USEC Reports Second Quarter
2012 Results
. Net loss of $92.0 million on revenue of $364.8 million
. Cash flow
provided by operations of $162.1 million; Cash balance of $229 million
. Advanced
technology expense of $85.7 million, including non-cash expense related to
transfer of centrifuge assets totaling $44.6 million
. 2012 outlook
updated on RD&D spending, year-end cash balance
BETHESDA, Md. - USEC Inc. (NYSE:USU) today reported a net
loss of $92.0 million or 76 cents per share for the quarter ended June 30,
2012, compared to a net loss of $21.2 million or 18 cents per share for the
second quarter of 2011. For the six-month period of 2012, the company reported
a net loss of $120.8 million or 99 cents per share compared to a net loss of
$37.8 million or 31 cents per share in the same period of 2011.
The largest factor in the net loss for the second quarter of 2012 was advanced
technology expense of $85.7 million. This amount includes an expense of $44.6
million related to the title transfer of previously capitalized machinery and
equipment to the Department of Energy (DOE) as provided under the cooperative
agreement for the research, development and demonstration (RD&D) program
for the American Centrifuge technology. Since the fourth
quarter of 2011, USEC has expensed all American Centrifuge project costs,
including interest expense that previously would have been capitalized. In the
second quarter of 2012, interest expense was $12.7 million. Combined, advanced
technology and interest expense in the second quarter of 2012 was $64.8 million
more than in the same quarter of 2011, partially offset by $10.0 million in
other income that represents DOE's share of the RD&D program beginning June
1, 2012.
"We made significant progress in the second quarter by securing near-term
funding for the RD&D program and putting in place a contract to support one
year of continued enrichment operations at the Paducah Gaseous Diffusion Plant,"
said John K. Welch, USEC president and chief executive officer. "While the
benefits of these achievements on our financial performance for the second
quarter were limited, these are significant accomplishments that are important
to our longer term success and will positively impact our financial performance
over the balance of the year.
"Our spending on American Centrifuge during the first half of the year
kept this important project moving forward even as we worked with DOE to fund
the RD&D program. Clearly this advanced technology expense had a
substantial effect on our financial results, but we believe it was essential to
providing a path for the successful commercial deployment of the technology.
"Our updated financial guidance reflects our expectation for better
results for the remainder of 2012," Welch said. "We now expect total
revenue of nearly $2 billion and a gross profit of approximately $140 million.
In addition, the cost-share arrangement for spending on the American Centrifuge
will significantly offset future expensing of RD&D spending."
USEC issued a separate news release today providing an update on the American
Centrifuge project and the RD&D program.
Revenue
Revenue for the second quarter of 2012 was $364.8 million, a 20 percent decline
over the same quarter of 2011. Revenue from the sale of separative work units
(SWU) for the quarter was $347.2 million compared to $330.3 million in the same
period last year. The volume of SWU sales was virtually unchanged compared to
the same quarter of 2011, but the average price billed to customers was 5
percent higher. For the six-month period, revenue in 2012 was $926.3 million,
an increase of $91.4 million or 11 percent compared to the same period in 2011.
Revenue from the sale of uranium was $3.6 million in both the second quarter
and six-month period of 2012 compared to $81.8 million in the first half of
2011. Most of our inventories of uranium available for sale have been sold in
prior years, and we expect this trend of significantly lower uranium revenue to
continue.
