Centrus Energy Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Centrus supplies low-enriched uranium (LEU) and conducts government-funded research and development on American Centrifuge technology.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $7.2 million | $90.0 million; down 92% |
| Gross profit (loss) | $(2.5) million | $15.8 million |
| Operating loss | $(23.6) million | $(10.5) million |
| Net income (loss) | $7.6 million | $(14.6) million |
| Net income (loss) allocable to common stockholders | $6.6 million; $0.73 per diluted share | $(14.6) million; $(1.60) per diluted share |
| Cash used in operating activities | $(82.0) million | $(54.9) million |
| Cash and cash equivalents | $151.7 million | $260.7 million at December 31, 2016 |
| Working capital | $176.9 million | $234.9 million at December 31, 2016 |
| Total debt carrying value | $166.2 million, including $6.4 million current | $234.1 million at December 31, 2016 |
| Total liabilities / stockholders’ deficit | $771.5 million / $(223.9) million | $949.6 million / $(236.1) million at December 31, 2016 |
Revenue fell sharply in both segments: LEU revenue was $0.8 million versus $73.6 million, mainly reflecting customer delivery timing; contract services revenue was $6.4 million versus $16.4 million, partly because Q1 2016 included revenue for earlier work and the current contract scope was reduced. Both segments reported gross losses. The company’s operating margin remained negative; the filing does not present a standalone margin percentage.
Net income was not indicative of underlying operating performance: it included a $33.6 million gain from the February debt exchange, while the operating loss widened and cash from operations was negative. Cash fell by $109.0 million during the quarter, including $27.6 million used to repurchase debt. The operating cash outflow included a $59.5 million reduction in payables under SWU purchase agreements.
Material changes and unusual items
- In February, Centrus exchanged $204.9 million principal amount of 8% PIK Toggle Notes for $74.3 million principal amount of 8.25% notes due 2027, 104,574 shares of Series B Preferred Stock with a $105.6 million aggregate liquidation preference at quarter-end, and $27.6 million cash. The exchange reduced debt carrying value and produced the $33.6 million accounting gain.
- The remaining 8% PIK Toggle Notes had $30.5 million principal outstanding at March 31, 2017, and mature in September 2019, subject to extension if specified conditions are met. The new 8.25% notes have a $135.8 million carrying value, which includes future interest obligations under the troubled-debt-restructuring accounting treatment.
- Q1 special charges were $2.4 million: $0.8 million of estimated termination benefits and $1.6 million of advisory costs. The company also recorded $6.1 million of advanced technology license and decommissioning costs.
- The Piketon facility decontamination and decommissioning (D&D) liability was $34.9 million at quarter-end; work was expected to continue through 2017 and be substantially complete by year-end. Surety bonds of $29.6 million were fully cash-collateralized.
- Series B Preferred Stock carries cumulative dividends at 7.5% annually. Centrus had not met the specified dividend-payment conditions and had not paid dividends as of quarter-end; $1.0 million of cumulative dividends was reflected in the common-stockholder income allocation.
Outlook, risks, and contingencies
Management forecast 2017 SWU and uranium revenue of $175–$200 million and total revenue of $200–$225 million, with more than two-thirds expected in Q4. It expected year-end cash of $150–$175 million and stated it anticipated adequate liquidity for at least the next 12 months. These expectations depend on customer delivery timing, LEU purchases and sales, legal contingencies, strategic uses of cash, D&D costs, and government funding.
The current UT-Battelle contract for American Centrifuge work runs through September 30, 2017, is valued at approximately $25 million, and is funded incrementally. Funding depends on the U.S. government; reduced or discontinued funding could lead to further demobilization, added costs, delays, or termination. The filing does not provide a clear value for the company’s total unfunded pension and postretirement obligations, but identifies them as significant long-term liabilities.
Other material risks include weak LEU market conditions and uncertain customer orders, dependence on third-party and Russian supply, the ability to sell purchased LEU, DOE-related receivables and claims with extended resolution timelines, and risks associated with debt obligations and the conditional guarantee of the remaining PIK notes. DOE and Centrus continued to preserve and toll rights and defenses relating to missed American Centrifuge milestones. Centrus reported that it regained compliance with NYSE MKT listing standards in April 2017, subject to a 12-month follow-up review.
Management concluded disclosure controls were ineffective at March 31, 2017, due to an unremediated material weakness in accounting for the D&D obligation. Management expected to complete remediation by year-end 2017; the financial statements were nevertheless stated to fairly present the company’s results in all material respects.
Important facts for investors to verify
- Whether 2017 deliveries and revenue materialize as forecast, particularly the expected concentration in Q4, and whether year-end cash remains within guidance.
- Progress on the post-September 2017 UT-Battelle contract and the amount and continuity of U.S. government funding.
- Actual D&D costs and schedule versus the $34.9 million accrued liability and expected year-end completion.
- Cash use, working-capital movements, and liquidity needs, including payments under SWU purchase agreements and surety-bond collateral.
- Debt terms, maturity-extension conditions, cumulative preferred dividends, and the effect of the exchange’s nonrecurring gain on reported earnings.
- Resolution of DOE receivables and claims, pension funding and obligations, and remediation of the internal-control material weakness.