USEC
Reports First Quarter 2012 Results
- Net
loss of $28.8 million on revenue of $561.5 million
- Gross
profit and gross profit margin improve over first quarter 2011
- RD&D
program expense increases advanced technology expense to $36.8 million
- Cash
flow provided by operations remains positive at $47.7 million
BETHESDA, Md. - USEC Inc.
(NYSE:USU) today reported a net loss of $28.8 million or 24 cents per share for
the quarter ended March 31, 2012, compared to a net loss of $16.6 million or 14
cents per share for the first quarter of 2011.
The financial results for
the first quarter reflect a 74 percent increase in separative work unit (SWU)
revenue and a 179 percent increase in overall gross profit as a result of a
higher gross profit margin. The gross profit margin was 6.9 percent in the
first quarter of 2012 compared to 3.7 percent in the same quarter last year. Offsetting
this improvement was higher advanced technology expense related to the
research, development and demonstration (RD&D) program for the American Centrifuge
technology proposed by the Department of Energy (DOE). Since the fourth quarter
of 2011, USEC has expensed all American Centrifuge project costs, including
interest expense that was previously capitalized.
"Although we recorded a net loss in the first quarter, we are pleased
to report higher revenue, a higher gross profit and gross profit margin, and
positive cash flow from operations in the quarter compared to the first quarter
of 2011," said John K. Welch, USEC president and chief executive officer.
"We have continued working toward the goals of the RD&D program
with USEC funding, but to achieve the program's goals, we need federal funds
through 2013. We are pleased with the strong support and progress by House and
Senate appropriators in the past week on fiscal 2013 funding. But, we are
quickly running out of time to obtain the necessary fiscal 2012 funding.. Our
credit facility severely limits spending on the American Centrifuge project
after May 31 unless we have federal RD&D funding in place. That means we
need action this month, or we will be forced to demobilize the project,"
Welch said.
"We continue to be in discussions regarding a multi-party arrangement
to produce U.S.-origin low enriched uranium by enriching a portion of DOE's
depleted uranium tails inventory at Paducah. If we are successful, we expect
the agreement to support operating Paducah for another year through May 31,
2013, as we work with DOE on the longer term transition plan for the
plant," he said. "However, as with any transaction, a deal is not
final until all approvals have been provided and final agreements signed."
Revenue
Revenue for the first quarter of 2012 was $561.5 million, an increase of
$181.0 million compared to the same quarter of 2011. Revenue from the sale of
SWU for the quarter was $537.9 million compared to $308.5 million in the same
period last year. The volume of SWU sales increased 73 percent in the quarter
reflecting the variability in timing of utility customer orders, including
orders that USEC and its customers have advanced from later in 2012 and from
2013. The average price billed to customers increased 1 percent. There was no
revenue from the sale of uranium in the first quarter of 2012 compared to $14.0
million in the first quarter of 2011. Revenue from the contract services
segment was $23.6 million in the first quarter of 2012 compared to $58.0
million in the same period of 2011. The decrease was due to a 98 percent
reduction in contract services revenue at the Portsmouth site as work was
transferred to a decontamination and decommissioning contractor for DOE over
the course of 2011. Revenue by subsidiary NAC International increased $11.9
million or 157 percent in the three-month period primarily as a result of
increased sales of dry cask storage systems.
In a number of sales transactions, USEC transfers title and collects cash
from customers but does not recognize the revenue until the low enriched
uranium is physically delivered. At March 31, 2012, deferred revenue totaled
$146.8 million compared to $181.5 million at December 31, 2011. The gross
profit associated with deferred revenue as of March 31, 2012, was $7.1 million.
A majority of reactors served by USEC are refueled on an 18-to-24-month
cycle, which can lead to significant quarterly and annual swings in SWU sales
volume that reflects the mix of refueling cycles. Therefore, short-term
comparisons of USEC's financial results are not necessarily indicative of
longer-term results.
