Sep 23, 2008
Executives
David Waldman - Crescendo Communications Dr. Louis F.
Centofanti – President and Chief Executive Officer Steven T. Baughman - Chief Financial Officer
Analysts
Robert Braus – Wunderlich Securities Dennis Scannel – Rutabaga Capital Walter Schenker – Titan Capital Ronald Rubin – Private Investor Al Kaschalk – Wedbush Morgan
Operator
Welcome to Perma-Fix’s second quarter fiscal 2008 fiscal earnings call. (Operator Instructions) I will now turn the call over to David Waldman with Crescendo Communications.
David Waldman
This morning we have Dr. Lou Centofanti, Chairman and CEO, and Steve Baughman, Chief Financial Officer.
The company issued a press release this morning containing the second quarter financial results, which is posted on the company’s website. If you have any questions after the call or would like additional information about the company, please contact Crescendo Communications at 212-671-1020.
I would also like to remind everyone that certain statements contained within this conference call may deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements on this conference call other than statements of historical facts 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 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.
With that taken care of, I would now like to turn the call over to Dr. Lou Centofanti.
Dr. Louis F. Centofanti
As you know, this quarter has probably been one of the most eventful quarters in the company’s history, the biggest event being the RC winning at the Hanford Plateau Contract. Before I get into that, though, we just had another event occur here that I would like to announce, because of its importance.
We just completed funding approximately $7.0 million refinancing from PNCR Bank as part of our $25.0 million credit facility. The new note is a 4-year loan amortized over 7 years, bears an interest of prime +1%.
These funds are in additional to our $18.0 million revolver capacity and will provide supplemental liquidity in the forms of working capital and capital investment in future growth of the company. So we’re very pleased with PNC’s continued faith in us and what we’ve been doing.
The big event of the quarter, of course, was our team winning the Plateau Contract at Hanford, that we announced in June. As I have discussed in the past, we have been very active in the bidding process for on-site management projects at DOE and we are pleased to report in June that our M&EC division was part of the consortium that won the Plateau Remediation Contract at the Hanford site in Richland, Washington.
The project is to clean up the legacy waste that is the result of decades of plutonium production for the U.S. Defense Program.
It is basically a cost-plus award sheet contract with a base period of five years and the option to renew for an additional five-year period. As a subcontractor to the project, our M&EC subsidiary will provide waste facility operations expertise in support of the team’s mission to perform remediation clean up and waste management activities for the DOE.
In addition, our Perma-Fix Northwest facility, located adjacent to the Hanford site, will also provide local support for the contract. Playing a role in the monumental Hanford clean-up project along side some of the major players in the industry is particularly gratifying for us at this moment.
And really, as I said earlier, is a major turning point for us. Although the contract has now been awarded and we are past the protest period, the project will not actually begin until October 1.
We are presently in the transition period of the contract so the impact on the company will be minor until really 2009. We will see some revenue in the fourth quarter but basically the major impact is 2009.
The dollar amount of the contract for the team as a whole was $4.5 billion over ten years. The exact dollar amount of revenue that we will derive is very difficult to determine at this time, but as we look at our scope and our parts of the project, we expect to recognize approximately $40 million to $50 million per year for both the on-site work, we’re working on the Hanford reservation, and for off-site work we will do under this contract at our Richland facility.
So we are very excited about this project. Right now our major focus is staffing up the project and putting in place the right team to basically hit the ground running on October 1.
We will have approximately, when we’re fully staffed up on this project, about 250 additional employees. As the on-site work continues to be our major focus for us moving forward, and again, as I’ve mentioned in the past, we are continuing to bid on additional projects for on-site management and watching for new opportunities on the on-site management side.
Now we will turn to our results for the quarter. Revenues within our Nuclear segment increased by 17% over the period last year.
This included sales from our Perma-Fix Northwest facility at Hanford, which was acquired in June 2007. We are very pleased with this despite, as we’ve talked about over the last year, the industry-wide slow down that we’ve seen throughout DOE.
