<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14287
USEC INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2107911
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2 DEMOCRACY CENTER, 20817
6903 ROCKLEDGE DRIVE, BETHESDA, MD (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (301) 564-3200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
As of December 31, 1998, there were 100 million shares of Common Stock, par
value $.10 per share, issued and outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
USEC INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
FINANCIAL INFORMATION
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998
(Unaudited) and June 30, 1998.......................... 3
Consolidated Statements of Income for the Three and Six
Months Ended
December 31, 1998 and 1997 (Unaudited)................. 4
Consolidated Statements of Cash Flows for the Six Months
Ended
December 31, 1998 and 1997 (Unaudited)................. 5
Notes to Consolidated Financial Statements (Unaudited).... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Quantitative and Qualitative Disclosures about Market
Risk...................................................... 16
PART II
OTHER INFORMATION
Legal Proceedings........................................... 17
Exhibits and Reports on Form 8-K............................ 17
Signature................................................... 17
</TABLE>
------------------------
This Quarterly Report on Form 10-Q includes certain forward-looking
information (within the meaning of the Private Securities Litigation Reform Act
of 1995) that involve risks and uncertainty, including certain assumptions
regarding the future performance of USEC. Actual results and trends may differ
materially depending upon a variety of factors, including, without limitation,
market demand for services, pricing trends in the uranium and enrichment
markets, the availability and cost of electric power, USEC's ability to
successfully execute its internal performance plans, the refueling cycles of
USEC's customers and the impact of any government regulation. Further, customer
commitments under their contracts are based on customers' estimates of their
future requirements.
2
<PAGE> 3
USEC INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1998 1998
------------ --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 45.4 $1,177.8
Accounts receivable -- customers.......................... 309.8 236.4
Inventories:
Separative Work Units.................................. 638.1 687.0
Uranium................................................ 196.4 184.5
Uranium provided by customers.......................... 154.2 315.0
Materials and supplies................................. 23.1 24.8
-------- --------
Total Inventories................................. 1,011.8 1,211.3
Payments for future deliveries under Russian Contract..... 50.0 63.4
Other..................................................... 36.0 39.5
-------- --------
Total Current Assets.............................. 1,453.0 2,728.4
Property, Plant and Equipment, net.......................... 140.7 131.9
Other Assets
Deferred income taxes..................................... 54.5 --
Deferred costs for depleted uranium....................... 47.9 50.0
Uranium inventories....................................... 566.4 561.0
-------- --------
Total Other Assets................................ 668.8 611.0
-------- --------
Total Assets................................................ $2,262.5 $3,471.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 100.0 --
Accounts payable and accrued liabilities.................. 196.5 $ 182.9
Uranium owed to customers................................. 154.2 315.0
Payables under Russian Contract........................... 18.9 8.4
Nuclear safety upgrade costs.............................. 29.1 41.2
-------- --------
Total Current Liabilities......................... 498.7 547.5
Long-Term Debt.............................................. 500.0 --
Other Liabilities
Advances from customers................................... 26.3 34.3
Depleted uranium disposition.............................. 4.2 372.6
Other liabilities......................................... 86.0 96.4
-------- --------
Total Other Liabilities........................... 116.5 503.3
Stockholders' Equity
Preferred stock, par value $1.00 per share, 25,000,000
shares
authorized, none issued................................ -- --
Common stock, par value $.10 per share, 250,000,000 shares
authorized, 100,000,000 shares issued and
outstanding............................................ 10.0 10.0
Excess of capital over par value.......................... 1,067.6 1,357.1
Retained earnings......................................... 69.7 1,053.4
-------- --------
Total Stockholders' Equity........................ 1,147.3 2,420.5
-------- --------
Total Liabilities and Stockholders' Equity.................. $2,262.5 $3,471.3
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
USEC INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue
Domestic.................................. $230.0 $131.7 $406.9 $451.4
Asia...................................... 171.3 180.6 251.2 263.8
Europe and other.......................... 21.1 10.0 72.2 47.5
------ ------ ------ ------
422.4 322.3 730.3 762.7
Cost of sales............................... 330.7 235.7 579.3 577.8
------ ------ ------ ------
Gross profit................................ 91.7 86.6 151.0 184.9
Project development costs................... 27.2 35.4 58.8 67.6
Selling, general and administrative......... 9.3 8.9 17.2 17.0
------ ------ ------ ------
Operating income............................ 55.2 42.3 75.0 100.3
Interest expense............................ 8.8 -- 15.3 --
Other (income) expense, net................. (2.0) .6 (3.6) (1.4)
