Perma-Fix Environmental Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The unaudited statements cover the Treatment and Services segments and discontinued operations.
Business context and results
The company treats and disposes of hazardous, radioactive and other waste, and provides environmental, technical and nuclear services. Government-related work generated 87.5% of Q2 revenue and 86.7% of first-half revenue.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $25.032 | $19.455 | $45.139 | $35.370 |
| Gross profit / margin | $4.516 / 18.0% | $2.884 / 14.8% | $7.525 / 16.7% | $4.520 / 12.8% |
| Operating income (loss) | $0.844 | ($0.880) | $0.269 | ($2.763) |
| Continuing operations income (loss), after tax | $0.519 | ($1.257) | $0.202 | ($2.506) |
| Net income (loss), including discontinued operations | $0.474 | ($1.445) | $0.063 | ($2.788) |
Q2 basic and diluted earnings per share were $0.04 and $0.03, respectively; first-half basic and diluted earnings per share rounded to $0.00. Treatment revenue increased 52.9% in Q2 and 41.3% in the first half; Services revenue increased 10.3% and 16.5%, respectively.
Cash flow, balance sheet and debt
- First-half cash from operating activities was $4.426 million, including $4.762 million from continuing operations; the comparable 2022 figures were cash used of $3.057 million and $2.690 million, respectively. Investing activities used $1.047 million and financing activities used $0.290 million.
- June 30 cash was $4.750 million; restricted finite-risk sinking funds were $11.780 million. Combined cash and restricted funds were $16.530 million. Working capital was $1.704 million, versus $0.818 million at year-end 2022.
- Total debt was $0.772 million at June 30, excluding lease liabilities; the revolving credit balance was zero. The company reported $10.368 million of borrowing availability, a figure that included cash and was subject to eligible receivables, reserves, and a $3 million minimum-availability condition. Operating and finance lease liabilities totaled $1.784 million and $0.549 million, respectively.
- On July 31, 2023, after quarter-end, the company extended its PNC facility maturity from May 2024 to May 2027 and obtained an additional $2.5 million term loan, repayable in monthly installments of about $41,667. The amendment also removed the minimum tangible adjusted net worth covenant, reduced borrowing availability by $750,000 indefinitely, and included a $100,000 lender fee.
Changes, outlook and management commentary
- Management attributed revenue growth to higher waste volumes and resumed or expanded project activity as delays related partly to COVID-19 eased, as well as contracts won in the first half. Treatment benefited from higher volume, although average pricing was lower due to revenue mix. Services gross margin improved with higher-margin projects.
- Gross margin improved year over year in both segments. Q2 SG&A declined 3.6% to $3.551 million; first-half SG&A declined 1.0% to $7.036 million.
- Management expects steady improvement in waste receipts and project work through the remainder of 2023, including existing contracts and contracts won or awaiting awards. It believes operating cash flows, facility availability and cash on hand should fund operations for the next 12 months; this is a forward-looking assessment, not a guarantee.
- The company budgeted approximately $2 million of 2023 capital expenditures, subject to possible delay or deferral. A proposed U.K. nuclear-waste treatment joint venture with Springfields Fuels Limited remains conditional on a definitive agreement, contract award, approvals and other conditions; the company’s investment amount and funding are not yet determined.
Risks, contingencies and unusual items
- PNC covenants create default risk if breached; the company reported meeting second-quarter 2023 covenant requirements. The credit agreement includes fixed-charge coverage testing and lender remedies, and borrowing availability is subject to restrictions.
- Government-related work is a significant concentration, and government contracts may be terminated for convenience or affected by funding changes. Inflation, labor and supply constraints, higher interest rates, permits, disposal-site availability and environmental compliance may also affect costs and results.
- PF Canada had $1.895 million of unpaid receivables and a $1.084 million contractual holdback due from Canadian Nuclear Laboratories at June 30. The parties were still discussing amounts due; CNL may seek to offset certain costs, including against a bond of approximately CAD $1.9 million.
- Environmental and closure obligations remain relevant. Accrued environmental remediation liabilities were $0.861 million, relating to discontinued operations; the company also reported accrued closure costs of $8.039 million. It had approximately $3.2 million of standby letters of credit and $31.870 million of bonds outstanding.
- A Tetra Tech lawsuit retains two claims after most claims were dismissed. The company says it believes it has no liability exposure; its insurer is providing a defense subject to a $100,000 self-insured retention and policy terms. Management said it was not aware of other litigation expected to materially affect financial condition, liquidity or future operations.
- The company received a $1.975 million Employee Retention Credit refund in March 2023, plus approximately $60,000 in interest. The refund helped cash flow and is an unusual item affecting the period’s liquidity and interest income.
- Management reported effective disclosure controls as of June 30, 2023, and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth, improved segment margins and management’s expected second-half project activity are sustained.
- Collection and final settlement of PF Canada’s receivable and contractual holdback, including any CNL setoffs.
- Liquidity and covenant headroom under the amended PNC facility, including the impact of the additional term loan, interest costs and restricted availability.
- Cash conversion as receivables and unbilled receivables rise, and the timing of vendor payments and capital spending.
- Exposure to government funding and contract termination, environmental obligations, bonds and letters of credit, and the remaining Tetra Tech litigation claims.