Another milestone for the quarter was that we did receive our draft permit from EPA for PCBs. And I know, you’ve all asked and you’ve all heard this many, many times, but we are making progress, although fairly slow, but we’re now within sight of a permit here, we think.
And we expect over the next several months that we should see a permit. Once the permit is issued we will be in a very formidable position as the only commercial entity authorized to treat this type of waste in the U.S.
And as I’ve said in the past, we have good reason to believe there is substantial government and commercial backlogs of these type of waste. Also pleased to report that we completed the sale of our Tulsa industrial facility.
We sold it for $1.5 million in cash subject to certain, of course, working capital adjustments and assumptions of somewhat liability. We have now sold three of our industrial facilities, which leaves us with Fort Lauderdale, Orlando, and Valdosta, Georgia.
The ones we have sold were major underperforming facilities and the sale of these have taken a major burden off our management in terms of focus and time and has allowed us to put more time and focus on the nuclear side. The remaining facilities, Valdosta, Fort Lauderdale, and Orlando, are operating in a positive mode, combined, and generating good cash flow and although we are committed to selling these facilities they are presently not a drain on the company and not a distraction and we’re really looking for the best opportunities with them.
As I’ve always mentioned, we’re continuing to look for new opportunities on the treatment side, on the service side and to grow the company and that is continuing from all those areas we’ve talked about in the past. As the wrap up, recent deal we audit, this operation is estimated that the cost to DOE to complete the clean up that they’ve started will probably eventually reach over $300.0 billion at the 25 sites where weapons were manufactured and it will take at least until the year 2062 to finish the clean up.
That’s $50.0 billion more than the last time they reviewed it and as we watch this we think this is probably still underestimated. We have got the technologies, we have got the experience, this new contract gives us a whole new bag of tricks to handle, treat, and deal with DOE’s problems.
We are very excited, we see tremendous opportunities right now. We think the company has never been better positioned to be the, or one of the, major players in the nuclear field cycle in terms of clean-up and handling nuclear waste.
And we’re really excited about where we are at the moment and what lies ahead. I think for the next year you’re going to see some fairly dramatic results because of what happened in this quarter.
With that, I will turn it over to Steve Baughman to talk a little more about the numbers.
Steven T. Baughman
I will now take a moment to go over the results in the quarter. Starting with the income statement, total revenue from continued operations for the first quarter were $15.8 million versus last year same quarter of $13.5 million.
The Nuclear segment realized revenue growth realized revenue growth of $2.0 million, or 15.4 %, for the quarter versus the same period last year. Excluding our Hanford operation, revenue decreased by $1.2 million.
As we mentioned in our press release results [inaudible] we have seen a slowdown in DOE work during the quarter. Total cost of sales of $10.9 million in Q2 versus last year’s $8.7 million for the same period.
Nuclear costs exceeded costs exceeded last year by $2.2 million mainly due to costs generated at our Hanford facility. Nuclear cost of sales excluding Hanford was flat compared to last year.
Gross profit for the quarter was $4.9 million, or 30.9% of gross revenue, versus last year’s $4.8 million, or 35.5%. The decline in gross profit was due to lower volume and lower margin projects compared to prior year.
Total sales and admin costs in the quarter were $4.0 million versus last year’s $3.8 million. Our Hanford facility accounted for $716,000 in admin costs.
Income from continuing operations for the quarter were $399,000 versus $752,000 last year. The loss from discontinued ops was $49,000 versus income from discontinued ops of $470,000 for last year, same quarter.
Net income was $458,000 versus last year’s net income of $1.2 million. Net income included a gain on the sale of Tulsa of $108,000.
Segment profit for Nuclear was $1.8 million versus $2.3 million last year. Our Engineering segment generated $134,000 in segment profit versus $43,000 last year.
Total earnings per share for the quarter were $0.01 versus $0.02 last year. Year-to-date earnings per share were $0.03 if you include the pick-up of $0.04 per share from the disposal of discontinued ops.
