Perma-Fix Environmental Services, Inc. (PESI) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Services Third Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Waldman, with Crescendo Communications. Thank you, Mr. Waldman. You may begin.

Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services Third Quarter Conference Call. On the call with us this morning are Dr. Lou Centofanti, Chairman and CEO, and Ben Naccarato, Chief Financial Officer. The company issued a press release last Thursday containing third quarter 2013 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements on this conference call, other than the statements of historical fact, are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company's filings with the U.S. Securities and Exchange Commission. The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after the date hereof that bear upon forward-looking statements. I'd now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, David, and welcome, everyone. Although we have continued to face a very challenging fiscal environment, we achieved our second consecutive quarter of positive EBITDA. As always, our business remains lumpy due to timing, and as it happened in this quarter, we received several meaningful shipments late in the quarter. Had it not been for the timing of these shipments, our EBITDA would have been even stronger. Our Treatment backlog increased from $5.9 million to $8.9 million. Overall, we anticipate a gradual improvement in funding for DOE treatment projects. As I stated in the past, there is really significant pent-up demand due to the various shutdowns and delay treatment at a number of the DOE sites. Notwithstanding the temporary government shutdown October, which compounded our short-term issues, we remain optimistic on the waste side. Within the Service segment, as we've previously disclosed, our Plateau contract expired on September 30, which will have a meaningful impact on revenue going forward. We planned for this and have adjusted our expenses accordingly. CH2M Hill remains one of our largest and most supportive customers, and we will continue to pursue opportunities as strategic partners. Despite these setbacks, we believe the funding environment is also starting to improve within the Service segment. Again, the government shutdown certainly didn't help, but we continue to receive small contracts, and we're actively bidding on a number of fairly sizable projects. Service pipeline is significant, and it's now just a matter of waiting for the projects to be awarded. Turning back to the Treatment segment. We see a number of exciting opportunities treating more complex, higher active waste streams. We have continued to focus on the Hanford tank waste. Still too early to know the timing, but from where we sit today, we offer DOE the best option for early treatment of some of the tank waste at Hanford. I think, as you all know, remember, none of that tank waste has ever been treated since the days of its production early in the Manhattan project, demonstrating our capabilities to treat tank waste at Hanford. Even on a small scale, it would open the door to much larger opportunities. As I have explained in the past, our permits and licenses at our Northwest facility allow us to accept these waste streams for treatment today. We are the only commercial treatment facility in the U.S. that can handle these high-priority Hanford waste streams. Outside of DOE, we've increased our sales and marketing efforts, in particular, on the international front and working aggressively on a number of opportunities in North America and Europe. Now turning to the medical isotope project. We continue to focus on our R&D efforts on advancing our technology. As I've discussed in the past, the current supply chain for this isotope tech-99 is very fragile, which is best illustrated by the recent shutdown in the last several months of 2 of the major reactors that produce tech-99. The good and bad of the situation is that it highlights the need for our process. The flip side is that it's -- several of these backup reactors are now being used to produce tech-99, which has hampered our ability to secure reactor time to run our next series of high-level tests to prove our process. We're addressing these issues and look forward to moving forward in the very near future. Finally, I'm pleased to welcome John Climaco to our Board of Directors. John brings expensive legal, operational experience, including strategic planning and business development. He will be heading a new committee, active -- to actively review strategic options for all of the aspects of the business. He brings direct experience in the medical nuclear industry, which will be especially helpful as we move forward on some of these upcoming initiatives. So to wrap up, even in a bleak market, we generated positive EBITDA 2 quarters in a row. Our backlog has increased. We expect funding environment will begin to improve in the new year. And probably, more importantly, as a result of our major cost-saving initiatives, any incremental growth and revenue should translate to very meaningful improvements in our bottom line. At the same time, we're working on a number of important initiatives, including our proposal to treat tank waste, and we're also bidding on a large number of service contracts and are aggressively working to expand our international and commercial business. We remain optimistic about the outlook and look forward to providing further details as the developments unfold. At this point, I'd like to call -- turn the call over to Ben, who will go into more detail on the numbers, and I'll get back to answer questions. Thank you.

