Business context and reporting period
Perma-Fix Environmental Services, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2012. It provides hazardous and radioactive waste treatment and disposal, environmental remediation, and technical services. Results include Safety and Ecology Corporation (SEC), acquired October 31, 2011; the acquisition materially affects comparison with Q1 2011. The company reports Treatment and Services segments.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $38.1 million | $23.6 million; up 61.2% |
| Gross profit / margin | $4.3 million / 11.3% | $3.0 million / 12.8% |
| Operating loss | $1.1 million | $0.6 million |
| Continuing-operations net loss | $0.9 million | $0.5 million |
| Net loss attributable to common stockholders | $1.1 million; $0.02 per share | $0.3 million; $0.01 per share |
| Operating cash flow | $(8.2) million | $(0.8) million |
Revenue included $18.6 million from SEC. Excluding SEC, revenue declined $4.1 million (17.5%) year over year. Treatment revenue increased 4.1%; Services revenue excluding SEC fell 41.2%, largely from lower work under the CHPRC subcontract. SEC reported a $1.3 million net loss for the quarter. Gross margin declined despite higher gross profit, reflecting the acquired business’s low margin and revenue mix.
Cash was $2.7 million at quarter-end, down from $12.1 million at December 31, 2011. Operating cash use included working-capital outflows, including accounts payable, accrued expenses and unearned revenue. Working capital was $9.7 million, down from $11.5 million. The company had approximately $17.9 million of total debt and no revolving-credit borrowings; borrowing availability under the PNC revolver was $15.1 million. It reported Q1 compliance with its principal covenants: fixed-charge coverage of 1.91 against a 1.25 minimum and tangible adjusted net worth of $65.0 million against a $30.0 million minimum.
Material changes, outlook and risks
- SEC acquisition drove reported growth and added government-services revenue, but the acquired business generated a quarterly loss. Purchase-price allocation remained preliminary.
- CHPRC revenue fell 44.4% to $5.9 million after a workforce reduction. The company’s government-related work represented 85.9% of continuing-operations revenue; government contracts may generally be terminated or renegotiated on 30 days’ notice.
- Management said it expected to meet remaining 2012 financial covenants and believed operating cash flow and available credit would be sufficient for obligations, but cautioned there were no assurances. Planned 2012 capital expenditures were approximately $2.7 million, with some projects discretionary.
- Environmental remediation spending budgeted for 2012 was $1.1 million; accrued remediation liabilities were $2.0 million. A separate finite-risk insurance sinking fund totaled $21.2 million, but these funds are designated for financial assurance and are not equivalent to unrestricted cash.
- Risks include government funding and contract concentration, collection timing for receivables (including $12.0 million of unbilled receivables), environmental and disposal liabilities, permit and insurance availability, and cost overruns or performance issues on acquired SEC projects. The company was pursuing litigation over nonconforming waste and disclosed related potential acquisition indemnity offsets.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provides no quantitative full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether SEC’s operating performance improves and its preliminary acquisition accounting and goodwill valuation are finalized without material adjustment.
- Whether the sharp operating cash outflow reverses, and whether receivables and unbilled receivables convert to cash as expected.
- Whether CHPRC work, other federal funding and contracts remain stable, including progress on SEC projects with prior performance concerns and cost overruns.
- Future covenant headroom, revolver availability and cash needs for debt service, capital spending, environmental remediation and financial-assurance requirements.
- Updates on remediation obligations, the nonconforming-waste litigation and related indemnification offsets.