Now moving to the balance sheet, paid receivables decreased by $4.4 million from year end. Our Tulsa receivables, which were the slowest part of the divestiture, totaled $674,000 and DSSI’s receivables dropped by $2.1 million, mainly due to the receipt from a large customer.
Increased collection efforts at our M&EC and Hanford facilities also impacted the reduction. Unbilled receivables decreased by $1.3 million from year end due to increased billing at M&EC.
Current assets related to dis-ops decreased from $5.2 million at year end to $2.0 million at quarter end due to the sales of Maryland, Tulsa, and Dayton’s trade receivables as part of the asset sales. DP&E related to dis-ops decreased due to the sale of Maryland, Tulsa, and Dayton’s fixed assets.
Finite Risk sinking fund increased from $6.0 million at year end to $8.8 million at the end of Q2. $1.1 million of this points toward our annual contribution to the sinking fund and $1.7 million went toward the Hanford facility’s sinking fund.
Current liabilities decreased due to the re-class of the PNC revolver and term debt from current to long-term. In addition, we paid down about $4.5 million in debt in the first half, primarily with the proceeds from the sales of our industrial group, mainly Dayton, Tulsa, and Maryland.
Now moving to the cash flow statement, I am just going to give you a quick overview since you haven’t seen it yet. We’ve got it done so I thought I would just share some of the information with you.
Cash provided by operating activities was $3.7 million year-to-date versus $4.8 million last year year-to-date. Cash provided by investment was $3.8 million, namely due to the proceeds from the sales of Dayton, Tulsa, and Maryland, which were offset by Finite Risk sinking fund payments.
Cash used in financing was $7.6 million, the majority of which was principal payments on long-term debt. Our working capital position at quarter end was a negative $(9.9) million, which includes working capital at our discontinued ops as compared to negative working capital at December 31, 2007, of $(17.2) million.
As I mentioned, our path forward at the end of last quarter was we were going to secure additional financing with PNC, which, as Lou mentioned, we succeeded in yesterday by adding $7.0 million in funding from our term note. We are going to continue the sale of our industrial segment which should generate additional liquidity.
And then finally, we expect to generate additional working capital and positive earnings for the remainder of 2008. EBITDA for the quarter was $1.9 million versus the same amount last year, same quarter.
With that I am going to turn the call over to questions.
Operator
(Operator Instructions) Your first call comes from Robert Braus - Wunderlich Securities.
Robert Braus – Wunderlich Securities
Do you have any idea what the split might be on the $40 million to $50 million on management versus treatment?
Dr. Louis F. Centofanti
It’s very difficult to break it up at this point. There’s a lot of flexibility and until we really get into the contract, it’s kind of hard, but it’s 50/50 60% management, 40% off-site, something like that.
But it’s very difficult for us to break it up right now.
Robert Braus – Wunderlich Securities
Do you have a better handle on the margins for the management side, or you won’t know until sometime in October?
Dr. Louis F. Centofanti
We really won’t know until we get into the project. Again, the whole thing has a lot of ifs, ands, and buts, and until we get into it it’s kind of hard to judge it.
And the numbers we gave you I think are pretty realistic. Management fees on the on-site may be, and again, this is based on performance so it’s difficult to give you numbers but it could be 6%, 8%, bottom line.
Robert Braus – Wunderlich Securities
And of an addition, besides the 250 employees you are going to add, do you have any estimate as to how much G&A you are going to be able to associate with the Hanford contract?
Dr. Louis F. Centofanti
We should be able to sort some of that G&A but again, it’s until we get into it it’s not clear.
Robert Braus – Wunderlich Securities
So the next conference call you will have a much better handle on it?
Dr. Louis F. Centofanti
We hope so.
Operator
Your next question comes from Dennis Scannel - Rutabaga Capital.
Dennis Scannel – Rutabaga Capital
Just to get a little more clarity, the 6% to 8% bottom line margin you’re talking about for the management portion, is that an EBIT number, is that a net margin number?
Dr. Louis F. Centofanti
That is net.