Revenue from the contract services segment was $14.0 million in the second
quarter and $37.6 million in the six-month period of 2012 compared to $56.3
million and $114.3 million in the respective periods 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 in the segment is now
dominated by our subsidiary NAC. Revenue by NAC decreased $3.6 million in the
three-month period and increased $8.3 million in the six-month period primarily
as a result of timing in sales related to NAC's 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
(LEU) is physically delivered. At June 30, 2012, deferred revenue totaled
$139.4 million compared to $146.8 million at March 31, 2012. The gross profit
associated with deferred revenue as of June 30, 2012, was $8.6 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 June 30, 2012, for SWU and uranium was
$340..4 million, a decrease of $28.2 million compared to the same quarter in
2011, primarily due to lower uranium sales volumes, partially offset by higher
unit SWU costs. Cost of sales for the segment increased $165.8 million in the
six months ended June 30, 2012, compared to the corresponding period in 2011,
primarily due to higher SWU sales volumes, partially offset by lower uranium
sales volumes. Cost of sales per SWU was 4 percent higher in the second quarter
and was flat for the six months ended June 30, 2012, compared to the
corresponding periods in 2011. Cost of sales was reduced during the current
periods for revisions to prior accrued amounts related to estimated disposal
costs for depleted uranium and property taxes and power prepayments related to
enrichment operations. These accrued estimated amounts had been previously
included in our production costs and included in SWU inventory. In addition,
prior to the start of 2012, a significant portion of the costs related to
pension and postretirement health and life benefit plans were attributed to
Portsmouth contract services, based on the employee base performing contract
services work. Starting in 2012, ongoing pension costs related to our former
Portsmouth employees are charged to the LEU segment rather than the contract
services segment based on our continuing enrichment operations that support our
active and retired employees. Excluding the effects of these items, cost of
sales per SWU was approximately 2 percent higher in the six months ended June
30, 2012, compared to the corresponding period in 2011.
Production costs increased $26.2 million, or 15 percent, in the second quarter
and $29.4 million in the six-month period compared to the corresponding periods
of 2011. Production volume increased 20 percent and 11 percent in the three-
and six-month periods, respectively, as USEC purchased supplemental power
during 2012 from the Tennessee Valley Authority (TVA) that had been deferred from
2011 due to regional flood conditions. The average cost per megawatt hour
decreased 1 percent in the first half of 2012 compared to the corresponding
period of 2011, reflecting lower TVA fuel cost adjustments, partially offset by
the fixed, annual increase in the TVA contract price. The unit production cost
declined 3 percent in the six-month period reflecting the lower impact of fixed
costs on increased production volumes.
We purchase approximately 5.5 million SWU per year under the Megatons to
Megawatts program, and the purchase costs for the SWU component of LEU under
the program declined $4.1 million in the six-month period compared to the
corresponding period of 2011, reflecting reduced volume due to the timing of
deliveries, partially offset by a 2 percent increase in the market-based unit
purchase cost.
Cost of sales for contract services was $33.6 million in the six-month period,
a decrease of $78.4 million over the same period last year, reflecting the
transition of contract services work at the Portsmouth site to DOE's
decontamination and decommissioning contractor.
The gross profit for the second quarter was $12.3 million compared to $33.2
million in the same quarter last year. In the six-month period, the gross
profit was $51.1 million compared to $47.1 million in the same period of 2011.
The gross profit margin for the six-month period of 2012 period was 5.5 percent
compared to 5.6 percent in the same period of 2011. Gross profit for the LEU
segment increased $2.3 million in the six-month period due to higher SWU unit
gross profits and sales volumes, partially offset by lower uranium sales
volumes. Gross profit for the contract services segment increased $1.7
million in the 2012 six-month period reflecting increased gross profit for NAC.
Advanced Technology, Other Income, Special Charges and Interest
Advanced technology
expense, primarily related to the demonstration of the American Centrifuge
technology, was $85.7 million in the second quarter compared to $33.5 million
in the second quarter of 2011. This increase of $52.2 million primarily
reflects an expense of $44.6 million related to the title transfer of
previously capitalized American Centrifuge machinery and equipment to DOE as
provided in the cooperative agreement entered into with DOE for the RD&D
program. As previously noted, beginning in the fourth quarter 2011, all
American Centrifuge project costs incurred have been expensed. Capitalization
of expenditures related to the American Centrifuge project has ceased until
commercial plant deployment resumes.
