Perma-Fix Environmental Services, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited; dollar figures below are in millions unless stated otherwise.
Business context
The company provides waste treatment and environmental services through its Treatment and Services segments. Its majority-owned Polish Medical segment is developing medical-isotope technology and has no revenue. A significant portion of Treatment and Services business depends on government customers and funding.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $14.809 | $16.354 | $24.847 | $29.955 |
| Gross profit | $1.816 | $4.032 | $1.850 | $5.510 |
| Gross margin | 12.3% | 24.7% | 7.4% | 18.4% |
| Operating income (loss) | $(11.216) | $0.613 | $(14.817) | $(1.184) |
| Net loss | $(8.398) | $(0.306) | $(12.411) | $(2.542) |
| Net loss per common share | $(0.71) | $(0.01) | $(1.04) | $(0.19) |
- Revenue fell 9.4% in Q2 and 17.1% in the first half. Treatment revenue declined 28.0% in Q2 and 27.1% in the first half, primarily due to lower government waste volume; first-half Treatment revenue was also affected by lower average pricing. Services revenue rose 29.6% in Q2 and 5.9% in the first half.
- In the first half, cash used in operating activities was $1.989 million, including $1.531 million from continuing operations and $0.458 million from discontinued operations. Cash used in investing was $0.025 million; financing activities provided $0.962 million. Cash decreased $1.056 million to $0.379 million.
- At June 30, cash was $0.379 million, working capital was $1.975 million (including discontinued operations), and total assets were $69.176 million. Working capital was $2.966 million at December 31, 2015.
- Total debt was $10.814 million, including $4.886 million drawn on the revolving facility and $5.675 million on the term loan. The $12 million revolver had $1.763 million of availability, subject to eligible-receivables limits and a remaining $0.5 million lender restriction.
Material changes and unusual items
- The planned shutdown of the Oak Ridge, Tennessee M&EC facility at the end of its lease on January 21, 2018 followed the lessor’s notice that the lease would not be renewed. The company plans to transition shipments and capabilities to other facilities, subject to customer needs and regulatory approvals.
- The M&EC event resulted in $8.288 million of intangible-asset impairment and $1.816 million of tangible-asset impairment, plus a $0.587 million write-off of prepaid equipment-related fees. The company recorded a $3.203 million tax benefit primarily related to the permit impairment. It also accrued $1.626 million for required RCRA closure activities, with an offsetting capitalized asset-retirement cost.
- Treatment gross margin fell to 7.3% in Q2 from 30.1% a year earlier; in the first half it fell to 2.9% from 21.9%. Services gross profit improved in both periods, supported by increased project work and certain higher-margin projects.
- Long-term debt facility terms were amended in March 2016: maturity extended to March 24, 2021, term-loan monthly payments reduced to approximately $101,600, borrowing availability restrictions partly released, and the annual capital-spending limit reduced to $3 million. The company recorded a $0.068 million debt-extinguishment loss.
Outlook, risks and contingencies
- Management expected certain large waste-treatment shipments delayed from the first half to arrive in the second half of 2016. No numerical revenue or earnings guidance is provided.
- The company failed its 1.15:1 minimum fixed-charge coverage ratio in both Q1 and Q2 2016. The lender waived both instances; an August 22 amendment changed the calculation methodology for subsequent quarters through Q1 2017 and reduced the tangible-adjusted-net-worth requirement from $30 million to $26 million. Management said it expected to meet remaining 2016 covenants, but warned that an unwaived breach could permit acceleration of debt and that liquidity might be insufficient to repay it.
- Management said operating cash flows and available credit were expected to fund Treatment and Services operations, while noting that Medical may need its own credit facility or additional equity. Equity financing could dilute the company’s ownership; insufficient funding could delay, reduce or end Medical’s R&D program.
- Environmental and regulatory exposure includes potential responsibility for hazardous-waste cleanup, required facility closure and remediation costs, and possible additional contamination. Accrued environmental remediation liabilities were $0.900 million; facility closure and post-closure financial assurance requirements were approximately $46.824 million. The filing reports $21.425 million in related sinking funds and $1.514 million of outstanding bonds and letters of credit.
- Government contracts may be terminated or renegotiated on 30 days’ notice. Federal-government-related work represented 44.4% of Q2 revenue and 52.1% of first-half revenue, down from 60.4% and 59.3%, respectively, in the comparable 2015 periods.
Important facts for investors to verify
- Whether delayed large waste shipments arrived in the second half of 2016, and whether Treatment volumes and margins recovered.
- Progress and costs for the M&EC shutdown, waste transition, regulatory approvals and required RCRA closure work.
- Subsequent covenant compliance, the precise amended FCCR calculation, and remaining revolver availability.
- Cash generation, working-capital needs and ability to fund debt service and planned capital expenditures.
- Medical segment financing, regulatory milestones and potential ownership dilution.
- Environmental remediation and closure estimates, including whether additional liabilities or impairments arise.