------ ------ ------ ------
Income before income taxes.................. 48.4 41.7 63.3 101.7
Provision (benefit) for income taxes........ 16.3 -- (31.9) --
------ ------ ------ ------
Net income.................................. $ 32.1 $ 41.7 $ 95.2 $101.7
====== ====== ====== ======
Net income per share -- basic and diluted... .32 $ .95
Dividend per share.......................... .275 .275
Average number of shares outstanding........ 100.0 100.0
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
USEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net income.................................................. $ 95.2 $ 101.7
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes.................................. (54.5) --
Depreciation and amortization.......................... 9.4 7.7
Depleted uranium disposition........................... -- 29.9
Changes in operating assets and liabilities:
Accounts receivable -- (increase) decrease.......... (72.9) 62.7
Inventories -- (increase) decrease.................. 31.4 (72.2)
Payments under Russian Contract, net................ 23.9 21.4
Accounts payable and accrued
liabilities -- (decrease)........................ (.1) (30.9)
Other.................................................. (2.6) 12.0
--------- --------
Net Cash Provided by Operating Activities................... 29.8 132.3
--------- --------
Cash Flows Used in Investing Activities
Capital expenditures........................................ (16.8) (13.1)
--------- --------
Cash Flows from Financing Activities
Exit Dividend paid to U.S. Treasury......................... (1,709.4)
Dividend paid............................................... (27.5)
Proceeds from issuance of debt.............................. 704.0
Repayment of debt........................................... (104.0)
Debt issuance costs......................................... (3.2)
Costs relating to initial public offering................... (5.3)
---------
Net Cash Used in Financing Activities....................... (1,145.4)
---------
Net Increase (Decrease)..................................... (1,132.4) 119.2
Cash and Cash Equivalents at Beginning of Period............ 1,177.8 1,261.0
--------- --------
Cash and Cash Equivalents at End of Period.................. $ 45.4 $1,380.2
========= ========
Supplemental Cash Flow Information
Interest paid............................................. $ 13.6
Income taxes paid......................................... 5.4
Supplemental Schedule of Non-Cash Financing Activities
Transfer of responsibility for depleted uranium
disposition to DOE..................................... $ 373.8
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
USEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by USEC Inc. ("USEC") pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the financial results for the interim period. Certain information
and notes normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations.
Operating results for the three and six months ended December 31, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999. The unaudited consolidated financial statements
should be read in conjunction with the financial statements and footnotes
thereto, together with management's discussion and analysis of financial
condition and results of operations, included in the Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 and the Registration Statement on Form
S-1, as amended (file number 333-67117).
Cash and cash equivalents at December 31, 1998, include temporary cash
investments with maturities of three months or less. At June 30, 1998, cash
consisted of non-interest bearing funds on deposit with the U.S. Treasury.
2. INITIAL PUBLIC OFFERING
On July 28, 1998, the sale of USEC's common stock in connection with an
initial public offering (the "IPO") was completed, resulting in net proceeds to
the U.S. Government aggregating $3,092.1 million, including $1,382.7 million
from the IPO and $1,709.4 million from the exit dividend paid to the U.S.
Treasury (the "Exit Dividend"). The U.S. Government, the sole selling
shareholder, sold its entire interest. USEC did not receive any proceeds from
the IPO.
The Exit Dividend of $1,709.4 million paid to the U.S. Treasury represented
the cash balance held in USEC's account at the U.S. Treasury and $500.0 million
of $550.0 million in borrowings at the time of the IPO. The Company retained
$50.0 million in cash from the $550.0 million in borrowings. The amount of the
Exit Dividend in excess of retained earnings was recorded in July 1998 as a
reduction of excess of capital over par value.
In connection with the IPO, USEC Inc. became a holding company. The
consolidated financial statements include the accounts of USEC Inc. and its
subsidiaries. All material intercompany transactions have been eliminated.
3. DEBT
USEC borrowed $550.0 million in variable rate debt at the time of the IPO,
under a credit facility comprised of three tranches. Tranche A consisted of a
364-day revolving credit facility for $400.0 million. Tranche B is a 364-day
revolving credit facility for $150.0 million which is convertible, at USEC's
option, into a one-year term loan. Tranche C is a five-year revolving credit
facility for $150.0 million for working capital and general corporate purposes.
Interest is paid at a rate equal to, at USEC's option (i) the London Interbank
Offered Rate ("LIBOR")
6
<PAGE> 7
USEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
plus an "Applicable Eurodollar Margin" or (ii) the Base Rate (as defined). The
Applicable Eurodollar Margin is based on USEC's credit rating. The weighted
average interest rate for borrowings under the credit facility, including the
amortization of fees, amounted to 6.6% for the period July 28 to December 31,
1998.
