USEC Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. The filing registrant is USEC Inc. (the company identified in the request as Centrus Energy Corp.). Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and financial performance
USEC supplied low-enriched uranium (LEU) to nuclear utilities, sourcing it from Paducah production and Russian supply agreements. It also operated contract-services businesses. The company faced a major transition: weak near-term LEU demand, uncertainty over continued Paducah enrichment, and a funding-dependent American Centrifuge project.
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Revenue | $561.5 | $380.5 | Up 48%; higher SWU sales more than offset lower contract-services revenue |
| Gross profit / margin | $38.8 / 6.9% | $13.9 / 3.7% | Improved; LEU gross profit rose on higher sales volume and lower costs |
| Operating loss | $(19.3) | $(24.6) | Improved, despite increased advanced-technology and restructuring/advisory costs |
| Net loss / diluted loss per share | $(28.8) / $(0.24) | $(16.6) / $(0.14) | Loss widened, principally as project-related interest costs were expensed rather than capitalized |
| Operating cash flow | $47.7 | $51.3 | Positive; included a $347.8 inventory reduction and was affected by timing of customer orders and Russian-contract payments |
| Capital expenditures | $2.9 | $50.7 | Lower as ACP capitalization had ceased |
Liquidity, debt and balance sheet
- Cash was $72.3 at March 31, versus $37.6 at year-end. Working capital was $556.1, down from $616.0.
- Gross borrowings were $615.0: an $85.0 credit-facility term loan and $530.0 of 3.0% convertible notes due October 2014. Convertible preferred stock was classified as a current liability at $91.5.
- The March credit-facility amendment extended maturity to May 31, 2013 and reduced total facility size to $235.0. Available credit was $75.6, including the effects of letters of credit and borrowing-base limitations. The term loan carried a 10.5% rate at quarter-end; facility commitments and principal begin stepping down in December 2012.
- Management said cash, operating cash generation and available credit were expected to meet needs for at least 12 months, but described maintaining adequate liquidity as challenging.
Material changes, outlook and significant risks
- Sales and margins: LEU-segment revenue rose 67%, with SWU sales volume up 73% and average billed SWU price up 1%. Contract-services revenue fell 59%, largely because Portsmouth work transferred to DOE’s decontamination contractor; NAC revenue increased. Q1 cost of sales included a $14.6 reduction from revisions to depleted-uranium disposition and property-tax accruals.
- Guidance: USEC did not provide earnings or operating-cash-flow guidance. It expected 2012 SWU revenue of approximately $1.4–$1.5 billion, potentially higher depending on a proposed DOE tails-enrichment arrangement, and contract-services revenue of approximately $85 million. Uranium revenue was expected to be lower than in recent years. The company anticipated buying 5.5 million SWU from Russia in 2012; the price was expected to rise 2% from 2011.
- Paducah: A proposed multi-party arrangement could extend enrichment operations for one year, through May 2013. If not finalized in the near term, management expected to ramp down operations in May 2012. A shutdown could affect supply, customer confidence, costs and liquidity; $63 million of net PP&E related to Paducah and $43 million of lease-turnover liabilities could be affected.
- American Centrifuge: DOE’s proposed two-year RD&D cost-share contribution was capped at $300 million, but funding and a definitive agreement were uncertain. Credit-facility limits generally restricted project spending to $1 million monthly after May 2012 absent qualifying agreements. USEC was preparing for possible demobilization; estimated costs included about $12 million of severance, $38 million of ongoing contractual commitments and up to $56 million of demobilization costs, in addition to other possible costs. Up to $1.1 billion of capitalized ACP costs could be expensed if deployment ceased to be probable or was materially delayed.
- Market and supply risks: Management cited excess LEU supply and little uncommitted demand over the next two to four years following reactor shutdowns in Japan and Germany. Paducah’s power-intensive technology, electricity-price uncertainty and reliance on Russian supply add exposure.
- Other items: Q1 included $4.5 million of advisory costs and $1.9 million of workforce-reduction charges; additional reductions and charges were expected. The company reported a potential former-employee severance class claim; estimated exposure was about $14 million if all approximately 400 affected employees qualified, with an estimated $9 million potentially attributable to DOE. USEC also warned that continued NYSE listing was at risk after its share price fell below $1 on April 19; delisting could trigger a cash repurchase right on convertible notes and a credit-facility default.
Important facts for investors to verify
- Whether Paducah’s proposed extension was finalized and what its economics and duration were.
- Whether DOE RD&D funding and agreements were secured, and whether the ACP continued, was restructured or was demobilized.
- Subsequent liquidity, borrowing-base availability, facility compliance and refinancing plans ahead of the May 2013 maturity.
- Whether customer order advancements affected backlog, future deliveries, cash receipts or margins.
- Whether ACP or Paducah decisions resulted in impairments, accelerated liabilities, severance costs or pension-funding demands.
- Developments in NYSE listing status, DOE contract claims and the former-employee severance litigation.