Perma-Fix Environmental Services, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter report. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Perma-Fix provides hazardous, radioactive and mixed-waste treatment and disposal, and environmental, technical and nuclear services. Its Treatment and Services segments generated $42.3 million and $14.7 million of 2014 continuing-operations revenue, respectively. The company also owns 64% of Polish subsidiary Perma-Fix Medical S.A., which is developing Technetium-99m medical-isotope technology and had no revenue at year-end.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Continuing-operations revenue | $57.065 million | $74.413 million |
| Gross profit / margin | $11.908 million / 20.9% | $9.816 million / 13.2% |
| Operating loss | $1.719 million | $34.229 million |
| Loss from continuing operations | $2.992 million | $34.471 million |
| Net loss | $1.304 million | $36.039 million |
| Cash provided by (used in) continuing-operations operating activities | $0.661 million | $(1.696) million |
Net loss attributable to Perma-Fix common stockholders was $1.225 million in 2014, or $0.11 per share, versus $35.975 million, or $3.18 per share, in 2013. The 2014 continuing-operations loss was partly offset by $1.688 million of income from discontinued operations, including a $3.842 million gain on insurance recoveries.
At December 31, 2014, cash was $3.680 million, working capital was positive $0.757 million (versus a $2.498 million deficit in 2013), and total debt was approximately $11.372 million, net of debt discount. There were no revolving-credit borrowings; stated revolver availability was $7.402 million, subject to eligible receivables and a $1.5 million borrowing-availability reduction. The company reported total 2014 operating cash use of $1.432 million, because $2.093 million was used in discontinued operations. Investing activities included $5.727 million of insurance proceeds from discontinued operations.
Backlog at year-end was $9.228 million, up from $7.695 million. The Treatment Segment’s stored-waste backlog is subject to processing timing and waste complexity.
Changes versus 2013
- Revenue fell 23.3%. Services revenue declined $24.151 million (62.1%), principally following completion of the CHPRC subcontract, which contributed about $17.653 million in 2013, and other DOE-related contracts that were not replaced quickly enough.
- Treatment revenue rose $6.803 million (19.1%), mainly from a higher-priced waste mix and increased government-waste revenue. Treatment gross margin improved to 24.8% from 15.7%; Services gross margin declined to 9.7% from 10.9%.
- Gross profit rose $2.092 million, while SG&A declined $2.403 million. The 2013 results included $27.856 million of non-cash goodwill impairment charges; 2014 included a further $0.380 million charge related to the SYA divestiture. No goodwill remained at year-end 2014.
- The company sold its engineering and consulting subsidiary SYA on July 29, 2014, for approximately $1.36 million before transaction expenses and adjustments. The sale was reported in continuing operations.
- Cash and working capital improved, supported in part by PFSG fire-insurance recoveries, SYA sale proceeds and equity proceeds raised by Perma-Fix Medical S.A. These items are not equivalent to recurring operating cash generation.
Outlook, risks and unusual items
- Management said it believed operating cash flow and available credit would be sufficient to service obligations and expected to generate positive cash flow in 2015; it provided no quantified revenue or earnings guidance. Planned 2015 capital expenditures were approximately $1.1 million, subject to available funding and possible deferral.
- Government work represented 60.9% of 2014 continuing revenue. USEC generated 18.0% of revenue and CHPRC 10.1%. Federal contracts may be terminated or renegotiated on 30 days’ notice, and federal budget reductions could affect demand.
- Debt covenants are a significant liquidity risk. The lender waived first-quarter 2014 fixed-charge testing; the company met the revised ratio in quarters two through four. A future breach not waived by the lender could permit acceleration of debt. The credit facility was scheduled to mature October 31, 2016.
- Operations depend on environmental permits, licenses, insurance and financial assurance. Treatment disposal options are limited; delays or refusal by third-party disposal sites could increase costs and prolong collections. Environmental remediation liabilities for discontinued operations totaled $1.016 million at year-end, with no insurance or third-party recovery included in the reserve estimates.
- The 2014 discontinued-operations result included a $3.842 million PFSG fire-insurance gain and a $0.723 million asset-impairment charge. The company elected not to rebuild the fire-damaged facility and continued to market it for sale.
- The company revised 2013 balance-sheet figures to correct previously omitted deferred tax liabilities on acquired indefinite-lived permits. The adjustment increased opening accumulated deficit by $3.455 million and 2013 deferred tax liabilities by $3.915 million, with a $0.460 million increase in current deferred tax assets. Management said the revision did not affect 2013 cash, earnings or cash flows and was not material to previously issued statements.
- Management concluded that internal control over financial reporting was ineffective at December 31, 2014 because of a material weakness in income-tax accounting, attributed to limited in-house tax expertise and over-reliance on an outside tax firm. Management reported remediation efforts underway. The 2014 auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- Perma-Fix Medical S.A. reported post-year-end developments: a preliminary, conditional LOI for a proposed $1 million investment, and notification of potential Polish grant funding, including about $0.8 million allocated directly to the subsidiary. Both were subject to further agreements and approvals; they were not completed financing at year-end.
Most important facts for investors to verify
- Whether Treatment growth and margin improvement can offset Services contract runoff, and whether backlog converts to revenue and cash.
- Recurring cash generation excluding insurance recoveries, divestiture proceeds and subsidiary equity financing; also the collectability and timing of unbilled receivables, which reached $7.450 million.
- Debt-covenant compliance, revolver availability under the borrowing base, scheduled repayments and refinancing needs.
- Progress in remediating the income-tax control weakness and the effects of the prior-period tax revision and valuation allowances.
- Status of government contracts, major-customer concentration, permit and insurance renewals, disposal-site access, environmental liabilities and the PFSG sale.
- Whether the proposed medical-isotope investment and grant funding become definitive, and the project’s technical, regulatory, commercialization and financing milestones.