At December 31, 1998, borrowings under the credit facility amounted to
$600.0 million including $400.0 million under Tranche A and $100.0 million under
each of Tranche B and Tranche C.
The credit facility requires USEC to comply with certain financial
covenants, including a minimum net worth and a debt to total capitalization
ratio, as well as other customary conditions and covenants. The credit facility
restricts borrowings by subsidiaries to a maximum of $100.0 million. The failure
to satisfy any of the covenants would constitute an event of default. The credit
facility also includes other customary events of default, including without
limitation, nonpayment, misrepresentation in a material respect, cross-default
to other indebtedness, bankruptcy, and change of control.
On January 20, 1999, USEC issued $350.0 million of 6.625% senior notes due
January 2006 and $150.0 million of 6.750% senior notes due January 2009. The net
proceeds of $494.2 million were used to repay a portion of the borrowings under
the credit facility and to reduce available commitments in the amount of $400.0
million under Tranche A. The senior notes are unsecured obligations and rank on
a parity with all other unsecured and unsubordinated indebtedness of USEC Inc.
The senior notes are not subject to any sinking fund requirements. Interest is
to be paid every six months on January 20 and July 20 beginning in July 1999.
USEC may redeem the senior notes at any time at a redemption price equal to the
principal amount plus any accrued interest up to the redemption date plus a
make-whole premium, as defined.
Borrowings of $500.0 million at December 31, 1998, are classified as
long-term as a result of the issuance of the senior notes.
4. INCOME TAXES
USEC was exempt from income taxes up to the time of the IPO. USEC
transitioned to taxable status on July 28, 1998, upon consummation of the IPO.
Future tax consequences of temporary differences between the carrying amounts
for financial reporting purposes and USEC's estimate of the tax bases of its
assets and liabilities resulted in deferred income tax benefits of $54.5 million
at the time of the IPO, as follows (millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
SWU and uranium inventory costs............................. $17.3
Plant lease turnover costs.................................. 9.0
Contractor pension costs.................................... 7.8
Decommissioning and shutdown costs at power generation
facilities................................................ 6.9
Other temporary differences relating primarily to other
liabilities............................................... 13.5
-----
$54.5
=====
</TABLE>
7
<PAGE> 8
USEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Excluding the special tax benefit of $54.5 million, the provision for
income taxes for the six months ended December 31, 1998, amounted to $22.6
million and reflects an effective income tax rate of 35.7%, as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Statutory federal income tax rate........................... 35.0%
State income taxes, net of federal benefit.................. 2.3
Research and experimentation tax credit..................... (2.2)
Other....................................................... .6
-----
35.7%
=====
</TABLE>
5. STOCKHOLDERS' EQUITY
Changes in stockholders' equity follow (millions):
<TABLE>
<CAPTION>
COMMON
STOCK, EXCESS OF TOTAL
PAR VALUE CAPITAL OVER RETAINED STOCKHOLDERS'
$.10 PER SHARE PAR VALUE EARNINGS EQUITY
-------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1998................. $10.0 $1,357.1 $ 1,053.4 $ 2,420.5
Exit Dividend paid to U.S. Treasury...... -- (658.0) (1,051.4) (1,709.4)
Transfer of responsibility for depleted
uranium to DOE......................... -- 373.8 -- 373.8
Costs related to the IPO................. -- (5.3) -- (5.3)
Dividend................................. -- -- (27.5) (27.5)
Net income............................... -- -- 95.2 95.2
----- -------- --------- ---------
BALANCE AT DECEMBER 31, 1998............. $10.0 $1,067.6 $ 69.7 $1,147.30
===== ======== ========= =========
</TABLE>
Pursuant to the USEC Privatization Act, at the time of the IPO, depleted
uranium generated by USEC from July 1993 to July 28, 1998 was transferred to the
Department of Energy ("DOE"), and the accrued liability of $373.8 million for
depleted uranium disposition was transferred to stockholders' equity.
In December 1998, USEC paid its first quarterly cash dividend of $.275 per
share amounting to $27.5 million. USEC anticipates dividend payment dates of
March 15, June 15, September 15, and December 15 in calendar year 1999.
On December 28, 1998, USEC issued a Notice of Annual Meeting of
Shareholders to be held February 2, 1999. Shareholders are being asked to (i)
vote for the election of seven directors, (ii) ratify the appointment of the
independent auditors, (iii) vote on the USEC Inc. 1999 Equity Incentive Plan
covering an aggregate of 9,000,000 shares of common stock, of which 2,250,000
shares are reserved for awards other than stock options, and (iv) vote on the
USEC Inc. 1999 Employee Stock Purchase Plan covering 2,500,000 shares of common
stock.