Thank you, Lou. Let me begin with revenue. Our total revenue from continuing operations for the third quarter was $19.1 million compared to last year's third quarter of $29.2 million, a decrease of $10.1 million or 34.6%. Revenue from our Treatment segment was $8.9 million compared to $11.4 million in 2012 as our Waste receipts were down from prior year and were received late in the quarter, and therefore, less revenue was earned as we could not process timing. In our Services segment, our revenue decreased by $7.6 million or 43% as new project awards continued to be delayed. Revenue from the Hanford project was relatively flat with prior year and, as Lou mentioned, the Hanford contract terminated on September 30. Turning to our cost of goods sold, our total cost of sales was $15.9 million in the second quarter compared to $25 million in prior year. Our Treatment segment costs were down $1.2 million or 14.2% compared to prior year. Most of this cost reduction came from reduced fixed costs at our plants impacted by workforce reductions and other facility-related cuts. Variable expenses related to revenue were up slightly from prior year. Our cost from sales of our Services segment was down $7.8 million from prior year with the majority of this variance coming due to lower costs from fewer projects but also from a reduction in our indirect costs, as we continue to streamline our services support group -- support structure. Costs related to the Hanford contract and the engineering groups were down slightly as well due to our cost initiative. Our gross profit from the -- for the quarter was $3.1 million compared to $4.2 million in 2012. Gross profit in the Treatment segment decreased by $1.3 million compared to prior year due to lower revenue and lower margin waste process. This variance was offset by the lower fixed costs related to these cost initiatives. In the Services segment, our gross profit actually increased from prior year by $199,000 despite lower project revenue as the company completed the problem fixed cost contract that had impacted expenses in prior year by approximately $900,000. Total SG&A costs for the quarter were $3.3 million or 17.2% of revenue, down from $4.2 million or 14.4% of revenue last year. This reduction was the result of lower labor expense and third-party costs related to lower project load in the Service segment. Our loss from continuing operations was $568,000 compared to $472,000 in the prior year. Our loss applicable to shareholders was $808,000 compared to last year's net loss of $554,000. Our loss per share for the quarter was $0.07 compared to a loss per share of $0.05 in prior year. And our adjusted EBITDA from continuing operations, as defined in our earnings release, was $770,000 compared to $1.3 million in the prior year. Turning to our balance sheet, our total cash was down $4.3 million, primarily reflecting the year-to-date operating losses. Our total receivables were down about 4.6% reflecting the reduced project revenue in our Service segment. Our backlog was up $3.1 million from the prior quarter end, and flat with 2012 year end. Our total debt was up $1.4 million to $15.7 million. PNC debt makes up $12.7 million of this, and the new note that we entered into on August 2, makes up to the remaining 3 with private investors. Our working capital increased by $1.8 million to $4.5 million as compared to $2.7 million on 12/31/12. On the cash flow front, our cash used by continuing operations for the year is $4.7 million. Cash used by discontinued ops was $336,000. Cash used for capital spending was $373,000, while $508,000 was used to pay out a minority interest position. And cash provided by financing of continuing operations was $1.7 million. Finally, I'd like to briefly touch on the restatement of our 2012 financial statements. Here, related to a deferred tax asset from an acquisition originally booked in the year 2000, subsequent to the filing of our 2012 10-K, management identified an error in the carrying value of this asset. The review of this information resulted in the conclusion that due to the materiality of the error, a restatement was necessary. The corrections to 2012 impacted the carrying value of the deferred tax asset and liability and the starting retained earnings balance on the balance sheet. On the income statement, the impact was to income tax expense only. There was no impact to the company's cash flow statement. The company filed an amended 2012 financial statement on our Form 10-K/A on December 12. I'll now turn the call back over to Lou.

Thank you, everyone. Now we will open it up for questions.

[Operator Instructions] Our first question comes from Al Kaschalk with Wedbush Securities.

Lou, I want to start first on the backlog. Up sequentially, as expected. I think some of that's seasonality. Because if you look at last year's number, it was -- I think, it was $9.4 million at the same period end. So one, could you address the level of backlog relative to the business strengths? And then two, how is that converted now that we're 75 days into the fourth quarter?

I can answer, Al. The level is about -- it's about flat with last year. It's down just a small bit. We're processing -- what we're doing with the reduced cost infrastructure is we're trying to streamline the waste processing at the facilities, and so it's processing through along with new waste streams that come in, in the quarter now. The new waste streams were impacted a little bit by the government shutdown, so what we're seeing is a little bit of a push out into first quarter with new waste streams. So it's all kind of a first in, first out. So that backlog is processing. It really depends on what else comes in, in the quarter. And so what we're seeing is a reasonable fourth quarter, but a little bit better first quarter than what we've seen in the past, which is the encouraging part.

So that would put it somewhere in the neighborhood of a $10 million per quarter run rate here, short term?

Yes, that's the goal.

Okay. All right. I was hoping, maybe you could clarify for me because I'm a little -- with the funding situation, how does the waste stream funding compare or differ versus the service funding given the 2 different types of businesses here?

