Centrus Energy Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Centrus supplies low-enriched uranium (LEU) to nuclear utilities and performs American Centrifuge research and development under government contract. Its reportable segments are LEU and contract services.
Key financial results
| Metric ($ millions, except per-share data) | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | 21.4 | 29.2 | 174.8 | 260.3 |
| Gross profit (loss) | (2.1) | (24.4) | 19.2 | (13.2) |
| Operating loss | (36.7) | (50.4) | (61.8) | (71.6) |
| Net loss | (41.3) | (55.1) | (58.8) | (85.6) |
| Net loss per share | (4.54) | (6.05) | (6.46) | (9.51) |
- Revenue mix: Q3 SWU revenue rose 60% to $14.1 million, reflecting 25% higher sales volume and a 32% higher average billed price. Contract services revenue fell 64% to $7.3 million as American Centrifuge work continued at a reduced scope. For the nine months, LEU revenue fell 28% and contract services revenue fell 48%.
- Profitability: Nine-month gross profit improved by $32.4 million year over year, while net loss narrowed by $26.8 million. Comparisons benefited from a $21.6 million pension remeasurement charge in 2015 and, in 2016, $8.1 million of contract revenue for work performed in late 2015. Q3 operating loss included $21.9 million of advanced technology costs.
- Cash flow and liquidity: Cash was $170.8 million at quarter-end, down $63.2 million from year-end 2015. Nine-month operating cash use was $51.9 million, investing cash use was $1.5 million, and financing cash use was $9.8 million. Working capital was $255.4 million, versus $307.7 million at December 31, 2015.
- Balance sheet and debt: Total assets were $613.8 million and total liabilities $838.1 million; stockholders’ deficit was $224.3 million. Long-term debt was $234.1 million net of financing costs, consisting of 8% PIK toggle notes. The company paid $9.8 million to repurchase notes with $26.1 million principal and recognized a $16.7 million extinguishment gain. The notes mature September 30, 2019, subject to possible extension under specified conditions.
- Other significant obligations: Pension benefit liabilities were $170.6 million and postretirement health and life obligations were $185.2 million. Piketon decontamination and decommissioning (D&D) obligations totaled $38.9 million, including $28.3 million current.
Material changes and unusual items
- The roughly $15 million Q3 increase in the Piketon D&D accrual, based on revised estimates and schedule, contributed to higher advanced technology costs. Remaining D&D costs were estimated at $38.9 million to $49.4 million, with work expected to continue through 2018.
- Uranium inventory valuation adjustments were $3.0 million for the nine months, including $2.3 million in Q3, reflecting lower market indicators.
- Nine-month contract services revenue includes $8.1 million billed in 2016 for work performed in Q4 2015 before the successor contract was signed. The new UT-Battelle contract, for October 2016–September 2017, is valued at approximately $25 million and is funded incrementally.
- Inventory declined to $185.8 million from $319.2 million, while payables under SWU purchase agreements fell to $16.5 million from $85.4 million. Management cited the reduction in purchase payables as a major operating cash use.
- Centrus held about $78 million of unpaid DOE invoices at both reporting dates, but recorded only $23.0 million as a long-term receivable because collection timing and amount remain uncertain.
Outlook, commentary, and risks
- Management forecast 2016 SWU and uranium revenue of $250 million–$275 million, total revenue of $275 million–$300 million, and year-end cash of $200 million–$250 million. It expected approximately 40% of full-year revenue in Q4 and 2016 SWU sales volume comparable to 2015.
- Management said liquidity should be adequate for at least the next 12 months, while noting dependence on customer order timing, inventory purchases, operating expenditures, and American Centrifuge government funding. It expected about $5 million per quarter in Piketon support costs through D&D completion.
- The nuclear fuel market remained oversupplied, pressuring prices; management noted limited uncommitted LEU demand before decade-end. Centrus depends on third-party supply, including Russian deliveries, and customer ordering and refueling schedules can make results volatile.
- Federal funding for the American Centrifuge demonstration cascade at Piketon ended in 2015. The 2017 UT-Battelle contract was incrementally funded while the federal government operated under a continuing resolution; further funding reductions could cause additional demobilization, costs, delays, or termination.
- PBGC discussions concerning qualified pension plans remained unresolved. Involuntary plan termination could affect the Enrichment Corp. guarantee of the notes. Centrus also faced potential NYSE MKT delisting if it failed to regain listing-standard compliance by May 17, 2017.
- Other key uncertainties include D&D regulatory approvals and costs, DOE claims and receivable recoveries, the ability to commercialize competitive enrichment technology, the notes’ conditional guarantee, and the company’s substantial pension and postretirement obligations.
Important facts for investors to verify
- Whether Q4 deliveries and order timing supported the 2016 revenue and cash guidance.
- Progress and funding terms under the 2017 UT-Battelle contract, and any changes in federal support.
- Actual Piketon D&D costs, regulatory approvals, schedule, and recovery of cash collateral as obligations are completed.
- Developments in PBGC discussions, pension funding requirements, and the conditional note guarantee.
- DOE claim resolution and recoverability of the recorded $23.0 million long-term receivable.
- Progress toward NYSE MKT listing compliance and the company’s liquidity as cash declines and obligations come due.