Centrus Energy Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing was signed March 31, 2017. Centrus supplies low-enriched uranium (LEU) to nuclear utilities and performs centrifuge research and development under contract with UT-Battelle for the U.S. government. It is not currently enriching uranium commercially.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $311.3 million | $418.2 million |
| Gross profit; gross margin | $45.1 million; 14.5% | $68.9 million; 16.5% |
| Operating loss | $61.7 million | $168.4 million |
| Net loss | $67.0 million; $7.36 per share | $187.4 million; $20.82 per share |
| Cash from operating activities | $37.7 million | $8.5 million |
| Cash and cash equivalents at year-end | $260.7 million | $234.0 million |
| Working capital | $234.9 million | $307.7 million |
| Total assets; total liabilities | $713.5 million; $949.6 million | $820.1 million; $985.8 million |
| Stockholders’ deficit | $236.1 million | $165.7 million |
- Revenue fell 26%. LEU revenue declined 23% to $272.8 million, while contract-services revenue fell 39% to $38.5 million. Uranium revenue dropped 78%, principally because 2015 included one-time transactions; SWU revenue declined 11% despite a 2% increase in SWU volume.
- LEU segment gross profit fell to $38.5 million from $70.1 million. Legacy pension and postretirement costs shifted from a $24.7 million credit in 2015 to a $4.2 million charge in 2016; 2015 also included an $18.5 million contract termination fee. Excluding legacy costs, the company reported non-GAAP LEU gross profit of $44.2 million versus $45.2 million.
- The net loss narrowed largely because 2015 included a $137.2 million impairment of excess reorganization value. The 2016 result also benefited from a $16.7 million gain on repurchasing debt; higher Piketon decommissioning costs and lower LEU gross profit were offsets.
- Operating cash flow was positive partly because inventories declined $89.5 million, converting previously purchased inventory into cash. The company used $9.8 million in financing cash to repurchase notes; cash increased $26.7 million during the year.
- Year-end long-term debt was $234.1 million net of issuance costs, representing $234.6 million principal on 8% PIK toggle notes. The notes’ estimated fair value was $107.4 million. Pension liabilities were $179.9 million and postretirement health and life obligations were $171.3 million.
Material changes and business developments
- The sales order book declined to $1.4 billion from $2.3 billion. The decrease included $0.7 billion of future sales cancelled after customers terminated portions of contracts tied to unmet American Centrifuge Plant milestones. About 5% of the remaining order book was estimated to remain exposed to such milestones, down from 35% a year earlier.
- In February 2016, Centrus began decontamination and decommissioning (D&D) of its Piketon demonstration facility and reduced staffing. The year-end estimated remaining D&D liability was $38.6 million; the company expected work to extend through 2017 and be substantially complete by year-end.
- In September 2016, Centrus entered into a UT-Battelle contract valued at approximately $25 million for October 2016–September 2017, with incremental government funding. This followed reduced contract funding compared with the prior contract year.
- On February 14, 2017, after year-end, Centrus exchanged $204.9 million of PIK notes for $74.3 million of 8.25% notes due 2027, 104,574 Series B preferred shares with $1,000 liquidation preference each, and $27.6 million cash. $29.6 million of PIK notes remained. Centrus anticipated a roughly $34 million gain, net of approximately $9 million transaction costs, in first-quarter 2017.
Outlook, risks, contingencies and unusual items
- 2017 outlook: Centrus projected SWU and uranium revenue of $175–$200 million, total revenue of $200–$225 million, and year-end cash of $150–$175 million. It expected lower SWU deliveries than in 2016 and more than two-thirds of annual revenue in the fourth quarter. These are management estimates subject to timing, market, funding, litigation and D&D uncertainties.
- The LEU market remained oversupplied, with depressed prices and strong competition. Centrus depends on inventory, TENEX and other suppliers; the Russian supply agreement’s required purchases exceed the current sales order book, and Russian LEU is subject to quotas, customer restrictions and geopolitical risks.
- Customer and revenue concentration is significant: the ten largest customers accounted for about 90% of 2016 revenue and the four largest about 50%. Timing of utility refueling and deliveries can cause substantial quarterly fluctuations.
- Centrus estimated approximately $40 million of ongoing costs to maintain the Piketon facilities and licenses through the current DOE lease term, expiring June 30, 2019, unless extended. D&D costs could exceed estimates. About $29.4 million of D&D surety bonds were fully cash-collateralized at year-end.
- Defined-benefit pension and postretirement obligations are substantial and underfunded. The filing estimated 2017 contributions of $1.1 million to qualified pension plans, $0.6 million to non-qualified plans and $13.8 million to postretirement health and life plans. February 2017 PBGC correspondence indicated Centrus could waive certain ERISA Section 4062(e) liabilities related to prior plant closures and that the PBGC would forbear future action related to the American Centrifuge project.
- Centrus disclosed a material weakness in internal control over financial reporting involving review controls for D&D obligation spreadsheets and cost estimates. A material adjustment was recorded in fourth-quarter 2016 before issuance; management was developing remediation. Disclosure controls were deemed ineffective, although management stated the financial statements fairly presented the company’s financial position and results.
- The company had a $702.2 million valuation allowance against deferred tax assets and $725.8 million of federal net operating losses, whose use depends on future taxable income and ownership-change limits.
- Two DOE claims were in litigation and settlement discussions: claims for $38.0 million of contract payments (with approximately $6.7 million already paid by DOE) and a $42.8 million pension and postretirement-cost claim, for which Centrus had recorded a full valuation allowance. The filing gives no assurance of recovery.
- NYSE MKT had accepted a compliance plan, with a May 17, 2017 deadline to regain listing compliance; failure could lead to delisting proceedings. Management said it expected adequate liquidity for at least the next 12 months.
Important facts for investors to verify
- Whether 2017 revenue and cash guidance was achieved, especially given the expected fourth-quarter revenue concentration.
- Actual cash outflows for Piketon D&D, facility and license maintenance, workforce reductions, and pension and postretirement benefits; compare with the $38.6 million D&D accrual and stated future cost estimates.
- Whether the sales order book converts to revenue and profit, including customer contract changes, remaining milestone-related terminations, and the ability to resell required TENEX supply at profitable prices.
- Final accounting and cash consequences of the February 2017 debt exchange, including the new notes’ terms, preferred-stock obligations and remaining PIK debt.
- Progress remediating the D&D control weakness, outcomes of the DOE claims and any subsequent NYSE MKT listing-compliance developments.