Nov 8, 2012
Operator
Good day, everyone, and welcome to the EnergySolutions Third Quarter 2012 Earnings Conference Call. This call is being recorded.
[Operator Instructions] At this time, I would just like to turn the call over to Richard Putnam, EnergySolutions' Vice President of Investors Relations. Mr.
Putnam, please go ahead.
Richard Putnam
Thank you, Marcella. Good morning, everyone.
Welcome to our third quarter earnings conference call. With me today are Chief Executive Officer, David Lockwood; and our Chief Financial Officer, Greg Wood.
Before I turn the call over to Mr. Lockwood, I'd like to remind listeners that during today's call, management's remarks will contain forward-looking statements within the meaning of federal securities laws.
These remarks may include statements concerning plans, estimates, objectives, goals, strategies, projections of future events or performance, many of which are based upon certain assumptions. Forward-looking statements involve risks and uncertainties, and although EnergySolutions believe that its plans, intention and expectations are based upon reasonable assumptions, we may not achieve those plans, intentions or expectations.
There are important risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made in this conference call. Such risks and uncertainties are discussed in our annual report on Form 10-K for the year ended December 31, 2011, and on our just announced earnings release included in our current report on Form 8-K filed with the Securities and Exchange Commission.
Any projections as to the company's future financial performance represent management's estimates as of today, November 8, 2012. EnergySolutions assumes no obligation to update these projections in the future due to changing conditions, developments or otherwise.
We've also prepared a number of tables which are referenced in -- that will be referenced this morning. Those tables are part of the earnings release that was put out earlier this morning, and they can be accessed on our Investor Relations tab at energysolutions.com.
We would like to answer as many of your questions as we can. We will be happy to follow up with you individually after the conference call if you have additional questions.
With that, I'll now turn the time over to David Lockwood, CEO of EnergySolutions.
David J. Lockwood
Good morning. Thank you for taking the time to join us to discuss our third quarter results.
As we detailed on our last earnings call, the new management team, in our first months on the job, reached a number of conclusions about our business: that we required more focus; that we would benefit from a lower cost structure; that we would also benefit from a stronger balance sheet; and that we need to invest to grow. Based on these conclusions, we launched 4 strategic alternatives: asset sales, cost restructuring, debt pay-down and investing for growth.
Let's talk about our progress on these 4 strategic initiatives during the quarter. Asset sales.
We've said we will refocus the company and pay down debt through asset sales. We continue to be actively engaged in that process with our financial adviser and have made significant progress.
As we've said in previous calls, we will not discuss potential strategic alternatives unless we have reached the conclusion on a particular process. In the case of our European business, that process has concluded.
As we embarked on asset sales, we were approached unsolicited by a third party to purchase our European business. As a public company, our board is focused on shareholder value, and our board decided it would be in the best interest of shareholders to run a competitive process to consider offers for that business, which includes the Magnox contract.
We received a number of offers to purchase our European business, but the board decided, based on a recommendation by management, not to sell but to retain and grow our business. Decommissioning is at the core of our company, and Magnox is one of the largest decommissioning contracts in the world.
We believe that contract not only has significant economic value, but also significant strategic value to our company, particularly as we pursue other decommissioning projects in the United States and Europe. As the incumbent, we look forward to rebidding the Magnox contract in order to retain this work for the decade to come.
In addition, we remain committed to expanding our operations in the U.K. and Europe.
In particular, as the incumbent of Magnox, we're excited about the prospects for future Tier 1 contracts in U.K., including Sellafield, which will follow the conclusion of the Magnox bid process. For example, today, we are working at the Sellafield site and believe our people and technologies will be an invaluable team when the NDA decides to rebid that contract.
Cost restructuring. We announced last month the cost restructuring with annualized savings of $35 million.
This cost restructuring was a product of 3 months of intense work by the management team. We conducted an extensive review of our business.
We've brought in external teams of cost consultants and efficiency experts. We interviewed hundreds of employees across our product lines.
The result was our cost restructuring program. The components of that restructuring are split approximately equally between direct and indirect costs.
In terms of direct costs, we expect to recognize significant efficiency gains at a number of our facilities, particularly Clive and Bear Creek. At both these facilities, volumes have declined over the past years, yet headcount had increased.
We are on track to reduce the ratio of employees to volume at both facilities to historical norms. In terms of indirect costs, we also expect to realize significant cost savings.
