Centrus Energy Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Centrus supplies low-enriched uranium (LEU) and provides engineering, manufacturing and technical services. Its two reportable segments are LEU and contract services.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $38.7 million | $35.7 million |
| Gross loss | $5.5 million | $5.6 million |
| Operating loss | $20.8 million | $26.3 million |
| Net loss | $20.9 million | $25.0 million |
| Net loss attributable to common stockholders | $22.9 million; $2.40 per share | $27.0 million; $2.97 per share |
| Cash used in operating activities | $31.9 million | $52.3 million |
Gross margin remained negative; the filing reports gross loss rather than a margin percentage. Revenue rose 8%, while the gross loss was nearly unchanged. At March 31, cash and cash equivalents were $87.9 million, down from $123.1 million at year-end. Cash, cash equivalents and restricted cash totaled $124.7 million, including $36.8 million of financial-assurance deposits. Working capital was $17.3 million, versus $45.8 million at December 31, 2018.
Current and long-term debt totaled $150.7 million on the balance sheet. This includes $27.5 million of 8% PIK Toggle Notes due September 30, 2019 (potentially extendable to 2024 if specified funding conditions are met) and 8.25% Notes due February 2027. The 8.25% Notes’ $123.2 million carrying value includes future interest obligations; principal was $74.3 million. Pension benefit liabilities were $166.4 million and postretirement health and life obligations were $134.5 million. Series B preferred dividends are cumulative and unpaid; $2.0 million was allocated to preferred dividends in the quarter.
Material changes versus prior period
- LEU revenue increased to $35.1 million from $21.3 million. Uranium revenue rose to $22.7 million from $3.6 million, while SWU revenue declined to $12.4 million from $17.7 million. Management attributed the changes largely to delivery timing and reported lower average SWU selling prices.
- LEU segment gross loss narrowed to $3.2 million from $13.5 million, reflecting improved uranium selling prices and lower average SWU costs, partly offset by lower SWU prices.
- Contract services revenue fell to $3.6 million from $14.4 million. The prior-year quarter included $9.5 million of DOE settlement revenue; contract services moved from $7.9 million gross profit to $2.3 million gross loss.
- SG&A declined $3.1 million to $8.1 million, contributing to the smaller consolidated net loss. Operating cash use also decreased year over year, though it remained substantial.
Outlook, commentary and principal risks
Management forecast 2019 SWU and uranium revenue of $85–$120 million, total revenue of $125–$160 million, and year-end cash and cash equivalents of $120–$140 million. Revenue is expected to be weighted toward the second half of the year. Management stated it expects adequate liquidity for at least 12 months from the report date, subject to operating results, customer payment timing, government funding and other factors.
- DOE issued a January 2019 notice of intent to contract with Centrus on a proposed high-assay, low-enriched uranium (HALEU) demonstration cascade. Contract discussions were ongoing; there was no assurance an agreement would be signed or the project proceed.
- The UT-Battelle contract for American Centrifuge work expired in September 2018. Centrus continued work toward expected milestones while seeking a successor agreement, with no assurance of execution. Reduced or discontinued government funding could lead to further demobilization, costs, delays or termination.
- The Piketon DOE lease was due to end June 30, 2019 absent agreement on other uses. Centrus reported $1.6 million of lease-turnover obligations, $3.2 million of termination benefits, and expected about $3.0 million of facility-maintenance expense in Q2. Cash collateral release depended on reducing or cancelling surety bonds as obligations were satisfied.
- The LEU order book was $1.1 billion at March 31, extending to 2030, but its estimated value depends on customer delivery choices and assumptions about prices and contract terms. The market remained oversupplied despite some improvement in price indicators.
- Centrus reported a material weakness in controls over evaluating customer arrangements that could affect contract accounting; disclosure controls were deemed ineffective at March 31. Management expected remediation by year-end 2019, subject to effective operation and testing of controls.
- A $42.8 million DOE pension and postretirement-benefit reimbursement claim remained in litigation and was fully valuation-allowed. The court had ruled on certain issues, but recovery amount and timing remained uncertain; Centrus was pursuing settlement. Additional revenue, if any, depends on legal outcomes and possible release of valuation allowances.
- Other significant risks include the September 2019 PIK note maturity, long-term pension and benefit obligations, supply and customer concentration, reliance on TENEX and other suppliers, and uncertainty over future LEU demand and enrichment prices. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
As a subsequent event, the board extended the Section 382 Rights Agreement to April 2022 and reduced its purchase price, stating that the amendment was intended to preserve tax attributes. Adoption was not in response to an effort to acquire control.
Most important facts for investors to verify
- Whether Centrus refinanced, repaid or qualified to extend the $27.5 million PIK Toggle Notes before their September 2019 maturity.
- Progress against 2019 revenue and year-end cash guidance, including the timing and cost of customer deliveries and LEU purchases.
- Whether DOE and UT-Battelle agreements for HALEU and American Centrifuge work were executed, and what funding and economics they provided.
- Whether Piketon lease obligations were completed and financial-assurance collateral was released as expected.
- Developments in the DOE benefit-cost litigation and any resulting recovery or revenue recognition.
- Whether management remediated and tested the disclosed material weakness, and the effect of pension obligations and unpaid cumulative preferred dividends on liquidity.