Dennis Scannel – Rutabaga Capital
So all your expenses and any debt you would associate with that contract?
Dr. Louis F. Centofanti
There’s not much debt, that wouldn’t be included, but everything else would.
Dennis Scannel – Rutabaga Capital
And on the part that would be actually treating the waste, flowing through M&EC, would that be that traditional kind of 35% to 40% gross margin or again, would the margin structure likely be different?
Dr. Louis F. Centofanti
That would be under our normal contract, normal rates.
Dennis Scannel – Rutabaga Capital
Of the 250 incremental employees, can you talk a little bit about how you would be phasing them in? Will we see 250 new FTEs at December 2008 or will they phase in through 2009?
Dr. Louis F. Centofanti
You put in a management team over the next couple of months of 10 people. Then on October 1 you add 220 people.
They are basically already there. We will pick up the existing teams that are operating the facility.
Dennis Scannel – Rutabaga Capital
And just in terms of thinking of how you kind of manage those incremental costs as the project ramps, so we will see a boost in your labor cost, I guess some of that will flow through cost of goods and some might be in SG&A and will there be revenues to offset that? I know the revenues will kind of increase more in 2009.
Dr. Louis F. Centofanti
No, any costs we incur in the fourth quarter, after the contract starts, are covered by cost-plus-revenue.
Dennis Scannel – Rutabaga Capital
The beauty of cost-plus.
Dr. Louis F. Centofanti
The beauty of cost-plus.
Dennis Scannel – Rutabaga Capital
A couple of other quick little things. Steve, on the $180,000 gain for Tulsa, did that flow through the discontinued operations net line?
Steven T. Baughman
Yes, it did.
Dennis Scannel – Rutabaga Capital
So the unit shows a $49,000 loss. We’re not talking a lot, but still we had discussed that those three remaining units are at least cash-flow positive so does that mean that they will continue to lose money at the net line?
Dr. Louis F. Centofanti
No, I think what we will start to see is that actually we will be making money at the net line because the operations that are left over, which is primarily in Florida and Georgia, we expect to be profitable going through the rest of the year.
Steven T. Baughman
To expand on what Lou said, we don’t see any drag from industrial going forward.
Dennis Scannel – Rutabaga Capital
Could you split out for me, at quarter end, what the actual debt was that would be in the current liabilities as well as in your kind of bulk long-term liabilities?
Dr. Louis F. Centofanti
We have got IRS debt, about $3.0 million.
Dennis Scannel – Rutabaga Capital
And that’s in the current?
Dr. Louis F. Centofanti
That’s current.
Dennis Scannel – Rutabaga Capital
And then on the long-term side?
Dr. Louis F. Centofanti
Long-term is just our revolver with PNC.
Dennis Scannel – Rutabaga Capital
And the total there is now?
Dr. Louis F. Centofanti
$5.4 million.
Dennis Scannel – Rutabaga Capital
Now what happened to that Keybanc note? Have you guys paid that off?
Dr. Louis F. Centofanti
No, we still have that and that’s in current. We have another two years on it.
And we owe $2.0 million on it.
Dennis Scannel – Rutabaga Capital
So is it fair to say total debt at the end of the quarter was $10.4 million? $2.00 Keybanc, $3.0 million IRS note, and the $5.4 million drawn on the revolver.
Dr. Louis F. Centofanti
Yes.
Dennis Scannel – Rutabaga Capital
And pro forma we add another $7.0 million that you’ve just extended on the term note but you’ve accepted that cash.
Dr. Louis F. Centofanti
What we’re going to do with that, those funds will go to pay off the revolver. So we will have obviously availability in the revolver so you shouldn’t really see a change in our debt structure.
Operator
Your next question comes from Walter Schenker - Titan Capital.
Walter Schenker – Titan Capital
Going back to the provisional permit on PCBs and trying to understand what goes wrong from here to there, what’s left to do and have there been any technical complaints, long-term, about that provisional permit to this point?