We've flattened the organization, increasing our span of control in many parts of the company by more than 30%. We've consolidated offices.
We are staying in our current corporate headquarters rather than move into significantly more expensive space down the street. And we have significantly reduced our legal costs and other professional fees.
Let me, in particular, highlight the reduction in legal costs going forward. We have reached agreements in principle to settle the 2 significant litigations outstanding against the company: the false claims case and the securities case.
The false claims case relates to our facilities, and the securities case to statements made during the IPO. The settlement amounts remain confidential and are subject to court and other approvals.
However, the company's contributions to these settlements will not have a material effect on the company and will significantly cut our legal costs going forward. Last quarter we, committed to undertake our cost restructuring this year and are on track to achieve that objective.
We continue to expect the impact of our cost-reduction plan to be reflected in the first quarter of 2013. Debt pay-down.
Our cash balance continues to grow. As of yesterday, we had over $100 million of unrestricted cash and $332 million of restricted cash in the bank.
Once we have completed the asset sale process, we will use the cash on our balance sheet to pay down debt. In addition, we used part of the greater cash flows that are driven by our cost restructuring plan to also strengthen our balance sheet.
Our cash flows remained strong. Our projected adjusted EBITDA this year will be more than 2x our cash interest.
Nevertheless, we are committed to paying down debt in the near term, so in the future we can pay less interest to our lenders and invest more in our people and in our company. Investing for growth.
We continue to be excited about the prospects for nuclear decommissioning in the United States and around the world. As we have talked about, we believe nuclear power will be increasingly challenged on 2 fronts, economics and the environment.
In terms of economics, the price of natural gas, which is expected to remain depressed for the foreseeable future, has dramatically altered the economics for utilities, including the decision to relicense existing plants. Just last week, for example, in Wisconsin, Dominion decided not to relicense it's Kewaunee Power Station.
In the words of Dominion, the plant was no longer economically viable. In terms of the environment, the events at Fukushima, general heightened concerns about environmental safety, we believe will cause utilities to shift away from nuclear.
This trend we expect to accelerate in the years ahead in the United States. In the rest of the world, while new build remains strong in China, other countries are also decommissioning their nuclear fleets.
Both Japan and Germany, 2 of the largest nuclear fleets outside the United States, have announced plans to decommission most of their nuclear plants. As the leader in nuclear decommissioning, we believe we are strongly positioned to profit from these opportunities in the years ahead.
Let me also give an update on another growth opportunity, the water treatment business. We continue to advance in a number of areas of this business.
Progress at Fukushima, for example, continues. This facility is completed, and we expect strong demand for our liners, containers and media.
We also continue to make good progress in expanding our water treatment business in the United States, where we are the market leader, and in China, where we see significant opportunities for growth. Let me finish by talking about guidance.
When we came into the business in June, we estimated adjusted EBITDA of $130 million and $140 million. Based on the performance of the most recent quarter and our internal forecasts, we are reaffirming our guidance of adjusted EBITDA in the range of $130 million to $140 million for 2012.
Let me stop there, so we have ample time for questions and turn it over to Greg to discuss our third quarter numbers in greater detail.
Gregory S. Wood
Thank you, David, and good morning, everyone. Today I'll be discussing our financial results for the third quarter, as set forth in the 5 tables attached to our press release.
These numbers include both GAAP and non-GAAP financial results, and you'll find a reconciliation of non-GAAP to GAAP results in Table 4 of our earnings release. Looking first at our income statement on Table 1, you can see that revenue in the third quarter was $444 million, up $23 million from $421 million in the third quarter of 2011.
Our Government revenue was down $8 million quarter-on-quarter, while Global Commercial revenue was up $31 million. Most of the increase in Global Commercial was attributable to our International operations.
I'll provide more details on segment results in a few minutes. The higher revenues and lower cost of revenue increased gross profits by more than $9 million in Q3 compared to the prior year.
Despite lower revenue, Government gross profits increased by $1.5 million and Global Commercial gross profits were up $7.5 million. Selling, general and administrative expenses were $32 million in the third quarter, slightly lower than the third quarter of 2011.
Our Q3 results include $3.3 million of restructuring costs associated with the organizational restructuring we announced on October 9. We expect to incur additional charges in Q4 for restructuring.
