Centrus Energy Corp. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 14, 2017. Centrus supplies low-enriched uranium (LEU) and conducts centrifuge research and development under a U.S. government contract. Results are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $50.3 million | $21.4 million | $101.5 million | $174.8 million |
| Gross profit (loss) | $11.6 million | $(2.1) million | $4.8 million | $19.2 million |
| Operating loss | $(8.2) million | $(36.7) million | $(53.8) million | $(61.8) million |
| Net loss | $(8.5) million | $(41.3) million | $(23.3) million | $(58.8) million |
| Net loss per common share | $(1.15) | $(4.54) | $(3.12) | $(6.46) |
- Q3 gross margin was approximately 23%; nine-month gross margin was approximately 5% (versus approximately 11% in 2016).
- Q3 revenue increased 135%, primarily on higher SWU delivery volumes and average prices. Nine-month revenue fell 42%, reflecting lower SWU volumes and the absence of prior-year uranium sales and contract-services revenue.
- Nine-month results included a $33.6 million gain on the February debt exchange; the comparative 2016 period included a $16.7 million debt-extinguishment gain. These gains reduced reported net losses and are not operating revenue.
- Cash used in operations was $95.6 million for the first nine months, versus $51.9 million in 2016. Investing activities provided $1.8 million and financing activities used $31.0 million; cash declined $124.8 million to $135.9 million.
Balance sheet, liquidity and debt
- At September 30, 2017, cash was $135.9 million, working capital was $145.9 million, and total assets were $521.9 million. Working capital was down from $234.9 million at December 31, 2016.
- Total liabilities were $776.5 million, exceeding assets; stockholders’ deficit was $254.6 million. Pension liabilities were $175.0 million and postretirement health and life obligations were $170.0 million.
- Debt carrying value totaled $163.6 million, including $157.5 million long-term and $6.1 million current. The balance included $74.3 million principal of 8.25% notes due February 2027, carried with future interest obligations, and $31.3 million of 8% PIK toggle notes due September 2019. The remaining PIK notes’ maturity may extend to 2024 if specified funding conditions are met.
- In February, Centrus exchanged $204.9 million principal of PIK notes for $74.3 million of 8.25% notes, Series B preferred stock with $104.6 million initial liquidation preference, and $27.6 million cash. Preferred dividends accrue at 7.5%; accumulated dividends brought the liquidation preference to $109.6 million by September 30. No dividends had been declared or paid.
- Management said it expected adequate liquidity for at least 12 months from the report date. Capital expenditures were expected to remain insignificant over the next 12 months.
Material changes and operating developments
- LEU revenue rose sharply in Q3 but declined 42% for the nine-month period. The average SWU price billed was up 11% in Q3 but down 8% year to date; management expected the full-year average SWU price to be about 3% below 2016.
- Contract-services revenue declined 40% for the nine months, partly because 2016 included revenue recognized for work performed in late 2015. The segment recorded a $0.6 million gross loss in 2017 year to date.
- Advanced technology license and decommissioning costs fell to $15.0 million for the nine months from $38.6 million in 2016. The prior-year period included a $15.0 million increase in the Piketon decommissioning accrual and other demobilization costs.
- Cash fell in part because SWU purchase-agreement payables declined by $42.3 million. Inventory reductions provided cash, while corporate costs and Piketon decommissioning also used cash.
Outlook, risks and contingencies
- For 2017, Centrus forecast SWU and uranium revenue of $175–$200 million, total revenue of $200–$225 million, and year-end cash of $150–$175 million. It expected more than half of annual revenue in Q4 and lower full-year SWU delivery volumes than in 2016.
- A new fixed-price UT-Battelle contract, signed October 26, 2017, covers October 2017–September 2018 and is expected to generate approximately $16 million upon completion of defined milestones. Government funding is incremental and subject to the federal continuing resolution.
- Piketon decontamination and decommissioning was expected to be substantially complete by year-end 2017. The company had accrued $16.6 million for remaining estimated costs and had $29.6 million of fully cash-collateralized surety bonds. Additional costs or delays could affect liquidity.
- Major risks include the weak, oversupplied LEU market; uncertain customer delivery timing and future contracting; reliance on external suppliers, including TENEX; government funding and regulatory decisions affecting American Centrifuge; pension and postretirement obligations; and the ability to meet debt obligations. The company also disclosed DOE-related receivables whose resolution may take an extended period.
- Disclosure controls were not effective at September 30, 2017 because a previously identified material weakness in controls over accounting for the decommissioning obligation remained unresolved. Management expected remediation by year-end, subject to controls operating effectively and testing.
Investor verification checklist
- Track Q4 deliveries, revenue concentration, and whether 2017 revenue and cash guidance was achieved.
- Assess operating cash burn, working-capital movements, and the timing of cash released as surety bonds are reduced or cancelled.
- Review the remaining Piketon decommissioning costs and progress on remediation of the related material weakness.
- Monitor government funding and milestones under the UT-Battelle contract, including the expected revenue and funding conditions of the new agreement.
- Evaluate debt maturities, PIK interest accumulation, preferred dividend accruals, and the conditions that could affect the 8% notes’ guarantee.