CENTRUS ENERGY CORP quarterly report, Q2 FY2012

USEC Inc. — Form 10-Q Summary

Business context and reporting period. This filing is for the quarter and six months ended June 30, 2012, and identifies the registrant as USEC Inc. (the request metadata names Centrus Energy Corp.). USEC supplied low-enriched uranium (LEU) to nuclear utilities, using enrichment at the Paducah gaseous diffusion plant and Russian-sourced material; it was also developing the American Centrifuge Plant (ACP) and operated a smaller contract-services business.

Financial results and position

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Revenue	$364.8 million	$454.4 million	$926.3 million	$834.9 million
Gross profit	$12.3 million	$33.2 million	$51.1 million	$47.1 million
Gross margin	3.4%	7.3%	5.5%	5.6%
Operating loss	$81.4 million	$17.0 million	$100.7 million	$41.6 million
Net loss	$92.0 million	$21.2 million	$120.8 million	$37.8 million
Net loss per share	$0.76	$0.18	$0.99	$0.31

• Q2 revenue fell 20%, mainly because uranium revenue declined by $64.2 million and contract-services revenue fell $42.3 million. SWU revenue rose $16.9 million. First-half revenue increased 11%, reflecting higher SWU sales, including orders advanced from later periods.
• Q2 gross profit fell 63%; the six-month increase in gross profit was modest. Advanced-technology costs were $85.7 million in Q2 and $122.5 million for the half, including a $44.6 million charge for transferring ACP equipment to DOE. ACP costs are being expensed rather than capitalized while commercial deployment is paused.
• Cash from operations was $162.1 million for the first half, versus $285.6 million a year earlier. The cash-flow statement reports a $191.4 million increase in cash, to $229.0 million; inventory reductions were a major source of operating cash. Capital spending was $4.1 million, versus $91.0 million.
• At June 30, cash was $229.0 million and available credit was $94.2 million, with no revolving borrowings outstanding and $10.8 million of letters of credit. Working capital was $530.7 million, down from $616.0 million at year-end 2011.
• Debt included $530 million of 3.0% convertible notes due October 2014 and an $85 million credit-facility term loan due May 2013. The facility matures May 31, 2013; the term loan carried a 10.5% rate at quarter-end. Convertible preferred stock, classified as a current liability, was $94.4 million. Debt-to-total-capitalization was 52%, including preferred stock classified as a liability.
• Total assets were $3.781 billion and stockholders’ equity $642.6 million. Inventories were $1.924 billion gross, offset by $1.383 billion of inventories owed to customers and suppliers.

Material changes and unusual items

• The May 2012 multi-party arrangement with Energy Northwest, BPA, TVA and DOE supports Paducah enrichment through May 31, 2013. USEC’s amended power agreements impose approximately $0.5 billion of minimum payments through that date, with specified termination rights tied to the Energy Northwest arrangement.
• The June 2012 DOE cooperative agreement provides for an estimated $350 million RD&D program through 2013, with an 80% DOE / 20% USEC cost share. DOE’s authorized funding was $87.7 million as of July 31, 2012; the remaining $192.3 million of DOE funding had not been authorized and depended on government funding actions. These July developments are subsequent to the quarter-end balance sheet date.
• The DOE agreement revised ACP milestones and granted DOE specified rights to use centrifuge intellectual property, including a potential commercial-use license in certain default or abandonment circumstances, subject to royalties capped at $665 million. Failure to meet milestones could also expose USEC to DOE remedies under the 2002 agreement.
• USEC reduced its workforce by 45 employees, including two senior officers, and recorded $9.6 million of workforce-reduction and advisory charges in the first half. Further organizational reductions were anticipated.
• The company received an NYSE minimum-share-price deficiency notice and had six months to regain compliance, potentially through a reverse stock split requiring shareholder approval. A delisting could trigger a cash repurchase right on the convertible notes and a credit-facility default.
• Preferred dividends were not declared for the first three 2012 payment dates; the filing reports an $8.5 million arrearage and accrued dividends added to the preferred liquidation preference.

Outlook, commentary and risks

• Management’s 2012 outlook projected revenue of about $1.95 billion, gross profit of about $140 million (roughly 7% margin), and a full-year net loss of about $100 million. It expected approximately $30 million of operating cash flow and year-end cash of about $200 million, assuming no revolving loans outstanding. These projections were subject to significant uncertainty.
• Management expected 2012 SWU deliveries to rise about 30% versus 2011, with SWU revenue around $1.8 billion; uranium revenue below $50 million and contract-services revenue around $85 million. It expected 2013 SWU sales volume to decline by about one-third.
• Management said the LEU market was oversupplied and expected an unfavorable supply-demand balance at least until the second half of the decade, citing reactor outages and delays in Japan and Germany. It also noted that the end of the Megatons to Megawatts program was expected in 2013 and that commercial Russian supply was subject to import quotas and other restrictions.
• ACP completion required substantial financing. DOE had not committed to a loan guarantee, and USEC had no assurance of obtaining a guarantee or other financing. If commercial deployment became no longer probable or was significantly delayed, up to $1.1 billion of previously capitalized ACP costs could be expensed; management stated it then believed those costs were recoverable.
• Management said cash and operating resources, plus renewed credit availability, were expected to meet needs for at least 12 months, assuming repayment of the $85 million term loan in May 2013 and renewal of the revolving facility at approximately similar availability. The filing also discusses potential balance-sheet restructuring and acknowledges that failure to renew the facility could threaten continued operations.
• Other material exposures include the possibility of Paducah shutdown costs and accelerated depreciation; a preliminary PBGC view that Portsmouth-related ERISA Section 4062(e) liability could exceed $100 million (disputed by USEC); and DOE receivables, claims and audits. USEC reported $46.6 million of past-due DOE-related receivables and $38.0 million of certified claims. A separate former-employee severance suit had an estimated potential exposure of about $14 million if all approximately 400 affected employees were entitled to severance; USEC said DOE might owe an estimated $9 million portion.

Investor facts to verify

• Whether Energy Northwest obtained the financing needed to complete the Paducah arrangement and whether all parties performed; the company identified that arrangement as essential to Paducah operations through May 2013.
• Whether DOE authorized and delivered the remaining RD&D funding, and whether USEC met the technical milestones, stayed within cost limits, and secured a viable ACP financing path.
• Whether Paducah operations continued after May 2013, and the resulting effects on supply, customer commitments, inventory valuation, shutdown costs and liquidity.
• Whether the May 2013 credit-facility maturity was refinanced or renewed, and whether USEC could repay the term loan while maintaining adequate liquidity.
• Developments in the PBGC matter, DOE receivable claims and audits, and any change in the potential ACP impairment or other contingencies.
• NYSE listing compliance and any resulting effect on convertible-note repurchase rights, credit-facility covenants or preferred-stock obligations.