Advanced technology
expense includes expenses by NAC to develop and expand its MAGNASTORT storage
and transportation technology of $0.4 million during the six-month period of
2012 compared to $0.7 million in the same period of 2011.
USEC entered into a
cooperative agreement with DOE in June 2012 for pro-rata cost sharing support
for continued American Centrifuge activities with a total estimated spending in
the initial phase of $33.1 million. DOE made the $26.4 million available by
taking the disposal obligation for a specific quantity of depleted uranium from
USEC, which will release encumbered funds for investment in the American
Centrifuge technology that we had otherwise committed to future depleted
uranium disposition obligations. As of June 30, 2012, USEC made qualifying American
Centrifuge expenditures of $12.5 million. DOE's pro-rata share of 80 percent,
or $10.0 million, is recognized as other income in the three and six-month
periods.
Selling, general and
administrative expenses in the six-month period of 2012 were $29.7 million, a
decrease of $2.5 million over the same period in 2011, reflecting lower salary,
employee benefit and other compensation costs and lower consulting costs.
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 $1.5 million in the second quarter of 2012 and $6.0 million in
the six months.
Initial actions taken
related to our organizational structure resulted in workforce reductions at our
American Centrifuge design and engineering operations in Oak Ridge, Tenn., the
central services operations located in Piketon, Ohio, and at our headquarters
operations located in Bethesda, Md. The reductions to-date involved 45
employees, including two senior corporate officers. A charge of $1.9 million
was incurred in the first quarter of 2012 and $1.7 million in the second
quarter of 2012 for one-time termination benefits consisting of severance
payments, short-term health care coverage and immediate vesting of restricted
stock for certain employees. Additional actions affecting employees to align
the organization with our evolving business environment are expected.
Interest expense
increased $12.6 million in the three months and $25.3 million in the six months
ended June 30, 2012, compared to the corresponding periods in 2011. 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 and six months ended June 30, 2011,
interest costs of $10.6 million and $21.6 million were capitalized,
respectively. 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 June 30, 2012,
USEC had a cash balance of $229.0 million compared to $72.3 million at March
31, 2012. Cash flow provided by operations in the six-month period of 2012 was
$162.1 million compared to cash flow provided by operations of $285.6 million
in the same period last year. Inventories declined $340.3 million in the
six-month period due to monetization of inventory produced in the prior year.
Payment of the Russian Contract payables balance of $65.2 million, due to the
timing of deliveries, was a significant use of cash flow in the six months
ended June 30, 2012. 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 $91.0 million. Cash
collateral deposits of $43.8 million were returned to us in June 2012 in
connection with the modification of surety bonds following the decrease in
accrued depleted uranium disposition in the first quarter associated with the
March 2012 uranium transfer agreement with DOE. Cash payments of $9.8 million
were made for financing costs.
2012 Outlook Update
On June 27, 2012,
USEC provided an update to its financial outlook for 2012. We are providing a
further update to our 2012 outlook and additional details specifically related
to the RD&D program. During the second quarter of 2012, we signed
agreements with DOE and others that have enabled us to provide an updated view
of financial projections for the remainder of the year. In May, USEC entered
into a multi-party arrangement with Energy Northwest, the Bonneville Power
Administration, the Tennessee Valley Authority and DOE to extend uranium
enrichment operations at the Paducah, Ky. plant. In June, we also entered into
an agreement with DOE regarding a two-year, cooperative research, development
and demonstration program for the American Centrifuge technology. The RD&D
program includes an 80 percent DOE and 20 percent USEC cost-sharing of expenses
with a total estimated cost of $350 million. This agreement will be
incrementally funded, and to date, DOE funding is limited to $87.7 million.
Under the Paducah
agreement, Energy Northwest is providing USEC with approximately 9,000 metric
tons of high-assay depleted uranium. USEC will enrich the depleted uranium
tails to make about 480 metric tons of LEU. The program, combined with other
USEC commercial obligations, will require approximately 5 million SWU.
