Perma-Fix Environmental Services, Inc. — FY2017 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2017; it does not provide a standalone fourth-quarter results summary. Perma-Fix treats hazardous, radioactive and mixed waste, provides environmental and nuclear services, and conducts medical-isotope research and development. Its Medical segment had no revenue.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $49.769 million | $51.219 million |
| Gross profit / margin | $8.620 million / 17.3% | $7.084 million / 13.8% |
| Operating loss | $4.736 million | $15.792 million |
| Continuing-operations loss | $3.538 million | $13.263 million |
| Net loss attributable to common stockholders | $3.680 million; $0.31 loss per share | $13.405 million; $1.15 loss per share |
| Cash from continuing operating activities | $1.089 million | $1.063 million |
| Cash at year-end | $1.063 million | $0.163 million |
Consolidated gross margin improved, but the company remained loss-making. Total operating cash flow, including discontinued operations, was $0.442 million. Investing activities provided $5.471 million, substantially reflecting release of PFNWR finite-risk funds; financing activities used $5.022 million. Cash increased by $0.900 million during the year.
At year-end, current assets were $17.313 million and current liabilities were $19.581 million, a $2.268 million working-capital deficit. Reported debt was $3.847 million, including $1.184 million current; there were no revolving-credit borrowings. Revolver availability was approximately $3.687 million, subject to eligible receivables, letters of credit and lender-imposed reductions. The credit facility matures March 24, 2021. The company met its 2017 financial covenants, though fourth-quarter fixed-charge coverage was 1.45:1 against a 1.15:1 minimum.
Material changes versus FY2016
- Revenue declined 2.8%. Treatment revenue rose 17.0% to $37.750 million, while Services revenue fell 36.6% to $12.019 million, primarily following completion of a $9.763 million nuclear-services project in 2016 and delays to another project in 2017.
- Treatment gross profit increased to $7.916 million from $4.015 million; Services gross profit dropped to $0.704 million from $3.069 million. Management attributed Treatment improvement mainly to increased volume and higher average waste pricing, and Services deterioration largely to lower project revenue and mix.
- Federal-government-related work accounted for 73.6% of revenue, up from 53.4% in 2016. Backlog of stored, unprocessed Treatment waste rose to $7.666 million from $5.250 million.
- Net loss narrowed substantially, in part because 2016 included $8.288 million of permit impairment and $1.816 million of tangible-asset impairment. 2017 included a further $0.672 million tangible-asset impairment at M&EC.
Outlook, management commentary, risks and unusual items
- M&EC closure: The Oak Ridge facility lease was extended to June 30, 2018, and closure was planned by then. The company recorded $1.400 million of additional closure costs in 2017; M&EC closure liabilities were $2.791 million, classified as current. Management estimated closure could eliminate $4–$5 million of annual fixed costs, while warning that customer needs, regulatory approvals and other facilities’ capacity could affect revenue retention and results.
- Liquidity plans: Management anticipated approximately $2.791 million of M&EC closure spending over the next 12 months and expected a conditional release of about $5 million from AIG-restricted funds in 2018, subject to insurer and regulatory approval. Management believed operating cash flow and credit availability could fund the next 12 months, but gave no assurance.
- Business outlook: The company cited government-budget uncertainty, contract timing and the 30-day termination or renegotiation provisions in federal contracts. It intends to pursue commercial and international markets and control costs. A large Services project that began in August 2017 was expected to continue until approximately June 2018.
- Internal 2018 targets, not a guarantee: Executive incentive plans used board-approved targets of $63.398 million revenue and $7.682 million EBITDA. These are compensation-plan benchmarks, not necessarily formal company guidance.
- Medical research: Medical-segment R&D remained curtailed pending capital raising; management said it would not resume full-scale activity until funding was obtained. Total R&D expense was $1.595 million in 2017, including $1.141 million for Medical.
- Tax and closure items: The 2017 tax benefit included $1.695 million related to the Tax Cuts and Jobs Act. Despite deferred tax assets, the company maintained a full valuation allowance against $10.259 million of deferred tax assets. Total accrued closure liabilities were $8.395 million; separate discontinued-operation environmental remediation liabilities were $0.871 million.
- Key risks: Dependence on federal work and government appropriations; project and customer concentration; permit, environmental-liability and closure obligations; limited disposal-site options; fixed-price cost overruns; credit-covenant and liquidity risk; collection and unbilled-receivable timing; and inability to finance Medical R&D. The filing also disclosed a 2017 employee-information security breach caused by an employee error, which the company said was not materially adverse.
- The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2017; the auditor did not attest to internal-control effectiveness. No litigation was identified that management believed would have a material adverse effect.
Important facts for investors to verify
- Whether M&EC closure was completed on schedule and within the recorded liability, and whether the expected $4–$5 million annual fixed-cost savings and conditional AIG fund release materialized.
- How much of the $3.687 million revolver availability remained accessible after borrowing-base limits, letters of credit and lender reductions, and whether covenant headroom remained adequate.
- Whether the increase in government-related revenue and Treatment backlog converted to processed work and cash collections, given the 73.6% federal-work concentration and elevated unbilled receivables.
- Whether Services replaced the completed 2016 project and delivered the project expected through June 2018 at acceptable margins; also monitor bad-debt expense and receivable collectability.
- Whether environmental closure and remediation estimates, disposal accruals, permits, financial assurance and the Medical segment’s funding needs changed after year-end.