Aug 8, 2012
Operator
Greetings and welcome to the Perma-Fix Environmental Services, Inc. Second Quarter Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host David Waldman of Crescendo Communications.
Thank you. Mr.
Waldman, you may now begin.
David Waldman
Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services second quarter conference call.
On the call with us this morning are Dr. Louis Centofanti, Chairman and CEO, and Ben Naccarato, Chief Financial Officer.
The company issued a press release this morning containing second quarter 2012 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.
David Waldman
I would 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 facts are forward-looking statements that are subject to known and unknown risks and uncertainties and other factors which could cause the 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.
David Waldman
I’d now like to turn the call over to Dr. Louis Centofanti.
Please go ahead Lou.
Louis Centofanti
Thank you, David, and welcome, everyone. We achieved the year-over-year sales growth and generated positive EBITDA for the quarter despite a very difficult funding environment at DOE as well as some legacy contracts we inherited from SEC that hurt our results.
I'll address both these topics in some detail as well as our growth initiatives which have positioned us for a stronger second half and a much stronger year in 2013.
Louis Centofanti
As we anticipated and we discussed on the prior call, our results were impacted by several factors. First, our treatment segment was extremely weak in the first half of 2012 as we processed a lot of our backlog.
DOE has -- what we have seen is redirected some funding towards several large projects we are not currently involved in such as the rectification plant at Hanford. This has temporarily delayed some of the funding both for our waste treatment projects and our service work at Hanford and other sites.
Louis Centofanti
Heading into the third quarter, our treatment segment is starting to pick up and we expect a much stronger second half of the year. Second factor impacting our results was, again back to DOE, they've been slow to award service contracts in the present environment.
For example at Los Alamos we were one of just 3 bidding teams for each project that was awarded the right to bid on approximately $450 million of task orders over the next 3 years.
Louis Centofanti
Though we expected to hear from DOE by now, the final task orders -- no task orders has still been issued. But we still feel we are very well positioned on that master task order bid.
Louis Centofanti
In total what we see out there is quite substantial. As we sit today we are bidding on approximately 25 contracts in our pipeline worth approximately $600 million.
It could easily double the size of our service business over the next couple of years even if funding at DOE remains tight.
Louis Centofanti
Turning to the acquisition of SEC we have dramatically expanded our service capabilities. We are bidding on a much broader scope of work.
As previously discussed, we've hired key people in business development. We assembled a thorough database on projects throughout the nuclear service industry and completed a series of strategic alliances that have provided us resources to grow our Service business and gain market share.
Louis Centofanti
As a result our sales force have been extremely active. Our pipeline, as I mentioned earlier, is more robust than at any point in the company’s history.
We have completed the integration of the 2 organization and implemented staff reductions at the end of June as we look to rightsize the organization. As a result of the integration of the combined organizations we were able to reduce back office and support functions by approximately $2 million a year.
Louis Centofanti
In addition, we have further initiated reductions at the end of the second quarter reducing our cost by $1.2 million per quarter, which is approximately 10% of our fixed cost base. We expect to realize the benefits of these cost saving measures in the second half of the year.
We are also in the process of completing a larger mediation contract we inherited from SEC which was a fixed price contract with cost overruns. We expect this project to be completed in the second half of the year at which time SEC's service business should become accretive.
Louis Centofanti
We are also taking steps to out step some of these unanticipated costs related to this contract. Also as disclosed in our 8-K on July 18 we have notified the former owners of SEC that we believe we have a claim against their reps warranties and covenants and plan to enforce our rights under the agreement.
Nevertheless the integration of 2 companies has progressed well. We are very excited about our expanded capabilities and the outlook for the future of Perma-Fix in this industry.
Louis Centofanti
On another -- an added subject, we also will continue to move forward with our new medical isotope production process. We have completed the design of the generator which uses our technology.
We are continuing to run successfully hot fuel [ph] tests with positive results. And we have continued to develop intellectual property for the actual production of the moly that goes into the generator.
