Perma-Fix Environmental Services, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial amounts below are in millions unless otherwise noted. The company provides radioactive, hazardous and other waste treatment and disposal, environmental and nuclear services, and medical-isotope research and development.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $11.984 | $11.758 | $37.801 | $37.179 |
| Gross profit / margin | $1.825 / 15.2% | $1.745 / 14.8% | $7.189 / 19.0% | $6.817 / 18.3% |
| Operating loss | $(1.035) | $(1.873) | $(1.518) | $(3.491) |
| Income (loss) from continuing operations | $0.317 | $(1.977) | $1.358 | $(3.878) |
| Net income (loss) attributable to common stockholders | $0.221 | $(2.044) | $0.965 | $(3.940) |
| Net income (loss) per share | $0.02 | $(0.17) | $0.08 | $(0.34) |
- Revenue rose 1.9% in Q3 and 1.7% year to date. Services revenue increased 19.9% in Q3 and 29.8% year to date; Treatment revenue declined 2.7% and 6.2%, respectively.
- Q3 gross margin improved to 15.2% from 14.8%; year-to-date margin rose to 19.0% from 18.3%. Management attributed stronger underlying Treatment margins, excluding closure costs, to lower fixed costs and revenue mix, and higher Services gross profit to revenue growth.
- Net results include significant non-operating tax effects: a $1.380 million tax benefit was recorded in Q3, and year-to-date results also include a $1.596 million gain from exchanging subsidiary preferred shares. The reported profit therefore includes material unusual items.
Cash flow, liquidity and debt
- For the first nine months, continuing operations generated $1.048 million of cash; discontinued operations used $0.468 million. Total operating cash flow was $0.580 million. Investing activities used $1.014 million, and continuing-operations financing activities provided $0.384 million.
- September 30 cash was $0.793 million, versus $1.063 million at year-end 2017. Cash plus the restricted finite-risk sinking fund was $16.681 million; the $15.888 million fund is collateral and is not unrestricted cash.
- Working capital was negative $3.933 million, compared with a $2.268 million deficit at December 31, 2017. Current assets were $16.265 million and current liabilities $20.198 million.
- Total debt was $4.423 million, including $1.283 million drawn on the revolver, $2.959 million of term debt and $0.181 million of capital-lease obligations. The revolving facility matures March 24, 2021. Reported revolver availability was approximately $2.524 million, after borrowing-base limits and the lender’s reduction; $2.660 million of letters of credit also support obligations and reduce availability.
- The company met its first-, second- and third-quarter 2018 financial covenants. Its fixed-charge coverage ratio was 1.39:1 against a 1.15:1 requirement at Q3; tangible adjusted net worth was $28.686 million against a $26.000 million minimum.
Material changes and management commentary
- The M&EC treatment facility is being closed. Management expected on-site closure activities to be completed by December 31, 2018. Closure-cost estimates increased by $2.308 million during the first nine months, including $1.093 million in Q3; $1.039 million of closure liabilities remained current at quarter-end.
- M&EC revenue fell to $0.023 million in Q3 and $0.155 million year to date, from $0.578 million and $5.650 million in the corresponding 2017 periods. Remaining Treatment facilities increased revenue as operations were transitioned, subject to customer requirements and regulatory approvals.
- Management reported Treatment backlog of $9.442 million at September 30, up 27.7% from June 30. It said delayed waste shipments received late in Q3 could support results in Q4 2018 and Q1 2019. This is commentary, not formal financial guidance.
- The July 2018 loan amendment released $1.0 million of a prior $2.0 million lender-imposed borrowing-availability reduction for working capital. Management expected operations, available credit and a potential release of restricted funds to fund the next 12 months, but stated there are no assurances.
- The company expected AIG and regulatory approval for release of approximately $5 million from the restricted sinking fund by the end of Q1 2019 following M&EC closure. Timing and receipt remain subject to approval.
- Medical Segment R&D remains substantially curtailed pending financing; the segment has no revenue and may further reduce, delay or eliminate its program if it cannot raise capital.
Risks, contingencies and other notable items
- Government customers represented 70.1% of Q3 revenue and 72.3% of year-to-date revenue. Government contracts may generally be terminated or renegotiated on 30 days’ notice; funding changes could materially affect results.
- The company reported $0.887 million of accrued environmental remediation liabilities, $2.660 million of standby letters of credit and $11.081 million of bonds outstanding. It may also face liability as a potentially responsible party at waste-disposal or remediation sites.
- A covenant breach could allow the lender to accelerate debt and terminate further credit; the filing warns the company might lack liquidity to repay accelerated borrowings. Other risks include collection delays, permits and regulatory compliance, disposal-site access, closure estimates, and government funding.
- The Series B preferred-stock exchange was completed in May: 134,994 common shares were issued, and the holders relinquished approximately $1.022 million of accrued unpaid dividends. The company recorded a $1.596 million gain.
- Adoption of Topic 606 reduced opening accumulated equity by $0.317 million; management said the ongoing financial-statement impact was expected to be immaterial. Disclosure controls were reported effective at September 30, 2018.
Important facts for investors to verify
- Whether M&EC closure was completed on schedule and whether final closure costs differ from the $1.039 million accrued at quarter-end.
- Whether AIG and regulators approved the anticipated $5 million sinking-fund release, and when the funds became available.
- Whether the reported $2.524 million revolver availability and covenant headroom were sufficient as working-capital needs and closure payments evolved.
- Whether backlog converted into shipments and revenue in Q4 2018 and Q1 2019, and whether Services growth and Treatment-facility transitions continued.
- How much reported profitability depended on the $1.380 million tax benefit and the $1.596 million preferred-stock exchange gain, versus recurring operating performance.
- Whether remediation, closure, disposal and other environmental obligations require additional accruals or cash expenditures.