Perma-Fix Environmental Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The unaudited consolidated financial statements cover the environmental waste Treatment and Services businesses. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $12.657 | $22.784 | $23.201 | $42.613 |
| Gross profit / margin | $1.557 / 12.3% | $4.023 / 17.7% | $1.650 / 7.1% | $4.560 / 10.7% |
| Loss from continuing operations | $(2.361) | $(0.980) | $(6.063) | $(3.868) |
| Net income (loss) attributable to common stockholders | $0.011 | $(0.876) | $(3.958) | $(3.789) |
| Operating cash flow | Not separately presented | Not separately presented | $(5.856) | $(3.776) |
- Q2 revenue fell 44.4% year over year; first-half revenue fell 45.6%. Operating losses were $2.094 million in Q2 and $5.583 million for the first half.
- The Q2 net result included a $3.541 million after-tax insurance-settlement gain in discontinued operations. Discontinued operations also recorded a $0.685 million asset impairment; revenue from discontinued operations was zero in 2014. Thus, the $11,000 Q2 net income did not reflect profitable continuing operations.
- Cash used in continuing operations was $4.329 million in the first half; discontinued operations used another $1.527 million. Investing activities included $5.727 million of insurance proceeds for property damage. Cash declined $0.297 million to $36,000.
- At June 30, total debt was $14.446 million, including $3.555 million current and $10.891 million long term. The $12 million revolving facility had $3.262 million of excess availability based on eligible receivables, excluding insurance proceeds temporarily held by the lender.
- Working capital deficit was $3.691 million, versus $2.958 million at December 31, 2013. Accumulated deficit was $59.036 million. Management and the prior auditor identified substantial doubt about the company’s ability to continue as a going concern.
Material changes versus the prior period
- Services revenue declined 74.3% in Q2 and 75.6% in the first half, principally following completion of the CHPRC subcontract and other government contracts. The CHPRC subcontract contributed $5.748 million of Q2 2013 revenue and $11.494 million in the first half of 2013.
- Treatment revenue decreased 7.0% in Q2 and 2.2% in the first half. Lower waste volume and the absence of a prior-year remediation job weighed on results, partly offset by increased government-waste revenue.
- Gross margin compressed: Q2 margin was 12.3%, down from 17.7%; first-half margin was 7.1%, down from 10.7%. Management cited lower volumes, mix, and loss of the higher-margin CHPRC work.
- SG&A decreased 11.9% in Q2 and 18.2% in the first half, reflecting lower headcount and reduced outside-service costs, partly offset by higher administrative health-claim costs.
Outlook, financing, risks, and unusual items
- Management reported early improvement late in Q2, citing awards of sizable Services projects and higher Treatment waste streams. The 2014 federal budget restored some funding after sequestration; management said this could support additional cleanup and treatment work. It anticipated positive cash flow for the remainder of 2014 but gave no quantified revenue or earnings guidance.
- Management warned that without near-term revenue growth, additional capital, or asset-sale proceeds on acceptable terms, cash might not sustain operations for the remainder of 2014 and the company could further reduce or curtail operations. It continued cost reductions and pursued commercial and international markets.
- In April, PNC reduced the revolving facility ceiling from $18 million to $12 million, waived certain covenant tests and adjusted 2014 fixed-charge coverage requirements. The company met the Q2 requirement (3.49:1 against 1.15:1) and said it expected to comply for the rest of 2014; a future breach without a waiver could permit acceleration of debt, which the company said it might be unable to repay.
- After quarter-end, PNC amendments allowed $2.350 million of the $3.850 million insurance settlement proceeds to be used for working capital, with $1.500 million remaining reserved. The company sold SYA on July 29 for approximately $1.300 million plus an estimated $60,000 working-capital adjustment; proceeds were used to repay the revolver and for working capital. SYA had 2013 revenue of approximately $2.565 million and a net loss of approximately $0.621 million.
- PFSG remained non-operational after an August 2013 fire; the company was evaluating its future and marketing the facility for sale. The insurance settlement was an unusual gain, while the company also recorded the PFSG impairment and a $0.380 million goodwill impairment related to SYA.
- Key risks include dependence on federal customers and contracts that may be terminated or renegotiated on 30 days’ notice; reduced or delayed government funding; collection and liquidity pressures; covenant compliance; environmental remediation and hazardous-waste liabilities; and the need to maintain permits and insurance. Federal work represented 57.1% of Q2 and 53.1% of first-half 2014 continuing revenue.
- The filing disclosed a dispute over nonconforming waste at the PFNWR facility. The parties were working under court supervision to process and remove the waste, with trial scheduled for November 3, 2014 on any remaining issues. Accrued environmental remediation liabilities were $1.031 million, including $0.649 million current.
- PF Medical S.A. reported an August private placement expected to provide $1.8 million net of commissions, plus a further $0.75 million subject to payment by August 17, 2015. The additional payment was not yet assured; the filing stated the company would own approximately 64% or 69% of the subsidiary depending on whether those shares were paid for or returned.
Important facts for investors to verify
- Whether new contract awards and higher Treatment volumes translated into sustained revenue, improved gross margins, and cash generation after Q2.
- Actual cash availability after the PNC reserve, debt repayments, SYA sale proceeds, and subsequent borrowing-base calculations; also confirm ongoing covenant compliance.
- Whether management’s going-concern risks were alleviated and whether additional financing, asset sales, or operational reductions became necessary.
- Final proceeds and ownership effects of the PF Medical S.A. offering, including collection of the deferred $0.75 million consideration.
- PFSG’s eventual disposition and the adequacy of insurance recoveries and environmental, closure, and disposal reserves.
- Resolution and financial consequences, if any, of the PFNWR waste dispute and other environmental contingencies.