Perma-Fix Environmental Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated results; amounts below are in millions unless noted.
Business context and results
Perma-Fix provides waste treatment and environmental services, primarily to government customers. Its reporting segments are Treatment, Services and Medical; the Medical segment is developing isotope-production technology and has not generated revenue.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $10.038 | $13.600 |
| Gross profit (margin) | $0.034 (0.3%) | $1.478 (10.9%) |
| Operating loss | $(3.601) | $(1.797) |
| Loss from continuing operations | $(3.846) | $(2.014) |
| Net loss attributable to Perma-Fix common stockholders | $(3.840) | $(2.065) |
| Loss per common share | $(0.33) | $(0.18) |
| Cash provided by (used in) operating activities | $0.067 | $(2.928) |
Financial position and liquidity
- At March 31, cash was $0.798, down from $1.435 at year-end. Working capital was $0.275, versus $2.966 at December 31, 2015.
- Total debt was $9.105, including $1.808 current and $7.297 long-term; total liabilities were $36.118. Revolver availability was $2.740, subject to eligible receivables and borrowing-base limits.
- Cash from continuing operations was $0.251; discontinued operations used $0.184. Investing activities used $0.024 and financing activities used $0.719. Capital purchases were $0.009.
- The March 24 lender amendment extended the credit facility maturity to March 24, 2021, reset term-loan payments to about $0.102 monthly, reduced interest-rate spreads and lowered the annual capital-spending limit from $6.0 to $3.0. A $0.070 closing fee was paid; $0.068 was recorded as a debt-extinguishment loss.
Material changes and management commentary
- Revenue fell $3.562, or 26.2%. Treatment revenue declined 26.1%, mainly from lower government-waste volume and average pricing; Services revenue declined 26.4%, largely following completion of a major nuclear-services project that contributed about $1.9 in Q1 2015.
- Treatment gross profit moved to a $0.138 loss from $1.235 profit, with margin falling to negative 1.9% from 12.7%. Services gross profit was $0.172, down from $0.243. Consolidated gross margin was only 0.3%.
- SG&A increased 7.3% to $3.055, including higher Services bid-and-proposal staffing and outside-service costs. R&D increased to $0.575 from $0.429, including $0.438 for PF Medical.
- Management attributed part of the quarter’s weakness to large treatment shipments delayed to later in 2016 and expected in the second and/or third quarters. It also said it was reviewing costs and expected to meet remaining 2016 financial covenants; no specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- The company failed its first-quarter minimum fixed-charge coverage covenant: 0.91:1 versus a required 1.15:1. PNC waived the breach on May 23, 2016, for a $0.005 fee. Management cautioned that a future unwaived breach could permit acceleration, and the company might not have sufficient liquidity to repay its debt.
- Government-related work generated $6.364, or 63.4% of continuing-operations revenue. Government contracts may be terminated or renegotiated on 30 days’ notice, and reductions in federal funding could materially affect results.
- PF Medical may need its own credit facility or additional equity; an equity raise could dilute Perma-Fix’s ownership. If it cannot obtain capital, its R&D may be reduced, delayed or suspended.
- Environmental and closure obligations remain significant: accrued environmental remediation liabilities were $0.900; facility closure and post-closure requirements were about $46.824, supported in part by a $21.396 sinking fund. Outstanding bonds and letters of credit totaled about $1.539. The filing notes potential responsibility for cleanup at third-party disposal sites.
- On May 2, PFMI agreed to sell a former site for $0.450, with about $0.075 down (approximately $0.036 received after costs) and the $0.375 balance payable in 60 monthly installments of about $0.00725. PFMI retains legal title subject to the agreement’s terms.
Most important facts for investors to verify
- Whether delayed waste shipments arrived in Q2 or Q3 and restored Treatment revenue and margins.
- Compliance with the waived covenant and remaining 2016 requirements, including borrowing-base availability and liquidity.
- PF Medical’s funding plan, commercialization and regulatory milestones, and any resulting dilution or program cuts.
- Exposure to federal customer funding and contract termination, and the adequacy of environmental, disposal and closure reserves.
- PFMI’s receipt of installment payments under the property sale agreement.