Cost of Sales and Gross Profit Margin
Cost of sales for the quarter ended March 31, 2012, for SWU and uranium was
$501.2 million, an increase of $194.0 million or 63 percent, compared to the
corresponding period in 2011 due to the associated increase in SWU sales
volume. Cost of sales per SWU was 2 percent lower in the quarter compared to
the first quarter of 2011 due to revisions to prior accrued amounts associated
with estimated disposal costs for depleted uranium and property taxes related
to enrichment operations. Excluding the effect of these items, cost of sales per
SWU was approximately 1 percent higher than the first quarter of 2011. Cost of
sales for SWU reflects monthly moving average inventory costs based on
production and purchase costs.
Production costs increased $3.2 million, or 2 percent, as production volume
increased 4 percent in the three months ended March 31, 2012, compared to the
corresponding period in 2011. The unit production cost, however, declined 3
percent in the first quarter of 2012 compared to the corresponding period in
2011. USEC purchased supplemental power during the first quarter of 2012 from
the Tennessee Valley Authority (TVA) that had been deferred from 2011 due to
regional flood conditions. The average cost per megawatt hour declined 5
percent reflecting lower TVA fuel cost adjustments, partially offset by the
fixed, annual increase in the TVA contract price. Although the unit cost of
production declined, the SWU unit cost of sales was negatively affected by
higher production and purchase costs embedded in our inventory costs from prior
periods.
We purchase approximately 5.5 million SWU per year under the Megatons to
Megawatts program, but under our agreed upon shipping schedule, there were no
deliveries in the first quarter of either 2011 or 2012.
Cost of sales for contract services was $21.5 million in the first quarter,
a decrease of $37..9 million or 64 percent over the same period last year,
reflecting the transition of contract services work at the Portsmouth site,
partially offset by increased sales by NAC.
The gross profit for the first quarter was $38.8 million, an increase of
$24.9 million over the same period in 2011. The gross profit margin for the
2012 period was 6..9 percent compared to 3.7 percent in the first quarter of
2011. Gross profit for the LEU segment was $21.4 million higher due to higher
SWU sales volume and lower costs. Gross profit for the contract services
segment increased $3.5 million in the three months compared to the
corresponding period in 2011, reflecting increased gross profit for NAC and a
$3.2 million pension curtailment charge in the prior period related to the
transition of Portsmouth site contract service workers to DOE's decontamination
and decommissioning contractor.
Advanced Technology, Special Charges and Interest
Advanced technology expense, primarily related to the demonstration of the
American Centrifuge technology, was $36.8 million in the quarter compared to
$26.7 million in the first quarter of 2011. As previously noted, beginning in
the fourth quarter 2011, all American Centrifuge project costs incurred have
been expensed. Although overall project spending has been reduced, costs
charged to expense were greater in 2012. Advanced technology expense includes
expenses by NAC to develop and expand its MAGNASTORT storage and transportation
technology of $0.1 million during the first quarter 2012 compared to $0.4
million in the same period of 2011.
Selling, general and administrative expenses in the first quarter were $14.9
million, a decrease of $0.6 million over the same period in 2011, primarily due
to slightly lower salary, employee benefit costs and other small expense
reductions.
USEC's business is in a state of significant transition, and in early 2012
we initiated an internal review of our organizational structure. We engaged a
management consulting firm to support this review, and costs for the management
consulting firm and other advisors totaled $4.5 million in the first quarter of
2012.
Initial actions taken related to our organizational structure resulted in
workforce reductions at our American Centrifuge design and engineering
operations in Oak Ridge, Tenn., and at our headquarters operations located in
Bethesda, Md. The reductions involved 25 employees, including two senior
corporate officers. A charge of $1.9 million was incurred in the first quarter
of 2012 for one-time termination benefits consisting of severance payments and
short-term health care coverage. Related cash expenditures of $0.7 million were
incurred in the first quarter of 2012, and most of the remainder is expected to
be incurred in the second quarter of 2012.
