Perma-Fix Environmental Services, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited. Unless stated otherwise, financial amounts below are in millions of dollars; revenue and operating results are from continuing operations. The company provides nuclear waste management and environmental engineering services.
Financial highlights
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $28.913 | $25.847 | $52.528 | $49.413 |
| Gross profit / margin | $8.049 / 27.8% | $7.182 / 27.8% | $11.079 / 21.1% | $12.125 / 24.5% |
| Operating income | $4.218 | $3.627 | $3.610 | $4.916 |
| Income from continuing operations | $2.552 | $2.116 | $2.019 | $2.691 |
| Net income, including discontinued operations | $2.520 | $1.446 | $2.199 | $2.083 |
| Diluted EPS | $0.05 | $0.03 | $0.04 | $0.04 |
- Cash flow: Six-month operating cash flow was $4.102 million, versus $4.115 million in 2010. Capital purchases were $1.689 million for continuing operations; payments into the finite-risk sinking fund were $1.905 million. Cash decreased $74,000 to $27,000.
- Liquidity: Working capital was $2.804 million at June 30, compared with $2.329 million at December 31, 2010. Restricted cash was $35,000. Revolver availability was $13.843 million, subject to borrowing-base limitations.
- Debt: Balance-sheet current and long-term debt totaled $9.257 million, net of debt discount and amounts classified with discontinued operations. The company made the final $833,000 principal installment on an acquisition-related note in June. Revolver and term-loan rates were variable.
- Balance sheet: Total assets were $132.282 million and total liabilities were $51.243 million at June 30, 2011. Accounts receivable rose to $14.878 million from $8.541 million at year-end; total unbilled receivables were $12.314 million.
Changes versus prior comparable periods
- Q2 revenue increased 11.9%; nuclear-segment revenue rose 12.3%, principally with higher waste volumes. Gross profit increased 12.1%, while gross margin was flat at 27.8%.
- Six-month revenue grew 6.3%, but gross profit fell 8.6% and margin declined to 21.1% from 24.5%. Management attributed the decline mainly to revenue mix and lower-margin waste; prior-year periods included higher-activity, higher-priced waste streams.
- Six-month operating income declined to $3.610 million from $4.916 million, and continuing-operations income fell to $2.019 million from $2.691 million. Q2 continuing-operations income improved year over year.
- CHPRC-related revenue was $17.171 million in Q2 and $30.833 million for the first half, up from $12.276 million and $24.001 million, respectively. It represented 59.4% of Q2 and 58.7% of first-half continuing revenue.
- Discontinued operations produced a Q2 loss of $32,000, versus a $670,000 loss a year earlier; first-half income was $180,000, versus a $608,000 loss.
Outlook, transactions, and risks
- Government funding and customer concentration: About 83% of continuing revenue was tied to federal-government work, directly or through contractors. CHPRC alone accounted for 58.7% of first-half continuing revenue. Management cautioned that DOE stimulus funding was expected to decline after 2011 and that government contracts may be terminated or renegotiated on 30 days’ notice. The CHPRC subcontract’s estimated five-year base-period revenue was $200–$250 million, subject to funding and contract conditions.
- Potential acquisition: After quarter-end, the company signed an agreement to acquire Safety and Ecology Holdings Corporation. Consideration includes $20 million cash, $2 million escrow, and a $2.5 million seller note, subject to adjustments and conditions. Management expected a third-quarter 2011 closing. A PNC commitment letter contemplated credit facilities totaling approximately $43.5 million, but definitive financing, the PFFL sale, and other conditions remained necessary. Safety reported approximately $86 million revenue and $3.3 million net income for fiscal 2010, as cited from its seller’s filing.
- Divestitures: A definitive agreement to sell PFFL for approximately $5.5 million in cash, subject to working-capital adjustments and closing conditions, was expected to close in August 2011. PFO was subject to a letter of intent at approximately $2 million plus assumption of certain liabilities; no definitive sale agreement had been reached. Management said sale proceeds would reduce the revolver and support working capital.
- Obligations and contingencies: The company recorded an $840,000 PFNW/PFNWR earn-out payable, expected in October 2011. Accrued environmental remediation liabilities were $2.330 million, including $1.380 million current; 2011 remediation spending was budgeted at $615,000. The company disclosed litigation over nonconforming waste delivered to PFNWR and potential offsets against earn-out payments. Management did not expect other disclosed litigation to have a material adverse effect.
- Operational and financing risks: Low cash on hand, receivable growth, collection timing, variable-rate borrowing, covenant compliance, disposal costs, permits, environmental liabilities, and continued access to financial-assurance coverage are relevant risks. Management expected to meet 2011 covenants and considered existing liquidity sufficient for current obligations, excluding the potential acquisition. A 1% interest-rate change on reported variable-rate borrowings was estimated to change annual interest cost by about $81,000.
- Other items: Q2 included $154,000 of severance expense from workforce reductions; research and development spending rose to $395,000 in Q2 and $661,000 for the first half. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Safety acquisition closed, its final purchase price and financing terms, and the impact of the contemplated $43.5 million credit facilities on leverage and liquidity.
- Whether the PFFL sale closed and whether PFO and PFSG were sold, including final proceeds and use of cash.
- CHPRC contract funding, revenue concentration, contract performance, and the effect of DOE budget changes after 2011.
- Collection and billing progress for the increased accounts receivable and $12.314 million in unbilled receivables.
- Actual payment and any offsets or litigation outcomes relating to the $840,000 earn-out and PFNWR nonconforming-waste dispute.
- Future gross margins, especially given the first-half decline, and the adequacy of environmental and disposal-cost accruals.