Perma-Fix Environmental Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The financial statements are unaudited. Perma-Fix 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 and position
Amounts are in millions of dollars unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $22.05 | $17.14 | $46.91 | $28.84 |
| Gross profit / margin | $3.31 / 15.0% | $3.27 / 19.1% | $7.95 / 16.9% | $5.77 / 20.0% |
| Operating income (loss) | $0.41 | $0.34 | $1.86 | $(0.28) |
| Continuing-operations income (loss), after tax | $0.26 | $0.37 | $1.57 | $(0.18) |
| Net income (loss) attributable to common stockholders | $0.20 | $0.29 | $1.42 | $(0.38) |
| EPS attributable to common stockholders | $0.02 | $0.02 | $0.12 | $(0.03) |
- Segment and margin trends: Q2 Services revenue rose $7.17 million, or 101.8%, while Treatment revenue fell $2.25 million, or 22.3%. For the first half, Services revenue increased $20.66 million, or 233.6%, and Treatment revenue declined $2.60 million, or 13.0%. Services growth lifted consolidated revenue and first-half gross profit, but consolidated gross margins contracted in both comparison periods. Management attributed Treatment weakness primarily to COVID-related shipment delays; Services results reflected more projects, with variable project timing and margins.
- Cash flow: First-half cash from operating activities was $2.70 million, including $2.96 million from continuing operations, versus cash used of $1.20 million and $0.86 million, respectively, in 2019. Investing activities used $1.35 million; financing activities provided $3.99 million. Capital expenditures were approximately $1.50 million, including $0.13 million acquired through finance leases.
- Liquidity and balance sheet: June 30 cash was $5.63 million; the company also held $11.39 million in restricted finite-risk sinking funds. Working capital was $5.31 million, compared with $0.03 million at year-end 2019. Total assets were $72.87 million, liabilities $42.12 million, and stockholders’ equity $30.76 million. Management said available liquidity was sufficient for the next 12 months.
- Debt: Total debt was $8.28 million, versus $3.88 million at December 31, 2019, including a $5.67 million PPP loan. There were no revolver borrowings at quarter-end; borrowing availability was approximately $12.33 million under a new facility with an $18 million maximum revolver, subject to borrowing-base limits and reserves. The facility also includes a term loan, matures May 15, 2024, and requires financial covenants. The company reported compliance with covenants in Q1 and Q2.
Material changes and notable items
- In May 2020, Perma-Fix replaced its prior PNC credit agreement with a facility extending to 2024. It recorded a $27,000 loss on extinguishment of debt. Revolving availability depends on eligible receivables and is reduced by $3.13 million of standby letters of credit.
- The company received a $5.67 million PPP loan in April. In July, it repaid approximately $327,000 due to a loan-calculation error. Forgiveness of all or part of the remaining balance is subject to program requirements and lender approval; the loan may be audited. The company also deferred $393,000 of employer Social Security taxes through June 30 and estimated further deferrals of about $790,000 otherwise due in 2020.
- COVID-19 caused project shutdowns and Treatment customer shipment delays. Some projects restarted late in Q2, but not all; management said continued delays or renewed shutdowns could affect Q3 and the rest of 2020. The company curtailed nonessential spending, considered capital-expenditure reductions, and implemented a hiring freeze as needed.
- Government-related work represented 89.9% of Q2 revenue and 90.2% of first-half revenue. Government contracts can be terminated or renegotiated, and funding changes could materially affect results.
Outlook, risks, and contingencies
- Management could not reliably estimate the future impact of COVID-19, but stated that cash, credit availability, and current projections were expected to support operations and covenant compliance over the next 12 months. It cautioned that further shipment delays or project shutdowns could undermine liquidity and covenant performance. No specific revenue or earnings guidance was provided.
- The Treatment and Services businesses face project timing, customer shipment, government-budget, permit, regulatory, disposal-site, and environmental-compliance risks. A covenant breach not waived by the lender could allow debt acceleration; the filing warns the company might not have sufficient liquidity to repay accelerated debt.
- Medical-segment R&D has been substantially reduced pending additional funding or partners; full activity is not expected to resume until funding is secured.
- Environmental remediation liabilities were $866,000, including $756,000 current. The company also reported $52.52 million of bonds outstanding and $19.65 million of closure and post-closure financial assurance coverage. It may face future cleanup or potentially responsible party costs.
- A July 2020 lawsuit by Tetra Tech alleges negligence, negligent misrepresentation, and equitable indemnification concerning draft reports prepared for a U.S. Navy review. Perma-Fix said it believes it has no liability, notified its insurer, and intends to defend the claims.
- After quarter-end, the buyer of property sold by a discontinued-operations subsidiary paid off a $105,000 note receivable. The company also appointed a new EVP of Waste Treatment Operations and entered into new executive employment agreements.
Important facts for investors to verify
- Whether COVID-related project interruptions and Treatment shipment delays persist, and whether Services growth and segment margins are sustainable.
- The amount of PPP loan forgiveness ultimately approved, any audit findings, and remaining repayment obligations.
- Continued covenant compliance, eligible-receivables-based borrowing availability, and liquidity if operating cash flow weakens.
- Government contract renewals and funding, environmental remediation exposure, and the status and potential cost of the Tetra Tech litigation.
- Whether Perma-Fix secures funding or partners to restart Medical-segment R&D.