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ES > SEC Filings for ES > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for ENERGYSOLUTIONS, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and the related notes of EnergySolutions included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 (our "2011 Annual Report").

Cautionary Statement Regarding Forward-Looking Statements

Certain statements made herein, including statements regarding anticipated renegotiations of certain of our contracts, expected impacts of reduced government spending, expected costs to complete certain of our contracts, expected recoupment of expenses for work we perform, our future need to access credit, our projected revenue, expenses, income, the implementation of strategic initiatives and the risks associated therewith, our anticipated settlement arrangements of outstanding legal proceedings and reaching agreements in principle with respect hereto, as well as our expectations regarding their impact on our financial position, results of operations and cash flows, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1965, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect the current analysis of existing information and are subject to various risks and uncertainties. As a result, caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, our actual results may differ materially from our expectations or projections.

While most risks affect only future revenue or expenses, some risks may relate to accruals that have already been reflected in earnings. Our failure to receive payments of accrued amounts or incurrence of liabilities in excess of amounts previously recognized could result in a charge against future earnings.

Additional information concerning these and other factors that may impact our expectations and projections can be found in our periodic filings with the Securities and Exchange Commission ("SEC"), including our 2011 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012. Our SEC filings are available publicly on the SEC's website at www.sec.gov, on EnergySolutions' website at www.energysolutions.com or upon request from EnergySolutions' Investor Relations Department at ir@energysolutions.com. We disclaim any obligation to update the forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a leading provider of a broad range of nuclear services to government and commercial customers who rely on our expertise to address their needs throughout the lifecycle of their nuclear operations. Our broad range of nuclear services includes engineering, in-plant support services, spent nuclear fuel management, decontamination and decommissioning ("D&D") services, operation of nuclear reactors, logistics, transportation, processing, and low-level radioactive waste disposal. We also own and operate strategic processing and disposal facilities that complement our services and uniquely position us to provide a single-source solution to our customers. We derive almost 100% of our revenue from the provision of nuclear services.

We provide our services through two customer groups: the Government Group and the Global Commercial Group. Our Government Group provides services to U.S. government customers for the management and operation, and/or clean-up of facilities with radioactive materials. The Global Commercial Group, reports its results under three operating business divisions: Commercial Services, Logistics, Processing and Disposal ("LP&D"), and International. Our Government Group customers are individual offices, departments and administrations within the U.S. Department of Energy ("DOE") and the U.S. Department of Defense. Our Commercial Services operations provide a broad range of on-site services, including D&D services and comprehensive long-term stewardship D&D work for shut-down nuclear power plants and similar operations, to commercial customers. Our commercial customers include power and utility companies, pharmaceutical companies, research laboratories, universities, industrial facilities, state agencies and other commercial entities that are involved with nuclear materials as well as state agencies in the U.S. Our LP&D operations provide a broad range of logistics, transportation, processing and disposal services to both government and commercial customers. Our LP&D division also operates our facilities for the processing and disposal of radioactive materials, including our facility in Clive, Utah, four facilities in Tennessee, and two facilities in Barnwell, South Carolina. Our International division derives revenue primarily through contracts with the Nuclear Decommissioning Authority ("NDA") in the United Kingdom ("U.K.") to operate, manage and decommission ten Magnox sites with twenty-two nuclear reactors. In addition, our International division also provides turn-key services and sub-contract services for the treatment, processing, storage and disposal of radioactive waste from nuclear sites and non-nuclear facilities such as hospitals, research facilities and other manufacturing and industrial facilities.


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Consistent with our experience for the full year 2011, revenue from our Government Group declined for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 due primarily to the completion of certain large contracts with the DOE in 2011, and to decreased American Recovery and Reinvestment Act ("ARRA") funding for 2012. In addition, in April 2012, the prime contractor on our Salt Waste project located at the Savannah River site informed the DOE of an estimated cost increase on the construction phase of the project that is unrelated to our work on the project. As a result of this change in total budgeted project costs, the current potential incentive fee pool was reduced, which resulted in a corresponding reduction in the amount of incentive fee we had previously recognized. Such fee had been based on previously estimated costs and the estimated progress to date on the construction phase. We anticipate the contract will be renegotiated in 2013, and that incentive fee will be added to the new contract. However, until negotiations occur and the related terms of the negotiated contract are known, we are unable to recognize any such potential incentive fee.