Our other income for the quarter was $12 million. We had a good quarter of performance in the NDT fund associated with our Zion project, as earnings were nearly $20 million.
This was offset by nonrecurring charges of approximately $5 million related to the tentative legal settlements that David mentioned and approximately $2.5 million related to write-off of an engineering research building that we donated to Washington State University in the quarter. The resulting net income attributable to EnergySolutions for the third quarter was $10 million or $0.11 per share compared with a net loss of nearly $4 million or $0.04 per share for the quarter ended September 30, 2011.
Flipping the page to the balance sheet, you can see that our cash ticked up to $88 million from $71 million at the end of Q2. We continue to work on working capital and reducing our accounts receivable and -- sorry, we reduced our accounts receivable and unbilled by $20 million during the quarter compared to Q2 and by more than $40 million compared to Q3 a year ago.
Related to our Zion decommissioning project. The NDT fund has decreased by $75 million so far this year to $622 million, while the decommissioning liability under ARO accounting decreased by $90 million to $606 million.
As a reminder, the comparison of these 2 numbers is not an accurate way to look at the profitability of this project, but we can report that the Zion project continues on track, and we expect to earn 5% to 10% profit margins over the life of the project. From a capital structure perspective, we remain committed to reducing debt with asset sales proceeds, better working capital management and operating cash flow.
But as David mentioned, we plan to conclude any potential asset sales before we pursue additional debt repayments. Our liquidity position is good, with over $100 million of unrestricted cash today, room under our revolving line of credit and no substantial debt amortization for the next few years.
And we have a good cushion against the financial covenants in our Credit Agreements. If you flip over to the cash flow statement, I won't spend a lot of time here as we've already talked about some of the components of working capital.
However, you can see that through Q3, we've generated nearly $16 million in cash from operating activities, and we've had capital expenditures of about $14 million during the first 9 months of 2012. We expect our capital expenditure requirements should be less than $20 million annually through at least 2013.
Table 4 shows the reconciliation of net income to adjusted EBITDA. Adjusted EBITDA for the third quarter was $42.7 million compared to $36 million in the third quarter of 2011.
Given the materiality and nonrecurring nature of restructuring costs and other one-time charges, we have added them back in calculating adjusted EBITDA and have made the same adjustments for prior period comparisons. Those restructuring and nonrecurring adjustments totaled $10.7 million in Q3.
As David mentioned earlier, we believe that our adjusted EBITDA will be in the range of $130 million to $140 million for 2012. Table 5 shows our segment detail.
First, looking at the Government revenue. It's down slightly year-on-year due to lower government spending, particularly our Moab contract that ended in April of this year.
Our Global Commercial revenue was up $31 million in Q3 compared to Q3 of 2011. Most of that came from our International operations, where revenue increased by $32 million.
Our cleanup projects in Japan and Korea accounted for most of this growth, with smaller growth coming from our Canadian operations. Magnox revenue was down slightly year-on-year.
Within our Commercial Services operations, revenue increased $1.5 million compared with the same quarter of last year, primarily due to growth in utilities services. The Zion project revenue was flat compared to last year.
Revenue in our LP&D operations was down $2.3 million primarily as a result of lower government waste disposal at our Clive facility. Processing and logistics revenues were up but not enough to fully offset the declines in the disposal volumes.
Despite lower revenue, Government Group's gross profit was up $1.5 million. Much of that's attributable to the rollout of lower-margin projects.
Gross margins grew to over 18% in the quarter compared to 13% last year. Global Commercial Group's gross profit was $7.5 million compared to the same quarter last -- sorry, up $7.5 million compared to the same quarter last year.
Gross margins increased slightly to over 9%. The result of all of this is that our operating profit before corporate SG&A was up $10 million in the quarter compared to the same quarter last year.
With that, I'll turn it back to David.
David J. Lockwood
Thank you, Greg. We're extremely pleased with the performance of our management team and our dedicated employees.
We come to work everyday excited about the prospects for our company. We're fortunate to work with the best people in the business, the engineers, scientists and professionals of EnergySolutions who make a difference in the communities in which they work and live.
The opportunities for environmental cleanup have never been greater, and we look forward to what we can achieve in the years ahead. With that, let's open it up for questions.
Operator?
Operator
[Operator Instructions] Our first question comes from Alex Rygiel, FBR.
