Perma-Fix Environmental Services, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The financial statements are unaudited. Perma-Fix provides waste treatment and environmental services through its Treatment and Services segments; the company also has a majority-owned Polish subsidiary developing medical-isotope technology.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $16.354 million | $12.657 million | $29.955 million | $23.201 million |
| Gross profit / margin | $4.032 million / 24.7% | $1.557 million / 12.3% | $5.510 million / 18.4% | $1.650 million / 7.1% |
| Operating income (loss) | $0.613 million | $(2.094) million | $(1.184) million | $(5.583) million |
| Continuing-operations income (loss), net of tax | $0.407 million | $(2.361) million | $(1.606) million | $(6.063) million |
| Net income (loss) attributable to common stockholders | $(0.154) million | $0.011 million | $(2.218) million | $(3.958) million |
| Basic and diluted earnings (loss) per share | $(0.01) | $0.00 | $(0.19) | $(0.35) |
Q2 revenue increased 29.2% year over year; six-month revenue increased 29.1%. Growth reflected higher government waste volumes and nuclear-services work under a contract awarded in the second half of 2014. That contract contributed about $2.9 million in Q2 and $4.8 million in the first half. Treatment gross margin improved substantially, while Services revenue growth also increased associated costs.
Cash flow: For the first half, cash used in operating activities was $2.071 million, including $1.273 million from continuing operations and $0.798 million from discontinued operations. Continuing-operations investing cash use was $0.282 million; financing cash use was $0.223 million. Cash fell $2.639 million to $1.041 million. Management noted that cash was primarily held by PF Medical, which is not a borrower under the PNC credit agreement.
Balance sheet and debt: At June 30, cash was $1.041 million, current assets $20.297 million, current liabilities $20.196 million, and working capital $0.101 million (including discontinued operations). Total assets were $83.846 million, liabilities $39.867 million, and stockholders’ equity $42.694 million. Total debt was $11.186 million, including $1.685 million drawn on the revolving facility; reported debt includes related-party debt. Revolving-credit availability was $3.637 million, after an indefinite $1.5 million reduction in availability. The company met its fixed-charge coverage and tangible-net-worth covenants in both 2015 quarters.
Changes, outlook and significant matters
- Improved operating performance: Higher revenue, improved Treatment margins and lower SG&A contributed to a return to operating and continuing-operations income in Q2. The first half nevertheless remained loss-making. Q2 net loss attributable to common stockholders included a $0.713 million loss from discontinued operations.
- Discontinued operations: PFSG, a fire-damaged facility, is not being rebuilt; the company began initiating its closure process. A Georgia environmental consent order alleged permit and hazardous-waste-rule violations and required a $201,200 penalty, which was paid and expensed in Q2. PFMI recorded a $0.150 million impairment; a letter of intent contemplated a sale of its property for approximately $0.450 million, subject to a definitive agreement and due diligence.
- Environmental obligations: Accrued environmental remediation liabilities were $0.996 million, including $0.627 million current. The company warns it could be identified as a potentially responsible party at third-party disposal sites. Facility closure and post-closure requirements were approximately $46.388 million, supported in part by $21.351 million in sinking funds and insurance arrangements.
- Outlook: Management said it expected to generate positive cash flow for the remainder of 2015 and expected to meet remaining quarterly loan covenants, but gave no quantified revenue or earnings guidance. Management anticipated funding working capital, debt payments, remediation and planned capital spending from operations and the credit facility. The 2015 capital-spending budget was approximately $1.1 million; $0.265 million had been spent in the first half.
- Key business risks: Approximately 60.4% of Q2 continuing-operations revenue and 59.3% of first-half revenue related to federal-government waste services. Government contracts may be terminated or renegotiated on 30 days’ notice; funding levels, contract volumes, collections, permits, disposal capacity and environmental remediation costs could materially affect results. A covenant breach not waived by PNC could accelerate debt repayment, and the filing cautions the company might not have sufficient liquidity to repay accelerated borrowings.
- Medical-isotope developments: PF Medical accepted a Polish research grant award of approximately $2.8 million over four years, subject to formal issuance; approximately $0.8 million was allocated directly to PF Medical. A July 2015 Digirad agreement provided for a $1.0 million investment and a potential multi-year Tc-99m supply arrangement, conditional on Polish court approval of the shares. If approved, Perma-Fix’s PF Medical ownership would decline from approximately 64.0% to 60.5%; if approval is not obtained within 120 days, the investment is to be returned and the agreements terminated.
- Controls and unusual items: Management concluded disclosure controls were ineffective because of a material weakness in income-tax accounting, related to limited internal tax expertise and reliance on an outside firm. Remediation steps were planned for Q3 2015. Q2 2014 comparisons included a $3.541 million gain on an insurance settlement in discontinued operations and a $0.380 million goodwill impairment in continuing operations.
Important facts for investors to verify
- Whether improved Treatment and Services performance is sustainable, especially the contribution and continuity of the large nuclear-services contract.
- Cash conversion, receivable collections, remaining revolver availability, and compliance with PNC covenants through year-end.
- PFSG closure requirements and costs, PFMI property-sale progress, and the adequacy of remediation and disposal accruals.
- Formal issuance and milestone funding of the Polish grant, court approval of Digirad’s investment, and commercialization progress for the Tc-99m technology.
- Whether management remediates the income-tax control weakness as planned and whether controls are subsequently assessed as effective.