Notwithstanding the decline in our Government Group operations, our Global Commercial Group operations remain strong. We continue to extend our business development efforts into Europe, Asia and Canada, and have won new contracts in Japan, Korea, Canada, Germany and elsewhere. Most notably we were selected by Toshiba Corporation as the technology provider for the clean-up of a large volume of radioactively contaminated water at the damaged Fukushima Dai-ichi Nuclear Power Plant.

We continue our work on the Magnox contracts. The Magnox contracts have been extended and are scheduled to expire on June 30, 2014. As expected, the NDA published a notice advising of its intention to launch the contract rebid process that is expected to commence in late 2012 and be completed in late 2013.

In September 2012, we initiated a restructuring plan (the "Restructuring Plan") to reduce operating costs and improve profitability within the U.S. entities. Under the Restructuring Plan, we are reorganizing our business, reducing our facility footprint and implemented a reduction in force of approximately 265 employees across multiple business segments and functions and other cost reductions. As a result, we estimate that the total restructuring charges under the Restructuring Plan will be between $12.0 million and $16.0 million, substantially all of which represent cash expenditures. The foregoing estimated charges include between $9.0 million and $11.0 million for severance, termination benefits and employee relocation costs, and between $3.0 million and $5.0 million for facility costs. We expect to substantially complete the Restructuring Plan by the end of the fourth quarter of 2012. We estimate that the Restructuring Plan will result in a reduction in expenses of approximately $35.0 million annually, not including restructuring charges associated with the Restructuring Plan.


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Results of Operations



The following table shows certain items from our statements of operations for
the three and nine month periods ended September 30, 2012 and 2011 (in
thousands):



                                      Three Month Period               Nine Month Period
                                      Ended September 30              Ended September 30,
                                     2012            2011            2012             2011
Revenue:
Government Group                 $     43,972    $     51,726    $     124,744    $     185,485
Global Commercial Group
Commercial Services                    48,631          47,110          129,110          141,402
LP&D                                   62,407          64,736          155,768          181,434
International                         289,147         257,455          917,848          838,646
Total revenue                         444,157         421,027        1,327,470        1,346,967
Cost of revenue:
Government Group                      (35,801 )       (45,088 )       (110,228 )       (168,730 )
Global Commercial Group
Commercial Services                   (43,883 )       (46,197 )       (117,636 )       (131,704 )
LP&D                                  (40,890 )       (40,396 )       (118,282 )       (127,624 )
International                        (277,426 )      (252,261 )       (867,584 )       (799,856 )
Total cost of revenue                (398,000 )      (383,942 )     (1,213,730 )     (1,227,914 )
Gross profit:
Government Group                        8,171           6,638           14,516           16,755
Global Commercial Group
Commercial Services                     4,748             913           11,474            9,698
LP&D                                   21,517          24,340           37,486           53,810
International                          11,721           5,194           50,264           38,790
Total gross profit                     46,157          37,085          113,740          119,053
Group selling, general and
administrative expenses:
Government Group                       (2,155 )        (3,266 )         (8,790 )        (11,024 )
Global Commercial Group               (11,797 )       (12,154 )        (32,297 )        (37,788 )
Total group selling, general
and administrative expenses
(1)                                   (13,952 )       (15,420 )        (41,087 )        (48,812 )
Group operating income:
Government Group                        6,016           3,372            5,726            5,730
Global Commercial Group                26,189          18,293           66,927           64,511
Total group operating income           32,205          21,665           72,653           70,241
Corporate selling, general
and administrative expenses
(1)                                   (17,827 )       (16,745 )        (58,574 )        (47,345 )
Equity in income of
unconsolidated joint ventures
(2)                                     4,286           5,714            7,422            9,995
Total income from operations           18,664          10,634           21,501           32,891
Interest expense                      (17,636 )       (18,201 )        (52,822 )        (54,850 )
Other income, net                      12,368           2,500           46,093           35,078
Income (loss) before income
taxes and noncontrolling
interests                              13,396          (5,067 )         14,772          (13,119 )
Income tax benefit (expense)           (3,347 )         2,218               20           (4,514 )
Net income (loss)                      10,049          (2,849 )         14,792            8,605
Less: Net (income) loss
attributable to
noncontrolling interests                    3            (979 )             35           (2,020 )
Net income (loss)
attributable to
EnergySolutions                  $     10,052    $     (3,828 )  $      14,827    $       6,585



(1) Together, group and corporate selling, general and administrative expenses represent our total segment, general and administrative expenses as reported in the accompanying condensed consolidated statements of operations and comprehensive income (loss). As such, both amounts are needed to compute total consolidated income from operations for the three and nine month periods ended September 30, 2012 and 2011.

