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, 2017. The company provides waste treatment and environmental services, with Treatment, Services and Medical reporting segments. The Medical segment is focused on research and development and has not generated revenue. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $12.715 | $14.809 | $25.422 | $24.847 |
| Gross profit / margin | $2.354 / 18.5% | $1.816 / 12.3% | $5.073 / 20.0% | $1.850 / 7.4% |
| Operating loss | $(1.097) | $(11.216) | $(1.618) | $(14.817) |
| Net loss attributable to common stockholders | $(1.169) | $(8.234) | $(1.896) | $(12.074) |
| Loss per share | $(0.10) | $(0.71) | $(0.16) | $(1.04) |
- Six-month operating cash outflow was $1.028 million, including $0.744 million from continuing operations. Investing activities provided $5.805 million, principally from the release of PFNWR finite-risk sinking funds; financing activities used $4.412 million. Cash rose $0.372 million to $0.535 million.
- At June 30, total debt was $4.439 million, comprising a $4.439 million term loan and no revolving-credit borrowings. Revolver availability was $3.302 million, after lender-imposed borrowing-availability reductions.
- Working capital remained negative at $0.825 million, improved from a $2.131 million deficit at year-end 2016. Total assets were $58.287 million and total liabilities were $28.152 million.
- Quarterly and six-month interest expense was $0.090 million and $0.189 million, respectively. The company reported income tax expense of $0.066 million for Q2 and $0.147 million for the six-month period.
Material changes versus the prior comparable period
- Q2 revenue fell 14.1%; six-month revenue increased 2.3%. Treatment revenue rose 20.6% in Q2 and 29.5% for six months, mainly on higher government waste volumes. Services revenue declined 54.8% and 40.4%, respectively, primarily because a large nuclear-services project ended in December 2016.
- Gross profit and margins improved substantially, mainly reflecting stronger Treatment results. Services gross profit fell in both periods as project revenue declined.
- SG&A increased 19.3% in Q2 and 4.7% for six months. Higher Services-segment bad-debt expense was a principal factor; the prior-year comparison also included a bad-debt reserve reduction.
- Prior-year results included $10.104 million in tangible and intangible impairment charges, largely related to the planned M&EC facility closure, and a related $3.203 million tax benefit. Neither impairment charge recurred in 2017, contributing to the improvement in reported losses.
- Long-term debt declined from $8.833 million at December 31, 2016 to $4.439 million at June 30, 2017. The released PFNWR sinking funds were used to repay the revolver, with remaining funds intended for working capital.
Outlook, commentary, risks and unusual items
- Management said it expected operating cash flows, credit-facility availability and remaining released sinking funds to fund operations through the remainder of 2017 and the first nine months of 2018; it cautioned that there were no assurances. No specific revenue or earnings guidance was provided.
- The company plans to close its M&EC facility by the end of its lease on January 21, 2018. It reported $2.745 million of current accrued closure liabilities and identified closure spending among its expected cash requirements.
- Management reported compliance with its financial covenants in Q1 and Q2 and expected compliance through Q3 2018. A covenant breach not waived by the lender could trigger accelerated repayment; the company warned it might not have enough liquidity to repay if acceleration occurred.
- Government-related work represented approximately 75.5% of Q2 revenue and 74.6% of six-month revenue. Federal contracts may be terminated or renegotiated on 30 days’ notice, and changes in government funding could materially affect results.
- The Medical segment’s R&D remains constrained by lack of funding. Management said activities would not return to full levels until financing is obtained; further reductions, delay or cancellation remain possible.
- Environmental and closure obligations, potential cleanup liability as a potentially responsible party, permits, waste-disposal arrangements and customer collections pose risks. The filing reported $0.885 million in accrued environmental remediation liabilities. Standby letters of credit totaled $2.675 million and bonds outstanding totaled $8.253 million.
- The company disclosed shareholder activism concerning strategic direction as a risk. After quarter-end, shareholders approved a new stock-option plan, and executive and consultant options were granted.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method; its impact was still being evaluated.
Important facts for investors to verify
- Whether Treatment-segment waste volumes and margins can be sustained, and whether Services can replace revenue from the completed project.
- Actual cash generation and liquidity needs, particularly as the M&EC closure spending proceeds and the working-capital deficit persists.
- Ongoing compliance with PNC covenants, borrowing-base availability and the conditions attached to the lender’s restrictions.
- Timing and final cost of M&EC closure, as well as any changes to environmental remediation or financial-assurance obligations.
- Whether the Medical segment secures funding and the extent to which its R&D program continues.
- Government contract renewals, funding levels and the timing and collectability of receivables.