Perma-Fix Environmental Services, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; financial amounts below are in millions unless stated otherwise.
Business context and results
The company provides radioactive and other waste treatment and disposal, environmental remediation, and technical and nuclear services. Its reportable segments are Treatment and Services. Government-related work represented 87.7% of Q2 revenue and 88.2% of first-half revenue. The Medical Segment was sold in December 2021 and had generated no revenue.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $19.455 | $16.145 | $35.370 | $39.278 |
| Gross profit / margin | $2.884 / 14.8% | $0.966 / 6.0% | $4.520 / 12.8% | $3.322 / 8.5% |
| Operating loss | $(0.880) | $(2.175) | $(2.763) | $(3.175) |
| Net income (loss) | $(1.445) | $2.994 | $(2.788) | $1.841 |
| Basic loss per share | $(0.11) | $0.25 | $(0.21) | $0.16 |
| Operating cash flow | Not separately reported | Not separately reported | $(3.057) | $0.488 |
Financial position and liquidity
- At June 30, cash was $0.163 million, versus $4.440 million at year-end 2021. Restricted finite-risk sinking funds were $11.511 million; cash plus restricted cash was $11.674 million.
- Working capital was $1.121 million, down from $4.060 million at December 31, 2021. Current assets were $23.681 million and current liabilities $22.560 million.
- Total debt was $1.295 million, including $0.489 million current; no revolving-credit balance was outstanding. Revolver availability was approximately $4.754 million, including a $3.020 million reduction for standby letters of credit.
- First-half cash used in continuing operations was $2.690 million; cash used in discontinued operations was $0.367 million. Investing activities used $0.733 million and financing activities used $0.444 million. Total cash and restricted cash declined $4.237 million.
- Accounts receivable were $12.956 million and unbilled receivables $6.348 million. The company reported $53.148 million of bonds outstanding and $3.020 million of standby letters of credit.
Changes versus comparable periods
- Q2 revenue rose 20.5% year over year, led by Services revenue growth of 31.1%; Treatment revenue increased 8.9%. Management attributed the improvement to resumed project work and higher Treatment waste volumes.
- First-half revenue fell 9.9%, entirely because Services revenue declined 19.0%. Delayed or curtailed projects and the completion of a prior-year large project contributed; Treatment revenue increased 4.4%.
- Q2 gross margin improved to 14.8% from 6.0%, including a Services segment recovery to 11.9% gross margin from negative 5.5%. First-half gross margin increased to 12.8% from 8.5%.
- SG&A increased 22.9% in Q2 and 14.6% for the first half. Operating losses narrowed, but the company remained loss-making.
- Prior-year Q2 and first-half net income included a $5.381 million gain from forgiveness of the company’s PPP loan. This materially affects year-over-year net income comparisons.
Outlook, risks, and unusual items
- Management expected continued improvement in Treatment waste receipts and increased Services project work during the remainder of 2022, while noting uncertainty from COVID-19, customer delays, economic conditions, and contract timing. Treatment backlog was $7.169 million at June 30, up 17.1% from March 31. No quantified revenue or earnings guidance was provided.
- Management stated it believed available cash, operating cash flows, and credit-facility availability would fund operations for the next 12 months, but cautioned there was no assurance. Cost reductions and deferral of capital spending remained possible; 2022 capital expenditure budget was approximately $2.0 million.
- The company failed its second-quarter minimum fixed-charge coverage ratio (FCCR) covenant. An August 2, 2022 lender amendment waived the failure, removed FCCR testing for Q3, reinstated testing for Q4 2022, and required at least $3.0 million of revolver availability until the Q4 test was met and certified. A future uncured covenant breach could permit acceleration of debt and termination of further credit.
- PF Canada had approximately $2.750 million in unpaid receivables and unbilled costs and $1.115 million in contractual holdback related to completed work for Canadian Nuclear Laboratories. CNL may assert offsets, including costs secured by a roughly CAD $1.9 million bond; discussions over amounts due continued.
- A proposed UK nuclear-waste facility partnership with Springfields Fuels Limited remained conditional on, among other things, winning a contract, definitive agreements, design, and approvals. The company expected a 45% interest; required investment and funding were undetermined.
- Risks include inflation, wage, fuel and utility costs, supply-chain delays, government contract termination or funding reductions, regulatory and environmental liabilities, and potential third-party disposal-site cleanup obligations. A new processing unit was delayed by supply-chain issues and began deployment in mid-May 2022.
- Q2 included $0.188 million of discontinued-operation losses; first-half discontinued-operation losses were $0.282 million. The company also recorded $0.361 million of additional estimated closure liabilities and asset-retirement obligations during Q2.
- Disclosure controls were deemed ineffective at June 30, 2022 because of an existing material weakness in controls over revenue recognition for nonroutine and complex contracts. Management described remediation steps, but had not yet concluded remediation was complete.
Important facts for investors to verify
- Whether operating cash flow, working capital, and cash balances stabilize, and whether the company maintains the required $3.0 million borrowing availability.
- Whether the company meets the reinstated FCCR covenant tests and whether lenders provide further waivers or amendments.
- Collection and final settlement of the PF Canada receivables, unbilled costs, holdback, and any CNL offsets.
- Whether the reported Treatment backlog converts into receipts and revenue, and whether delayed Services projects resume or are replaced by new awards.
- Whether cost inflation, supply constraints, and government funding or contract changes affect segment margins and liquidity.
- Progress and testing of the revenue-recognition control remediation, and any further environmental, closure, or legal contingencies.