In both cases, we've seen from past 1.5 years, 2 years, a slowdown, which on the treatment side, produces a backlog on the site. So I tend to be a little bit optimistic here, just philosophically, that they're only allowed to store for a certain period of time in general. And so, we're a little bit optimistic on the treatment side just because of the pent-up demand from past delays. The service side, same thing. We see a lot of contracts. We're very focused on the international side and especially Canada and hopeful we'll see some results very shortly from our -- one, our past work in Canada, which we've done quite a bit, and continuing into the near future here. So the Service side, it's -- we're seeing commercial, we're seeing international, and we're seeing some market being bid at DOE.

Okay. But just to drill a little bit further, are you -- on the waste side, you're contracted directly through the DOE. On the service side, is it part of, generally, a larger contract, of which you're, so-called, subcontracting, or are you...

Well on the DOE side, we are usually with the primes -- with the prime contractors. On the service side, it's a combination of primes, DOE, international, direct clients or whatever. So it's a real -- it's a total mixture of -- at different levels.

Okay, but given the runoff on the acquisition and the contracts there, it's fair to say that all of those entities on the service side are not really seeing a lot of release of contracts or bids?

That's been the case. We've seen our contracts expiring and falling off faster than we've seen up to now, a renewal. But we feel fairly confident that, that's now turning around. But we -- there is a hole there we've dug in terms of the service work, in terms of the drop-offs. But right now, we think it's turning around in terms of going back to a more stable state where the additions will be greater than the drop-offs, the ending of contracts. And that's...

Okay, I'm a little confused. Does that mean that we're stabilized here at kind of a $10 million level or more like $8 million, $9 million? And then what are you seeing in terms of the ability to see that net additions will be better than net subtractions?

Well I think what you see in the third quarter is somewhat of a low point. I think it shows, that's -- at this point, that's probably as strong as I can make it, but...

Okay. Okay, one cleanup item I'd like -- maybe you can address at some point. Any thoughts going forward from the fire that you had? And then second, could you just address the strategic nature of the new committee that was announced, and how we should anticipate what the time frame, or outlook or what should be the end results of this from the board's perspective?

Well, first, on the Valdosta fire, it is -- we've been in a cleanup mode, and that's about near the end. And again, we were still confident all those expenses were covered by insurance. The...

Did you receive any proceeds yet?

Yes. We've been receiving interim funding for the cleanup.

How much more is left do you estimate?

Well we're at the final phase of the cleanup, which includes removal of a containment pad, but then you've got the whole rebuild. So we're currently getting quotes for the rebuild. That's been kind of a step process. First was to clean the facility from the fire, and that has been done. And then the second phase is this tag removal. And then the third phase would be rebuild. So it's going to be -- we're -- it's going to be another month or so before we have all our numbers in.

Okay. So that's fair enough, though, right? The insurance should cover it. You should be no net cash out?

Right. Other than our retainers or our deductibles, we expect to be made whole.

Then you're second question was on the committee.

Yes.

We've formed the strategic committee. It's -- we continue to ask ourselves, are we doing what's best, or are we doing all we can. And we regularly get that question from shareholders. Are we doing all we can to maximize value for the shareholders here? So what -- given all the changes going on in the industry, within the company, we felt it was very prudent to set up a special committee at the board level to explore all options. This was just formally set up on -- at our board meeting Thursday and Friday. It was just completed in terms of the formality of setting it up. We have a very strong board that's already -- that's always been very active in the company, but I think having this committee will allow us to bring additional focus, resources in a very structured manner in terms of various options for us. So beyond that, it's kind of hard to say much of anything. The committee has not even met yet, and setting its goals and reviewing what we've done and should be doing.

Our next question comes from Doug Dyer with Heartland Advisors.

Lou, in your response, I kind of -- I may have missed what you thought was more of a stable-state type of revenue number. We're talking $10 million, $9 million or $8 million, where do you think we're at with a stable state kind of number going forward?

Yes, Doug. We -- we're -- our goal is to maintain about $10 million a quarter at the [indiscernible] facility. And of course, that, again because of the nature of the business, that may be up or down in a particular quarter, but it should come out to about that number.

Okay. And do you feel the business is now rightsized to run at that $10 million per quarter number?

Correct. And that was -- sort of the focus was, as opposed to ramping up all the time when the numbers were up and then being overstaffed, et cetera, we're sort of rightsizing to a more, hopefully, for a more continual processing and revenue recognition model.

Okay. And as far as what's in backlog for Treatment, would you say that the current streams are -- in terms of complexity, is this comparable to what you've had in backlog before or better or worse in terms of what you can get from margin?

It's about the standard. Our margins are strong on the Treatment side. They really depend on the volume in a particular quarter, so I think you -- from your modeling in the past results, you could use similar modeling. I'd say, strong margins.

