Business context and reporting period
Perma-Fix Environmental Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its Treatment segment handles radioactive, hazardous and other waste; its Services segment provides on-site waste management, technical and remediation services. Results include Safety and Ecology Corporation (SEC), acquired October 31, 2011, for the full periods shown in 2012 but not in 2011.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $34.0 million, up 17.5% from $28.9 million | $72.1 million, up 37.2% from $52.5 million |
| Gross profit / margin | $3.8 million / 11.1%, versus $8.0 million / 27.8% | $8.1 million / 11.2%, versus $11.1 million / 21.1% |
| Operating income (loss) | $(1.4) million, versus $4.2 million | $(2.5) million, versus $3.6 million |
| Net income (loss) attributable to common stockholders | $(1.3) million, versus $2.5 million | $(2.3) million, versus $2.2 million |
| Basic and diluted EPS | $(0.02), versus $0.05 | $(0.04), versus $0.04 |
- Cash from operating activities was negative $9.1 million for the first half, including negative $8.7 million from continuing operations. Cash fell $10.8 million, from $12.1 million at year-end to $1.3 million.
- At June 30, current assets were $40.5 million and current liabilities $31.5 million; reported working capital was $9.0 million, down from $11.5 million at December 31, 2011. Unbilled receivables totaled $13.7 million, up $3.4 million.
- Total debt was approximately $17.5 million, including $3.6 million current; variable-rate borrowings were $15.3 million. Revolver availability was $11.0 million. The company reported compliance with its PNC financial covenants and expected to remain compliant for the rest of 2012.
- Total assets were $152.2 million and total liabilities $59.6 million at June 30, 2012. The balance sheet also included $21.3 million in the finite-risk sinking fund, subject to policy terms and restrictions.
Material changes versus the prior comparable period
- Reported revenue growth reflects SEC, which contributed $17.3 million in Q2 and $35.9 million in the first half. Excluding SEC, management said Q2 revenue declined 42.4%, principally from Treatment revenue and lower CHPRC subcontract activity. Treatment revenue fell 43.1% in Q2; CHPRC subcontract revenue fell 43.1%.
- Despite higher reported revenue, gross profit and margins fell sharply. Treatment gross margin was 10.8% in Q2 versus 33.9% a year earlier, reflecting lower-priced waste, revenue mix and fixed costs. SEC generated Q2 gross profit of $1.0 million on $17.3 million revenue; management reported a 6.0% gross margin for SEC.
- SEC reported a net loss of $0.8 million for Q2 and $2.1 million for the first half. Acquisition-related costs totaled $0.7 million to date, with $28,000 incurred in Q2.
- Cash use reflected working-capital movements, including higher unbilled receivables and payments of accounts payable, accrued expenses and unearned revenue. The company also made its final two required payments to the finite-risk insurance policy sinking fund.
Outlook, risks and unusual items
- Management budgeted approximately $2.7 million of 2012 capital expenditures for operating improvements, capacity and permit compliance; projects may be delayed or deferred. It said operating cash flow and revolver availability were expected to be sufficient for current obligations, while acknowledging there are no assurances.
- The company’s business depends heavily on government funding. Government-related work represented 85.3% of continuing-operations revenue in Q2 and 85.8% in the first half. Federal contracts and subcontracts may generally be terminated or renegotiated on 30 days’ notice; reduced DOE funding or budget uncertainty could materially affect results and cash flow.
- SEC acquisition dispute: Perma-Fix estimated the cost to complete a fixed-price subcontract would be $5–$7 million above the seller’s representation. It notified Homeland on July 13, 2012 that it intended to offset losses against payments on a $1.458 million note and claimed the remaining $0.5 million escrow balance. Homeland disputed the offset and escrow claim and threatened to assert default; a court finding against Perma-Fix could require repayment and could permit settlement using cash, shares or both, subject to limitations.
- One surety on two pre-acquisition SEC bonds was in bankruptcy proceedings. The second subcontract was completed; the company had not been notified of a default and said it believed it could replace the remaining bond if required.
- Environmental remediation liabilities were $1.9 million, including $0.8 million current; the company budgeted $1.1 million of 2012 remediation spending. It also faces potential liability as a potentially responsible party at disposal or remediation sites.
- The company suspended its 401(k) matching contribution effective June 15, 2012, to reduce costs. It also wrote off $117,000 of costs when its unused shelf registration expired in June.
- Management stated disclosure controls were effective as of June 30, 2012 and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether operating cash flow, collections and revolver availability can support obligations given cash of $1.3 million and the first-half cash outflow.
- Whether margins recover as Treatment volumes, waste pricing and the CHPRC contract evolve, and whether SEC can improve its reported losses and margins.
- The timing and collectability of the $13.7 million of unbilled receivables, particularly the increase in Services unbilled balances.
- The outcome and accounting impact of the Homeland indemnification dispute, including note offsets, escrow recovery and any potential default or share issuance.
- Government funding and customer concentration, PNC covenant compliance, and the status of the surety bond and environmental remediation obligations.