Perma-Fix Environmental Services, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial amounts below are in millions of dollars unless stated otherwise. The company provides waste treatment and environmental services through its Treatment and Services segments; its Medical segment remains in research and development and has no revenue.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $17.135 | $13.160 | $28.843 | $25.817 |
| Gross profit / margin | $3.271 / 19.1% | $2.043 / 15.5% | $5.772 / 20.0% | $5.363 / 20.8% |
| Operating income (loss) | $0.344 | $(0.799) | $(0.280) | $(0.483) |
| Continuing operations, net | $0.373 | $0.788 | $(0.177) | $1.040 |
| Net income (loss) attributable to common stockholders | $0.289 | $0.610 | $(0.383) | $0.745 |
| Diluted earnings (loss) per share | $0.02 | $0.05 | $(0.03) | $0.06 |
- Q2 revenue rose 30.2%; Treatment revenue increased 10.4% and Services revenue increased 75.4%, mainly due to newly awarded project work. For the six months, revenue increased 11.7%, with Treatment up 10.5% and Services up 14.7%.
- Q2 gross margin improved year over year, but the comparison includes substantially lower M&EC closure costs in 2019 than 2018. Excluding those costs, Treatment margin was 27.7% versus 29.9% in Q2; Services margin declined to 9.1% from 13.0%.
- Six-month Services gross profit fell to $0.188 million from $1.060 million, and its margin fell to 2.1% from 13.7%, despite higher revenue. Consolidated six-month gross margin decreased to 20.0% from 20.8%.
- Q2 2018 included a $1.596 million gain from an exchange offer of subsidiary preferred stock; this did not recur in 2019. Q2 2019 also included $0.095 million of other income, whose nature is not clearly explained in the supplied filing text.
Cash flow, liquidity and debt
- Six-month operating cash flow was a use of $1.197 million, including $0.863 million from continuing operations and $0.334 million from discontinued operations; the comparable 2018 total was $2.335 million provided. The 2019 continuing-operations outflow included a $3.053 million increase in unbilled receivables.
- At June 30, cash was $0.384 million. Cash plus restricted finite-risk sinking funds was $16.543 million, much of which was restricted. The company reported a $0.480 million working-capital deficit, improved from $6.753 million at year-end 2018; the improvement reflected the $5 million sinking-fund reclassification and reduced scheduled term-loan payments.
- On July 22, 2019, after quarter-end, the company received $5 million of sinking funds from AIG for general working capital. This was a subsequent event, not cash received by June 30. Following the release, coverage under the closure policy was reduced.
- Total debt was reported at $4.175 million, including a $2.5 million unsecured related-party loan from shareholder and consultant Robert Ferguson, reported net of debt discount. The PNC revolving facility had no balance outstanding; stated borrowing availability was approximately $3.463 million and was subject to borrowing-base limits, reductions, and $2.639 million of outstanding standby letters of credit.
- PNC amendments waived or removed fixed-charge coverage ratio testing for 2019, set minimum Adjusted EBITDA targets through year-end, and reduced monthly term-loan principal payments from about $101,600 to $35,547 beginning July 1. The company said it met the Q2 Adjusted EBITDA requirement and expected to meet covenants over the next 12 months. FCCR testing resumes in Q1 2020.
- Operating lease adoption added $2.667 million of right-of-use assets and $2.699 million of lease liabilities at June 30. The company budgeted approximately $1.5 million for 2019 capital expenditures; timing or amount could change.
Management outlook, risks and unusual items
- Management said cash from operations, credit availability, the $2.5 million related-party loan and the July AIG release should fund operations for the next 12 months, while noting there is no assurance. No formal revenue or earnings guidance is provided.
- Management described its expansion strategy into commercial and international markets as beginning to show success. Canadian Nuclear Laboratories task orders were valued at approximately $8.5 million in May and an additional $3 million in late July 2019, for work through 2019.
- Government clients accounted for about 75.1% of Q2 revenue and 75.8% of six-month revenue. Government contracts may be terminated or renegotiated on short notice; funding changes or project timing could materially affect results. Services revenue and margins vary with project scope, timing, and bid terms.
- The company remains exposed to covenant compliance and liquidity risk: a lender acceleration could leave it unable to repay debt. The related-party loan included shares and a warrant as consideration, and permits the lender in specified default circumstances to elect repayment in cash or shares, subject to terms and limits.
- Environmental, hazardous-waste, permit, insurance, and remediation risks remain. Accrued environmental remediation liabilities were $0.877 million; standby letters of credit were $2.639 million and bonds outstanding were $29.465 million. Management reported no litigation expected to have a material adverse effect.
- M&EC closure work was substantially completed; $0.330 million of additional closure costs were recorded in the first half, with $0.156 million of closure liabilities remaining at June 30. Medical R&D remains constrained by lack of funding and may be further reduced, delayed, or discontinued.
Most important facts for investors to verify
- Whether Services project revenue can sustain acceptable margins, given the sharp first-half decline in Services gross profit and margin.
- Actual availability and use of the July $5 million AIG funds, and the resulting reduction in financial-assurance coverage.
- Compliance with Adjusted EBITDA targets and the return of FCCR testing in 2020, along with actual revolver availability after letters of credit and lender restrictions.
- Collection and billing of unbilled receivables, which rose 98.3% from year-end to $6.158 million, and the effect on operating cash flow.
- The filing states disclosure controls were effective as of June 30, 2018, although this is a June 30, 2019 report; verify whether the year is a typographical error.