Centrus Energy Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Centrus supplies low-enriched uranium (LEU) and related components to nuclear utilities and provides technical services, including work to demonstrate domestic high-assay low-enriched uranium (HALEU) production. Figures are unaudited and in millions of dollars unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $91.3 | $33.6 | $209.3 | $154.3 |
| Gross profit (loss) | $49.5 | $(0.8) | $78.3 | $62.6 |
| Operating income (loss) | $38.2 | $(9.5) | $46.6 | $30.4 |
| Net income (loss) | $42.1 | $(7.0) | $58.8 | $38.0 |
| Net income per diluted share | $2.95 | $(0.83) | $3.66 | $3.12 |
Q3 revenue included a $43.5 million DOE settlement recognized in technical solutions. Excluding that settlement, Q3 revenue was approximately $47.8 million. Nine-month revenue also included the settlement; the comparable 2020 period included a $32.4 million recovery related to a customer bankruptcy. Management said gross profit, excluding these respective one-time proceeds, increased $6.8 million for Q3 and $4.6 million for the nine-month period.
- LEU: Revenue was $32.0 million in Q3, up 71%, and $115.3 million for nine months, up 2%. Nine-month SWU revenue rose 15%, while uranium revenue fell 45%. Excluding the 2020 bankruptcy recovery, nine-month LEU gross profit increased $10.6 million, principally from higher SWU sales volume and lower average SWU unit cost.
- Technical solutions: Revenue was $59.3 million in Q3 and $94.0 million for nine months. Excluding the DOE settlement, revenue increased 6% and 22%, respectively, year over year, reflecting increased HALEU and X-energy work. Excluding the settlement, technical-solutions gross profit decreased $2.0 million in Q3 and $5.6 million for nine months.
- Margins: Reported gross margin was approximately 54% in Q3 2021 versus negative 2% in Q3 2020, and 37% for the first nine months of 2021 versus 41% in 2020. These reported comparisons are affected by the one-time settlements.
Cash, liquidity, debt and balance sheet
- Cash and cash equivalents were $171.0 million at September 30, 2021, compared with $152.0 million at year-end 2020. Working capital was $79.0 million, up from $40.0 million.
- Nine-month operating cash flow was $0.8 million, compared with $5.2 million in 2020; capital expenditures were $0.7 million. Financing provided $18.9 million, including net common-stock proceeds. Cash, cash equivalents and restricted cash totaled $176.9 million at period end.
- Debt carrying value was $107.9 million: $74.3 million principal on 8.25% notes due February 2027 and $33.6 million of future interest obligations; $6.1 million was classified as current. The notes’ carrying value includes future interest, so interest payments reduce debt carrying value rather than being reported as interest expense.
- Total liabilities were $716.3 million and stockholders’ deficit was $229.1 million. Pension benefit liabilities were $75.9 million and postretirement health and life obligations were $124.3 million.
- Management stated it expected adequate liquidity for at least 12 months from the filing date. The company raised $27.6 million net through at-the-market common-stock sales in the first nine months and reported additional capacity to sell shares.
Material changes, outlook and risks
- The $43.5 million DOE settlement resolved claims for pension and postretirement costs associated with prior contract work. Centrus contributed $33.8 million to its pension plan and deposited $9.7 million into a postretirement-benefit trust. This settlement materially boosted reported Q3 and nine-month results.
- The LEU sales order book was approximately $1 billion at September 30, 2021, extending to 2030 and including about $320 million of deferred revenue and customer advances. Management estimated approximately 2% of the order book was at risk related to customer operations. Order-book estimates depend on customer delivery choices and future price assumptions.
- Management expected 2021 and 2022 LEU revenue to be slightly higher than 2020 and gross margins to be similar to 2020, excluding the 2020 one-time bankruptcy recovery. Results remain sensitive to customer order timing, supply and market prices.
- The HALEU contract is a three-year DOE cost-share program scheduled to end June 1, 2022. COVID-related supplier and DOE equipment delays increased the estimated completion costs by approximately $10 million from the initial 2019 estimate; DOE-supplied storage-cylinder delays pushed anticipated production to mid-2022. DOE increased its cost-share ceiling to $117.9 million on October 28, 2021, and provided incremental funding expected to cover work through mid-November. Centrus reported $101.9 million of aggregate cash receipts through September 30.
- DOE’s FY2022 budget request included $33 million for a proposed HALEU availability program, but funding, scope and any follow-on contract were uncertain. Centrus warned that absent sufficient funding or an output-purchase contract, it could have to stop operating the demonstration cascade or operate at a loss, adversely affecting liquidity. The company had no contractual obligation to work beyond DOE funding and accrued no additional costs for that possibility at quarter-end.
- On October 20, Centrus announced a tender offer for outstanding Series B preferred shares at $1,145.20 per share, below the $1,347.29 aggregate liquidation preference per share at September 30. Maximum consideration was approximately $43.3 million. The related amendment required consent from holders of at least 90% of outstanding shares; the offer was scheduled to expire November 18, 2021.
- Other risks include LEU market oversupply, reliance on third-party and Russian supply subject to trade restrictions, concentration in major customers, pension obligations, and uncertain government and commercial demand for HALEU. The filing also describes an unresolved DOE assertion of approximately $9.6 million in potential Joppa power-plant decommissioning costs; Centrus had not accrued a liability because it could not estimate any potential obligation.
Important facts for investors to verify
- How much of reported earnings and gross-profit improvement is repeatable after excluding the DOE settlement and prior-year bankruptcy recovery.
- Whether DOE funding and any competitively awarded follow-on contract support HALEU completion and continued operations, and whether revised project costs remain within available funding.
- Actual operating cash generation, future pension and postretirement funding needs, and liquidity effects of the preferred-stock tender offer and further equity issuance.
- LEU order-book conversion, customer delivery timing, supply commitments, pricing and applicable import restrictions.
- Developments in the potential Joppa-related liability and the status or outcome of the disclosed Portsmouth-related litigation and indemnification matters.