Centrus Energy Corp. — Q2 2019 Form 10-Q
Business context and reporting period. Centrus supplies nuclear fuel and related services through its LEU and contract services segments. This unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $10.6 million | $39.4 million | $49.3 million | $75.1 million |
| Gross loss | $4.3 million | $10.7 million | $9.8 million | $16.0 million |
| Operating loss | $15.3 million | $27.4 million | $36.1 million | $53.7 million |
| Net loss | $15.6 million | $26.1 million | $36.5 million | $51.1 million |
| Net loss allocable to common stockholders | $17.6 million | $28.1 million | $40.5 million | $55.1 million |
| Loss per common share | $1.84 | $3.08 | $4.24 | $6.05 |
- Q2 revenue fell 73%, mainly because there were no SWU sales, versus $32.9 million of SWU revenue in Q2 2018. Contract services revenue rose 23% to $8.0 million. First-half revenue declined 34%; lower SWU sales and the absence of $9.5 million of prior-year DOE settlement revenue were important factors.
- First-half operating cash outflow was $45.1 million, compared with $65.7 million in 2018. Cash, cash equivalents and restricted cash decreased $47.7 million to $112.0 million; unrestricted cash was $88.3 million at June 30.
- Working capital was $11.7 million, down from $45.8 million at December 31, 2018. Total debt carrying value was $150.7 million: $33.6 million current and $117.1 million long term. The $27.5 million 8% PIK Toggle Notes were due September 30, 2019, unless eligible for extension; the 8.25% Notes mature in February 2027.
- Total liabilities were $873.6 million and stockholders’ deficit was $358.3 million. Pension liabilities were $161.5 million and postretirement health and life obligations were $132.6 million.
Material changes and unusual items
- LEU segment revenue was $2.6 million in Q2, entirely uranium revenue; the segment recorded a $5.1 million gross loss. First-half LEU gross loss improved to $8.3 million from $23.5 million, principally reflecting lower SWU costs and higher uranium selling prices, partly offset by lower SWU prices.
- Contract services had Q2 revenue of $8.0 million and gross profit of $0.8 million. First-half segment gross loss was $1.5 million, versus $7.5 million gross profit in 2018, which included the DOE settlement revenue.
- First-half SG&A declined to $15.8 million from $20.9 million. A $2.9 million credit for reversal of accrued termination benefits followed retention of Piketon employees for the HALEU work. Uranium inventory valuation adjustments totaled $2.3 million, including $2.0 million in Q2.
- The LEU sales order book was $1.1 billion at June 30, extending to 2030. Its value depends in part on customer delivery timing, contract terms and estimated future prices.
Outlook, risks and contingencies
- Management forecast 2019 SWU and uranium revenue of $155–$180 million, total revenue of $205–$230 million, and year-end cash and cash equivalents of $105–$125 million. Revenue was expected to be weighted toward the second half. Capital expenditures were expected to be insignificant over the next 12 months.
- Under the May 2019 HALEU letter agreement, DOE authorized up to $6.4 million in payments and is obligated for costs up to $18.6 million. A definitive contract was anticipated by October 31, 2019, with DOE potentially covering up to 80% of costs, capped at $115 million; Centrus estimated its share at approximately $29 million. Execution was not assured. Centrus recorded a $0.5 million loss provision for initial-phase work.
- The Piketon DOE lease was extended to May 31, 2022, but DOE may terminate it if the parties do not execute the contemplated definitive contract. Centrus recovered $13.5 million of lease-turnover collateral; $16.9 million of NRC-related collateral remained subject to cancellation of surety bonds.
- The company reported adequate liquidity for at least 12 months, while noting dependence on customer receipts, inventory purchases and government contract funding. The Russian SWU supply agreement, market oversupply, low enrichment prices, customer delivery timing and possible trade restrictions are material business risks.
- Two 2019 class-action complaints allege off-site contamination near the Portsmouth site; Centrus said it had not been served and expected potential Price-Anderson Act indemnification. A separate DOE claim for $42.8 million in pension and postretirement costs remained disputed, with a full valuation allowance; litigation and settlement efforts continued.
- Disclosure controls were deemed ineffective at June 30 because a previously identified material weakness in controls over customer arrangements remained. Management expected remediation by year-end 2019. No material changes to the previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether the September 2019 PIK note maturity was refinanced, repaid or extended, and the conditions and implications of any extension.
- Whether DOE and Centrus executed the definitive HALEU contract, its final funding terms and the company’s actual cost exposure.
- Whether cash and liquidity tracked management’s year-end forecast, including release of NRC collateral and the effect of ongoing cash burn.
- Whether LEU order-book volumes, delivery schedules, pricing and supplier purchase obligations support expected revenue and margins.
- Developments in the DOE benefits-cost litigation, the Portsmouth class actions and remediation of the material weakness in internal controls.