Business Context and Reporting Period
Perma-Fix Environmental Services, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its continuing operations comprise Treatment and Services segments, providing waste treatment, nuclear, environmental, and technical services. Results are reported in thousands of dollars unless otherwise noted. The filing was signed December 12, 2013.
Financial Performance and Liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $19.072 million | $29.190 million | $61.685 million | $100.824 million |
| Gross profit | $3.129 million | $4.226 million | $7.690 million | $12.525 million |
| Gross margin | 16.4% | 14.5% | 12.5% | 12.4% |
| Operating loss | $0.667 million | $0.492 million | $5.714 million | $2.705 million |
| Net loss | $0.808 million | $0.533 million | $4.660 million | $2.547 million |
| Net loss per share | $0.07 | $0.05 | $0.41 | $0.24 |
- For the nine months, continuing-operations loss was $4.436 million, versus $2.288 million in 2012. Q3 continuing-operations loss was $0.568 million, versus $0.472 million.
- Nine-month operating cash used was $5.010 million, including $4.674 million from continuing operations. Investing activities used $0.908 million; financing activities provided $1.642 million. Cash fell $4.276 million to $92,000.
- At September 30, working capital was $4.479 million, including discontinued operations. Total debt was $15.665 million, including $2.486 million current and $13.135 million long-term debt (the balance-sheet presentation also classifies $44,000 of debt with discontinued-operation assets). Revolver availability was $10.045 million, based on eligible collateral.
- Total assets were $135.376 million; total liabilities were $54.516 million. Accrued closure costs were $11.463 million. Nine-month capital expenditures were $373,000; the company had budgeted approximately $2.5 million for 2013.
Material Changes Versus Prior Comparable Period
- Revenue fell 34.7% in Q3 and 38.8% for the first nine months. Management attributed the decline mainly to reduced government spending and waste volumes, contract completions, and adverse economic conditions.
- Nine-month Services revenue fell 46.9%, and Treatment revenue fell 23.1%. Q3 Services revenue declined 43.0%; Treatment revenue declined 21.7%.
- Despite lower Q3 gross profit, consolidated gross margin improved to 16.4% from 14.5%. For the nine months, gross margin was nearly flat at 12.5% versus 12.4%. Cost reductions and lower headcount supported margins, while Treatment margins were pressured by lower volumes, mix, and fixed costs.
- SG&A declined 22.0% in Q3 and 21.6% for the nine months, but operating and net losses worsened. The nine-month results included a $1.149 million noncash goodwill impairment charge related to a subcontract that was not renewed.
- Cash declined from $4.368 million at December 31, 2012, to $92,000 at September 30, 2013. Debt increased from $14.267 million to $15.665 million, including a new $3 million loan from two company shareholders.
Outlook, Risks, Contingencies, and Unusual Items
- Management said late-Q3 waste shipments increased backlog and expected the backlog to support higher Q4 revenue and operating cash flow. It expected to meet Q4 financial covenants and said current operating cash flow and revolver availability should be sufficient for current obligations; these are expectations, not guarantees. The company also planned further cost reductions and expansion in commercial and international markets. No quantified earnings or revenue guidance was provided.
- Management warned that failure to improve revenue and working capital could materially harm results and liquidity, cause further asset impairment, and lead auditors to express substantial doubt about the company’s ability to continue as a going concern.
- Federal government-related revenue represented 68.7% of continuing-operations revenue in Q3 and 66.3% for the nine months. Federal contracts may be terminated or renegotiated on 30 days’ notice. Government sequestration, continuing resolutions, contract expirations, and seasonal fluctuations remain key risks.
- The CHPRC subcontract expired September 30, 2013, without renewal. The company recorded a $1.149 million impairment for related goodwill. A preliminary impairment test for remaining reporting units passed step one, but the annual test was pending and could result in a further Q4 impairment. The valuation assumed a government-spending recovery beginning in Q4 2013 and projected revenue growth ranging from 2% to 85% over four years.
- A fire at the held-for-sale South Georgia facility on August 14 left it non-operational. The company recorded $3.731 million of costs and a $3.531 million insurance receivable, net of a $200,000 deductible; it reported receiving approximately $1.8 million of insurance proceeds in October. Future operation and sale options remained under review.
- Other exposures include $1.566 million of accrued environmental remediation liabilities and litigation over nonconforming waste delivered to the PFNWR facility; trial was scheduled for May 13, 2014. A $188,000 EPA penalty related to alleged improper mixed-waste storage was included in nine-month costs.
- PNC waived a first-quarter fixed-charge coverage covenant failure; the company reported compliance in Q2 and Q3. The August amendment reduced the revolver commitment from $25 million to $18 million and removed a $2.5 million equipment line. A $3 million unsecured, subordinated shareholder loan carries 2.99% interest and included stock and warrants as consideration.
- The company effected a 1-for-5 reverse stock split on October 15, 2013, and reported regaining Nasdaq minimum-bid-price compliance on October 29. Separately, Nasdaq notified the company that its late 10-Q filing violated a listing rule; Nasdaq’s acceptance of any compliance plan was discretionary.
- Management reported a material weakness in internal control over financial reporting associated with deferred-tax accounting and stated controls were not effective at September 30. The company had restated 2010–2012 financial results in its December 12, 2013 Form 10-K/A and planned increased review of deferred-tax accounts.
Most Important Facts to Verify
- Whether Q4 shipments translated into the expected revenue, cash flow, and covenant compliance, given very low reported cash and continued operating cash outflows.
- Actual revolver borrowing availability, eligible collateral, debt maturities, and ongoing compliance with PNC’s financial covenants.
- Outcome of the annual goodwill impairment test and sensitivity of valuations to government-spending recovery assumptions.
- Timing and collectability of remaining South Georgia fire insurance proceeds, and the facility’s operating or sale disposition.
- Progress remediating the deferred-tax control weakness and any further financial-statement corrections or Nasdaq listing consequences.