Perma-Fix Environmental Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 7, 2019. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context and reporting period
Perma-Fix provides treatment, processing, disposal, and technical services for hazardous, radioactive, and other waste. Its reporting segments are Treatment, Services, and Medical. Treatment and Services depend substantially on government-related work; the Medical segment remains in research and development and generated no revenue. Management attributes the sharp Services growth to project contracts and task orders won under its strategic plan. The company completed closure and decommissioning of its M&EC facility.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $22.535 million | $11.984 million | $51.378 million | $37.801 million |
| Gross profit / margin | $5.157 million / 22.9% | $1.825 million / 15.2% | $10.929 million / 21.3% | $7.189 million / 19.0% |
| Operating income (loss) | $2.043 million | $(1.035) million | $1.763 million | $(1.518) million |
| Net income attributable to common stockholders | $1.768 million | $0.221 million | $1.385 million | $0.965 million |
| Diluted EPS | $0.15 | $0.02 | $0.11 | $0.08 |
| Cash from operating activities | Not separately stated for quarter | $(3.463) million | $0.580 million |
- Quarterly revenue rose 88.0%; nine-month revenue rose 35.9%. Services revenue increased 332.3% in Q3 and 101.0% year to date. Treatment revenue increased 10.7% and 10.6%, respectively.
- Services gross margin was 14.6% in Q3 versus 9.1% a year earlier, but was 9.4% for the first nine months versus 12.5%. Treatment gross margin benefited from higher revenue and lower M&EC closure costs.
- Cash used by continuing operating activities was $3.004 million for the first nine months, versus $1.048 million provided in 2018. Increased accounts receivable and unbilled receivables used $3.193 million and $6.140 million, respectively.
- At September 30, cash was $2.441 million; working capital was only $44,000, compared with a $6.753 million deficit at December 31, 2018. Total assets were $67.099 million and total liabilities were $38.992 million.
- Total debt was $3.909 million, including a $1.994 million related-party note; the company reported no revolving-credit balance. Reported revolving availability was approximately $9.319 million. Operating and finance lease liabilities totaled $3.313 million.
Material changes versus the prior comparable period
- Growth was concentrated in Services, particularly nuclear services, reflecting new project awards; government-generated revenue represented 86.5% of Q3 revenue and 80.5% of nine-month revenue.
- Profitability improved, including a return to operating income. Comparisons were affected by M&EC closure costs: $1.093 million in Q3 2018 and $2.308 million for the first nine months of 2018, versus $330,000 year to date in 2019.
- Prior-period results included a $1.596 million gain on the exchange offer of subsidiary Series B preferred stock and a $1.380 million tax benefit from releasing part of a deferred-tax valuation allowance in 2018. These items make reported year-over-year earnings comparisons less representative of underlying operations.
- The company received $5.0 million of previously restricted AIG finite-risk sinking funds in July after the M&EC closure. Remaining restricted funds were $11.236 million at September 30, down from $15.971 million at year-end.
- Accounts receivable rose 39.4% and current unbilled receivables rose 197.7% from year-end. Deferred revenue declined 5.4%.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow, credit-facility availability, and remaining cash should be sufficient for the next 12 months, while noting there are no assurances. It expects to continue implementing its strategic plan, expanding commercial and international work, and controlling costs. No specific revenue or earnings forecast was provided.
- Management cited Canadian Nuclear Laboratories task orders valued at approximately $8.5 million and $3.0 million for work through 2019; government customers may terminate contracts or task orders for convenience. Project-based Services revenue and margins may vary with project timing, scope, and competitive bids.
- PNC amendments waived or removed fixed-charge-coverage testing for 2019 and imposed minimum Adjusted EBITDA tests, including $3.75 million for the three quarters ending December 31, 2019. The company reported meeting the second- and third-quarter EBITDA tests and other applicable covenants. PNC was expected to release a further $300,000 borrowing-availability reduction after filing; fixed-charge-coverage testing resumes in Q1 2020 at a minimum 1.15:1. A covenant breach could permit acceleration, and management warned liquidity might be insufficient if debt were accelerated.
- The term-loan monthly principal payment was reduced from approximately $101,600 to $35,547 beginning July 2019; the remaining balance is due at the facility’s March 2021 maturity. The $2.5 million unsecured related-party loan from shareholder and consultant Robert Ferguson bears 4% interest and includes warrants and shares issued as consideration.
- The Medical segment’s R&D remains substantially curtailed pending funding or partners; management said it may be further reduced, delayed, or eliminated if capital is not secured.
- Environmental exposures include potential responsibility for hazardous-waste cleanup and remediation at third-party disposal sites. Accrued environmental remediation liabilities were $877,000, including $418,000 current. Outstanding letters of credit were $2.639 million and bonds were $28.213 million. Management said it was not aware of legal proceedings expected to have a material adverse effect.
- Adoption of lease accounting in 2019 added operating lease right-of-use assets and liabilities; management said the income-statement and cash-flow effect was immaterial.
Most important facts for investors to verify
- Whether the Services project-driven revenue growth converts to collections and sustainable margins; monitor receivables and the sharp increase in unbilled receivables.
- Whether the company meets the December 2019 Adjusted EBITDA test and subsequent PNC covenants, and whether the anticipated borrowing-availability release occurred.
- Liquidity after working-capital needs, scheduled debt payments, and the March 2021 term-loan maturity; distinguish unrestricted cash from restricted insurance funds.
- Actual 2019 capital expenditures versus the approximately $1.5 million budget, and the funding and progress of Medical-segment R&D.
- Changes in government funding, contract renewals or termination, environmental remediation estimates, and required insurance, permits, letters of credit, and bonds.