(2) For the three month period ended September 30, 2012, we recorded $4.3 million income of from our unconsolidated joint ventures of which $0.1 million of loss is attributable to LP&D and $4.4 million of income is attributable to the Government Group. For the nine month period ended September 30, 2012, we recorded $7.4 million income from our unconsolidated joint ventures of which $0.1 million of loss is attributable to LP&D and $7.5 million of income is attributable to the Government Group.


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Three Month Period Ended September 30, 2012 Compared to the Three Month Period Ended September 30, 2011

Government Group

Revenue from our Government Group decreased $7.8 million to $44.0 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to the completion of certain large contracts during 2011 and to decreased ARRA funding for 2012, partially offset by increased demand of engineering and technology work. Gross profit increased by $1.5 million and gross margin increased to 18.6% for the three month period ended September 30, 2012 from 12.8% for the three month period ended September 30, 2011, due primarily to increased testing and technical supporting activities on a large scale mixing project. The overall reduction of federal government spending is expected to continue to negatively impact the financial results of our Government Group for the remainder of the year.

Revenue and cost of revenue related to engineered systems and technology projects within the Government Group increased $7.0 million and $5.0 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011 due primarily to increased testing activities on the large scale mixing contract awarded in August 2011. As a result, gross profit increased $2.0 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our subsidiary Isotek Systems, LLC increased $1.4 million and $0.5 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to the fixed price waste shipment phase of the contract which commenced in January 2012. As a result, gross profit increased $0.9 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue from our subsidiary EnergySolutions Performance Strategies Inc. increased $1.1 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to fee recognition for supporting work completed on certain Salt Waste projects. In contrast, cost of revenue decreased $0.5 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due to budget cuts on contracts at Los Alamos National Laboratory. As a result, gross profit increased $1.6 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue generated by our contract with the DOE to clean up the Atlas mill tailings site near Moab, Utah decreased $12.3 million and $11.1 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due to the completion of the contract in April 2012. As a result, gross profit decreased $1.2 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue related to our UCOR liquids and gases staff augmentation project decreased $3.2 million and $2.6 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due to the completion of the contract during the second quarter of 2012. As a result, gross profit decreased $0.6 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue generated by our Salt Waste processing facility contract decreased $1.5 million and $0.3 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to lower fee earnings resulting from a higher projection of expected costs to complete the contract. As a result, gross profit decreased $1.2 million during the three month period ended September 30, 2012 compared to the same period in 2011. We anticipate the contract will be renegotiated in 2013, and that the previously forfeited incentive fee will be added to the new contract.

Global Commercial Group

Commercial Services Operations

Revenue from our Commercial Services operations increased $1.5 million to $48.6 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to the increase in liquid waste processing projects during 2012. As a result, gross profit increased $3.8 million and gross margin increased to 9.8% for the three month period ended September 30, 2012 from 1.9% for the three month period ended September 30, 2011.

Revenue related to the decommissioning of the Zion Station increased $0.1 million for the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011, due primarily to increased project activity. Cost of revenue decreased $2.6 million due primarily to the combination of higher ARO gain and lower accretion expense recognized for


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the three month period ended September 30, 2012 compared to the same period in 2011. As a result, gross profit increased $2.7 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our project services delivery group increased $1.7 million and $1.6 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to increased design and fabrication activities to support our contracts in Asia which resulted in higher labor, training and travel costs. Gross profit increased $0.1 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our technology products group decreased $0.1 million and $0.6 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to lower demand of specialty container liners and decreased incentive compensation expense. As a result, gross profit increased $0.5 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our commercial technology and engineering operations decreased $0.1 million and $0.8 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 72011, due primarily to completion of design work during 2011. As a result, gross profit increased $0.7 million for the three month period ended September 30, 2012 compared to the same period in 2011.

LP&D Operations

Revenue from our LP&D operations decreased $2.3 million to $62.4 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to lower volumes of waste processed and disposed at our Clive, Utah facility offset by increased fabrication activities at our manufacturing division and increased transportation services. As a result, gross profit decreased $1.8 million and gross margin decreased to 34.4% for the three month period ended September 30, 2012 from 36.1% for the three month period ended September 30, 2011.

