Perma-Fix Environmental Services, Inc. — FY2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed March 15, 2012. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Perma-Fix provides radioactive, mixed, hazardous and non-hazardous waste treatment and disposal, on-site waste management, remediation and technical services. Its reportable segments are Treatment and Services. The October 31 acquisition of Safety & Ecology Holdings Corporation and subsidiaries (SEC) expanded the Services business; the acquired operations are included for November and December only.
Perma-Fix also sold its Fort Lauderdale subsidiary in August and substantially all assets of its Orlando subsidiary in October 2011. Segment comparisons were recast to reflect the revised reporting structure.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue from continuing operations | $118.610 | $97.790 |
| Gross profit / margin | $28.788 / 24.3% | $20.615 / 21.1% |
| Operating income / margin | $11.737 / 9.9% | $6.195 / 6.3% |
| Income from continuing operations | $11.800 | $3.271 |
| Net income attributable to Perma-Fix common stockholders | $14.064 | $2.608 |
| Cash from continuing operating activities | $23.498 | $8.074 |
| Cash at year-end | $12.055 | $0.101 |
| Working capital | $11.549 | $2.329 |
| Current and long-term debt | $19.048 | $10.656 |
- Revenue rose 21.3%; management attributed $10.669 million to SEC and said revenue excluding SEC grew 10.4%. Treatment revenue grew 23.4%, mainly on higher waste volume. Services revenue excluding SEC declined 5.2%, primarily due to reduced CHPRC subcontract staffing.
- Gross profit increased 39.6%. Treatment gross margin improved to 32.4% from 23.9%, reflecting volume, revenue mix and workforce cost reductions. Services gross profit excluding SEC declined 8.9%, mainly due to lower CHPRC activity.
- Reported net income included $1.509 million of after-tax gains on disposal of discontinued operations and $0.777 million of income from discontinued operations. Continuing operations generated $11.800 million of income; the filing reports basic and diluted continuing-operations EPS of $0.21.
- Operating cash flow improved substantially. Continuing-operations investing cash use was $20.676 million, including $15.628 million of net acquisition consideration; capital equipment purchases were $2.303 million. Continuing-operations financing provided $4.337 million.
- Year-end debt included a $15.810 million PNC term loan, $1.863 million acquisition note payable to Homeland, and other notes and obligations. There were no revolving-credit borrowings at year-end; availability under the receivables-based revolver was $15.382 million. The amended PNC facility provides up to $25 million revolving credit, a $16 million term loan and up to $2.5 million equipment financing.
- Accounts receivable were $19.106 million and unbilled receivables totaled $10.295 million, including $3.045 million of SEC unbilled receivables. Goodwill was $27.063 million, including $10.893 million recorded for SEC.
Material changes versus prior period
- Revenue increased $20.820 million, while gross margin rose 3.2 percentage points and operating income increased $5.542 million versus 2010.
- The $8.529 million increase in continuing-operations income also reflected a $2.801 million swing in income taxes: 2011 had a $0.955 million tax benefit, versus $1.846 million of tax expense in 2010. The benefit was principally associated with a partial valuation-allowance release.
- Debt rose about $8.4 million, largely in connection with the SEC acquisition and refinancing. Working capital improved by $9.220 million, and cash increased by $11.954 million during the year.
- The SEC acquisition consideration was approximately $17.885 million. SEC contributed $10.669 million of reported revenue and a $0.224 million net loss for the two months included. Its purchase-price allocation was preliminary. Pro forma combined revenue was $188.681 million for 2011 and $194.766 million for 2010; pro forma continuing income was $3.327 million and $10.165 million, respectively.
- Quarterly results were seasonal and uneven. Fourth-quarter revenue was $33.295 million, gross profit $6.408 million, income from continuing operations $5.360 million and net income attributable to common stockholders $5.854 million.
Outlook, risks, contingencies and unusual items
- Management provided no firm consolidated revenue or earnings guidance. It budgeted approximately $2.681 million of 2012 capital expenditures and said operating cash flow plus available credit was expected to cover current obligations, while noting there is no assurance.
- Management expects government funding, especially DOE spending, and contract timing to affect demand. Most federal contracts and subcontracts can be terminated or renegotiated on 30 days’ notice. Government-related work was 84.4% of 2011 continuing revenue; CHPRC alone represented 49.9%.
- The CHPRC subcontract’s base period runs through September 30, 2013, with an option period through September 30, 2018. Management estimated $200–$250 million of revenue over the five-year base period, subject to contract performance and government funding.
- SEC had a previously identified material weakness in internal controls related to assessing whether contracts were loss-making; Perma-Fix identified additional control deficiencies after acquisition. SEC was excluded from management’s and the auditor’s ICFR assessment because of acquisition timing. The company and auditor otherwise reported effective ICFR for the assessed operations, and the financial-statement audit opinion was unqualified.
- Several acquired SEC projects had performance concerns and substantial cost overruns before acquisition. A DOE contract’s renewal was uncertain; cost recovery on some non-governmental fixed-price projects was also uncertain, with one project expected to finish by the second quarter of 2012.
- Environmental remediation liabilities for discontinued facilities were $2.002 million, including $1.138 million current; management budgeted $1.138 million of 2012 remediation expenditures. Estimates may change with remediation findings, disposal costs or regulatory requirements.
- Other material exposures include limited disposal alternatives for commercial low-level radioactive waste, stringent permitting and insurance requirements, competition and price pressure, covenant/default risk, and variable-rate debt. A 1 percentage-point interest-rate change was estimated to change annual interest cost by about $0.161 million.
Most important facts for investors to verify
- Whether SEC integration, contract controls and remediation of its internal-control deficiencies are completed, and whether acquired fixed-price projects avoid further losses or liabilities.
- Whether federal budgets and CHPRC work sustain revenue, given the high customer concentration and 30-day termination or renegotiation provisions.
- Cash conversion and collection of receivables, especially the $10.295 million unbilled balance, and the effect of acquisition-related working-capital needs.
- Compliance with PNC covenants, availability under the borrowing-base revolver, debt repayment requirements and the company’s ability to fund planned capital spending and environmental obligations.
- Final SEC purchase-price allocation, related escrow recovery and any resulting adjustments to goodwill or acquired intangible assets.
- Progress and cost of remediation at discontinued facilities, and availability of licensed disposal sites for Treatment operations.