All of these lead toward an eventual submission of an FDA application. And we will be announcing more details in the very near future.
We’ve initiated discussions with key industry players in the medical field and again also looking forward to announcing additional milestones in the months ahead as various talks progress.
Louis Centofanti
Just to wrap up we have faced a number of headwinds in 2012 and continue to feel the effects of delays and redirected government spending in both Treatment and the Service segment. The biggest issue we face in the remainder of 2012 is the timing of awards.
However, a strong balance sheet at the end of 2011 has helped us weather the current market.
Louis Centofanti
Due to the delays in DOE issuing new service contracts and the time it takes to ramp up and generate revenue we also feel that our projections were a little -- for revenue were a little too high and we feel more comfortable today projecting revenue for this year in the $130 million to $140 million range, although that could change quickly if any material contracts are awarded in the next few months.
Louis Centofanti
In the meantime we’ve implemented cost reductions I mentioned earlier to deal with the lower level of revenue. Regardless of the budget cycle, treatment and on site work needs to get done.
The Treatment segment is picking up as we head into the third quarter and we’ve invested considerable resources in expanding our bidding organization, which should allow us to grow our Service segment and gain market share in any environment. We expect these initiatives will bear fruit in the second half of the year and will allow us to enter 2013 in a very strong competitive position.
Louis Centofanti
For this reason we remain confident we can grow Perma-Fix to the $200 million to $300 million range over the next few years. With that I would like to turn the call over to Ben, who will go into more detail and then we will be back to answer questions at the end of our formal remarks.
Ben?
Ben Naccarato
Thank you, Lou. Let me begin with revenue.
Our total revenue from continuing ops for the second quarter was $34 million compared to $28.9 million in the second quarter of 2011, an increase of $5.1 million or 17.5%. Revenue from the services segment increased by $12.7 million or 112.2%.
Revenue from the Safety and Ecology acquisition totaled $17.3 million but was offset by reductions in revenue at our Hanford contract of $4.6 million. The drop at Hanford relates to the reduction in scope on the Plateau Remediation Contract resulting in lower headcount at the time -- and on this time and materials contract.
Ben Naccarato
In our Treatment segment, revenue decreased by $7.6 million or $43.1%. This decrease was directly related to continued shortfall in waste received from our government customers primarily the DOE sites.
So the value of our shipments received was down 62% [ph] compared to prior year. Of the revenue recognized much of the revenue was high volume of lower margin low level waste.
Similarly over the 6 months ended June 30th our revenue increased 37.2% with $35.9 million received from the SEC acquisition, but offset by lower revenue of $9.3 million and $7.1 million from the Hanford and Treatment segment respectively.
Ben Naccarato
Turning to cost of goods sold, our total cost of sales was $30.2 million in the second quarter compared to $20.9 million in the prior year. Cost of sales from our services segment was up $12 million from prior year.
$16.3 million of these were from the SEC acquisition while the Hanford costs were down $4.2 million primarily due to lower labor cost.
Ben Naccarato
Our Treatment segment costs were down $2.7 million due to the variable expenses related to decreased revenue and lower payroll expenses related to headcount reductions made in the latter part of the second quarter in 2011. Our gross profit for the quarter decreased by $4.3 million coming in at $3.8 million or 11.1% of revenue compared to last year where it was $8 million or 27.8%.
Ben Naccarato
Our gross profit from Services segment increased by $609,000 as the SEC acquisitions contributed a $1 million of gross profit at 6% of gross revenue offset by reductions from the Hanford contract of $393,000. Gross profit in our Treatment segment decreased by $4.9 million and the gross margin was 10.8% compared to 33.9% in the prior year.
Lower revenue and lower margin waste mix in the Treatment segment contributed to the shortfall, although we did see lower fixed expenses as a result of the reduction enforced in the latter part of the second quarter of 2011.
