Centrus Energy Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Centrus supplies low-enriched uranium (LEU) and provides contract services. Figures are unaudited and in millions of dollars unless noted.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $104.7 | $34.1 | $154.0 | $109.2 |
| Gross profit (loss) | $35.5 | $7.8 | $25.7 | ($8.2) |
| Operating income (loss) | $23.1 | ($9.1) | ($13.0) | ($62.8) |
| Net income (loss) | $22.8 | ($7.8) | ($13.7) | ($58.9) |
| Net income (loss) allocable to common stockholders | $20.9 | ($9.7) | ($19.6) | ($64.8) |
| Basic EPS | $2.18 | ($1.06) | ($2.05) | ($7.11) |
Q3 gross margin was approximately 34%; the nine-month gross margin was approximately 17%. The quarter’s results benefited from higher LEU sales volumes and lower average SWU costs. Nine-month results remained loss-making despite substantial improvement from 2018.
- Revenue mix: Q3 LEU revenue was $87.8, including $75.0 from separative work units (SWU); contract services revenue was $16.9. Nine-month LEU revenue was $125.5 and contract services revenue was $28.5.
- Cash flow: Operating cash used was $26.5 for the first nine months, versus $77.7 used in 2018. Investing activities provided $0.7; financing activities used $33.8, including repayment of matured PIK notes.
- Liquidity: September 30 cash and equivalents were $77.2; cash, equivalents and restricted cash totaled $100.1. Working capital was $32.0, down from $45.8 at year-end 2018. Management said liquidity should be adequate for at least 12 months. A further $17.0 of NRC surety-bond collateral was received October 4, after quarter-end.
- Debt and obligations: Centrus repaid the $28.5 total due on its 8% PIK Toggle Notes on September 30. Remaining 8.25% Notes mature in February 2027; their $120.2 carrying value includes future interest obligations, while principal is $74.3. Pension liabilities were $159.0 and postretirement health and life obligations were $130.3.
- Capital and preferred stock: Total liabilities were $786.6 and stockholders’ deficit was $335.4. Series B preferred stock had a $125.2 liquidation preference; cumulative dividends were included in the common-stock earnings allocation but had not been declared or paid.
Changes and management commentary
- Q3 revenue rose $70.6 year over year, largely because SWU sales volume increased 752%; average billed SWU prices declined 50%. For the nine-month period, revenue rose $44.8, with LEU gross profit improving from a $15.5 loss to $25.1.
- Contract-services gross profit was $0.6 for nine months, down from $7.3 in 2018, which included $9.5 of DOE settlement revenue. Management also cited increased costs and a different mix of contract work.
- Management reiterated 2019 guidance: SWU and uranium revenue of $155–$180 and total revenue of $205–$230. Revenue was expected to be weighted to the second half; year-end cash and equivalents were projected at $105–$125.
- On October 31, 2019, after quarter-end, Centrus signed a three-year, $115 DOE contract to demonstrate HALEU production. DOE reimburses up to 80% of eligible costs, subject to funding and a $115 cap. Centrus’s cost share is expected to exceed $29; management anticipated a Q4 contract-loss charge of approximately $17–$22, based on estimates under review.
- Management described continued LEU market oversupply and uncertain demand, despite some recovery in price indicators. The LEU order book was approximately $1.0 billion and extended to 2030, but depends on delivery timing, customer options and estimated future prices.
Risks, contingencies and unusual items
- Supply and trade exposure: Centrus relies on suppliers including Russia’s TENEX and has minimum purchase commitments. U.S. trade reviews, quotas, sanctions, or changes to the Russian Suspension Agreement could restrict supply or raise costs. The filing also notes potential effects from an extended market supply-demand imbalance.
- DOE funding and technology: HALEU program costs could exceed current estimates and increase Centrus’s cost share. Further government funding reductions could harm American Centrifuge development and liquidity. The company had no assurance of additional UT-Battelle work.
- Legal matters: Centrus is pursuing a $42.8 claim against DOE for pension and postretirement costs; the related receivable has a full valuation allowance. Two class actions allege off-site contamination near the Portsmouth site. Centrus disputes liability and has sought DOE indemnification under the Price-Anderson Act.
- Controls: Disclosure controls were deemed ineffective at September 30 because a previously identified material weakness in accounting controls over customer arrangements remained. Management expected remediation by year-end 2019, subject to successful operation and testing of corrective controls.
- Other notable items included a $2.3 inventory valuation adjustment for uranium and a $2.9 reversal of accrued termination benefits. Operating results can fluctuate materially with customer delivery timing and market conditions.
Investor verification points
- Check subsequent reports for actual Q4 HALEU costs, the projected $17–$22 loss, DOE funding received, and the contract’s total cost-share exposure.
- Compare 2019 year-end revenue and cash with the reiterated guidance; account for the October collateral receipt when assessing cash trends.
- Review operating cash conversion, inventory and supplier-payable movements, and liquidity after repayment of the PIK notes.
- Monitor TENEX supply commitments, trade and sanctions developments, LEU pricing, and customer delivery timing against the order book.
- Track progress on internal-control remediation and developments in the DOE reimbursement claim and Portsmouth class actions.