Centrus Energy Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Centrus supplies nuclear fuel components through its LEU segment and provides engineering and related services through Technical Solutions. The company is also developing domestic uranium-enrichment capability, including HALEU production for the U.S. Department of Energy (DOE). LEU sales generated about 89% of revenue in both the quarter and first half.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $98.4 | $99.1 | $165.3 | $134.4 |
| Gross profit | $28.0 | $60.9 | $51.0 | $67.2 |
| Operating income | $14.4 | $44.6 | $22.7 | $41.2 |
| Net income | $12.7 | $37.4 | $19.9 | $37.0 |
| Diluted earnings per share | $0.83 | $2.51 | $1.30 | $2.48 |
- Margins: Gross margin was 28.5% in Q2 versus 61.5% a year earlier; first-half gross margin was 30.9% versus 50.0%. Net margin was 12.9% and 12.0%, respectively, compared with 37.7% and 27.5% in the comparable 2022 periods.
- Revenue mix: Q2 SWU revenue fell 44% to $48.1, while uranium revenue rose to $39.5 from zero. First-half LEU revenue increased 42% to $146.4, but Technical Solutions revenue declined 39% to $18.9.
- Cash flow: First-half operating cash flow was positive $15.2, compared with use of $56.2 in 2022. Investing used $0.7; financing provided $18.1, including $23.2 of net ATM share-sale proceeds. Cash, cash equivalents and restricted cash increased $32.6 to $245.0.
- Liquidity: Cash and cash equivalents were $212.5; restricted cash and financial-assurance deposits were also included in cash-flow cash totals. Working capital was $197.2, up from $137.9 at year-end 2022. Management said liquidity should be adequate for at least the next 12 months.
- Debt and obligations: The carrying amount of the 8.25% Notes was $98.7, including scheduled interest, and they mature in February 2027. The balance sheet also showed $83.8 of postretirement benefit obligations and $43.3 of pension liabilities. Stockholders’ deficit narrowed to $32.5 from $74.1.
Material changes and notable items
- Q2 revenue was nearly flat year over year, but gross profit fell 54%. Management attributed the decline primarily to SWU contract and delivery mix: average SWU selling price decreased 54%, partly offset by a 21% increase in volume. Higher uranium costs also contributed to the higher LEU cost of sales.
- For the first half, revenue rose 23%, but gross profit fell 24% and net income fell 46%. LEU gross profit declined 19%; Technical Solutions gross profit declined to $0.3 from $4.9.
- First-half inventory increased to $288.6 gross, including $72.8 of inventories owed to customers and suppliers; net inventory was $215.8. Long-term inventory loans increased to $74.1 from $48.7.
- Centrus sold 722,568 Class A shares through its ATM program in Q1, raising $23.2 net of commissions and expenses shown in cash flows. A shelf registration effective July 10, 2023 permits up to $200 million of securities to be offered.
Outlook, risks and contingencies
- Centrus is no longer providing 2023 operating-results guidance, citing market uncertainty and disruption. Its LEU order book was approximately $1.0 billion, extending to 2030, and included about $328 million of deferred revenue and customer advances.
- The HALEU Operation Contract has an approximately $150 million base value through 2024. Phase 1 includes a roughly $30 million Centrus cost share matched by DOE; Phase 2 is expected to be about $90 million and is subject to congressional appropriations. DOE had funded about $33.0 million as of June 30, against an estimated $120.1 million transaction price for Phases 1 and 2. The company reported an $8.7 million remaining accrued contract loss. Management warned that lack of additional DOE funding could lead to material costs or losses.
- Management said work was on schedule and on budget toward initial production of 20 kilograms of HALEU UF6 by December 31, 2023. The NRC authorized introduction of uranium hexafluoride into the cascade in June. The contract targets annual production of 900 kilograms by no later than December 31, 2024; additional DOE production options depend on DOE discretion and appropriations.
- Russia-related sanctions, import restrictions, payment and transportation disruptions pose significant risks because TENEX is a major current source of supply. The Canadian shipper’s permit for Russian LEU transportation had been extended through July 2024; further extensions would be needed thereafter while restrictions remain. The RSA remained in effect after the April 2023 review.
- On July 13, 2023, after quarter-end, Centrus and TerraPower signed an MOU to collaborate on potential commercial-scale domestic HALEU production for TerraPower’s Natrium project. A definitive agreement remains to be negotiated.
- DOE asserted that Enrichment Corp. may owe approximately $9.6 million for a portion of Joppa power-plant decommissioning costs. Centrus had not formed an opinion on the claim, could not estimate any liability and recorded no accrual. The filing also describes Portsmouth-site lawsuits; Centrus asserts compliance and seeks DOE indemnification.
- The June 2023 amendment extended the Section 382 Rights Agreement to June 30, 2026, to help preserve tax benefits. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor facts to verify
- Whether LEU delivery timing, uranium sales mix and inventory costs support a recovery in gross profit after the sharp year-over-year margin decline.
- Whether DOE provides the funding and appropriations needed for HALEU contract phases, and whether the production milestones are achieved within the stated cost-share framework.
- Whether TENEX deliveries, Russian import permissions, sanctions, payment channels and transportation permits remain available and compliant.
- How much of the $1.0 billion order book converts to deliveries and revenue, given customer timing, pricing assumptions and supply restrictions.
- The potential exposure and progress of the DOE Joppa claim and Portsmouth litigation, including the scope and availability of DOE indemnification.
- Future financing or dilution: the company has a $200 million shelf registration and may use proceeds for general corporate purposes.