Business context and reporting period
This is USEC Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 24, 2011; it is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as USEC Inc. Its business comprised low-enriched uranium (LEU) sales, contract services, and development of the American Centrifuge Plant (ACP).
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $2,035.4 million | $2,036.8 million |
| Gross profit / margin | $158.4 million / 7.8% | $204.7 million / 10.1% |
| Operating income | $33.7 million | $94.1 million |
| Net income | $7.5 million; $0.07 basic EPS | $58.5 million; $0.53 basic EPS |
| Operating cash flow | $22.5 million | $443.4 million |
| Capital expenditures | $162.2 million | $441.3 million |
| Cash and cash equivalents at year-end | $151.0 million | $131.3 million |
| Long-term debt at year-end | $660.0 million | $575.0 million |
| Working capital | $985.6 million | $887.0 million |
Revenue was essentially unchanged, but gross profit fell 23% and net income fell 87%. LEU-segment gross profit declined to $134.3 million from $187.4 million; contract-services gross profit rose to $24.1 million from $17.3 million. Year-end debt comprised $575 million of 3.0% convertible notes due 2014 and an $85 million term loan due May 2012. The $225 million revolving facility had no borrowings and $207.7 million of available credit at year-end, subject to borrowing-base and covenant limits. The filing reports debt to total capitalization of 36%, including convertible preferred stock classified as a liability.
Material changes versus the prior comparable period
- SWU revenue fell 8% as sales volume declined 10%, partly offset by a 3% increase in average billed price. Uranium revenue increased 31%, reflecting higher sales volume despite lower average prices.
- LEU cost of sales was broadly flat, but unit costs rose; Russian-contract SWU purchase cost per unit increased 8%. Overall gross margin contracted from 10.1% to 7.8%.
- Operating cash flow dropped sharply from $443.4 million to $22.5 million, with higher receivables following strong fourth-quarter sales and reduced cash generation from working-capital movements. Cash increased by $19.7 million during 2010, supported by financing proceeds.
- ACP capital expenditures declined substantially as the project remained demobilized. USEC reported cumulative ACP investment of approximately $1.95 billion, including about $1.18 billion capitalized and $767 million expensed.
- Revenue from contract services rose 33% in 2010, but Portsmouth cold-shutdown work was scheduled to transition to DOE’s new D&D contractor after March 28, 2011.
Outlook, commentary, risks and unusual items
- 2011 outlook: Management expected revenue of approximately $1.7 billion, gross profit of $70–$80 million and gross margin of 4%–5%; it expected a net loss and did not provide net-income or cash-flow guidance. First-quarter ACP spending was expected to be approximately $50 million, subject to liquidity and credit-facility limits.
- ACP financing and execution: USEC said completion costs were estimated at $2.8 billion from financial close, excluding prior investment, pre-close spending, contingency, financing costs and financial assurance. It had applied for a $2 billion DOE loan guarantee and was pursuing up to $1 billion from Japanese export credit agencies. Neither source was assured. DOE had provided a draft term sheet, but due diligence, final terms and funding conditions remained outstanding. A February 2011 amendment extended the financing milestone to November 2011; missed milestones could expose USEC to DOE remedies.
- Operating transition: The Russian supply contract, representing about half of LEU supply, was expected to end in 2013, with no extension anticipated. Paducah’s power contract with TVA ran through May 2012; electricity represented about 70% of Paducah production costs, and replacement power arrangements were unresolved.
- Portsmouth costs and collections: Management expected a significant decline in government-services revenue beginning in the second quarter of 2011. Potential severance was up to approximately $25 million, and possible pension and postretirement plan closing adjustments were up to approximately $32 million and $15 million, respectively, before potential DOE recoveries; these amounts had not been fully recorded. DOE-related receivables totaled $77.3 million, including $10.9 million past due and $27.7 million unbilled, with recovery timing uncertain.
- Other notable items: 2010 included $44.4 million of DOE cost-sharing income for ACP work, $6.6 million of preferred-stock issuance costs, and a $6.5 million tax charge related to Medicare Part D tax treatment. In 2009, $70.7 million of trade-duty distributions had supported results. Toshiba and B&W completed only the first $75 million of a planned $200 million investment; the remaining phases were conditional. A January 2011 debt-for-equity exchange reduced convertible notes by $45 million and was expected to generate an approximately $3 million gain.
- The filing states that DOJ indicated it did not intend to pursue the False Claims Act matter concerning DOE contract invoices. The filing identifies substantial risks from project funding and cost uncertainty, power-price volatility, Russian supply dependence, customer concentration, regulation, and competition. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether USEC secured the DOE loan guarantee, acceptable credit-subsidy terms, and the additional capital needed to complete the ACP—and whether the project’s full cost materially exceeds the stated estimate.
- Whether ACP machine performance, supplier readiness, remobilization schedule and DOE milestone compliance support commercial deployment.
- Whether USEC obtained economic Paducah power beyond May 2012 and adequate LEU supply and replacement economics after the Russian contract ends in 2013.
- The actual revenue, staffing and one-time costs resulting from the Portsmouth contract transition, including severance, benefit-plan adjustments and DOE receivable collections.
- Whether 2011 results and cash generation were consistent with management’s outlook, particularly the projected margin decline, expected net loss and ACP spending needs.