Alexander J. Rygiel
If you could update us on a few items. First, I know you don't want to get into too much detail on the asset sales, but I believe in the past, you were hopeful to have many of those completed by year-end.
If you could just maybe update that kind of view on your timeline for asset sales, that would be helpful.
David J. Lockwood
Yes, asset sales, we plan to have done -- if we're going to do asset sales, we plan to have them done by the end of the year.
Alexander J. Rygiel
And are there any other assets that you possibly moved down the path pretty far on selling that you also made the determination not to move forward with?
David J. Lockwood
No.
Alexander J. Rygiel
Okay. As it relates to Magnox, how should we think about the incremental costs for rebid and the potential for you to partner with another entity?
David J. Lockwood
So 2 things. We have not given guidance on the costs of rebidding Magnox, but that is included in our numbers when we forecast.
And we believe that the best chance for winning Magnox is with a partner, for us not to bid it alone.
Alexander J. Rygiel
And what's the timeline for when we may hear who your partner is?
David J. Lockwood
I don't know the answer to that. It's not -- it would not be immediately, but we don't know the answer to that.
Alexander J. Rygiel
And one last question, and then I'll get back in the queue. As it relates to Zion, what's the timeline for disposal shipments to Clive?
David J. Lockwood
We expect the first unit will leave Zion and head to Clive next month.
Operator
Our next question comes from Al Kaschalk, Wedbush.
Albert Leo Kaschalk
[technical issue]
Operator
Our next question comes from Jon Evans, Edmunds White Partners.
Jonathan Evans
Could you talk a little bit about the bonds? And I guess what I was hoping to understand is, can you help us understand the basket and the availability that you have to go out and try to repurchase the high-yield bonds?
Because obviously, that would be very accretive to the shareholders if you did that with some of the cash flow in your quest to reduce debt.
Gregory S. Wood
Sure. As you know, our credit facilities senior to the bonds, so there are restrictions on what we can repurchase.
But under that Credit Agreement, we are allowed a basket. From memory, it's in the range of -- I think it depends on our -- the cash flow that we're generating, but the basket is in the range of $25 million to $30 million a year.
Jonathan Evans
So do you think you guys will start to purchase those in the market to reduce debt? Or help us understand how you achieve reducing debt.
David J. Lockwood
We have not made those decisions yet. That's a discussion that we're having with the board.
Once we have gone through the asset sale process, we'll have a better idea both for what our cash position will be, our balance sheet, our needs going forward. So once we've done that -- and what our EBITDA will be going forward because if we conduct asset sales, that will obviously change the EBITDA of the company.
So once we've done that, then we will look at how best to reduce debt, whether it's through using the basket on the bonds or whether it's through paying down term loan or other means.
Jonathan Evans
One last question relative to that is if you could talk a little bit about if you make asset sales, do you have a claw -- any kind of clawback either with the term loan or with the high-yield bonds? In other words, do they have to get a portion of the asset sales?
Gregory S. Wood
Yes. Under our -- under the senior Credit Agreement, there is a requirement that 100% of asset proceeds be used to pay down that debt.
Operator
Our next question comes from Scott Levine, JPMorgan.
Rodney C. Clayton
It's Rodney here for Scott. So first, can you remind -- and I understand the point that you want to see how the asset sale process plays out before making any additional debt payments.
But can you remind us how much cash you need to carry on the balance sheet before you would consider making additional payment once the asset sales are out of the way?
David J. Lockwood
Well, again, it depends upon which assets we sale and what the resulting EBITDA is and also what the require -- the funding requirements would be given however the company is going to look once we do the asset sales. So I don't think there is a number that we could give you.
It's really going to depend on what the company looks like going forward.
Rodney C. Clayton
Okay, I understand that. Secondly, can you provide a quick update on the San Onofre steam generator shipments, when do you kind of expect that to -- when you might get those shipments to Clive?
David J. Lockwood
We don't talk specifically about when those generators would or wouldn't go to Clive. So we include that in our forecasts, both the forecast we give and our internal forecast as we think about next year.
But we're not going to comment on any particular steam generator and whether it's going or not going or whether it's in the guidance or not in the guidance. But I understand your question, but we're just not going to talk about that.
Rodney C. Clayton
Okay, fair enough. Finally, can you help us with the contribution that you're getting from Fukushima on your International revenues and margins?