Ben Naccarato
Our G&A costs for the quarter were $4.6 million or 13.5% of revenue up from $3.4 million for 11.9% of revenue last year. Costs associated with the SEC acquisition totaled $1.2 million and also included a write off of approximately $117,000 related to our shop registration which expired on June 26, 2012.
Ben Naccarato
Loss from continuing operations from the quarter was $1.1 million compared to income of $2.6 million last year. Loss applicable to common shareholders was $1.3 million compared to last year’s net income of $2.5 million.
Total loss per share for the quarter was $0.02 compared to earnings per share of $0.05 last year. And our adjusted EBITDA from continuing operations for the quarter was $491,000 compared to $5.4 million last year.
Ben Naccarato
Turning to the balance sheet. Our total cash from year end is down $10.8 million primarily from $9.1 million of cash used for operation.
Much of the cash balance in 2011 related to upfront invoicing which related to our backlog or unearned revenue of $14.6 million. Significant cash has been used to process waste in 2012 and the slowdown in new waste shipment has impacted our cash balance.
Ben Naccarato
Our finite risk sinking fund increased by $1.9 in our balance now sits [ph] at $21.3 million. Our backlog was down by $8.7 million to $5.9 million, this decrease was a result of processing significantly more waste than we are receiving in the quarter.
Our total debt sits at $17.6 million of which $15.3 is from our P&C financing agreement.
Ben Naccarato
And our working capital dropped by $2.6 million ending the quarter at $9 million. Finally, our cash flow I will summarize, as I mentioned cash used in continuing ops was $8.7 million.
Cash used by discontinued ops was $372,000. Cash used for capital spending was $387,000.
Cash used from the SEC acquisition escrow account was $1.5 million. Cash used for the finite risk payment was $1.9 million, and cash used for financing of our continuing operations was $926,000.
Ben Naccarato
Operator I will now open the call for questions.
Operator
[Operator Instructions] Our first question comes from Gregg Hillman from First Wilshire Securities Management.
R. Gregg Hillman
Just a couple of questions. First of all, when you make those medical isotopes, did you use the cyclotron?
Louis Centofanti
No. We use a research reactor or a commercial reactor.
R. Gregg Hillman
And is that a big capital cost? How much is the cost if a hospital was going to buy one of those things?
Louis Centofanti
No, 0 because the materials are made in research reactors basically for a fee or a commercial reactor for a fee. So you take a sample, you irradiate it in either your research reactor or a commercial reactor.
R. Gregg Hillman
Okay. And then also -- and then I want to ask you about that pipeline [ph] of $600 million in a potential market side, how much of that is commercial and how much of that is government, either DOE or military?
Louis Centofanti
It’s 2/3 government, either Corps of Engineers, Department of Defense, or Department of Energy, or NIH.
R. Gregg Hillman
And the rest of the government -- what kind of customers are the commercial customers?
Louis Centofanti
Nuclear utilities, hospitals, research enrichment facilities, international.
Operator
[Operator Instructions] We do have another question coming from Robert Brous from Wunderlich Securities.
Robert Brous
The $600 million potential pipeline, that would be over a 5-year period, a 10-year period?
Louis Centofanti
That’s over approximately a 2-year period, and the comment I would make about that pipeline, number one, is that we just don’t bid on anything. We look for things where we see an advantage.
That’s one positive. The second is we do have partners on most of those bids.
So that isn't necessarily all our percentage and it would be difficult to try to break all that out. But, we see it as -- as I said it’s as strong as it’s ever been.
Robert Brous
So on most of that, you are designated sub?
Louis Centofanti
We could be the upfront or we could be a sub. It’s all the above.
We are bidding projects where we're the lead.
Robert Brous
And that percentage onsite versus treatment?
Louis Centofanti
That’s all onsite. Now the treatment is separate.
Operator
I will now turn the call back to management for closing comments.
Louis Centofanti
Thank you all very much. Look forward to the next call.
I'm sure it'll be more positive. So we will talk to you then.
Operator
Thank you. This does conclude today’s teleconference.
You may disconnect your lines at this time and have a wonderful day.