Business context and reporting period
Perma-Fix Environmental Services, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. It provides waste treatment and disposal, environmental and nuclear services, and waste-processing research and development through its Treatment and Services segments. The 2012 results include a full year of Safety and Ecology Corporation (SEC), acquired October 31, 2011; 2011 included only two months of SEC. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue from continuing operations | $127.5 million | $118.1 million |
| Gross profit / margin | $15.8 million / 12.4% | $28.4 million / 24.1% |
| Operating income (loss) | $(4.4) million | $11.4 million |
| Income (loss) from continuing operations | $(6.6) million | $11.6 million |
| Net income (loss) attributable to common stockholders | $(6.3) million; $(0.11) per share | $13.8 million; $0.25 per share |
| Cash from operating activities, continuing operations | $(2.5) million | $24.0 million |
| Cash and working capital at year-end | $4.4 million; $3.3 million | $12.1 million; $8.0 million |
| Current and long-term debt | $14.2 million | $17.7 million |
Total cash decreased $7.7 million in 2012, ending at $4.4 million. Cash used in operating activities including discontinued operations was $3.4 million; cash used in investing and financing activities was $0.7 million and $3.6 million, respectively. At year-end, the company had no revolver borrowings and reported up to $10.1 million of borrowing availability, subject to eligible receivables. The $21.3 million finite-risk sinking fund is a long-term asset, not ordinary available cash.
Fourth-quarter 2012 revenue was $26.7 million, gross profit was $3.3 million, and loss from continuing operations was $4.3 million. The quarter included significant income-tax charges.
Material changes versus the prior comparable period
- Reported revenue rose 8.0%, principally because SEC contributed $55.7 million in 2012 versus $10.2 million in 2011. Excluding SEC in both periods, management said revenue declined $36.1 million, or 33.4%.
- Treatment revenue fell 30.3% to $45.9 million, largely on lower government waste volume. Services revenue excluding SEC fell 38.3%, primarily reflecting reduced CHPRC subcontract activity after a workforce reduction.
- Gross profit declined $12.6 million and gross margin fell 11.7 percentage points. Treatment gross margin contracted to 20.2% from 32.4%, as lower volumes left fixed costs less absorbed.
- Federal-government-related work was 79.6% of continuing-operations revenue, down from 84.5% in 2011. CHPRC represented 19.3% of revenue, compared with 50.1% in 2011; DOE revenue rose to 20.6%, primarily reflecting SEC.
- Treatment backlog of stored waste fell to approximately $8.7 million from $14.6 million.
- Debt declined from $17.7 million to $14.2 million, while working capital fell by $4.7 million.
Outlook, risks, contingencies and unusual items
- Management gave no specific revenue or earnings forecast. It said continuing federal budget uncertainty and continuing resolutions were reducing waste shipments and available service work, and expected funding uncertainty to remain a factor until a final budget or year-long continuing resolution. Government contracts and subcontracts are generally terminable or renegotiable on 30 days’ notice.
- Management budgeted approximately $2.5 million of 2013 capital expenditures, subject to available funding and possible deferral. It said cash flows and available credit were believed sufficient for current obligations, while acknowledging no assurance.
- Customer and funding concentration, competitive bidding and margin pressure, seasonal activity, and dependence on permits, financial assurance, insurance, and limited third-party disposal sites are significant risks.
- 2012 income-tax expense was $1.25 million despite a pretax loss. It included a $1.949 million reserve for an uncertain tax position and a $1.375 million write-off of deferred tax assets. Federal and state NOL carryforwards were reported at approximately $17.9 million and $46.3 million, respectively, subject to limitations and expiration.
- After year-end, the company settled acquisition-related claims with TNC: the remaining approximately $1.46 million SEC acquisition note was cancelled, a new approximately $230,000 note was issued, and the remaining $500,000 escrow was released to TNC. The company also settled related matters with SEC President Christopher Leichtweis, including ending a bond-related fee obligation and reducing his annual salary by $30,000 for three years.
- On March 7, 2013, PFNWR received an EPA notice alleging improper storage of mixed waste. EPA proposed a $215,500 penalty; the agency said it could seek up to $37,500 per day per violation if negotiations did not resolve the matter. The company said discussions were beginning.
- NASDAQ notified the company in December 2012 that its share price failed the $1.00 minimum bid requirement. The initial compliance period ran through June 3, 2013; the company said it was considering options, including a reverse stock split.
- Management and BDO reported effective internal control over financial reporting at December 31, 2012, and BDO gave an unqualified audit opinion on the financial statements.
Important facts for investors to verify
- Whether revenue and margins recover without relying on the acquisition-related comparison effect, and whether Treatment volumes and CHPRC work stabilize.
- Whether the company generates positive operating cash flow, maintains working capital and meets PNC covenants; verify actual revolver availability against eligible receivables.
- Resolution and final cost of the EPA matter, the PFNWR nonconforming-waste litigation, and the remaining environmental remediation obligations.
- Developments in federal budgets, major customer contracts, third-party disposal capacity, and required insurance and financial-assurance coverage.
- Resolution of the NASDAQ minimum-bid-price deficiency and the potential impact of any reverse stock split or equity issuance.
- Tax-authority outcomes for the uncertain tax position and the realizability and usability of deferred tax assets and NOL carryforwards.