I mean, whatever level of detail you can provide with respect to, I guess, percentage of revenues or how the margins compare to what you get from Magnox would be helpful.
Gregory S. Wood
Sure. So this is Greg.
We -- as we mentioned, most of the increase in revenue compared to Q3 of last year was attributed to our International operations, and particularly the cleanup operations in Japan and Korea. And as you can imagine, most of that's Fukushima.
So it's the better part of $30 million increase year-on-year. And in terms of -- we don't provide the specifics on gross margins, but for providing the liners and the media and the containers, that's the bulk of the revenue as they ramp up to treat the water.
And generally, that's -- let's say that's better margins than we get overall on the Magnox contracts.
Operator
Our next question comes from Al.
Albert Leo Kaschalk
David, I was wondering if you could help us understand the why the partnering with another company obviously in the E&C nuclear service firm, is best for, a, the company and, b, shareholders. And this, of course, relates to Magnox?
David J. Lockwood
Yes, no, I think given the nature of the rebid, I think it significantly improves the chances of winning. I do not think you will see any firm, any sole vendor bid that contract.
I think it will be consortiums of either 2 firms or up to as many as 3 or 4 firms in one particular bid. And I think we believe the best chance of winning is to partner with another firm.
Albert Leo Kaschalk
Is that mandated from the NDA, or is that something that even your competitors would candidly admit?
David J. Lockwood
Look, I can't speak for our -- first of all, as far as I know, it is not mandated by the NDA. I do not believe that's a requirement of making a bid.
However, I believe if you talk to any of the number of firms who are bidding that contract, they would all tell you that if you want to have a shot at winning that, you've got to partner with at least one other firm. The ability to partner with another firm brings a much broader array of resources and capabilities to the bid that we believe anyway will be important to the NDA.
Albert Leo Kaschalk
Okay. And then sort of related to that and in line with the restructuring efforts and cost, I think Greg said $3.3 million was what you recorded in Q3.
What's that number expected to be in Q4?
Gregory S. Wood
The total restructuring guidance we gave when we announced this on October 9 was a range of $12 million to $16 million, of which a chunk of that was attributable to facilities, and the rest was for personnel costs. We said $9 million to $11 million for severance termination benefits, employee relocation, et cetera, and between $3 million and $5 million for facility costs.
Albert Leo Kaschalk
And then what was that to lead to savings or cost savings in '13, was that $25 million?
Gregory S. Wood
Well, our target, what we've quantified is about $35 million of annual savings, and our goal is to get to that for the run rate on January 1.
Albert Leo Kaschalk
Okay. So if I can pose this question to you, if the Magnox contract is to be won by a bid by joint effort and you take your sort of historical levels of performance on that contract from an EBITDA basis, is it fair to say that your cost savings could exceed any value -- or any EBITDA levels that you would have to share with a partner on that contract?
Or you're not in a spot today to be able to conclude that?
David J. Lockwood
Yes, I would say it's too early to speculate on that.
Operator
Our next question comes from Robert Perry, Kingsland Capital.
Robert Perry
So I had a question with regard to your strategy on asset sales. Now that you've decided, in conjunction with the board, not to sell the European business.
Given your other portfolio of businesses, I mean, what characteristics of kind of your remaining businesses make -- would make one business more or less attractive to consider for sale than another? Can you just give us some idea how you're evaluating the rest of the portfolio outside the International business?
David J. Lockwood
Yes, so as we've talked about on previous calls -- let's take out the International business for the moment. If you look at our U.S.
business, what are our key competitive strengths? Well, one is we have the largest Class A commercial disposal facility in the United States, that's Clive; two is we have the largest processing facility, which is Bear Creek; we have the largest logistics firm in -- for nuclear commissioning in Hittman and other assets such as containers; and we have the leading water treatment business in the United States.
Those are really our core competency here in the States beyond the -- as we've talked about, the overarching opportunity here, which is nuclear decommissioning that we see at Zion, that we see at Magnox, at Sellafield in the U.K., the next large contract, and in other places throughout Europe. So that's how we think about our core competitive strengths, and we consider asset sales in the context of that.
Operator
At this time, I'm showing no further questions. I would like to turn the call over to Mr.
David Lockwood for closing remarks.
David J. Lockwood
All right. Thank you, everyone, for participating in our call today.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
You may now disconnect. Have a great day.