Dr. Louis F. Centofanti
The draft permit is issued, we had a public hearing, we have not heard anything of significance, either in the public hearing. The questions that came up in the public hearing from some of the people interested in our facility, we’ve given them tours, given them more data.
We think everyone has been satisfied. The next step is when the comment period ends, here in two weeks.
We will then sit down with EPA one last time and if they have any comments or questions or issues, review them and probably, my guess would be within a month after that, after the end of the comment period, we hope to have a final permit. Now the way it works is it won’t be effective for another month after that.
So within about two months we could have our final permit. Or we could actually be treating waste.
And we don’t see any roadblocks at the moment. I mean, nothing has come up that would indicate a problem for EPA or anything else.
Walter Schenker – Titan Capital
And just to reiterate things you’ve said before, while you will ramp as a function of your success in treating them and your learning curve in treating them, you have a backlog of PCB-tainted waste, which will allow you, once you are allowed to operate, to start and move up as you feel comfortable to a reasonable level of treatment of PCB waste once you in fact start that process.
Dr. Louis F. Centofanti
We have in storage waste we can already treat. And we have identified a lot of waste in both DOE and commercial that we will immediately go after.
And we already have, it’s just there’s not a lot of value in trying to move it to our facility and plug up our facility until we’re able to treat it.
Walter Schenker – Titan Capital
And this process should be at least as profitable as any other incremental volume through that facility?
Dr. Louis F. Centofanti
The treatment unit operates at about 50% capacity today. If we could double our throughput, the cost of treating extra waste is minimal.
So initially it should be a very profitable operation.
Operator
Your next question comes from Ronald Rubin - Private Investor.
Ronald Rubin – Private Investor
Believe it or not, I think I spoke to you about 15 years ago. I have been a shareholder for many years.
Dr. Louis F. Centofanti
Well, thank you for the confidence and sticking with us.
Ronald Rubin – Private Investor
I was just wondering, obviously we have been trading in such a narrow range for such a long time, are we creating any excitement with this news to try and get the word out there and build our share price up a little bit?
Dr. Louis F. Centofanti
As I had one other fairly sophisticated investor call me about a month ago and say, “You know, I’ve been with you now for six years and I look back at what your balance sheet looked like and what you were doing then and what you’re doing today, and the stock price is about the same.” So there has been tremendous improvement both in the basic numbers and our position.
I can only say, as I sit here today, I think this thing is worth a lot, lot more. You could just never duplicate what we have, what we’ve put in place, for the value of this company.
So I think it’s worth a significantly higher price. And I think as we go into 2009 you’re going to see it on fundamentals.
I think you’re going to see numbers on the revenue and earnings side that should support a much higher price. Whether you look at this from a strategic point of view, if you are a major nuclear company trying to get into the U.S.
market, you could never duplicate what we have for the value of this company, at two to three times our value right now. So I think it’s there, the value is there, it’s not been recognized.
But I think over the next year we should be able to see some of that value continuing to come out.
Ronald Rubin – Private Investor
I guess we have a market maker out there that is promoting the stock?
Dr. Louis F. Centofanti
Of course, David Waldman has been promoting it with me. And we have a variety of market makers.
We still don’t have an analyst. One of our problems has been that we were so small, up to today, that the analysts have shied away from us.
But we have four or five that have been following us closely that are in the space and my hope is to have an analyst here in the very near future that could really lay out the story better than we can, independently of us.
Operator
Your next question comes from Al Kaschalk - Wedbush Morgan.
Al Kaschalk – Wedbush Morgan
I was wondering if you could just comment, you mentioned the DOE slow down over the past twelve months or last couple of years probably. Where are we at going forward here on the next cycle and when is the time frame for awards under that cycle?
Dr. Louis F. Centofanti
There are several events that have been occurring that have negatively affected funding. In one sense DOE has a basic budget and 90% of it is committed to people and there is very little of a slush fund there.
And so when they cut the budget by a very small amount, it really hurts the whole operation. So what we’ve seen over the last year has been one cycle of bidding, which has slowed, really, the waste generation down.