In April, we took additional action to reduce costs with a focus on
headquarters operations in Bethesda and central services located in Piketon,
Ohio. Approximately 20 positions were eliminated and related severance costs of
$1.1 million are expected in the second quarter 2012.
Interest expense was $12.7 million in the three months ended March 31, 2012.
As noted above, all American Centrifuge related project costs incurred have
been expensed, including interest expense that previously would have been
capitalized. For comparison, in the three months ended March 31, 2011, interest
costs of $11.0 million were capitalized. Interest expense in the first quarter
of 2012 included $1.4 million of previously deferred financing costs related to
the former credit facility that were expensed in connection with the amended
and restated credit facility obtained in March 2012.
Cash Flow
At March 31, 2012, USEC had a cash balance of $72.3 million compared to
$37.6 million at December 31, 2011. Cash flow provided by operations in the
first quarter of 2012 was $47.7 million, compared to cash flow provided by
operations of $51.3 million in the previous year. Inventories declined $347.8
million in the three-month period due to monetization of inventory produced in
the prior year. The increase in accounts receivable of $36.0 million reflects
the lag in some inventory monetization. Payment of the Russian Contract
payables balance of $206.9 million, due to the timing of deliveries, was a
significant use of cash flow in the three months ended March 31, 2012. The
decrease in accrued depleted uranium disposition in the first quarter
associated with the $44.0 million uranium transfer agreement with DOE will not
generate cash flow until surety bonds can be modified and cash collateral
returned. Capital expenditures were significantly reduced due to our decision
to expense all costs related to the American Centrifuge project. In the same
period of 2011, capital expenditures totaled $50.7 million.
On March 13, 2012, USEC amended and restated its existing $310.0 million
credit facility, scheduled to mature on May 31, 2012, to a $235.0 million
credit facility that matures on May 31, 2013. The amended and restated credit
facility includes a revolving credit facility of $150.0 million (including up
to $75.0 million in letters of credit) and a term loan of $85.0 million. Under
the amended and restated credit facility, commencing December 3, 2012, the
aggregate revolving commitments and term loan principal will be reduced by $5.0
million per month through the expiration of the credit facility. As with the
former facility, the credit facility is secured by the assets of USEC Inc. and
its subsidiaries. Borrowings under the credit facility are subject to
limitations based on established percentages of eligible accounts receivable
and USEC-owned inventory pledged as collateral to the lenders.
Paducah Plant Update
We have recently been in discussions regarding a potential one-year
extension of Paducah enrichment operations through a multi-party arrangement
involving the participation of Energy Northwest, a West Coast power supplier,
the Bonneville Power Administration (BPA), a federal agency within DOE, TVA and
DOE. The proposed arrangement would involve the enrichment of depleted uranium
tails currently owned by DOE to produce U.S. origin low enriched uranium (LEU).
As part of this arrangement, we would enter into an amendment to our existing
power contract with TVA to purchase the power needed to operate the Paducah
plant through the term of this arrangement. We hope to finalize the agreements
among the parties in the near term. However, we have no assurance that we will
reach an agreement, and if we are not successful, we expect to be ramping down
enrichment operations at Paducah in May.
Even if we are successful in a one-year extension of Paducah enrichment
operations, we have no assurance that we will continue enrichment operations at
Paducah beyond the one-year term of an agreement. Even if market demand
improves in the next year, market demand and plant economics may not support
continued enrichment operations. Although the plant continues to operate at a
very high level of efficiency, the technology uses significant amounts of
electric power and is not cost-competitive with gas centrifuge plants operated
by our competitors. During 2012, USEC expects to engage in continuing
discussions with DOE regarding the future of the Paducah plant and the
transition of Paducah operations. Under our lease, DOE has the obligation for
decontamination and decommissioning of the Paducah plant. If enrichment
operations cannot be extended, we will be working with DOE to achieve an
orderly termination of enrichment operations and phased de-lease of the
facilities to minimize transition costs.
