Perma-Fix Environmental Services, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated figures; dollar amounts below are in millions unless noted.
Business context and financial performance
Perma-Fix provides waste treatment and environmental services through its Treatment and Services segments. Federal government work is a significant source of revenue. The company reported that sequestration, reduced government and commercial spending, and the completion or near-completion of large contracts constrained results.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $22.784 | $33.698 | $42.613 | $71.634 |
| Gross profit | $4.023 | $3.930 | $4.560 | $8.299 |
| Gross margin | 17.7% | 11.7% | 10.7% | 11.6% |
| Operating loss | $(0.898) | $(1.191) | $(5.048) | $(2.213) |
| Loss from continuing operations | $(0.980) | $(1.009) | $(3.868) | $(1.816) |
| Net loss attributable to common stockholders | $(0.876) | $(1.171) | $(3.789) | $(2.172) |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.07) | $(0.04) |
Q2 revenue fell 32.4% year over year, while gross profit rose modestly as lower costs improved gross margin. The Services segment drove the quarterly revenue decline: its revenue fell 46.4%, while Treatment revenue was nearly flat. First-half revenue decreased 40.5%; both segments reported lower gross profit. First-half operating loss included a $1.149 million noncash goodwill impairment charge.
- Q2 Services revenue declined $10.985 million, mainly because large DOE nuclear-services and technical-services contracts were completed or nearing completion. First-half Services revenue fell 48.4%.
- Q2 Treatment revenue increased 0.7%; first-half Treatment revenue decreased 23.7%, primarily reflecting lower government waste volume. Q2 Treatment gross margin improved to 22.9% from 10.8%, but the first-half margin fell to 12.4% from 16.6%.
- Federal-government-related revenue represented 58.0% of Q2 continuing-operations revenue and 65.2% for the first half, versus 83.8% in each comparable 2012 period.
Cash flow, liquidity and debt
- Cash was $0.095 million at June 30, down from $4.368 million at December 31, 2012. The company reported $3.776 million of cash used in operating activities in the first half, including $3.609 million from continuing operations; cash used in investing was $0.701 million.
- Working capital was $3.057 million, compared with $3.307 million at year-end. Current assets were $25.618 million and current liabilities were $22.561 million.
- Debt was approximately $14.4 million at June 30, including $2.568 million current and $11.850 million long-term on the balance sheet. The company had $7.281 million of excess revolver availability at June 30, based on eligible receivables.
- PNC waived the first-quarter fixed-charge coverage covenant shortfall and revised the calculation methodology. The company reported a Q2 ratio of 2.14:1 against a 1.25:1 minimum, and said it expected to meet covenants for the rest of 2013.
- After quarter-end, the company borrowed $3.0 million from two existing stockholders at a fixed 2.99% rate, subordinated to PNC. It said the proceeds enabled a revolver paydown and borrowing availability of approximately $6.2 million as of August 2. The transaction also provides for 450,000 common shares and warrants for 350,000 shares.
- On August 2, the PNC revolver commitment was reduced from $25 million to $18 million and the $2.5 million equipment line was removed.
Outlook, material developments and risks
- Management said 2013 revenue was below expectations due to sequestration, contract endings and adverse economic conditions. It cited historical third- and fourth-quarter operating cash generation associated with the federal fiscal year-end and upfront contract billing, but cautioned that this pattern was not assured. If revenue and working capital do not improve, results and liquidity could be materially affected, including goodwill.
- The CHPRC subcontract at DOE’s Hanford site will expire September 30, 2013 and will not be renewed. The company recorded a $1.149 million noncash impairment of all goodwill allocated to that reporting unit. CHPRC represented 28.2% of Q2 revenue and 29.2% of first-half revenue.
- The company plans to pursue commercial and international markets, new services and customers, and greater share in existing markets; it gave no quantified revenue or earnings guidance. It also said it would further reduce costs if expected revenue growth did not materialize.
- On July 16, 2013, the company settled an EPA matter concerning alleged improper mixed-waste storage at PFNWR for approximately $188,000, which had been accrued. The EPA had proposed a $215,500 penalty; its notice described potential statutory penalties of up to $37,500 per day per violation.
- Revenue for Q2 included a claim for costs incurred on a substantially completed fixed-price contract. Recovery was considered probable by management, but the customer may counterclaim for alleged defects; the outcome could substantially change earnings.
- Other exposures include environmental remediation liabilities of $1.568 million, possible responsibility for third-party disposal-site cleanup, delays in collecting unbilled receivables, variable-rate debt, and dependence on government funding and contracts that may be terminated or renegotiated on 30 days’ notice.
- NASDAQ had granted the company until December 2, 2013 to regain compliance with its $1.00 minimum bid-price requirement. Management planned to seek shareholder approval for a possible 1-for-2 to 1-for-7 reverse stock split; approval and compliance were not assured.
Key facts for investors to verify
- Progress in replacing the CHPRC contract and reducing government-customer concentration after its September 2013 expiration.
- Cash generation, working-capital trends, collection of unbilled receivables, and actual borrowing availability under the amended PNC facility.
- Compliance with credit covenants and the terms, accounting treatment, share issuance and warrant dilution associated with the $3.0 million related-party loan.
- Recovery of the fixed-price contract claim and any customer counterclaim, along with the status of environmental matters and remediation costs.
- NASDAQ bid-price compliance and the outcome of the proposed reverse-split authorization.