8
<PAGE> 9
USEC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED DECEMBER 31, 1998
Revenue
Revenue amounted to $422.4 million in the three months ended December 31,
1998, an increase of $100.1 million (or 31%) over the $322.3 million in the
three months ended December 31, 1997. In the six months ended December 31, 1998,
revenue was $730.3 million, a reduction of $32.4 million (or 4%) from the $762.7
million in the six months ended December 31, 1997. The changes in revenue are
attributable primarily to changes in the timing of customer nuclear reactor
refueling orders. In the six months ended December 31, 1998, revenue was also
affected by a lower commitment level of a domestic customer and lower sales of
natural uranium. USEC provided enrichment services for 29 reactors in the three
months ended December 31, 1998, compared with 24 in the corresponding period of
fiscal 1998. Fifty two reactors were supplied in the six months ended December
31, 1998, compared with 54 in the corresponding period of fiscal 1998. Revenue
and operating results can fluctuate significantly from quarter-to-quarter, and
in some cases, year-to-year. Customer requirements are determined by refueling
schedules for nuclear reactors, which generally range from 12 to 18 months (or
in some cases up to 24 months), and are in turn affected by, among other things,
the seasonal nature of electricity demand, reactor maintenance, and reactors
beginning or terminating operations. The average SWU price billed to customers
in the six months ended December 31, 1998, was about the same as in the
corresponding period of fiscal 1998, notwithstanding the trend toward lower
prices for new contracts in the highly competitive uranium enrichment market.
The percentage of revenue attributed to domestic and international
customers follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic............... 54% 41% 56% 59%
Asia................... 41 56 34 35
Europe and other....... 5 3 10 6
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
Changes in the geographic mix of revenue resulted primarily from changes in
the timing of customers' orders.
Cost of Sales
Cost of sales is based on the quantity of SWU sold during the period and is
dependent upon production costs at the gaseous diffusion plants ("plants") and
purchase costs under the Russian Contract. Production costs consist principally
of electric power, labor and benefits, depleted uranium disposition costs,
materials, and maintenance and repairs. Under the monthly moving average
inventory cost method, an increase or decrease in production or purchase costs
will have an effect on costs of sales over future periods.
Cost of sales amounted to $330.7 million in the three months ended December
31, 1998, an increase of $95.0 million (or 40%) over the $235.7 million in the
corresponding period of fiscal
9
<PAGE> 10
1998. Cost of sales in the six months ended December 31, 1998, was $579.3
million, an increase of $1.5 million from the $577.8 million in the
corresponding period of fiscal 1998. As a percentage of revenue, cost of sales
amounted to 78% and 79% for the three and six months ended December 31, 1998,
respectively, compared with 73% and 76% for the corresponding periods of fiscal
1998. Persistent hot weather, high electricity demand in the Midwest and power
generation shortages resulted in record high power costs from the early summer
into the fall with a resulting negative impact on the Paducah plant's production
costs. Power costs continued to remain unusually high into October 1998. USEC
curtailed production at the Paducah plant during this period to reduce the
impact of higher power prices and is increasing total production over the
remainder of the fiscal year to help meet production and cost targets. The
impact of higher power costs and lower production volumes on unit production
costs increased cost of sales in the three and six months ended December 31,
1998, and, under the monthly moving average inventory cost method, is expected
to affect cost of sales over the remainder of the fiscal year.
SWU unit production costs in the six months ended December 31, 1998 and
1997 were adversely affected by lower production facility capability due to
continued sub-optimal gaseous diffusion cell availability at the Portsmouth
plant. In December 1998, a fire at the Portsmouth plant in a production cell
consisting of compressors used to extract gasses from the enrichment process
resulted in lower than planned production. The fire was limited to a single
equipment housing containing the affected compressors.
Electric power costs amounted to $199.0 million in the six months ended
December 31, 1998, (representing 55% of production costs) compared with $212.0
million (representing 53% of production costs) in the corresponding period of
fiscal 1998. The decline in power costs was attributable to lower production
volumes at the Paducah plant. Costs per megawatt hour increased 8% in the six
months ended December 31, 1998, compared with the corresponding period of fiscal
1998, reflecting the severe power shortage in the summer of 1998. Costs per
megawatt hour returned to normal levels in the three months ended December 31,
1998, and declined 3% compared with the corresponding period in fiscal 1998.
Costs for labor and benefits amounted to $122.9 million in the six months
ended December 31, 1998, an increase of $4.3 million (or 4%) from $118.6 million
in the corresponding period of fiscal 1998. In June 1998, USEC accrued a special
charge of $32.8 million for costs relating to certain severance and transition
benefits to be paid with respect to 500 plant workers in connection with
workforce reductions over the next two fiscal years. A charge of $20.0 million
for worker and community transition assistance benefits was paid to the
Department of Energy in June 1998, and, as of December 31, 1998, payments of
$4.2 million had been made in connection with workforce reductions of 259 plant
workers.
