USEC Inc. (now Centrus Energy Corp.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing was made under the name USEC Inc.; amounts below are in U.S. dollars, millions unless stated otherwise.
Business context
USEC supplied low-enriched uranium (LEU) to nuclear utilities and provided limited government contract services. The business was in transition: the Paducah enrichment arrangement was due to expire May 31, 2013, while the company pursued a DOE cost-shared research, development and demonstration (RD&D) program for its American Centrifuge technology. USEC also sold NAC International in March 2013.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $320.4 | $542.0; down 41% |
| Gross profit / margin | $13.3 / 4.2% | $36.7 / 6.8% |
| Operating loss | $13.7 | $20.0 loss |
| Continuing-operations loss | $23.7; $0.19 per share | $29.3; $0.24 per share |
| Net loss | $2.0; $0.02 per share | $28.8; $0.24 per share |
| Operating cash flow | $(175.3) | $47.7 |
| Cash and cash equivalents at quarter-end | $71.9 | $292.9 at Dec. 31, 2012 |
- Q1 revenue included $290.2 of separative work unit (SWU) sales, $27.6 of uranium sales and $2.6 of contract services. SWU sales volume fell 49% year over year; average billed SWU price increased 5%.
- Advanced technology costs were $59.3, up from $36.7, reflecting increased RD&D activity. DOE’s $47.6 share of qualifying Q1 program costs was recorded as other income.
- Net income from discontinued operations was $21.7, including a $35.6 gain on NAC’s sale. The sale generated $39.9 cash in Q1 and a further $3.3 in April.
- Operating cash use was driven in significant part by payment of $209.8 of Russian Contract payables. Inventory reductions provided $57.1 of operating cash. Investing cash flow was $39.6, mainly NAC sale proceeds; financing cash use was $85.3, including repayment of the $83.2 term loan.
- Total assets were $1,524.8 and stockholders’ deficit was $469.6 at March 31. Current assets were $1,429.4 and current liabilities $874.2; working capital, as defined in the filing, was $555.2.
- Debt included $530.0 of 3.0% convertible senior notes due October 1, 2014. The amended revolving facility matured September 30, 2013; there were no revolving borrowings, $12.4 of letters of credit and $67.6 of available credit at quarter-end. Restricted cash was $15.1.
- Convertible preferred stock and accrued dividends were reported as a $103.7 current liability. Pension benefit liabilities were $322.4 and postretirement health and life obligations were $210.4.
Material changes versus the prior period
- Revenue fell $221.6, primarily because SWU sales volume declined; gross profit fell $23.4. Although SWU gross profit remained positive, lower volume and unit margins reduced LEU segment gross profit by $22.7.
- Cost of sales per SWU rose 7%; management said the increase was about 3% excluding specified items. Q1 2013 included $2.8 of accelerated Paducah-related expense, while Q1 2012 benefited from a $14.6 reduction in prior accrued costs.
- Cash declined $221.0 during the quarter, compared with a $34.7 increase in Q1 2012. The term loan was repaid in connection with the credit-facility amendment.
- NAC’s results were classified as discontinued operations following its sale. The $21.7 discontinued-operations income made the consolidated net loss much smaller than the continuing-operations loss.
Outlook, management commentary and risks
- Management expected 2013 SWU deliveries to be lower than 2012 and did not update its previously issued financial guidance. It said cash and operating sources could meet obligations for at least 12 months, conditional on renewing or replacing the revolving facility after September 2013.
- The Energy Northwest arrangement supporting Paducah enrichment expired May 31, 2013. A short-term extension was under discussion but not assured; without an agreement, USEC expected to begin ceasing enrichment. Management anticipated lower revenue during the transition and potentially substantial transition costs.
- Management estimated approximately $42 of accrued Paducah lease-turnover costs, including $39 expected within 12 months, and approximately $25 of potential severance costs in a full shutdown without employee transfer.
- The RD&D program was scheduled through December 2013, with total costs up to $350, funded 80% by DOE and 20% by USEC. Funding available at the filing date was expected to support activity through September 30; further funding remained subject to government action. USEC said the program remained on schedule and budget. It had completed construction of the 120-machine demonstration cascade, with integrated testing planned before operation later in 2013.
- Completion of the American Centrifuge Plant required substantial additional financing. USEC cited a pending $2 billion DOE loan-guarantee application, potential Japanese export-credit financing of up to $1 billion contingent on a guarantee, and a further estimated need of at least $1 billion. None was assured; raising project capital could reduce USEC’s ownership.
- USEC stated that it expected adequate liquidity for at least 12 months, but that assessment depended on extending or replacing the credit facility. The filing also described possible balance-sheet restructuring and noted substantial uncertainty about the company’s ability to complete it.
- NYSE listing was at risk: the company had an existing minimum-share-price deficiency and received a separate market-capitalization deficiency notice on April 30, 2013. Delisting could trigger holders’ right to demand cash repurchase at par of the $530.0 notes, which USEC said it could not afford.
- The PBGC had preliminarily estimated approximately $130 of potential ERISA Section 4062(e) liability related to the Portsmouth transition. USEC disputed both liability and the estimate; a future Paducah-related liability could be greater. Other contingencies included DOE contract-payment disputes and an appealed employee severance case; management reported no accrual for the latter.
Important facts for investors to verify
- Whether the revolving facility was renewed or replaced before its September 30, 2013 maturity, and the company’s liquidity after Paducah’s transition.
- Whether Paducah enrichment continued beyond May 31, 2013, and the actual cash, severance, pension, lease-turnover and other transition costs.
- DOE appropriations and reimbursements for RD&D, progress against remaining technical milestones, and the path to American Centrifuge financing and commercialization.
- Developments in the NYSE listing deficiencies and any resulting implications for the convertible notes and credit facility.
- Resolution of the PBGC matter, DOE receivables and claims, and the company’s ability to address the 2014 note maturity and any balance-sheet restructuring.
- Whether reported earnings and liquidity are sustainable apart from NAC’s one-time sale gain and DOE RD&D cost-sharing income.