Centrus Energy Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Business context
Centrus supplies low-enriched uranium (LEU) and uranium to nuclear utilities through third-party and inventory sources, and provides engineering, manufacturing and other technical services. Its two segments are LEU, the principal revenue source, and Technical Solutions, which includes DOE-funded work to demonstrate domestic high-assay, low-enriched uranium (HALEU) production.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $247.2 million | $209.7 million |
| Gross profit | $97.6 million | $32.5 million |
| Operating income (loss) | $51.0 million | $(19.7) million |
| Net income (loss) | $54.4 million | $(16.5) million |
| Cash provided by operating activities | $67.1 million | $11.3 million |
| Cash and cash equivalents at year-end | $152.0 million | $130.7 million |
| Working capital | $40.0 million | $32.8 million |
Gross margin was approximately 39.5% in 2020 versus 15.5% in 2019. LEU revenue rose 12% to $190.5 million; Technical Solutions revenue rose 41% to $56.7 million. LEU gross profit was $97.8 million, while Technical Solutions recorded a $0.2 million gross loss. The company reported $0.59 basic and $0.57 diluted earnings per share for the year, but a $41.9 million deemed dividend associated with retiring preferred shares reduced income allocable to common stockholders; adjusted diluted EPS excluding that item was $4.71, a non-GAAP measure.
Q4 comparison: Revenue was $92.9 million versus $55.7 million in Q4 2019; gross profit was $35.0 million versus $6.8 million; operating income was $20.6 million versus an operating loss of $6.7 million; net income was $16.4 million versus a net loss of $2.8 million. Q4 2020 common-stockholder net loss was $26.3 million, reflecting the preferred-stock retirement deemed dividend.
Operating cash flow benefited from net income, a $25.8 million inventory decrease and a $13.2 million increase in payables under SWU purchase agreements; it included the one-time $32.6 million customer bankruptcy-claim recovery. Investing used $1.4 million and financing used $44.4 million, including $61.6 million for preferred-stock repurchases and $23.1 million net proceeds from common-stock issuance.
Year-end total assets were $486.3 million and total liabilities were $806.9 million; stockholders’ deficit was $320.6 million. Debt carrying value was $114.1 million, comprising $74.3 million principal and accrued future interest obligations; the 8.25% notes mature in February 2027. Pension and postretirement benefit liabilities totaled $255.2 million. The LEU order book was approximately $960 million through 2030, including about $328 million of deferred revenue and customer advances.
Material changes and unusual items
- Revenue increased 18% year over year. LEU SWU revenue included a $32.6 million recovery from a customer bankruptcy proceeding; excluding that recovery, average SWU selling prices increased 13% while SWU sales volume decreased 15%.
- LEU cost of sales fell 22%, with average cost per SWU down 12%, primarily reflecting lower TENEX contract pricing. Technical Solutions’ 2019 gross loss included an $18.3 million accrued projected loss on the HALEU contract; that provision declined to $7.7 million at year-end 2020, and 2020 cost of sales benefited by $10.6 million from prior accruals.
- The company issued 2,537,500 Class A shares for $25.4 million gross proceeds and repurchased 62,854 Series B preferred shares for approximately $60 million, about 60% of shares then outstanding. Remaining preferred shares had a $53.9 million liquidation preference, including accrued dividends, at year-end.
- In Q4, Centrus transferred approximately $30.4 million of pension assets and related obligations to an insurer through a group annuity contract.
Outlook, risks and contingencies
Management expected 2021 and 2022 LEU revenue to be slightly above 2020, with gross margins similar to 2020 excluding the one-time claim recovery; expected 2021 LEU deliveries under the existing order book were $130–$140 million. Management said the HALEU demonstration remained on schedule and within budget, with the DOE cost-share contract running through 2022. DOE’s maximum reimbursement is $115 million, but funding is incremental; the filing gives differing current obligated-funding amounts in separate sections ($87.4 million in the contract discussion and $74.5 million in the liquidity discussion). DOE cash payments totaled $55.8 million by year-end.
Key uncertainties include the oversupplied enrichment market, volatile customer delivery timing, concentration among major customers, dependence on foreign suppliers and Russian import quotas, and the need to sell enough TENEX-sourced material to meet purchase commitments. The Russian Suspension Agreement was extended through 2040, with a significant quota allocation for Centrus through 2028. HALEU demand, post-2022 funding and commercial deployment are not assured; licensing, technical, economic and appropriations hurdles remain. COVID-19 had not materially affected LEU operations at filing, but caused supplier delays and potential added costs for Technical Solutions work.
Other exposures include substantial pension and postretirement obligations, fixed-price/cost-share contract overrun risk, DOE agreement and funding risks, nuclear regulation and trade restrictions, and multiple lawsuits alleging off-site contamination at Portsmouth. The company believes DOE indemnification applies, but outcomes and coverage are uncertain. A tentative DOE settlement of a pension-cost claim would pay $43.5 million including interest if approved; it was not final at filing. The filing also reports a $486.0 million valuation allowance against federal and state deferred tax assets, while management said a partial federal release might become possible within 12 months if profitability is sustained.
As subsequent events, Centrus reported that by March 22, 2021 it had sold 1,015,211 shares through its ATM program for $23.3 million gross proceeds. In February 2021, it exchanged 3,873 preferred shares for 231,276 common shares and a warrant for up to 250,000 additional shares.
Important facts for investors to verify
- How much 2020 earnings and cash generation depended on the $32.6 million one-time customer recovery, and the resulting normalized LEU profitability.
- The current DOE obligated funding level for the HALEU contract, whether the Piketon license amendment is approved, and funding or customer plans after 2022.
- Whether Centrus can place all required TENEX purchases within Russian quotas and customer acceptance limits, especially for overseas sales.
- The status and potential financial effect of Portsmouth litigation and approval or collection of the tentative $43.5 million DOE settlement.
- Future pension contributions and preferred dividends, remaining preferred liquidation preference, and dilution from ATM sales, the preferred exchange and warrant.
- Reconcile the filing’s inconsistent stated DOE obligated-funding amount for the HALEU contract ($87.4 million versus $74.5 million).