Centrus Energy Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts are in millions of dollars, except per-share data. Centrus supplies low-enriched uranium (LEU) and provides American Centrifuge research and development services. Its two reportable segments are LEU and contract services.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $63.4 | $63.3 | $153.4 | $231.1 |
| Gross profit | $5.5 | $4.3 | $21.3 | $11.2 |
| Operating loss | $(14.6) | $(10.2) | $(25.1) | $(21.2) |
| Net loss | $(2.9) | $(15.1) | $(17.5) | $(30.5) |
| Net loss per share | $(0.32) | $(1.68) | $(1.92) | $(3.39) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(49.9) | $(5.8) |
- Q2 LEU revenue was $54.9, up 30%; SWU sales volume increased 63%, while average billed SWU prices fell 19%. Contract-services revenue was $8.5, down 60%, reflecting the reduced American Centrifuge work scope.
- For the first half, LEU revenue fell 32% to $128.5, including lower SWU revenue and a 79% decline in uranium sales volume. Contract-services revenue fell 41% to $24.9. Gross profit nevertheless rose to $21.3, partly because first-half 2016 includes $8.1 of UT-Battelle revenue for work performed in late 2015.
- Reported LEU gross margin was 10.2% in Q2 versus 13.0% a year earlier, and 10.7% for the first half versus 6.7%. Management said lower purchase costs supported results, while lower billed SWU prices and legacy costs weighed on performance. First-half legacy costs were $5.5, compared with $0.2 in 2015.
- Q2 net loss improved substantially, principally due to a $16.7 gain on early extinguishment of debt. The operating loss widened year over year. First-half net loss improvement also included the debt gain and higher gross profit.
- Cash and cash equivalents were $174.5 at June 30, down $59.5 from year-end. First-half operating cash use was $49.9, including a $50.9 reduction in SWU purchase payables; investing cash use was $1.6 and financing cash use was $8.0. Working capital was $276.8, down from $307.7 at year-end.
- Long-term debt was $227.8 carrying value, representing $228.3 principal of 8% PIK toggle notes. Centrus repurchased notes with $26.1 principal and $0.5 accrued interest for $9.8 cash, recognizing a $16.7 gain. Notes mature September 2019, subject to a conditional extension to 2024. Their estimated fair value was $90.5.
- Total liabilities were $858.0 versus assets of $675.0, leaving a stockholders’ deficit of $183.0. Pension liabilities were $171.4 and postretirement benefit obligations were $185.0.
Outlook, risks, and notable items
- Management maintained 2016 guidance of $250–$275 in SWU and uranium revenue, $275–$300 in total revenue, SWU sales volume comparable to 2015, and year-end cash of $200–$250. It expected adequate liquidity for at least 12 months; results remain sensitive to deliveries, inventory purchases, and American Centrifuge funding and costs.
- The UT-Battelle contract provides approximately $2.7 per month through September 30, 2016, substantially below the approximately $6.9 per month received through September 2015. Centrus said it was seeking a new agreement for continued Oak Ridge work after expiration.
- U.S. government funding for the Piketon demonstration ended in 2015. Decontamination and decommissioning (D&D) work began in 2016, is expected to extend through 2017, and has been delayed by contractual and regulatory arrangements. The accrued D&D liability was $25.7 at June 30; additional delay-related costs may arise. Surety bonds of $29.4 were fully cash collateralized.
- DOE claims included approximately $78 of unpaid invoices, but only $23.0 was recorded as a long-term receivable because the timing and amount of collection are uncertain. The filing also identifies uncertainty over PBGC discussions and possible pension-related actions; a pension-plan termination could end Enrichment Corp.’s limited guarantee of the notes.
- Centrus remained out of compliance with NYSE MKT listing standards and had until May 17, 2017, to regain compliance under an accepted plan; delisting proceedings could follow if it fails to comply or make required progress. Other key risks include depressed LEU market prices, supply and customer-contract exposure, potential further American Centrifuge demobilization, and limited commercial deployment prospects for its technology.
- A rights agreement adopted in April 2016 seeks to protect tax attributes, including $324.7 of federal net operating losses reported at December 31, 2015. It generally imposes dilution consequences for specified ownership thresholds; stockholder approval was expected to be sought in 2017.
Most important facts for investors to verify
- Whether Centrus can meet its year-end cash guidance despite first-half cash burn and continued operating and D&D costs.
- Whether a successor UT-Battelle agreement is secured after September 30, 2016, and at what funding level.
- The timing, cost, and regulatory progress of Piketon D&D, including any additional costs from delays.
- Recovery prospects for DOE receivables and the outcome of PBGC discussions, including any effects on pension funding or the note guarantee.
- Progress toward NYSE MKT listing compliance by May 17, 2017, and the status of the 2019-maturity PIK notes and any conditional maturity extension.