Centrus Energy Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results. Centrus supplies low-enriched uranium (LEU) and provides technical services, including work on a U.S. Department of Energy (DOE) high-assay low-enriched uranium (HALEU) demonstration program.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $33.6 million | $104.7 million | $154.3 million | $154.0 million |
| Gross profit (loss) | $(0.8) million | $35.5 million | $62.6 million | $25.7 million |
| Operating income (loss) | $(9.5) million | $23.1 million | $30.4 million | $(13.0) million |
| Net income (loss) | $(7.0) million | $22.8 million | $38.0 million | $(13.7) million |
| Net income (loss) allocable to common stockholders | $(8.9) million | $20.9 million | $32.1 million | $(19.6) million |
| Basic earnings (loss) per share | $(0.83) | $2.18 | $3.21 | $(2.05) |
- Quarterly revenue and margins: Q3 revenue fell 68% year over year. LEU revenue declined to $18.7 million from $87.8 million, with no material SWU deliveries during the quarter; technical solutions revenue was $14.9 million, down 12%. Gross loss was primarily associated with the LEU segment.
- Nine-month performance: Revenue was nearly unchanged, while gross profit increased to $62.6 million. Results included a one-time $32.4 million recovery in Q2 on claims related to a rejected customer contract. Excluding that recovery, SWU average selling price rose 42% year over year; SWU sales volume fell 54%.
- Cash flow and liquidity: Operating activities provided $5.2 million in the first nine months, versus $26.5 million used in 2019. Capital expenditures were $0.9 million. Cash and cash equivalents were $152.8 million at September 30, up from $130.7 million at year-end; cash, cash equivalents and restricted cash totaled $158.7 million. Reported working capital was $70.5 million, compared with $32.8 million at year-end. Management said liquidity should be adequate for at least 12 months.
- Debt and obligations: The 8.25% Notes mature in February 2027; principal was $74.3 million. Balance-sheet debt was $114.1 million, including current and future interest obligations, versus $120.2 million at year-end. Pension liabilities were $121.2 million and postretirement health and life obligations were $131.3 million. Series B preferred stock had a $133.1 million liquidation preference, including accrued cumulative dividends.
- Margins and other items: The nine-month improvement reflected the customer-claim recovery, better SWU pricing, lower advanced technology costs, and $6.6 million of nonoperating benefit-plan income. The company released a state deferred-tax valuation allowance, recording a $0.8 million tax benefit; it retained a full valuation allowance on federal deferred tax assets.
Changes, outlook and material developments
- Management expected Q4 2020 LEU revenue to be the highest quarterly level of the year, assuming planned deliveries proceed. It expected Q4 gross margins above the year-to-date average, excluding the one-time claim recovery.
- Based on the current order book and market conditions, management expected 2021 and 2022 LEU revenue to be slightly above 2020, with gross margins similar to 2020 excluding the recovery. These are expectations, not guarantees.
- The LEU contracted order book was $1.0 billion through 2030, including $0.3 billion of deferred revenue and customer advances. Its value depends on delivery timing, customer requirements, contract pricing and market assumptions.
- The three-year DOE HALEU contract reimburses 80% of eligible costs up to $115 million, with Centrus responsible for the remaining share and any excess costs. DOE was obligated for approximately $74.5 million as of quarter-end, and Centrus had received $41.5 million. The accrued contract-loss balance declined from $18.3 million at year-end 2019 to $9.6 million; 2020 cost of sales benefited by $8.7 million from release of previously accrued losses. Centrus reported the program on schedule and within budget, but future HALEU demand is uncertain.
- After quarter-end, DOE selected TerraPower’s team for initial Advanced Reactor Demonstration Program funding; Centrus described a potential role in commercial-scale HALEU supply, but no final subcontract was assured. Centrus also announced an October memorandum of understanding with Terrestrial Energy regarding future LEU supply.
- In October, the U.S. and Russia extended the Russian Suspension Agreement through at least 2040, with a portion of import limits allocated to Centrus’s TENEX supply agreement for 2021–2028. The filing says this allocation is expected to support the company’s plans, but it also warns that later reviews, restrictions, or inability to sell contracted supply could affect purchase obligations, revenue and viability.
- Centrus raised approximately $25.4 million gross through an August–September common-stock offering of 2,537,500 shares; estimated offering costs were $2.3 million. The share issuance increased Class A shares outstanding. On October 19, the company launched a tender offer to buy up to $60 million of Series B preferred shares; completion was not assured.
- COVID-19 had not materially affected LEU operations or results to the filing date, but the company reported supplier delays and expected higher costs, with potential effects on HALEU work, deliveries and regulatory approvals.
- Legal matters include a pending DOE reimbursement claim for $42.8 million of past pension and postretirement costs, carried with a full valuation allowance, and Portsmouth-site contamination-related litigation. Several claims were dismissed or withdrawn, while others remained pending or unserved; the company cited potential DOE indemnification under the Price-Anderson Act.
Most important facts for investors to verify
- How much of nine-month earnings and operating cash generation depended on the nonrecurring $32.4 million customer-claim recovery, and how results perform without it.
- Whether Q4 deliveries and management’s 2021–2022 LEU revenue and margin expectations materialize, given quarterly delivery variability and import limits.
- Whether DOE funding, schedule, costs and the remaining loss estimate for the HALEU contract remain on track, and whether commercial or government demand develops after the demonstration program.
- The availability and terms of TENEX supply under the amended import limits, including the effects of future RSA reviews and any additional trade restrictions or sanctions.
- The impact of pension and postretirement obligations, cumulative Series B preferred dividends, and the preferred-stock tender offer on future liquidity and capital structure.
- Developments in the DOE reimbursement claim and Portsmouth-related litigation, including the extent of any indemnification coverage.