |
| Gross profit / margin | $5.581 million / 33.0% | $3.129 million / 16.4% | $7.232 million / 18.0% | $7.690 million / 12.5% |
| Operating income (loss) | $2.620 million | $(0.667) million | $(2.964) million | $(5.714) million |
| Continuing-operations income (loss), net of tax | $2.344 million | $(0.568) million | $(3.720) million | $(4.436) million |
| Net income (loss) | $1.871 million | $(0.808) million | $(2.087) million | $(4.660) million |
| Net income (loss) per share | $0.16 | $(0.07) | $(0.18) | $(0.41) |
Q3 operating results improved substantially, led by a 42.3% increase in Treatment revenue and higher Treatment margins. The nine-month comparison remained pressured by lower Services revenue and contract completions. Q3 consolidated net income included a $473,000 loss from discontinued operations. Nine-month results included a $3.530 million after-tax gain on the PFSG fire insurance settlement; excluding that gain, the reported net loss would have been larger.
Cash flow: For the first nine months, operating activities used $3.344 million, investing activities provided $6.684 million and financing activities used $2.000 million. Cash increased $1.340 million to $1.673 million. Investing cash included $5.727 million of property-insurance proceeds. The company also reported $1.332 million of restricted cash, primarily related to the Polish subsidiary’s share offering.
Balance sheet and liquidity at September 30, 2014: Total assets were $88.948 million and total liabilities were $40.010 million. Long-term debt, including its current portion, was approximately $12.336 million. Cash was $1.673 million; working capital was negative $226,000. Revolving-credit excess availability was $8.558 million, after an indefinite $1.5 million reduction in availability. Backlog was approximately $10.681 million.
Material changes versus the prior comparable period
- Q3 revenue fell 11.4% year over year. Services revenue declined $5.943 million, primarily because the CHPRC subcontract ended in September 2013 and replacement work was delayed. Treatment revenue rose $3.776 million on increased waste volume.
- Q3 gross profit increased $2.452 million; gross margin rose to 33.0% from 16.4%. Treatment gross margin increased to 38.9% from 20.2%, reflecting higher volume and lower fixed costs.
- Nine-month revenue decreased 35.0%, largely reflecting the end of the CHPRC subcontract and other completed Services contracts. Treatment revenue increased 12.9%, while Services revenue declined 70.7%.
- Nine-month SG&A declined $1.917 million, partly reflecting lower headcount and cost reductions. The company recorded $380,000 of goodwill impairment in 2014, versus $1.149 million in 2013.
- Total debt declined from $14.248 million at December 31, 2013 to approximately $12.336 million. The revolving-credit commitment was reduced from $18 million to $12 million in April 2014.
Outlook, risks, contingencies and unusual items
- Management said sizable project awards in the latter part of Q2 and Q3 improved business trends. Backlog had risen $2.986 million from year-end 2013 and $4.604 million from June 30, 2014. The company expects increased government spending on waste-management services to support revenue, but provided no numerical earnings or revenue guidance.
- Management expects to meet the remaining 2014 quarterly fixed-charge coverage covenant. The first-quarter 2014 requirement was waived; the company reported ratios of 3.49:1 and 3.63:1 for Q2 and Q3, respectively, against a 1.15:1 requirement. Failure to comply without a lender waiver could permit acceleration of debt, and the company warned it might lack liquidity to repay accelerated obligations.
- The filing repeats the auditor’s prior-year going-concern warning and states that the company’s financial position and results raise substantial doubt about its ability to continue as a going concern. It reported an accumulated deficit of $57.165 million and a nine-month net loss of $2.087 million. Management said available cash flows and credit availability should be sufficient for current obligations, but acknowledged uncertainty and the need to increase revenue, control costs and potentially raise capital.
- Government customers represented 63.6% of Q3 revenue and 57.5% of nine-month revenue, down from 68.7% and 66.3%, respectively, in 2013. Government contracts may be terminated or renegotiated on 30 days’ notice; reduced public funding, contract losses, collection delays, permits, disposal-site access and environmental liabilities are identified risks.
- The PFSG facility remained non-operational after its August 2013 fire and was being marketed for sale while management evaluated its future. The company recorded $723,000 of impairment charges in discontinued operations. The $3.530 million insurance gain and substantial insurance proceeds are unusual items, not recurring operating earnings.
- The company reported $1.031 million of accrued environmental-remediation liabilities, including $28,600 current. It also disclosed approximately $46.612 million of facility closure and post-closure financial-assurance requirements, supported in part by a $21.326 million sinking fund. Management said no pending litigation was believed likely to have a material adverse effect; a previously disclosed waste-related suit was mediated and remaining claims dismissed in October 2014.
- PF Medical S.A. had received $1.247 million of a planned approximately $2.550 million offshore share placement into escrow, pending Polish approvals and legal requirements. Additional receipts were expected, but completion and timing were not certain.
- Disclosure controls and procedures were assessed as effective at September 30, 2014; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improved Q3 Treatment volumes and $10.681 million backlog convert into sustained revenue and operating cash flow.
- Whether covenant compliance continues and whether the $8.558 million stated revolver availability remains accessible under borrowing-base and lender conditions.
- Whether the company can address going-concern concerns given negative working capital, accumulated losses and reliance on nonrecurring asset-sale and insurance proceeds.
- Final settlement and use of PFSG insurance proceeds, the facility’s disposition, and any additional impairment or remediation costs.
- Completion of Polish approvals and collection of the remaining PF Medical S.A. subscription proceeds, including the effects on ownership and funding.