Perma-Fix Environmental Services, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The company provides waste treatment and environmental services through its Treatment and Services segments; its Medical segment remains in research and development and has no revenue. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Revenue | $12.658 million | $12.707 million; down 0.4% |
| Gross profit / margin | $3.321 million / 26.2% | $2.719 million / 21.4% |
| Operating income (loss) | $317,000 | $(520,000) |
| Continuing-operations income (loss), net of tax | $253,000 | $(675,000) |
| Net income (loss) | $96,000 | $(806,000) |
| Income attributable to common stockholders / diluted EPS | $136,000 / $0.01 | $(727,000) / $(0.06) |
| Cash from operating activities | $2.434 million, including $2.615 million from continuing operations | $1.872 million total |
| Cash / working capital | $2.916 million cash; working-capital deficit of $2.472 million | $1.063 million cash at Dec. 31, 2017; deficit of $2.268 million |
| Debt | $3.551 million term debt; no revolving-credit balance | $3.847 million total debt at Dec. 31, 2017 |
| Capital expenditures | $248,000 | $22,000 |
Material changes versus Q1 2017
- Treatment revenue fell $1.075 million, or 10.7%, principally due to lower waste volume and the planned closure of the M&EC facility. M&EC revenue declined to $56,000 from $3.379 million.
- Services revenue grew $1.026 million, or 38.4%, led by nuclear services. Gross profit improved in both segments; overall margin rose 4.8 percentage points.
- Management attributed much of the Treatment cost reduction to lower depreciation following full depreciation of M&EC tangible assets in 2017. Services costs rose with project activity, but Services gross margin improved to 14.6% from 1.2%.
- SG&A declined $70,000 to $2.780 million, and R&D declined $157,000 to $232,000, including reduced Medical-segment spending.
- Revenue-standard Topic 606 adoption reduced Q1 2018 revenue by $115,000 and continuing income by $46,000 versus the amounts that would have been reported before adoption; the opening accumulated deficit increased by $317,000. Prior-year figures were not restated. Management expects the ongoing effect to be immaterial.
Liquidity, outlook, and risks
- At March 31, revolving-credit availability was reported as approximately $2.823 million, subject to the borrowing base, a lender-imposed $2 million availability reduction, and approximately $2.660 million of standby letters of credit. The facility matures March 24, 2021. The company said the lender expected to reduce the $2 million restriction to $1 million in the first half of 2018, subject to approvals and documentation; removal of the remainder depended on results.
- The company met its Q1 financial covenants: fixed-charge coverage was 1.22:1 against a 1.15:1 minimum, and tangible adjusted net worth was $27.038 million against a $26 million minimum. Management expected covenant compliance for the next twelve months, while warning that a breach could permit acceleration and that liquidity might be insufficient to repay accelerated debt.
- Management expected operating cash flows and credit availability to fund operations for twelve months. It also anticipated a roughly $5 million partial release of the $15.726 million finite-risk sinking fund in the second half of 2018 following M&EC closure. Release requires AIG and regulatory approval and is not assured.
- M&EC closure and decommissioning were planned by the end of the amended lease term, June 30, 2018. Accrued current closure liabilities were $1.864 million at quarter-end. The company budgeted about $1 million in 2018 capital spending and approved an additional $1 million for Treatment-segment footprint expansion; projects could be delayed or deferred.
- Government customers represented 76.3% of Q1 revenue. Government contracts and subcontracts may be terminated or renegotiated on 30 days’ notice, and funding changes could materially affect results. Services revenue is project-timing dependent.
- Medical R&D remains substantially curtailed pending financing; management said it may be further reduced, delayed, or eliminated if funding is not obtained. Environmental remediation, closure obligations, permits, third-party disposal sites, and potential liability as a potentially responsible party are additional risks. Accrued environmental remediation liabilities were $848,000.
- Standby letters of credit were $2.660 million and bonds outstanding were $8.767 million. Management reported no litigation or governmental proceeding expected to have a material adverse effect. Disclosure controls were assessed as effective at March 31, 2018.
- After quarter-end, the company announced an all-or-none exchange offer for all 1,284,730 M&EC Series B preferred shares, expiring May 30, 2018: up to 135,000 newly issued common shares plus cash for fractions. If completed, holders would relinquish preferred rights, including approximately $1.011 million of accrued dividends.
Important facts for investors to verify
- Whether M&EC closure was completed on schedule, and the final closure costs and regulatory approvals.
- Whether the anticipated $5 million sinking-fund release occurred and how it affected liquidity and working capital.
- The actual reduction in lender-imposed borrowing restrictions, current availability, and ongoing covenant headroom.
- Whether Services growth and improved margins continued, and whether Treatment volumes recovered after M&EC’s closure.
- The outcome of the preferred-stock exchange offer and any resulting dilution or reduction in accrued preferred obligations.
- Funding prospects for Medical-segment R&D and the adequacy of environmental, closure, and third-party disposal accruals.