USEC Inc. (now identified in the request as Centrus Energy Corp.) — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing registrant is USEC Inc.; financial amounts below are in millions of dollars unless stated otherwise.
Business context and financial performance
USEC supplied low-enriched uranium (LEU) to nuclear utilities, enriched uranium at the Paducah gaseous diffusion plant, purchased supply from Russia, and pursued the American Centrifuge project. The business was in transition: Paducah enrichment was supported by a one-year arrangement ending May 31, 2013, while the centrifuge project depended on DOE cost-sharing and future financing.
- Third-quarter revenue: $570.5, up 52% from $374.5. SWU revenue rose 88% to $559.5, principally because of higher sales volume and the timing of customer orders; contract-services revenue fell 80% to $11.0 as Portsmouth work had transitioned to DOE’s contractor.
- Nine-month revenue: $1,496.8, up 24% from $1,209.4. SWU revenue increased 54% to $1,444.6; uranium revenue declined to $3.6 from $103.1, and contract-services revenue declined 71% to $48.6.
- Gross profit and margins: Q3 gross profit was $37.5 versus $26.9, with margin of 6.6% versus 7.2%. Nine-month gross profit was $88.6 versus $74.0, with margin of 5.9% versus 6.1%. Higher SWU sales supported profit, while contract-services contraction and cost pressures weighed on results.
- Net results: Q3 net income was $4.5, or $0.04 per diluted share, versus a $6.9 loss. Nine-month net loss widened to $116.3, or $0.95 per share, from a $44.7 loss. Nine-month operating loss was $88.0; higher advanced-technology expense and interest, including costs no longer capitalized, were significant factors.
- Cash flow: Nine-month operating cash flow was $180.5 versus $107.2. Investing activities provided $95.8, mainly reflecting $99.6 of returned surety collateral, while capital expenditures were $3.8 versus $130.3. Cash increased $265.7 to $303.3.
- Liquidity and working capital: Reported working capital was $524.1, down from $616.0 at year-end 2011. Available credit was $90.1, with no revolving borrowings and $14.9 of letters of credit outstanding. Management said cash, operating cash generation and available credit should cover needs for at least 12 months, assuming repayment of the $85.0 term loan in May 2013 and renewal of the revolving facility at roughly then-current availability.
- Debt and preferred stock: Debt included an $85.0 term loan due May 31, 2013, bearing 10.5% at quarter-end, and $530.0 of 3% convertible notes due October 1, 2014. Convertible preferred stock was classified as a current liability at $97.4 and accrued dividends in kind; debt to total capitalization, including preferred stock, was 52%.
Material changes versus the prior comparable period
- Higher SWU sales volume—up 83% in Q3 and 50% for nine months—drove revenue growth, but the company said orders had been advanced from later periods, which could reduce future sales and backlog.
- Contract-services revenue and gross profit fell substantially following the completion of most Portsmouth site work in 2011.
- Advanced-technology expense rose to $167.6 for nine months from $86.2. USEC expensed current centrifuge-project costs and recorded a $44.6 charge for transferring specified machinery and equipment to DOE; DOE cost-sharing support of $44.6 was recognized as other income for the nine-month period.
- Interest expense increased to $37.7 for nine months from $0.3, in part because project interest was no longer capitalized and because of the new credit facility and financing costs.
- Cash and cash equivalents rose from $37.6 at December 31, 2011, while net inventories declined to $610.8 from $881.9. Customer- and supplier-owned inventory owed by USEC, included in current liabilities, increased to $1,325.4 from $870.1.
Outlook, management commentary and principal risks
- 2012 guidance reiterated: Revenue of approximately $1.95 billion, gross margin of 7%, advanced-technology expense of approximately $250 million (including the $44.6 asset transfer), and DOE-related other income of approximately $105 million. Management expected a full-year loss of roughly $100 million and operating cash flow of approximately $60 million; year-end cash was expected to exceed $200 million.
- Paducah transition: Management believed continued enrichment beyond the Energy Northwest arrangement ending May 2013 would be difficult. It anticipated accelerating depreciation of Paducah assets beginning in Q4 2012, based on an expected lease term through 2014; estimated added cost of sales was $1.8–$2.7 per quarter. The company was discussing a transition and possible property returns with DOE.
- American Centrifuge funding and milestones: The DOE agreement contemplated a $350 million RD&D program through December 2013, funded 80% by DOE and 20% by USEC. DOE funding remained incremental and partly subject to future authorization. The first two technical milestones were achieved; three remained due by December 31, 2013. USEC said completing commercial deployment required substantial additional financing and that a loan guarantee was not assured.
- Potential asset impairment: USEC carried approximately $1.1 billion of capitalized American Centrifuge costs and said it could expense up to that amount if commercial deployment ceased to be probable or were materially delayed. It also identified possible inventory impairment if carrying costs exceeded market prices.
- Liquidity and capital structure: The credit facility matured May 31, 2013, with scheduled $5 million monthly reductions beginning December 2012. Management was developing possible balance-sheet restructuring options. A restructuring could substantially dilute common shareholders or leave them with little or no value.
- Pension and other contingencies: PBGC had informally estimated potential ERISA Section 4062(e) liability related to the Portsmouth transition could exceed $100 million; USEC disputed both applicability and amount. The company also cited potential future pension, severance and lease-transition costs at Paducah. A Portsmouth employee severance lawsuit was dismissed October 11, 2012, subject to the plaintiff’s right to appeal.
- Other notable risks: The amended TVA power arrangement carried minimum payments of approximately $0.5 billion and a take-or-pay obligation through May 2013, subject to specified termination conditions. USEC had received an NYSE minimum-share-price deficiency notice and did not expect to cure it before November 8, 2012; it intended to seek shareholder approval for a reverse stock split. Delisting could trigger a cash repurchase right on the convertible notes and a credit-facility default.
- Management identified continued weak LEU demand, falling market price indicators, reactor shutdowns, customer contract revisions, Russian supply and import restrictions, and delayed DOE payments and appropriations as risks. It foresaw an unfavorable LEU supply-demand imbalance until at least the second half of the decade.
Important facts for investors to verify
- Whether DOE appropriated and delivered the remaining RD&D funding, and whether USEC met the remaining technical milestones.
- Whether USEC renewed or replaced its revolving credit facility before May 31, 2013 and repaid or refinanced the $85.0 term loan.
- The actual Paducah shutdown and de-lease schedule, associated costs, and effect on customer deliveries, inventory access and margins.
- The status and terms of any American Centrifuge financing, project restructuring, and recoverability of the approximately $1.1 billion of capitalized costs.
- The resolution of the PBGC matter, including any accelerated pension funding, and the amount and timing of potential Paducah transition obligations.
- Whether the company met NYSE listing requirements and whether any reverse split or restructuring affected common shareholders or convertible-note obligations.
- Actual full-year 2012 performance versus guidance, particularly cash flow, year-end cash, DOE cost-sharing income and advanced-technology expense.