Perma-Fix Environmental Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparative periods ended September 30, 2019. Financial amounts below are in millions unless stated otherwise.
Business context
Perma-Fix provides radioactive, hazardous and other waste treatment, remediation and technical services. Its Treatment and Services segments depend heavily on government contracts; government-related work generated 93.1% of Q3 revenue and 91.3% of nine-month revenue. The Medical segment generated no revenue and had reduced research and development activity while seeking funding.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $30.172 | $22.535 | $77.079 | $51.378 |
| Gross profit / margin | $4.750 / 15.7% | $5.157 / 22.9% | $12.700 / 16.5% | $10.929 / 21.3% |
| Operating income / margin | $1.285 / 4.3% | $2.043 / 9.1% | $3.140 / 4.1% | $1.763 / 3.4% |
| Continuing-operations income, net of tax | $1.481 | $1.895 | $3.049 | $1.719 |
| Net income attributable to common stockholders | $1.446 | $1.768 | $2.870 | $1.385 |
| Basic EPS | $0.12 | $0.15 | $0.24 | $0.12 |
For the nine months, cash from continuing operations was $3.503; cash from operating activities including discontinued operations was $3.174. Capital expenditures in cash-flow investing activities were $1.488; the filing reports total equipment purchases of approximately $2.371, including financed amounts.
At September 30, cash was $4.811, working capital was $7.020, and revolving-credit borrowings were zero. Revolver availability was approximately $16.404, subject to eligible receivables, reserves and outstanding letters of credit. Total debt was $7.254, including the remaining $5.318 PPP loan; operating and finance lease liabilities were separately reported. Current assets were $37.024 and current liabilities $30.004. Restricted finite-risk funds of $11.418 are not unrestricted cash.
Material changes versus prior year
- Q3 revenue rose 33.9%, driven by Services revenue growth of $10.652 (85.5%), while Treatment revenue fell $3.015 (29.9%). Nine-month revenue rose 50.0%, with Services up $31.311 and Treatment down $5.610.
- Despite higher Q3 revenue, gross profit declined $0.407 and gross margin fell to 15.7% from 22.9%. Treatment gross margin dropped to 15.5% from 33.1%; Services margin improved to 15.8% from 14.6%.
- Nine-month gross profit increased $1.771, but gross margin declined to 16.5% from 21.3%. Higher Services activity drove growth, partly offset by weaker Treatment results.
- Unbilled receivables rose 79.9% from year-end to $14.366. Accounts payable increased $5.375 to $14.652. The company attributed improved working capital partly to the PPP proceeds and higher unbilled receivables.
- Total debt increased to $7.254 from $3.880 at year-end, primarily reflecting the PPP loan; the new PNC facility also increased maximum revolving capacity to $18.0 million and extended maturity to May 2024.
Outlook, risks and unusual items
- Management said Services projects that had been shut down restarted by the latter part of Q2. COVID-related customer waste-shipment delays continued in Treatment and could affect Q4 2020 and Q1 2021. Management could not reliably estimate the pandemic’s future effects.
- Management believed available cash and credit capacity were sufficient for the next 12 months and expected to meet loan covenants over that period, while warning that renewed shutdowns or shipment delays could impair results, liquidity and covenant compliance. No specific revenue or earnings guidance was provided.
- The May 2020 PNC facility has a $27 million minimum tangible adjusted net worth covenant, a $6 million annual capital-spending limit and a 1.15:1 minimum fixed-charge coverage ratio. The company reported meeting required covenants through Q3; breach could permit acceleration of debt and termination of further credit.
- The company applied on October 5, 2020 for forgiveness of the remaining PPP loan balance; lender and SBA approval was pending. A government audit could require repayment of some or all of the loan. The company also deferred $0.838 million of employer Social Security taxes, with payment scheduled in 2021 and 2022.
- In July, Tetra Tech sued the company and others over draft reports concerning the Hunter’s Point Naval Shipyard investigation. Perma-Fix said it believed it had no liability; its insurer is providing a defense subject to a $100,000 self-insured retention and policy terms.
- Environmental remediation liabilities were $0.854 million, including $0.744 million current. The company also reported $45.814 million of outstanding bonds and $3.026 million of standby letters of credit.
- The Medical segment’s R&D remained curtailed pending capital or partners. Management said full activity would not resume until funding is obtained. The filing also reported a $0.027 million loss on extinguishment of debt related to the May refinancing.
Key facts for investors to verify
- Whether PPP forgiveness was granted, and any effect of review or audit on the reported $5.318 million balance.
- Whether Treatment waste shipments recover and whether COVID-related delays extend into Q4 2020 or Q1 2021.
- Services project mix, margins and timing, given the segment’s large contribution to revenue growth and project-based variability.
- Collection and billing of the $14.366 million in unbilled receivables, and the resulting cash-conversion impact.
- Ongoing covenant headroom, eligible-receivables-based borrowing availability, and repayment obligations for debt and deferred payroll taxes.
- Developments in the Tetra Tech litigation and any environmental remediation or regulatory obligations.