Perma-Fix Environmental Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 4, 2015. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $17.309m | $16.905m | $47.264m | $40.106m |
| Gross profit / margin | $4.946m / 28.6% | $5.581m / 33.0% | $10.455m / 22.1% | $7.232m / 18.0% |
| Operating income (loss) | $1.499m | $2.620m | $0.315m | $(2.964)m |
| Continuing operations, net of tax | $1.284m income | $2.344m income | $(0.322)m loss | $(3.720)m loss |
| Net income (loss) attributable to common stockholders | $1.070m | $1.871m | $(1.148)m | $(2.087)m |
| Basic and diluted EPS | $0.09 | $0.16 | $(0.10) | $(0.18) |
Cash flow and liquidity: Nine-month operating cash flow was $0.251m, including $1.484m provided by continuing operations and $1.233m used by discontinued operations. Investing activities used $0.291m and financing activities used $1.579m. Cash declined $1.682m to $1.998m. Working capital was $1.149m at September 30, including discontinued operations.
Debt: Total debt was $8.877m, including $3.613m current and $5.264m long-term; this includes a $1.303m related-party note classified as current. The PNC facility matures October 31, 2016. Revolver availability was $4.284m, net of a $1.5m indefinite availability reduction. The company reported compliance with its quarterly covenants.
Other balance-sheet items: Total assets were $83.596m and total liabilities $37.658m. Environmental remediation liabilities were $0.976m. Financial assurance closure and post-closure requirements were approximately $46.404m, with $21.364m in related sinking funds.
Material changes versus comparable periods
- Q3 revenue rose 2.4%, but gross profit fell 11.4% and gross margin contracted from 33.0% to 28.6%. Lower Treatment Segment revenue, particularly lower average-priced government waste, drove the gross profit decline.
- Q3 Services revenue increased 53.4%, primarily from a nuclear-services contract awarded in the second half of 2014. Treatment revenue decreased 14.5%. For the nine months, revenue increased 17.8%, with Services up 50.6% and Treatment up 6.5%.
- Nine-month gross profit increased $3.223m and operating results improved from a $2.964m loss to $0.315m income. Continuing-operations net loss narrowed to $0.322m from $3.720m.
- Nine-month net loss includes $1.313m of losses from discontinued operations, compared with $1.633m income in 2014. The prior-year result included a $3.530m insurance-settlement gain; 2015 included a $0.201m PFSG civil penalty and a $0.150m PFMI property impairment charge.
- Cash from operations improved from a $3.344m use in the first nine months of 2014 to $0.251m provided in 2015; 2014 investing cash inflow included substantial insurance proceeds.
Outlook, commentary, risks and unusual items
- Management said it expected to meet fourth-quarter 2015 PNC covenant requirements and believed operating cash flow plus credit-facility availability would be sufficient to fund operations, while cautioning there was no assurance. A covenant breach not waived by PNC could trigger accelerated repayment; the company said it might not have sufficient liquidity in that circumstance.
- Management planned to pursue commercial and international growth to offset uncertainty in U.S. government spending, and to align operating costs with revenue. It budgeted approximately $1.1m of 2015 capital expenditures, subject to possible deferral; $0.338m had been spent through September.
- Federal government-related work represented 54.7% of Q3 continuing revenue and 57.7% of nine-month continuing revenue. Government contracts and subcontracts generally may be terminated or renegotiated on 30 days’ notice.
- PFSG, damaged by fire in 2013, is being closed. The company paid a $201,200 Georgia environmental penalty and submitted a draft post-closure plan. PFMI agreed to sell a closed-site property for $450,000, subject to due diligence; the company remains responsible for remediation unless responsibility is transferred with regulatory approval.
- PF Medical received $1.0m gross from Digirad for an equity investment and entered a multi-year Tc-99m supplier agreement that depends on commercialization. A Polish research grant of approximately $2.8m over four years was awaiting official issuance; PF Medical’s stated direct allocation was approximately $0.8m. The technology is developmental and PF Medical was not generating revenue.
- Disclosure controls were deemed ineffective due to a material weakness in income-tax accounting, attributed primarily to limited in-house tax expertise and reliance on an outside firm. Management described remediation steps and targeted remediation in Q4 2015.
- Key risks include government-funding and contract uncertainty, covenant compliance and liquidity, collection delays, environmental remediation and potential responsible-party exposure, permits and regulatory compliance, and commercialization of new technology. Management reported no other material change in previously disclosed risk factors and no litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether fourth-quarter covenant compliance was achieved and whether the PNC facility was refinanced or repaid before its October 2016 maturity.
- Subsequent cash generation, revolver availability, and progress in collecting receivables and funding working-capital needs.
- Performance and durability of the nuclear-services contract, and whether Treatment Segment volumes and margins recover.
- PFSG closure obligations, environmental remediation costs, and completion and proceeds of the PFMI property sale.
- Official grant issuance, remaining PF Medical subscription collections, and milestones toward Tc-99m commercialization and supplier sales.
- Whether the income-tax control weakness was remediated and whether subsequent filings report any related adjustments.