Costs for the future disposition of depleted uranium amounted to $15.4
million in the six months ended December 31, 1998, a decline of $14.5 million
(or 49%) from $29.9 million in the corresponding period of fiscal 1998. The
reduction reflects a lower future disposal rate per kilogram of depleted uranium
based on fixed-cost disposal contracts for a certain quantity of depleted
uranium and lower production levels at the plants. At December 31, 1998, the
accrued liability for the future disposal of depleted uranium aggregated $12.3
million. Pursuant to the USEC Privatization Act, depleted uranium generated by
USEC from July 1993 to July 28, 1998 was transferred to DOE, and the accrued
liability of $373.8 million at the time of the IPO, on July 28, 1998, was
transferred to stockholders' equity.
Subsequent to the IPO, production costs include charges for taxes other
than income taxes and property insurance premiums.
10
<PAGE> 11
In November 1998, USEC gave notice to terminate the operations and
management contract with its contractor, Lockheed Martin Utility Services, Inc.
USEC expects to assume direct management and operation of the plants six months
from the date of notice. USEC expects an orderly transition of compensation and
benefits to allow the plant workers to become employees of USEC or its
subsidiaries.
Pursuant to an agreement with the United States Treasury Department, USEC
has committed to continue operation of the plants until at least January 2005,
subject to limited exceptions, including events beyond the reasonable control of
USEC, such as natural disasters, a decrease in annual worldwide demand for SWU
to less than 28 million SWU, a decline in the average price for all SWU under
USEC's long-term firm contracts to less than $80 per SWU (in 1998 dollars), a
decline in the operating margin to below 10%, a decline in the interest coverage
ratio to below 2.5x in a consecutive twelve-month period, or if the long-term
corporate credit rating is downgraded below an investment grade rating. None of
the exceptions to USEC's obligation to operate the plants is currently
applicable, and based on information known, USEC does not believe any of these
exceptions will be applicable in the near future. Based on information known,
USEC does not anticipate that the average SWU price under its long-term firm
contracts is likely to fall below $80 per SWU (in 1998 dollars) in the near
future.
SWU purchased from the Russian Federation represented 26% and 35% of the
combined produced and purchased supply mix in the three and six months ended
December 31, 1998, respectively, compared with 42% and 40% purchased from the
Russian Federation and DOE in the corresponding periods of 1998. The Russian
Federation has delayed shipments from time to time and beginning December 1998
deliveries are delayed as a result of the lack of an agreement between the
Russian Federation and other companies regarding the sale of the natural uranium
component of the highly enriched uranium. USEC purchases the SWU component, and
it is not certain when shipments will resume. Cost of sales has been, and will
continue to be, affected by amounts paid to purchase SWU under the Russian
Contract at prices that are substantially higher than marginal production cost
at the plants. As a result of Russian SWU purchases, USEC has operated the
plants at lower production levels resulting in higher unit production costs.
Pursuant to the Russian Contract, Russian purchases will peak in calendar year
1999 at 5.5 million SWU per year and are expected to remain at that level
thereafter.
Project Development Costs
Project development costs, primarily for the AVLIS project, amounted to
$27.2 million in the three months ended December 31, 1998, a decline of $8.2
million (or 23%) from $35.4 million in the three months ended December 31, 1997.
In the six months ended December 31, 1998, project development costs declined
$8.8 million (or 13%) to $58.8 million from $67.6 million in the corresponding
period of fiscal 1998. The reductions in the fiscal 1999 periods reflect lower
spending on design and licensing activities while activities are focused
primarily on integrated operation of the laser and separator systems to verify
enrichment production economics. AVLIS project development costs are currently
charged to expense as incurred. USEC intends to capitalize AVLIS development
costs associated with facilities and equipment designed for commercial
production activities.
Operating Income
Operating income amounted to $55.2 million and $75.0 million in the three
and six months ended December 31, 1998, respectively, as compared with $42.3
million and $100.3 million in the corresponding periods of fiscal 1998. The
increase in the three-month period reflects higher gross profit and a reduction
in project development costs. The reduction in the six-month period
11
<PAGE> 12
reflects lower gross profit resulting primarily from the effect on cost of sales
of higher unit production costs during the severe power shortage in the summer
of 1998.
Interest Expense
Interest expense of $8.8 million in the three months ended and $15.3
million in the six months ended December 31, 1998, represents interest on
borrowings under the credit facility. Prior to the IPO, USEC had no short or
long-term debt. Outstanding borrowings under the credit facility averaged $562.7
million during the period from July 28 to December 31, 1998, at a weighted
average interest rate of 6.6%, including the amortization of fees.