Two, we’ve seen a stagnant budget. The President has continued to push to cut the DOE budget.
At the same time, Congress has come in and upped the budget. So there’s been a back-and-forth between the two of them.
So as we sit today, Congress did not pass the budget for DOE and that’s not necessarily bad because the continuing resolution that they will probably pass instead is not a too bad budget for DOE. It’s better than what the President proposed.
So as we sit today, it’s really going to depend on one, the new Congress coming in and how they fund DOE, because we’re sort of right on the edge of how much money they have. And on the other hand, it’s like winning this Hanford contract.
For us now, we’ve become a part of the slush fund that’s got to sit there and they’re going to have to pay those salaries no matter what to maintain the facility. So it’s going to be real important what happens with the DOE budget for waste treatment.
How much money will they have left over to send waste off-site? In one way they are continuing to try to focus on saving jobs and protecting making the facility safe, so that’s usually the first priority.
The second priority then is get waste off-site. So it will depend a lot on the new budget.
If it stays about the same we should be in good shape, which I think it will. I don’t think either candidate is going to propose cutting the DOE budget right now.
Al Kaschalk – Wedbush Morgan
If we assume that the budget was left relatively flat are there programs that you are looking at and have in mind the time frame over the next 12 months where those would be RFP’d or RPQ’d and awarded?
Dr. Louis F. Centofanti
All the new bids we’re doing are really in several areas. One is for the on-site work.
And they’re pretty well all programmed in. We have already bid on the thru-waste operations in Oakridge.
I think there were five teams that bid on that so we have a 20% chance on that, if you do simple arithmetic. We think, of course, we’re a little better than that.
Then you’ve got two or three projects, the Advanced Mix Waste Facility at Idaho, which we will one way or another bid on. And that’s one of our top priorities.
Then we have a couple other projects we’re looking at at this point that it’s probably better to not talk about until we get a little more into them. And then we have the other longer-term one that we’re looking at, is our high-level, high-activity project where we’re looking at options to move into high-level waste, high-activity waste, and that’s mostly through Hanford.
So, again, in about six to eight months when I can really talk about the details, if we’re successful in what we’re trying to do, it could become a very exciting project. Dwarfing a lot of the things we’re already doing.
Operator
Your next question comes from Dennis Scannel - Rutabaga Capital.
Dennis Scannel – Rutabaga Capital
Just a quick follow-up. Do you guys have a backlog figure for the end of the quarter?
And then kind of a question of how backlog will be recognized with the Plateau Contract.
Dr. Louis F. Centofanti
How it’s going to be recognized, there’s really two parts to that. Remember, that’s for waste brought into our facility.
So for the on-site work, I don’t believe there will be any backlog there.
Dennis Scannel – Rutabaga Capital
But as stuff is categorized and what, put on trucks to head to your Tennessee facility, that’s when it would go into backlog?
Dr. Louis F. Centofanti
Or into our Hanford facility. Either one.
As the waste goes into our facility then some fraction of it, depending on how fast it’s treated, will go into backlog.
Dennis Scannel – Rutabaga Capital
On the tank, the Hanford tank clean-up program that I guess went to Washington Group and Energy Solutions, are there any potential opportunities for you to provided services either through your Northwest facility or other facilities or are you pretty much shut out of that?
Dr. Louis F. Centofanti
We already have a contract there. We already provide services for waste treatment to some of the waste that comes off that project.
And then the second we’re working on is the high-activity, high-level waste which is directly related to the tank waste. So we’re looking at options for trying to provide DOE with alternatives for treatment of the tank waste.
Dennis Scannel – Rutabaga Capital
And would that treatment be done primarily in your Northwest facility, or also out in Tennessee?
Dr. Louis F. Centofanti
If we’re successful, they would not move that waste across country. So it would have to be done either at or on the Hanford reservation.
Operator
There are no further questions.
Dr. Louis F. Centofanti
We appreciate your support, especially you long-term investors out there. We appreciate your listening in and asking questions.
And look forward to giving you a further update at the next conference call.