USEC Inc. Form 10-Q Summary — Quarter Ended September 30, 2011
Company identification: The filing is by USEC Inc., the historical registrant associated with Centrus Energy Corp.; it is not filed under the Centrus Energy Corp. name. Financial statements are unaudited and report results for the three and nine months ended September 30, 2011.
Business context and reporting period
USEC supplied low-enriched uranium (LEU) to nuclear utilities, sourcing roughly half its supply from enrichment at the Paducah gaseous diffusion plant and half under the Russian Megatons to Megawatts contract. It was also developing the American Centrifuge Plant (ACP) and provided government contract services and nuclear fuel-storage products through NAC International. Portsmouth site services transferred to the Department of Energy’s decontamination and decommissioning contractor on September 30, 2011.
Financial performance
| Metric (millions, except per-share data) | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $374.5 | $564.6 | $1,209.4 | $1,369.0 |
| Gross profit | $26.9 | $38.0 | $74.0 | $108.8 |
| Gross margin | 7.2% | 6.7% | 6.1% | 7.9% |
| Operating income (loss) | $(14.7) | $7.8 | $(56.3) | $17.5 |
| Net income (loss) | $(6.9) | $1.0 | $(44.7) | $(1.5) |
| Net loss per share, basic and diluted | $(0.06) | $0.01 | $(0.37) | $(0.01) |
- Q3 revenue fell 34% year over year. SWU revenue declined 26% and uranium revenue 73%, primarily reflecting lower sales volumes and customer-order timing. Contract-services revenue declined 32%.
- For the first nine months, revenue fell 12%; gross profit fell 32%. Lower LEU sales volumes and higher unit costs weighed on results. Average SWU selling prices increased, but did not offset the volume and cost effects.
- Cash from operations was $107.2 million for the first nine months, versus $30.0 million in 2010. The filing attributes this in part to collections of receivables and higher Russian-contract payables; inventory growth used cash.
- Capital expenditures were $130.3 million. Investing activities used $133.9 million and financing activities used $6.4 million. Cash declined by $33.1 million to $117.9 million.
- At September 30, cash was $117.9 million, working capital was $776.6 million (down from $985.6 million at year-end 2010), and current assets and current liabilities were $2,334.7 million and $1,558.1 million, respectively.
- Debt comprised an $85.0 million term loan due May 31, 2012 and $530.0 million of 3.0% convertible notes due October 1, 2014. The term-loan interest rate was 9.5%. The revolving facility had no borrowings, $16.9 million of letters of credit and $208.1 million of available credit. Convertible preferred stock, carried as a liability, was $85.9 million.
Material changes and unusual items
- Portsmouth government services ended September 30, reducing a source of contract-services revenue going forward. NAC revenue increased, supported by dry-cask storage-system sales.
- USEC exchanged $45 million principal amount of convertible notes for approximately 6.95 million common shares and cash for accrued interest; it recorded a $3.1 million debt-extinguishment gain. Shares outstanding rose to 123.0 million at September 30 from 115.2 million at December 31, 2010.
- USEC expensed $9.6 million of previously capitalized centrifuge costs in Q2 for machines irreparably damaged during lead-cascade operations. It said there was no machine technology, design or manufacturing issue associated with the damage.
- Portsmouth employee transitions resulted in $5.1 million of 2011 pension and postretirement curtailment charges. A separate Portsmouth severance liability was less than $1 million at quarter-end.
- ACP-related capitalized costs were approximately $1.3 billion. USEC said it could expense up to that amount if deployment ceased to be probable or was significantly delayed; up to $100 million of earlier machines was also under review for possible write-off.
Outlook, management commentary and principal risks
- 2011 guidance was revenue of approximately $1.7 billion, including about $1.4 billion of SWU revenue and $135 million of uranium revenue. Management expected SWU volume to be 10% below 2010 and average billed SWU prices to rise at least 3%; contract-services revenue was estimated at approximately $200 million.
- Management expected a full-year gross margin of 5%–6%, SG&A of about $60 million, and a net loss. It expected existing enrichment operations to generate positive operating cash flow, but provided no net-income or cash-flow guidance because of ACP uncertainty.
- USEC had reduced October 2011 ACP spending by approximately 30%, suspended some supplier contracts and issued potential-layoff notices to about 450 ACP workers. It was discussing a DOE research, development and demonstration program potentially involving up to $300 million in government funding. No agreement or funding had been secured as of the filing; further cuts or project demobilization could occur.
- The company was also assessing whether Paducah could operate economically beyond May 2012. The TVA power contract expired May 31, 2012; management cited power costs, market demand and a possible DOE depleted-uranium re-enrichment contract as key factors. Without an extension, USEC said it would cease being a uranium-enrichment producer during the transition period.
- Liquidity depended in part on renewing or replacing the credit facility, which matured May 31, 2012. Management’s expectation that resources would cover at least 12 months assumed renewal of the revolving facility and repayment of the term loan at maturity; failure to refinance could materially impair liquidity and raise going-concern uncertainty.
- Other material risks included uncertainty around DOE loan-guarantee financing and project milestones; possible termination of the Toshiba/Babcock & Wilcox investment agreement; potential ACP impairment and related tax-asset valuation allowances; Fukushima-related weaker demand and excess market supply; and implementation and import-quota conditions on the new TENEX supply agreement.
- The filing noted a Portsmouth salaried-employee severance lawsuit; USEC stated it believed it had meritorious defenses, had accrued no amount, and could not estimate a possible loss. It did not believe other ordinary-course legal matters would materially affect results or financial condition.
Investor verification priorities
- Whether USEC and DOE reached a funded RD&D agreement, what conditions and cost-sharing applied, and whether the ACP continued or was demobilized.
- Whether the May 2012 credit facility was renewed or replaced, and whether USEC could repay the term loan and maintain adequate liquidity.
- Whether Paducah operations continued beyond May 2012, including the power arrangement, customer demand and any DOE tails re-enrichment contract.
- Whether ACP capitalized assets were impaired, including the machines under review and any resulting deferred-tax valuation allowance.
- Whether the Toshiba/B&W investment remained available and whether the TENEX supply contract’s required government arrangements and import permissions were completed.
- How fourth-quarter results and cash flows compared with guidance, especially given order timing, customer advances and the end of Portsmouth services.