Provision for Income Taxes
At the time of the IPO, USEC became subject to federal, state and local
income taxes. The provision for income taxes in the six months ended December
31, 1998, includes a special income tax benefit of $54.5 million for deferred
income tax benefits that arise from the transition to taxable status. Deferred
tax benefits represent differences between the carrying amounts for financial
reporting purposes and USEC's estimate of the tax bases of its assets and
liabilities.
Excluding the special tax benefit, the provision for income taxes was $22.6
million in the six months ended December 31, 1998, and reflects an effective
income tax rate of 35.7%.
Net Income
Net income was $32.1 million in the three months ended December 31, 1998,
compared with $41.7 million in the three months ended December 31, 1997. The
reduction is due to income taxes and interest expense, both of which have been
incurred since the IPO in July 1998, partly offset by higher gross profit and
lower project development costs.
Excluding the special tax benefit, net income was $40.7 million in the six
months ended December 31, 1998, compared with $101.7 million in the
corresponding period of fiscal 1998. The reduction is due primarily to the
provision for income taxes following the transition to taxable status, lower
gross profit, and interest expense on borrowings in the fiscal 1999 period,
partly offset by lower project development costs. Including the special tax
benefit, net income was $95.2 million in the six months ended December 31, 1998.
USEC expects its earnings for fiscal 1999 will continue to be affected by
interest expense from changes in its debt/equity structure, income taxes from
its transition to taxable status in July 1998 and the effects on cost of sales
of higher unit production costs resulting from lower production during the
severe power shortage in the summer of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash flow
Net cash flows provided by operating activities amounted to $29.8 million
in the six months ended December 31, 1998, compared with $132.3 million in the
corresponding period of fiscal 1998. Cash flow in the fiscal 1999 period
reflects an increase of $72.9 million in customer trade receivables at December
31, 1998 from changes in the timing of customer orders, a reduction of $61.0
million in net income excluding the special tax benefit and cash payments of
$8.9 million for costs and expenses relating to the privatization incurred prior
to the IPO, partly offset by a reduction of $31.4 million in inventories.
Net cash flows provided by operating activities in the six months ended
December 31, 1997, had been reduced by an increase of $72.2 million in
inventories and had been increased by a reduction of $62.7 million in customer
trade receivables from changes in the timing of customer
12
<PAGE> 13
collections and by depleted uranium disposition costs of $29.9 million. Under
the USEC Privatization Act, depleted uranium generated up to the time of the IPO
on July 28, 1998, was transferred to DOE with no cash outlays by USEC.
Subsequent to the privatization, USEC incurs cash outlays for the disposition of
depleted uranium generated in the production process.
Capital expenditures related primarily to plant improvements amounted to
$16.8 million in the six months ended December 31, 1998, compared with $13.1
million in the corresponding period of fiscal 1998.
USEC borrowed $550.0 million at the time of the IPO, pursuant to a credit
facility comprised of three tranches. Tranche A consisted of a 364-day revolving
credit facility for $400.0 million. Tranche B is a 364-day revolving credit
facility for $150.0 million which is convertible, at USEC's option, into a
one-year term loan. Tranche C, is a five-year revolving credit facility for
$150.0 million for working capital and general corporate purposes. In connection
with the IPO on July 28, 1998, USEC borrowed $550.0 million and transferred
$500.0 million of such proceeds to the U.S. Treasury as part of the Exit
Dividend of $1,709.4 million and retained $50.0 million in cash. Borrowings, net
of repayments, amounted to $600.0 million from July 28 to December 31, 1998.
Borrowings under the credit facility bear interest at a rate equal to, at USEC's
option (i) the London Interbank Offered Rate ("LIBOR") plus an "Applicable
Eurodollar Margin," or (ii) the Base Rate (as defined). The Applicable
Eurodollar Margin is based on USEC's credit rating.
On January 20, 1999, USEC issued $350.0 million of 6.625% senior notes due
January 2006 and $150.0 million of 6.750% senior notes due January 2009. The net
proceeds of $494.2 were used to repay a portion of the borrowings under the
credit facility and to reduce available commitments in the amount of $400.0
million under Tranche A. The senior notes are unsecured obligations and rank on
a parity with all other unsecured and unsubordinated indebtedness of USEC Inc.
Interest on the senior notes is to be paid every six months on January 20 and
July 20 beginning in July 1999.
The total debt-to-capitalization ratio adjusted to include short-term debt
was 34% at December 31, 1998.
