Perma-Fix Environmental Services, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter report. Perma-Fix provides treatment and disposal of radioactive, mixed, hazardous and other waste, environmental and nuclear services, and medical-isotope technology research and development. The Medical Segment has not generated revenue.
Financial performance
Amounts below are in U.S. dollars; “m” means millions. Fiscal 2015 is the comparable period.
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $51.219m | $62.383m |
| Gross profit / margin | $7.084m / 13.8% | $14.351m / 23.0% |
| Operating income (loss) | ($15.792m) | $1.133m |
| Continuing-operations net loss | ($13.263m) | ($0.063m) |
| Net loss attributable to common stockholders | ($13.405m), or ($1.15) per share | ($1.050m), or ($0.09) per share |
| Cash from continuing operating activities | $1.063m | $1.744m |
| Cash from operating activities, including discontinued operations | $0.104m | ($1.118m) |
| Cash and total debt at year-end | $0.163m / $8.833m | $1.435m / $9.836m |
| Working capital | ($2.131m) | $2.966m |
- Revenue declined 17.9%. Treatment revenue fell 21.9% to $32.253m, primarily from lower waste volumes and delayed government shipments; Services revenue fell 10.0% to $18.966m.
- Treatment gross margin contracted to 12.4% from 26.4%; Services gross margin was 16.2% versus 16.3%. Consolidated gross margin fell as revenue declined and fixed costs were spread over lower volume.
- Year-end revolving borrowings were $3.803m, with reported additional borrowing availability of $1.748m, subject to borrowing-base and lender restrictions. The credit facility matures March 24, 2021.
Material changes and unusual items
- Following notice that its Oak Ridge lease would not be renewed, the Company decided to close M&EC at the lease end in January 2018 and transition work to other treatment facilities, subject to customer needs and regulatory approvals. The facility generated $4.419m of 2016 revenue, versus $6.591m in 2015.
- The M&EC decision led to $8.288m of permit impairment, $1.816m of tangible-asset impairment, a $0.587m prepaid-cost write-off, and a $1.626m increase in closure liabilities. The permit impairment generated a reported $3.203m tax benefit. The Company also re-estimated remaining asset lives and accelerated depreciation.
- Total accrued closure liabilities were $7.315m at year-end, including $3.058m for M&EC; $2.177m of M&EC closure costs was classified as current. The Company estimated approximately $3.058m of M&EC closure spending, including $2.177m in 2017.
- Discontinued operations reported a $0.730m loss, compared with $1.864m in 2015. Environmental remediation liabilities for discontinued operations totaled $0.925m, of which $0.677m was current.
- The 2016 net loss included substantial non-cash impairments. The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal controls.
Outlook, liquidity and principal risks
- Management expected remaining delayed waste shipments to arrive during the first nine months of 2017. It expects M&EC’s closure to reduce fixed costs and improve Treatment margins, but warns that other facilities may not be able to accept all transferred waste.
- Management stated that operating cash flows, credit availability and anticipated release of PFNWR financial-assurance funds should be sufficient for Treatment and Services operations for at least the next 12 months. This depends in part on regulatory approval and the expected 2017 release of funds: approximately $5.941m was held in the PFNWR sinking fund, with about $2.5m expected to be posted as collateral for a replacement bond and approximately $3.441m expected to be available to reduce revolving debt.
- The Company failed its minimum fixed-charge coverage covenant in each of the first three quarters of 2016; the lender waived each breach and amended covenant calculations and terms. The Company met the fourth-quarter requirement. At year-end it reported $1.250m of indefinite borrowing-availability restrictions, with another $0.750m restriction to apply upon receipt of the PFNWR funds. A future unwaived breach could permit acceleration of debt, and the filing cautions that liquidity might be insufficient to repay accelerated borrowings.
- Government-generated waste represented 53.4% of 2016 revenue, down from 57.9% in 2015. Government contracts may generally be terminated or renegotiated on 30 days’ notice. A Services customer, PSC Metal, contributed $9.763m, or 19.1% of 2016 revenue; its project was completed in December 2016.
- Medical Segment research was substantially curtailed in late 2016 for lack of capital. A proposed $10m investment was under negotiation after its letter of intent expired; no definitive agreement or funding was assured. The Company’s proposed 2017 commercialization path also depends on regulatory approvals.
- The $80m revenue and $9.3m EBITDA targets disclosed for 2017 are management incentive-plan benchmarks, not company-issued financial guidance. Management said achievement was likely but not assured.
- Other significant risks include dependence on limited nuclear-waste disposal options, environmental and closure obligations, permits and financial-assurance requirements, project timing and seasonality, competition and fixed-price cost overruns. The Treatment backlog was approximately $5.250m at year-end, versus $4.698m a year earlier; processing time may vary with waste complexity.
Most important facts for investors to verify
- Whether delayed government shipments arrived as expected and whether Treatment revenue and margins recover.
- Whether the PFNWR financial-assurance replacement and sinking-fund release were approved and completed, and how proceeds affected revolver borrowings and availability.
- Whether the Company continues to comply with lender covenants, including the fixed-charge coverage test, and whether restrictions or pricing terms change.
- Whether M&EC closure costs remain within estimates and transferred waste can be processed at other facilities without material revenue loss.
- Whether the proposed PF Medical financing closed, what terms and control effects resulted, and whether isotope R&D resumed or received required approvals.
- Whether discontinued-site remediation reserves, disposal costs and other environmental obligations prove adequate.