Okay. All right. In the last quarter, you talked about meeting with the DOE and some congressional-level folks. At that point, we're just kind of waiting to see if the DOE has determined when they want to move ahead. Are we still kind of in the same spot, or do you see anything starting to loosen up finally?

Yes. We're pretty much still in the same position. They've added a Secretary of Energy, but all of the appointments at Department of Energy, in the middle, are still tied up in Senate confirmations. It's part of -- one of the problems that exist. So what you have is the Assistant Secretary for Environmental Cleanup and his staff at the political level are still in limbo. So that's one of the -- we continue to see the -- that stalemate hurting decisions at Department of Energy. So there is a real -- there's still -- even though you have top leaders, the top leader with the Secretary, you still lack the in-between, and because of that, there's -- politically, it's -- the department is still lagging because of the delayed appointments.

[Operator Instructions] Our next question comes from Robert Manning, a private investor.

Do I understand, from the 10-Q, that you have a little bit over $10 million in borrowing capacity right now based on eligible collateral?

That...

Well, right now, as of September 30.

September 30, correct. Yes.

Yes. Now, the -- you're fairly close to some of your covenants. How's the bank feel about that? What could happen to change that amount of borrowing availability?

Well the borrowing availability is directly tied to our receivables. So...

I understand that, yes.

Yes, so long as the business maintains the availability, we'll be fine. The covenant issued a bank, again, like in the past, we've been with PNC Bank for over 12 years now, and so the covenants have been written for the company at a size it was perceived to be back when we did the acquisition 2 years ago. So we are constantly in communication with them to make sure the covenants are accurately reflecting our business state. So we're comfortable that the bank works with us regardless of the results of the covenant.

Yes, yes. Shifting to the political realm now, the change in the filibuster posture in the Senate, is that likely to help at all with some of this backlog of appointees, specifically, I guess, our Assistant Secretary for Environmental Cleanup?

We would hope so. What we've seen with the new budget, I think, one thing, it should help. Because the uncertainty is a serious a problem as cutting the funding and maybe even more serious. And with the new effort to put a 2-year budget in place, we're real pleased with that. That will stop this on-and-off process that -- DOE is probably one of the worst going through that process because of the risks of its business. And so that it does not want to be put in a position of having a problem, so it is very conservative, in general, in the approach it takes. So with a 2-year budget, that could have a fairly dramatic effect on being able to do work on some of these sites. The appointments, we'll have to wait and see. I mean, there's actually been movement on several appointments, and we'll see if the new love fest translates into [ph] new appointments.

Now assuming that the Senate is going to vote for this 2-year budget, which it looks like they will, the battle now shifts to appropriations, Harold Roger's committee and Barbara Mikulski's committee. How important is that, and what is the attitude of their committees towards money that might be allocated towards cleanup? Or is that not important there that all of those decisions are made within the DOE?

Well you saw that the head of that conference committee was one of the strongest proponents of the cleanup in terms of...

Yes, but she's not involved directly in the appropriations. She's budget.

The point I always made about the politics of this program is that, one, if you -- it has very strong bipartisan support. The sites, if you look at the politics of almost every site, it's fairly strongly Republican. And so you have very strong local pressure on the sites -- highly educated sites that understand the risk they're at and put and know how to develop the system. So the program, overall, through all these years, when you look at the budget allocation for the cleanup, it's been -- it's varied a little bit, but it's been very steady between $5 billion and $6 billion a year. So we think you'll continue to see support, and the only issues then become -- would it hurt us more not so much the overall size of the budget, but more of the size of 2 of the construction projects that are going on? One is MOX and the other is the WTP, the Waste Treatment Plant at Hanford. So those 2 have consumed -- and several other construction projects, so they've consumed a big part of the budget.

Are they likely to consume less now in the near term? Or do we have to wait until 2020, or whenever it's done?

That's a good question, and we -- now, it's -- goes back to the leadership and what their priorities are at this point. We've seen a little bit of easing up of the waste -- at the waste treatment plant, diverting funds. I'm not -- I wouldn't predict that's going to become extremely significant. I think the DOE's still very focused on trying to get that plant constructed in the midterm not the short term.

Well, bottom line, of the flavor, it does feel better.

There are no further questions in queue at this time. I would like to turn the call back over to Dr. Centofanti for closing comments.

Well, thank you, all, very much. We'd like to thank you, all, for taking part in it. Again we've achieved positive EBITDA, 2 consecutive quarters in a very challenging environment. Our treatment backlog is up from the second quarter, and we see a lot of opportunity right now in terms of the Service side. So hopefully, I'll be able to be on the next call, and as we look ahead to '14, be a lot more positive. So thank you, all, very much.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.