On November 10, 1998, the Board of Directors of USEC Inc. declared the
first regular quarterly dividend payment of $.275 per share. The dividend of
$27.5 million was paid December 15, 1998 to shareholders of record as of
November 25, 1998. During 1999, USEC anticipates dividend payment dates of March
15, June 15, September 15 and December 15.
Net working capital amounted to $754.3 million at December 31, 1998.
Extended payment terms were provided to an Asian customer with respect to an
overdue trade receivable of $36.0 million at December 31, 1998. Interest is
earned on the unpaid balance, and the trade receivable has been secured by an
irrevocable letter of credit with payments scheduled in February and March 1999.
AVLIS deployment is estimated to cost $2.5 billion from fiscal 1999 through
fiscal 2007, of which $700.0 million is expected to be spent during the
performance demonstration, design and licensing phase. Once this first phase is
successfully completed, USEC will initiate the procurement, construction and
startup phase, which is estimated to cost $1.8 billion.
Actual AVLIS expenditures may vary from this estimate based on the results
of development and demonstration activities or on account of changes in business
conditions, regulatory requirements and the timing of NRC licensing, costs of
construction labor and materials, the market for uranium enrichment services,
and USEC's cost of capital.
13
<PAGE> 14
USEC expects that its cash, internally generated funds from operating
activities, and available financing sources including borrowings under the
credit facility and a commercial paper program to be established, will be
sufficient to meet its obligations as they become due and to fund operating
requirements of the plants, purchases of SWU under the Russian Contract, capital
expenditures and discretionary investments, AVLIS expenditures in the near term,
interest expense, and quarterly dividends.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue exists because many software and embedded systems
(defined below), which use only two digits to identify a year in a date field,
were developed without considering the impact of the upcoming change in the
century. Some of these systems are critical to USEC's operations and business
processes and could fail or function inaccurately if not repaired or replaced
with Year 2000 ready products. USEC's software and embedded systems will be Year
2000 ready when such systems are replaced or remediated to perform essential
functions accurately and without failure. Software is computer programming that
has been developed by USEC for its own use (in-house software) and purchased
from vendors (vendor software). Embedded systems refer to both computing
hardware and other electronic monitoring, communications, and control systems
that have microprocessors.
USEC has designed and begun implementation of a Year 2000 project which
focuses on systems that are critical to its business. The failure of such
critical systems would directly and adversely affect the ability to generate or
deliver products and services or otherwise affect revenue, safety, or
reliability for a period of time as to lead to unrecoverable consequences. USEC
has adopted a phased approach for critical systems to address the Year 2000
issue. The phases include: (1) a company-wide inventory, in which critical
systems were identified; (2) assessment, in which critical systems were
evaluated as to their readiness to operate in the Year 2000; (3) remediation, in
which critical systems that are not Year 2000 ready are upgraded by modification
or replacement; (4) testing, in which remediation is validated by checking the
ability of critical systems to operate within the Year 2000 time frame; and (5)
certification, in which systems are formally acknowledged to be Year 2000 ready
and acceptable for operation.
The Year 2000 project is proceeding on schedule. For in-house and vendor
software, the inventory and assessment phases have been completed, and critical
systems have been identified. Other software that requires Year 2000 remediation
may be included during the assessment, remediation, and testing phases. The
identified, critical, in-house and vendor software is in the process of being
remediated, and is expected to be substantially complete by April 1999. USEC
expects to substantially complete the testing and certification phases by April
1999.
Remediated software and embedded systems will be tested both for ability to
handle Year 2000 dates, including leap year, and to assure that repair has not
affected functionality. Software and embedded systems are being tested
individually and where necessary will be tested in an integrated manner with
other systems, with dates advanced to simulate the Year 2000. All systems will
be tested to reduce risk, but testing cannot comprehensively address all future
combinations of dates and events.
USEC depends on external parties, including electric power utilities,
customers, suppliers, government agencies, and financial institutions, to
reliably deliver products and services. To the extent that external parties
experience Year 2000 problems, the demand for and the reliability of USEC's
services may be adversely affected. USEC has adopted a phased approach to
address external parties and the Year 2000 issue. The phases include: (1)
inventory, in which critical business relationships are identified; (2) action
planning, in which a series of actions and a time
14
<PAGE> 15
frame for monitoring expected compliance status is developed; (3) assessment, in
which the likelihood of external party Year 2000 readiness is evaluated; and (4)
contingency planning, in which plans are made to deal with the potential failure
of an external party to be Year 2000 ready. Additional critical relationships
may be entered into or included. Assessment of Year 2000 readiness of external
parties will continue through calendar year 1999.
