Perma-Fix Environmental Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; balance sheet compared with December 31, 2017. Unaudited. Unless noted, amounts are in millions of dollars.
Business context and financial results
Perma-Fix provides waste treatment and environmental services through its Treatment and Services segments. Its Medical segment remains in research and development and has generated no revenue. The company is closing its M&EC facility and transitioning work to other Treatment facilities.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $13.160 | $12.715 | $25.817 | $25.422 |
| Gross profit / margin | $2.043 / 15.5% | $2.354 / 18.5% | $5.363 / 20.8% | $5.073 / 20.0% |
| Operating loss | $(0.799) | $(1.097) | $(0.483) | $(1.618) |
| Continuing operations, after tax | $0.788 income | $(1.226) loss | $1.040 income | $(1.901) loss |
| Net income (loss) attributable to common stockholders | $0.610 | $(1.169) | $0.745 | $(1.896) |
| Basic and diluted EPS | $0.05 | $(0.10) | $0.06 | $(0.16) |
Q2 revenue rose 3.5%; first-half revenue rose 1.6%. Services revenue increased 30.1% in Q2 and 34.0% in the first half, while Treatment revenue declined 5.0% and 7.9%, respectively. The Services improvement was led by nuclear services. Treatment’s decline reflected lower government waste volume and lower average prices from waste mix, as well as M&EC’s closure.
Q2 and first-half net income included a $1.596 million gain, net of legal costs, from exchanging M&EC subsidiary preferred stock. Thus reported net income does not reflect operating profitability alone. The Q2 gross margin was also reduced by a $1.215 million increase in M&EC closure costs; excluding that charge, management reported Treatment gross margin of 29.9% for Q2 and 30.5% for the first half.
Cash flow, liquidity and debt
- For the first half, operating cash flow was $2.335 million, including $2.657 million from continuing operations and $0.322 million used by discontinued operations. Capital purchases were $0.554 million in the cash flow statement; the company separately reported $0.767 million of equipment purchases, including $0.213 million financed. Cash used in investing activities was $0.492 million and cash used in continuing-operations financing was $0.579 million.
- Cash was $2.184 million at June 30, up from $1.063 million at year-end. The $15.807 million finite-risk sinking fund is restricted collateral, not ordinary available cash. Cash plus that fund was $17.991 million.
- Working capital deficit was $3.374 million, versus $2.268 million at December 31, 2017; the company attributed the deterioration in part to the M&EC closure-cost accrual. Accounts receivable declined to $6.075 million, which management attributed primarily to collections.
- Total debt was $3.451 million, including a $3.255 million term loan and $0.196 million capital lease; there were no revolving borrowings at June 30. The revolving facility matures in March 2021. Reported borrowing availability was $3.051 million at June 30, after borrowing-base limits, a lender-imposed $2 million availability reduction and $2.660 million of letters of credit. A July 26 amendment released $1 million of that reduction; the company reported availability of $3.136 million as of July 27.
- The company met its first- and second-quarter financial covenants. It reported fixed-charge coverage ratios of 1.22:1 and 1.72:1 against a 1.15:1 requirement; tangible adjusted net worth was $27.038 million and $28.364 million against a $26 million minimum.
Outlook, risks and unusual items
- Management expected on-site M&EC closure activities to be completed on or before September 30, 2018. Remaining accrued M&EC closure liabilities were $0.924 million at quarter-end; the company recorded an additional $1.215 million closure charge in Q2 following an updated cost estimate.
- Management expected a possible release of approximately $5 million from the restricted AIG sinking fund in the latter half of 2018 after M&EC closure, subject to AIG and regulatory approvals. It said operating cash flows and available credit were expected to fund the next 12 months, while acknowledging there was no assurance.
- Government clients accounted for 70.5% of Q2 revenue and 73.3% of first-half revenue. Government contracts and subcontracts may be terminated or renegotiated on 30 days’ notice; reduced government funding or contract activity could materially affect results.
- The Medical segment’s R&D remains limited because it needs additional funding. Management said activities may be further reduced, delayed or eliminated if funding is not obtained.
- Environmental and closure exposures include $0.898 million of accrued remediation liabilities, plus potential liability as a potentially responsible party at waste sites. Outstanding bonds were $8.943 million; standby letters of credit were $2.660 million. Management said pending litigation was not expected to have a material adverse effect.
- Topic 606 was adopted January 1, 2018 using the modified retrospective method, reducing opening accumulated equity by $0.317 million. The filing says ongoing effects are expected to be immaterial.
Important facts for investors to verify
- Whether the M&EC closure was completed on schedule, and whether final closure costs differed from the $0.924 million quarter-end accrual.
- Whether the anticipated $5 million AIG sinking-fund release received required approvals and improved usable liquidity.
- Whether the July credit-facility amendment and borrowing availability remained in effect, and whether the company continued to meet covenants.
- Whether Services growth and Treatment revenue at the remaining facilities offset M&EC’s lost revenue and weakness in government waste volumes and pricing.
- How much reported earnings depended on the nonrecurring $1.596 million preferred-stock exchange gain, and whether operating performance improved independently.
- Changes in government funding and contract exposure, Medical-segment funding, and environmental, remediation and other closure liabilities.