Revenue and cost of revenue from our processing facilities increased $5.8 million and $2.1 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to increased fabrication activities on a new contract, the recognition of fees related to processing of materials on a large scale contract, and to lower labor, transportation and container costs. As a result, gross profit increased $3.7 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue related to our disposal facilities decreased $12.2 million and $3.8 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to lower volumes of waste receipts on DOE projects due in part to a decrease in ARRA funding. The majority of costs at our disposal facilities are fixed, resulting in a disproportionate decrease in cost of revenue as a percentage of revenue. As a result, gross profit decreased $8.4 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our logistics operations increased $4.1 million and 2.3 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to increased utility shipments offset in part by lower cask rental expense. As a result, gross profit increased $1.8 million for the three month period ended September 30, 2012 compared to the same period in 2011.

International Operations

Revenue from our International operations increased $31.7 million to $289.1 million for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to filter media, containers and support for clean-up operations in Japan and Korea, continued progress of fabrication activities in China and increased waste processing activities in Canada. Gross profit increased $6.5 million and gross margin increased to 4.1% for the three month period ended September 30, 2012 from 2.0% for the three month period ended September 30, 2011.

Revenue and cost of revenue from our operations in Asia increased $31.9 million and $26.7 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to increased revenues and costs related to fabrication activities at the Yangjiang and Haiyang, China nuclear reactor sites, and to supplying filter media, containers and support for clean-up operations in Japan and Korea. As a result, gross profit increased $5.1 million for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our operations in Canada increased $1.5 million and $1.5 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to


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increased shipments of waste for processing and higher demand for waste storage services. As a result, gross profit remained level for the three month period ended September 30, 2012 compared to the same period in 2011.

Revenue and cost of revenue from our U.K. operations decreased $1.5 million and $3.0 million, respectively, for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011, due primarily to progress delays at two Magnox sites. Revenue was negatively impacted by $5.0 million while cost of revenue was positively impacted by $4.9 million as a result of fluctuations in pound sterling exchange rates for the three month period ended September 30, 2012 compared to the same period in 2011. Gross profit decreased $0.1 million due to exchange rate fluctuations for the three month period ended September 30, 2012 compared to the same period in 2011.

Group selling, general and administrative expenses

Group selling, general and administrative ("SG&A") expenses include expenses that are not directly associated with performing services for our customers. These expenses consist primarily of compensation and related benefits for management and administrative personnel, preparing contract bids, office expenses, advisory fees, professional fees, strategic growth initiatives such as research and development, and administrative overhead. Group SG&A expenses decreased $1.4 million, or 9.5%, to $14.0 million for the three month period ended September 30, 2012 compared to $15.4 million for the three month period ended September 30, 2011, due primarily to lower bid and proposal costs incurred during 2012, lower employee incentive expenses and our ongoing effort to reduce SG&A expenses. Group SG&A expenses, as a percentage of revenue, decreased 0.3% for the three month period ended September 30, 2012 compared to the same period in 2011.

Corporate selling, general and administrative expenses

Corporate SG&A expenses reflect costs associated with supporting our entire company including executive management and administrative functions such as accounting, treasury, legal, human resources, and information technology, as well as other costs required to support our company. Corporate SG&A expenses increased $1.1 million, or 6.5%, to $17.8 million, for the three month period ended September 30, 2012, from $16.7 million for the three month period ended September 30, 2011 due primarily to reorganization and transitional costs resulting from the execution of the Restructuring Plan during the quarter, offset by decreased incentive compensation expense. Corporate SG&A expenses, as a percentage of revenue, increased 0.2% for the three month period ended September 30, 2012 compared to the same period in 2011.

Equity in income of unconsolidated joint ventures

Income from unconsolidated joint ventures decreased $1.4 million, or 25.0%, to $4.3 million for the three month period ended September 30, 2012, from $5.7 million for the three month period ended September 30, 2011, due primarily to a $1.3 million decrease from our proportional share of income from our Washington River Protection Solutions LLC joint venture at the Hanford site.

Interest expense

Interest expense decreased $0.6 million to $17.6 million for the three month period ended September 30, 2012 from $18.2 million for the three month period ended September 30, 2011, due primarily to a decrease in outstanding borrowings during late 2011. During the three month period ended September 30, 2012, we . . .

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