USEC is assessing the progress of Year 2000 remediation efforts internally
and externally to determine the scope of contingency planning necessary to
reduce the risk. If the remediation schedule lags and cannot meet certain
milestones, a contingency planning process would begin, and contingency plans
would be implemented if a remediated system does not become available by the
date it is needed. USEC also plans to develop contingency plans for the
potential failure of critical external parties to address their Year 2000
issues.
USEC recognizes that, given the complex interaction of computing and
communication systems, it is not possible to be certain that all efforts to have
all critical systems Year 2000 ready will be successful. Irrespective of the
progress of the Year 2000 project, the Company is preparing contingency plans.
The plans will take into account the possibility of multiple system failures,
both internal and external, due to Year 2000 effects.
There can be no assurance that such programs will identify and cure all
software problems, or that entities on whom USEC relies for certain services
integral to its business, such as the electric power suppliers, will
successfully address all of their software and systems problems in order to
operate without disruption in 2000.
USEC expects its costs for software modifications and systems upgrades to
resolve Year 2000 issues will amount to $14.2 million, of which $7.8 million had
been incurred at December 31, 1998. Pursuant to USEC's financial accounting and
reporting policies, purchased hardware and software costs are capitalized, and
implementation costs, including consultants' fees, are charged against income as
incurred.
POWER PURCHASES, CHANGING PRICES AND INFLATION
The plants require substantial amounts of electricity to enrich uranium.
USEC purchases firm and non-firm power to meet its production needs. Firm power
represented 82% and non-firm power represented 18% of power purchases in the six
months ended December 31, 1998. Production costs would increase to the extent
that the market prices of firm and non-firm power were to rise. In addition, the
price that USEC pays for firm power could increase if there were additional
regulatory costs or unanticipated equipment failures at the power plants
supplying the firm power to the plants.
A majority of USEC's contracts with customers generally provide for prices
that are subject to adjustment for inflation. In recent years, inflation has not
had a significant impact on operations, and unless inflation increases
substantially, it is not expected to have a material effect.
15
<PAGE> 16
USEC INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments are reported on the balance sheet at December 31,
1998, and include cash and cash equivalents, accounts receivable and payable,
certain accrued liabilities, payables under the Russian Contract, and
variable-rate debt, the carrying amounts which approximate fair value at
December 31, 1998.
On January 20, 1999, USEC refinanced $500.0 million of borrowings under the
credit facility with $350.0 million of 6.625% senior notes due January 2006 and
$150.0 million of 6.750% senior notes due January 2009. As a result, $500.0
million of debt has been classified as long-term on the balance sheet at
December 31, 1998. The fair value of fixed rate debt is based on the public
offering price of the senior notes.
The repayment schedule of debt obligations, based on the ultimate maturity
date available under the credit facility and the maturity dates of the senior
notes, the variable interest rate of short-term debt based on the implied
forward rate in the yield curve as of December 31, 1998, and the balance sheet
carrying amounts and related fair values at December 31, 1998, follow
(millions):
<TABLE>
<CAPTION>
MATURITY DATE
--------------------------
JULY JANUARY JANUARY BALANCE SHEET FAIR
2003 2006 2009 CARRYING AMOUNT VALUE
------ ------- ------- --------------- ------
<S> <C> <C> <C> <C> <C>
Short-term debt................. $100.0 $100.0 $100.0
Variable interest rate........ 6.7%
Long-term debt:
6.625% senior notes........... $350.0 350.0 349.1
6.750% senior notes........... $150.0 150.0 149.3
------ ------
$600.0 $598.4
====== ======
</TABLE>
16
<PAGE> 17
USEC INC.
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
None.
EXHIBITS AND REPORTS ON FORM 8-K:
Exhibit 27, Financial Data Schedule, is filed herewith.
There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USEC Inc.
January 27, 1999 By /s/ HENRY Z SHELTON, JR.
--------------------------------------
Henry Z Shelton, Jr.
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS EXTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45400
<SECURITIES> 0
<RECEIVABLES> 309800
<ALLOWANCES> 0
<INVENTORY> 1011800
<CURRENT-ASSETS> 1453000
<PP&E> 211500
<DEPRECIATION> (70800)
<TOTAL-ASSETS> 2262500
<CURRENT-LIABILITIES> 498700
<BONDS> 500000
0
0
<COMMON> 10000
<OTHER-SE> 1137300
<TOTAL-LIABILITY-AND-EQUITY> 2262500
<SALES> 422400
<TOTAL-REVENUES> 422400
<CGS> 330700
<TOTAL-COSTS> 330700
<OTHER-EXPENSES> 36500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8800
<INCOME-PRETAX> 48400
<INCOME-TAX> 16300
<INCOME-CONTINUING> 32100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32100
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