American Centrifuge
Update
During the first quarter of
2012, USEC began work on the RD&D program and expects to fund the program
activities through May 31, 2012. DOE proposed this two-year cost share program
to enhance the technical and financial readiness of the centrifuge technology
for commercialization. Under the cost-sharing arrangement, DOE's total
contribution would be capped at $300 million. Despite the lack of a conditional
commitment for a loan guarantee, DOE's proposal to share the cost of the
RD&D program reflects the importance the U.S. government places on having a
source of domestic uranium enrichment. The terms of USEC's new credit facility
allows spending on the American Centrifuge project of up to $15 million per
month through May 31, 2012, but significantly limits spending after May 31.
Unless we enter into definitive agreements with DOE for federal funding of the
RD&D program, our spending on the project after May 31 will generally be
limited to $1 million per month, an amount that will not support continuation
of the proposed RD&D program.
USEC has been working with
Congress and DOE on legislation to provide federal funding for the RD&D
program in government fiscal year 2012, but federal funding for the program has
yet to be approved. The current political environment in Washington has
significantly slowed the legislative process and obtaining legislation
providing for 2012 funding prior to May 31, or at all, is highly uncertain. We
are also pursuing a non-legislative path to funding for 2012 with DOE.
President Obama's fiscal year 2013 budget proposal includes $150 million for
the RD&D program. The U.S. House and Senate are considering appropriations
bills that include funding for the program. However, given the significant
uncertainty surrounding our prospects for finalizing an agreement and obtaining
funding from DOE for an RD&D program and the timing thereof, we are also in
parallel preparing for a demobilization of the project. Our evaluation of these
options is ongoing.
2012 Outlook Update
We will make a number of
decisions during 2012 regarding our business that will significantly affect
financial results for the year and future years. For example, we are in
discussions with Energy Northwest, BPA, TVA and DOE on a multi-party
arrangement that involves enriching DOE depleted uranium tails, which would
allow us to continue enrichment operations at the Paducah plant for another
year. During 2012, we expect to engage in continuing discussions with DOE
regarding the future of the Paducah GDP and the transition of Paducah
operations. We also continue to work with DOE and Congress regarding funding
for the RD&D program. We expect to fund RD&D program activities through
May 31, 2012, but our credit facility significantly restricts our spending on
the American Centrifuge project beyond that date. As a consequence, the
amount of advanced technology expense beyond that date is uncertain and
dependent on government funding for the RD&D program. In addition, we are
in the midst of an organizational structure review that we anticipate will
result in long-term cost reductions, but that will require short-term charges
to reflect the costs for outside advisors and the cost of implementing
personnel reductions. Given this continued uncertainty regarding key elements
of our business, we are not providing guidance at this time for earnings or
cash flow from operations, but we are providing guidance on expected revenue.
We expect to deliver significant quantities of LEU to customers in 2012.
Revenue from the sale of SWU is expected to be approximately $1.4 to $1.5
billion, but could increase depending on the terms of a potential arrangement
to enrich DOE depleted uranium tails. Uranium revenue in 2012 is expected to be
lower than in recent years and is dependent on the level of Paducah production
in 2012 and our obligations to return uranium to TENEX under the Russian
Contract. We anticipate buying 5.5 million SWU from Russia under the Megatons
to Megawatts program during 2012. Under the pricing formula, the price we pay
Russia will increase 2 percent compared to deliveries in 2011.
Our contract services work at the former Portsmouth GDP for DOE was largely
completed in September 2011, and revenue for that segment is expected to
decline significantly in 2012. In prior years, contract work at Portsmouth
represented approximately three-quarters of the revenue for the contract
services segment. Our subsidiary NAC will represent a majority of revenue for
the segment going forward, and we expect annual revenue for contract services
in 2012 of approximately $85 million.
USEC Inc., a global energy company, is a leading supplier of enriched
uranium fuel and nuclear industry related services for commercial nuclear power
plants.