Production of the LEU, which began in early June, will take about 12 months.
The overall tails disposal liability of the U.S. government will be reduced as
a result of the agreement and subsequent processing.
USEC's guidance in
the first quarter of 2012 did not assume Paducah operations beyond May 31,
2012, and included an expectation that 2012 SWU deliveries would be roughly
equivalent to 2011 deliveries. As a result of the new contract, USEC expects to
increase SWU deliveries in 2012 by approximately 30 percent compared to last
year and roughly equal to the volume of SWU sold in 2009. Revenue from the sale
of SWU is expected to be approximately $1.8 billion, an increase of $300
million to $400 million over first quarter guidance. We anticipate the average
price per SWU billed to customers will increase 5 percent compared to 2011.
Uranium revenue in 2012 is expected to be less than $50 million, subject to
timing of sales, which is $80 million less than in 2011.
Guidance for the contract services segment is unchanged. Contract services work
for DOE at the former Portsmouth GDP was completed in September 2011, and
revenue for the segment is expected to decline significantly in 2012. In prior
years, contract work at Portsmouth represented approximately three-quarters of
revenue for the contract services segment. USEC 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.
Total revenue is expected to be approximately $1.95 billion. Based on our view
of revenue and expense, we expect to earn a gross profit of approximately $140
million, reflecting a gross profit margin in 2012 of approximately 7 percent,
compared to 5 percent in 2011.
Below the gross profit line, we will have significant expenses related to the
American Centrifuge project. Beginning in the fourth quarter of 2011, all
project costs incurred have been expensed, including interest expense that
previously would have been capitalized. We will expense cost under the RD&D
program as incurred. We expect advanced technology expense and the transfer of
certain assets to DOE valued at $44.6 million to total approximately $250
million in 2012, with about half of that amount having been expensed prior to
the start of the RD&D program in June. Interest expense that previously
would have been capitalized is expected to be approximately $40 million. Under
the 80/20 cost share with DOE for the RD&D program, we expect to report
Other Income of approximately $105 million for 2012. This assumes additional
funding is authorized in addition to the $87.7 million authorized to date.
We have undertaken a review to align our organization with our evolving
business environment and to reduce the size of our workforce over time. The
recent agreements regarding the RD&D program and a 12-month extension of
Paducah enrichment operations will stretch out the time period for additional
workforce reductions. Further workforce reductions would require us to take
additional charges for one-time employee termination benefits. We expect our
SG&A expense to be approximately $58 million in 2012, a $4 million
reduction from 2011, as our financial results begin to reflect the benefit of
reductions in corporate expenses.
Although we expect to
earn a gross profit of approximately $140 million, advanced technology expense,
interest expense, and special charges are expected to result in loss for the
full year 2012 of approximately $100 million. However, we expect to report cash
flow from operations of approximately $30 million and to end the year with a
cash balance of approximately $200 million without outstanding loans on the
revolving portion of our credit facility, although we will have issued letters
of credit. Looking to 2013, we expect the volume of SWU sold will decline by
approximately one-third.
Our financial
guidance is subject to a number of assumptions and uncertainties that could
affect results. Variations from our expectations could cause substantial
differences between our guidance and ultimate results. Among the factors that
could affect our results are:
. Movement and timing
of customer orders;
. Changes to SWU and
uranium price indicators, and changes in inflation that can affect the price of
SWU
billed to customers;
. The pace and number of
nuclear power reactors in Japan that are restarted following
extensive safety inspections;
. Availability of
funding for and continuance of the RD&D program;
. Our ability to
complete the contract with Energy Northwest to enrich depleted uranium; and
. Potential acceleration
of expenses and depreciation and other costs that may be triggered by
decisions
with respect to the continuation of Paducah enrichment operations beyond May
2013.