Centrus Energy Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Amounts are in U.S. dollars and millions unless noted. Comparisons are with Q1 2017 unless otherwise stated.
Business context and results
Centrus supplies low-enriched uranium (LEU) and uranium to nuclear utilities and provides engineering and technical services. It has two reportable segments: LEU and Contract Services. The uranium enrichment market remained oversupplied, pressuring prices. Centrus has no current commercial enrichment production; its longer-term goal is to resume production.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $35.7 | $7.2 |
| Gross loss | $(5.6) | $(2.9) |
| Operating loss | $(26.3) | $(24.0) |
| Net income (loss) | $(25.0) | $7.6 |
| Net income (loss) attributable to common stockholders | $(27.0) | $6.6 |
| Basic and diluted loss per share | $(2.97) | Basic $0.73; diluted $0.72 |
| Cash used in operating activities | $(52.3) | $(73.0) |
Revenue increased $28.5, or 396%. LEU revenue was $21.3, up from $0.8, while LEU gross loss widened to $13.5 from $1.9 as higher sales volumes included a greater concentration of lower-priced contracts. Contract Services revenue rose to $14.4 from $6.4 and reported gross profit of $7.9, including $9.5 of settlement-related revenue; excluding that revenue, the segment had a $1.6 gross loss. Overall gross margin was approximately negative 15.7% (gross loss divided by revenue).
Net results deteriorated from a $7.6 profit to a $25.0 loss. Q1 2017 included a one-time $33.6 gain from a debt exchange; Q1 2018 had no comparable gain. Q1 2018 also included $7.7 of advanced-technology license and decommissioning costs, $11.2 of SG&A, and $1.3 of intangible-asset amortization.
Cash, liquidity, debt, and obligations
- Cash and cash equivalents were $153.3 at March 31, down from $208.8 at December 31, 2017. Including restricted cash, the cash-flow statement total was $189.5, down $55.3 during the quarter.
- Operating cash outflow was $52.3; the company cited a $55.9 reduction in SWU purchase payables as a significant cash use. Investing cash flow was approximately zero and financing cash outflow was $3.0, including interest classified as debt.
- Working capital was $129.6, down from $163.5 at year-end. Current assets were $474.3 and current liabilities $344.7.
- Long-term debt was $155.3; total debt carrying value was $161.4, including $6.1 classified as current. The 8% PIK Toggle Notes had $32.1 carrying value and mature in September 2019, subject to extension if specified conditions are met. The 8.25% Notes mature in February 2027.
- Long-term pension benefit liabilities were $159.2 and postretirement health and life benefit obligations were $153.1. Total liabilities were $824.6, compared with total assets of $580.9; stockholders’ deficit was $243.7.
Management said it expected adequate liquidity for at least the next 12 months. It forecast year-end 2018 cash and cash equivalents of $100–$125, with the anticipated decline driven by supply-purchase timing and higher required postretirement-benefit contributions.
Material changes, outlook, and significant items
- 2018 guidance: SWU and uranium revenue of $150–$175; total revenue of $175–$200. Management expected more than half of annual revenue in Q4 and said average sales prices would decline as more sales reflect recent market conditions.
- DOE settlement: A January 2018 agreement settled claims for $24.0 and closed specified contracts and subcontracts, subject to exceptions for certain pension and postretirement claims. Centrus received $4.7, applied approximately $19.3 of prior advances against receivables, and recognized $9.5 of additional revenue in Q1. Further recovery relating to pension and postretirement costs remained unresolved.
- Supply agreement: On April 27, 2018, after quarter-end, Centrus entered a long-term Orano SWU supply agreement, nominally beginning in 2023. Minimum purchases are approximately 2.4 million SWU over six years, with options affecting start date and term; pricing uses market-related factors and includes floors and ceilings. Payments include euros, creating foreign-exchange exposure, and deliveries to the U.S. may be limited while an antidumping order applies.
- Facility costs: Most Piketon decontamination and decommissioning work was complete. Centrus estimated approximately $16 of costs from Q2 2018 through Q2 2019 for NRC license termination and DOE lease turnover; the lease expires in June 2019. Management warned that higher-than-estimated costs could harm results and liquidity.
- American Centrifuge funding: Government-funded work was limited to research and development at Oak Ridge, with funding provided incrementally. Reduced or discontinued funding could cause further demobilization, delays, costs, or termination of the project.
- Order book: The LEU order book was $1.3 billion at both March 31, 2018 and December 31, 2017. Approximately 14% was estimated to be at risk from American Centrifuge deployment milestones or customer financial conditions; one customer had filed for bankruptcy protection.
- Accounting and dividends: Centrus adopted ASC 606 on January 1, 2018; reported Q1 contract-services revenue was $0.4 lower than under the previous accounting method. Series B preferred dividends are cumulative at 7.5% annually; no dividends had been declared or paid, and accrued unpaid amounts increase the liquidation preference.
Key risks and investor verification points
- Verify the timing and profitability of LEU deliveries, purchase commitments, and customer orders; quarterly revenue and cash flow can fluctuate substantially.
- Assess whether the $1.3 billion order book converts to sales as estimated, including the exposure to at-risk contracts, customer credit, and market pricing.
- Monitor liquidity against the cash forecast, required supply purchases, pension and postretirement funding, and facility-closure costs.
- Review the September 2019 PIK note maturity and any conditions required to extend it, alongside debt servicing and preferred-stock dividend accumulation.
- Track DOE resolution of outstanding pension and postretirement claims, and the potential consequences of American Centrifuge milestone disputes or changes in government funding.
- Consider dependence on third-party LEU suppliers, including TENEX, market oversupply, geopolitical and trade restrictions, and the Orano agreement’s euro exposure and U.S. delivery limits.