Perma-Fix Environmental Services, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; balance-sheet figures are as of September 30, 2011, compared with December 31, 2010. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context and reporting period
Perma-Fix provides nuclear and hazardous-waste treatment and management services, plus environmental engineering and regulatory-compliance services. Its continuing operations report Nuclear and Engineering segments; the results of Safety & Ecology Holdings Corporation (SEHC), acquired October 31, 2011, are not included in this quarter’s or nine-month results.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $32.787 | $22.864 | $85.315 | $72.277 |
| Gross profit | $11.301 | $2.595 | $22.380 | $14.719 |
| Gross margin | 34.5% | 11.3% | 26.2% | 20.4% |
| Operating income (loss) | $6.922 | ($1.328) | $10.532 | $3.587 |
| Continuing-operations income (loss) | $4.421 | ($0.965) | $6.440 | $1.725 |
| Net income (loss) | $6.011 | ($1.066) | $8.210 | $1.017 |
| Diluted earnings per share | $0.11 | ($0.02) | $0.15 | $0.02 |
Q3 revenue rose 43.4% year over year; nine-month revenue rose 18.0%. Q3 net income included a $1.777 million after-tax gain on the sale of Perma-Fix of Fort Lauderdale (PFFL). Nine-month net income also included that gain; continuing-operations income excludes it.
Cash flow: Nine-month cash provided by operating activities was $13.363 million, including $14.104 million from continuing operations. Net investing cash provided was $1.423 million, including $5.370 million in proceeds from the PFFL sale; financing activities used $4.246 million. Cash increased $10.540 million to $10.641 million.
Balance sheet and liquidity: Current assets were $40.368 million and current liabilities $31.438 million; reported working capital was $8.930 million, versus $2.329 million at year-end 2010. Total debt, net of debt discount and debt classified with assets held for sale, was approximately $5.562 million; the revolving credit balance was zero. September 30 availability under the then-existing revolver was $13.092 million. Cash was $10.641 million, while $19.342 million was held in the finite-risk sinking fund and other restricted financial-assurance arrangements.
Material changes versus prior comparable periods
- Q3 gross profit increased $8.706 million, with gross margin rising to 34.5% from 11.3%. Management attributed the improvement mainly to higher waste-treatment volume, revenue mix, and workforce cost reductions implemented in March and April 2011.
- Q3 Nuclear Segment revenue increased 44.0%; Engineering revenue increased 20.7%. Nine-month Nuclear revenue rose 18.5%, while Engineering revenue was essentially flat.
- CHPRC-related revenue was $19.570 million in Q3 and $50.403 million for nine months, representing 59.7% and 59.1% of continuing-operations revenue, respectively. Government-related revenue represented 84.3% of nine-month continuing-operations revenue.
- Accounts receivable rose $8.491 million from year-end, primarily with higher Nuclear revenue. Unbilled receivables declined $2.545 million to $9.447 million. Accrued expenses rose $4.505 million, including higher tax and payroll accruals and the $0.840 million PFNWR earn-out payable, which was paid October 3, 2011.
- Debt decreased from $10.656 million gross at December 31, 2010 to $5.676 million gross at September 30, 2011, reflecting repayments, including the final installment on acquisition-related debt and repayment of revolver borrowings.
Outlook, transactions, risks and unusual items
- Management said it expected operating cash flow and available liquidity to be sufficient for existing obligations and those arising from the SEHC acquisition, but gave no numeric earnings or revenue guidance. It expected to meet 2011 financial covenants.
- Management warned that DOE cleanup funding supported by the 2009 stimulus package was expected to decline after 2011. Government contracts may be terminated or renegotiated on 30 days’ notice, and government budget timing can cause seasonal revenue fluctuations. Management cited a potential $200–$250 million of revenue over the five-year base period of the CHPRC subcontract, subject to funding.
- After quarter-end, PFO was sold on October 14, 2011, for $2.0 million cash, subject to working-capital adjustments and assumption of certain liabilities. PFSG remained for sale.
- SEHC was acquired October 31, 2011. Disclosed consideration included $13.884 million cash, $2.0 million placed in escrow, and a $2.5 million unsecured note bearing 6% interest; certain Homeland investors purchased approximately 813,007 restricted shares for about $1.0 million. The purchase accounting valuations were not complete. The new PNC facility provides up to a $25 million revolver, a $16 million term loan, and an equipment line of up to $2.5 million, with maturity October 31, 2016. Post-transaction revolver availability was approximately $18.708 million; cash was approximately $6 million as of November 2.
- SEHC brought significant project-performance uncertainties: the DOE had cited substantial deficiencies, cost overruns, and schedule delays on one project; another project had cost overruns and a request for equitable adjustment of up to $5 million, with no assurance of recovery. A third project contract was terminating; failure to meet specified renewal or replacement-contract conditions could trigger a $1.5 million escrow distribution to Perma-Fix.
- Environmental and disposal exposures include $2.149 million of accrued environmental remediation liabilities and $12.421 million of accrued closure costs. The company also faces potential liability as a potentially responsible party at third-party waste sites. Management said current litigation was not expected to have a material adverse effect; litigation over nonconforming waste delivered to PFNWR remained relevant to earn-out offsets.
- The First Fidelity surety-related lawsuit against SEC and an SEC executive remained pending after the company paid the surety $50,000 and agreed to an inspection in connection with the acquisition. The filing also disclosed related-party interests in prior acquisition earn-outs, a lender warrant, and SEHC executive arrangements.
- The board authorized a share-repurchase program of up to $3 million on October 7, 2011; no shares had been repurchased as of the filing date. Management said it was still evaluating the program.
Important facts for investors to verify
- Whether the company maintains cash generation, covenant compliance, and adequate borrowing availability after financing the SEHC acquisition.
- How the SEHC acquisition affects consolidated revenue, earnings, cash flow, debt, and purchase-accounting values once included in reported results.
- The status and financial consequences of SEHC’s troubled projects, including contract continuation, possible recovery of cost overruns, and the $1.5 million escrow condition.
- Whether CHPRC and broader DOE funding remain sufficient, given their concentration in revenue and the disclosed potential for contract termination or renegotiation.
- Whether receivables and unbilled receivables are collected on schedule, and whether remediation, closure, disposal, or surety-related exposures require additional accruals.