Centrus Energy Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results. Centrus supplies nuclear fuel and technical services through its LEU and Technical Solutions segments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $62.4 million | $75.7 million | $118.0 million | $120.7 million |
| Gross profit | $17.1 million | $43.8 million | $28.8 million | $63.4 million |
| Operating income | $7.5 million | $31.0 million | $8.4 million | $39.9 million |
| Net income | $11.6 million | $33.7 million | $16.7 million | $45.0 million |
| Basic/diluted EPS | $0.81/$0.79 | $3.28/$3.19 | $0.66/$0.65 | $4.25/$4.15 |
Gross margin was approximately 27% in Q2 and 24% for the six-month period, compared with approximately 58% and 53%, respectively, in 2020 (calculated from reported revenue and gross profit). Prior-year gross profit included a $32.4 million customer bankruptcy-claim recovery; excluding that item, gross profit rose $5.7 million in Q2 and declined $2.2 million for the six months.
- Segments: Q2 LEU revenue was $45.2 million, down 29%; Technical Solutions revenue was $17.2 million, up 40%. Six-month LEU revenue was $83.3 million, down 11%; Technical Solutions revenue was $34.7 million, up 30%. Technical Solutions recorded gross losses of $1.1 million in Q2 and $2.1 million for the six months.
- Cash flow: Operating activities provided $2.9 million in the first half, versus $8.4 million used in 2020. Investing used $0.7 million; financing provided $21.8 million, including common-stock issuance proceeds. Cash, cash equivalents and restricted cash increased $24.0 million to $181.9 million, including $176.0 million of unrestricted cash and cash equivalents.
- Liquidity and working capital: Working capital was $75.8 million, up from $40.0 million at year-end 2020. Management expected adequate liquidity for at least 12 months from the filing date.
- Debt and obligations: The 8.25% Notes mature in February 2027; principal was $74.3 million. Their reported carrying value, including future interest obligations, was $111.0 million. Current debt was $6.1 million. Pension liabilities were $114.4 million and postretirement health and life obligations were $126.2 million.
Material changes and unusual items
- LEU sales volume increased, but the average SWU sales price fell 29% in the first half, reflecting delivery timing and the mix of contracts. First-half SWU volume rose 106%; first-half cost of sales included $15.9 million of previously deferred costs associated with earlier, higher-cost inventory.
- Technical Solutions growth reflected increased work on the HALEU and X-energy contracts. Previously accrued HALEU contract losses reduced cost of sales by $4.6 million in the first half of 2021.
- Centrus sold 1,238,637 Class A shares through an at-the-market offering for $28.7 million gross and $27.6 million after agent commissions and expenses; it also recorded $0.4 million in direct issuance costs. In February, it exchanged and retired preferred shares in a transaction involving 231,276 Class A shares and a warrant for 250,000 shares. The transaction resulted in a $6.6 million deemed dividend affecting six-month EPS; adjusted diluted EPS, a non-GAAP measure, was $1.14.
- Revenue recognized from previously deferred sales was $28.5 million in the first half, compared with none in the prior-year period.
Outlook, risks and contingencies
- Management expected 2021 and 2022 LEU revenue to be slightly above 2020 and gross margins to be similar to 2020, excluding the prior-year one-time claim recovery. Results may fluctuate with customer delivery timing, prices, supplier costs and market conditions.
- The HALEU demonstration remained on schedule, with production of modest quantities expected to begin in early 2022. COVID-related supplier delays and costs increased the estimated cost to complete the existing contract scope by approximately $8.8 million versus the 2019 estimate. Centrus planned to seek additional DOE funding; it had not accrued those additional costs because it had no contractual obligation to perform work above the initial estimate. Unfunded overruns could materially affect liquidity.
- The DOE HALEU contract reimburses 80% of eligible costs up to $115 million; DOE was obligated for approximately $113.4 million and had paid $86.5 million through June 30. The contract ends in 2022. Centrus estimated a further $25–$30 million could be required to continue Piketon operations from completion of the current contract through September 30, 2022. Continued operation depends on securing government or other funding or customer demand; otherwise the company may stop operations or bear additional costs.
- The LEU order book was approximately $1 billion through 2030, including about $321 million of deferred revenue and customer advances. Approximately 2% was estimated to be at risk from customer operations. The order book depends on delivery assumptions, pricing, contract terms and customer requirements.
- A tentative DOE settlement of a pension and postretirement-benefits claim would provide $43.5 million, subject to required approvals; no assurance was given that it would be approved or collected. Any proceeds would be applied to benefit obligations.
- DOE asserted that Centrus may be responsible for approximately $9.6 million of Joppa power plant decommissioning costs. Centrus had not assessed the assertion, could not estimate any potential liability, and recorded no accrual.
- Other risks include market oversupply and pricing, Russian supply and import restrictions, reliance on major customers and suppliers, pension obligations, COVID-related disruption, and Portsmouth-site litigation. Centrus asserted potential Price-Anderson Act or contractual indemnification for certain claims. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Investor verification priorities
- Track HALEU cost-to-complete estimates, DOE funding commitments, contract amendments and the schedule for production and post-contract operations.
- Verify whether the tentative $43.5 million DOE settlement receives approval and is collected, and how proceeds affect pension and postretirement obligations.
- Monitor the Joppa decommissioning-cost assertion, Portsmouth litigation and any related accruals or indemnification developments.
- Assess LEU order-book conversion, customer delivery timing, realized SWU prices and inventory-cost effects, particularly the deferred costs recognized in 2021.
- Review cash needs, benefit-plan funding, debt terms and the effects of equity issuance and preferred-stock transactions on per-share results.