Perma-Fix Environmental Services, Inc. — Q3 2012 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2012. The company provides waste treatment and disposal, on-site waste management, technical, and nuclear remediation services through its Treatment and Services segments. Results include Safety and Ecology Corporation (SEC), acquired October 31, 2011; prior-year periods do not include SEC in reported results.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $29.1 | $32.8 | $101.2 | $85.3 |
| Gross profit / margin | $4.4 / 15.2% | $11.3 / 34.5% | $12.5 / 12.3% | $22.4 / 26.2% |
| Operating income (loss) | $(0.3) | $6.9 | $(2.8) | $10.5 |
| Continuing-operations income (loss), net | $(0.3) | $4.4 | $(2.3) | $6.4 |
| Net income (loss) attributable to common stockholders | $(0.4) | $6.0 | $(2.8) | $8.2 |
| Net income (loss) per share | $(0.01) | $0.11 | $(0.05) | $0.15 |
- Cash flow: Operating cash flow was $(6.3) million for the first nine months, including $(5.9) million from continuing operations. Investing activities used $0.7 million; financing activities used $2.3 million. Cash fell $9.3 million to $2.8 million.
- Liquidity: Working capital was $6.6 million, down from $12.1 million at December 31, 2011. The $25 million revolving facility had $11.5 million of excess availability, subject to eligible-receivables borrowing limits.
- Debt: Total debt was $16.4 million at September 30, 2012, including $3.6 million current and $12.8 million long-term. Variable-rate PNC borrowings were approximately $14.1 million; the company reported no revolver balance in the debt table. A 1 percentage-point rate change was estimated to change annual interest cost by about $141,000.
Material changes versus prior comparable periods
- Q3 revenue declined 11.2% year over year. Excluding $11.3 million of SEC revenue, revenue declined 45.6%. For the nine months, reported revenue rose 18.6%, mainly because SEC contributed $47.2 million; excluding SEC, underlying revenue declined.
- Lower waste volumes reduced Treatment revenue, while Services revenue excluding SEC fell as CHPRC subcontract activity declined. CHPRC revenue was $6.0 million in Q3 2012 versus $19.6 million a year earlier, following a workforce reduction in 2011.
- Gross margin fell sharply, reflecting lower volumes and fixed-cost absorption, as well as SEC’s low margins: SEC reported a $0.2 million Q3 gross profit on $11.3 million revenue and a $1.5 million gross profit on $47.2 million nine-month revenue.
- Q3 2011 net income included a $1.8 million after-tax gain on disposal of discontinued operations. Nine-month 2011 net income also included this gain; 2012 discontinued operations recorded losses.
- Cash fell from $12.1 million at year-end, partly because shipments and collections were slower in the first nine months of 2012 while the company processed prior backlog and paid expenses.
Outlook, risks, and unusual items
- Management gave no specific revenue or earnings forecast. It said demand depends on government funding, especially DOE budgets, and warned that federal contracts and subcontracts may be terminated or renegotiated on 30 days’ notice. Management expected to meet remaining-2012 financial covenants and believed cash flow plus available credit would be sufficient for current obligations, while noting there are no assurances.
- Capital spending of approximately $2.7 million was budgeted for 2012; $0.4 million had been spent through September. Some projects could be delayed or deferred.
- On November 7, 2012, after quarter-end, the company amended its PNC loan agreement to exclude about $0.7 million of acquisition costs and $1.6 million of SEC contract fair-value costs in calculating the fixed-charge ratio from September 30, 2012. The minimum ratio remained 1.25:1.0; reported Q3 actual was 1.42:1.0. The amendment included a $15,000 fee.
- SEC acquisition dispute: The company alleged the acquired fixed-price contract would cost more than $7 million above representations and SEC liabilities at closing were about $24 million versus a $15 million covenant. Homeland disputed some claims; $0.5 million remained in escrow. Contractual liability caps may limit recovery. The company was negotiating and reviewing its obligations under the related 6% note.
- Environmental and legal exposure: Accrued remediation liabilities were $1.8 million, including $0.5 million current. The company faces potential responsibility for hazardous-waste cleanup, ongoing remediation at former or discontinued facilities, and litigation concerning nonconforming waste at PFNWR. It had budgeted $1.1 million for 2012 remediation spending.
- Government customer concentration remains significant: government-related work represented 83.2% of Q3 continuing-operations revenue and 85.1% for the nine-month period. CHPRC represented 20.1% of Q3 revenue; DOE direct work represented 15.8%.
- Management reported disclosure controls effective as of September 30, 2012, and no material change in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- Whether Treatment volumes and underlying Services activity recover, and whether SEC contracts can generate margins materially above the reported levels.
- Cash conversion, unbilled receivable collectability, and ongoing liquidity under the PNC borrowing-base limits and financial covenants.
- Resolution, timing, and recoverability of the SEC acquisition claims, including the disputed escrow and the potential contract cost overrun.
- DOE and CHPRC funding, contract continuity, and the impact of government budget decisions on customer concentration and revenue.
- Actual remediation spending and whether environmental liabilities, disposal accruals, or other contingencies require upward revision.