Centrus Energy Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023. Financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars.
Business context and reporting period
Centrus supplies nuclear fuel components through its LEU segment and provides engineering, manufacturing and related services through Technical Solutions. LEU sales are primarily to nuclear utilities; Technical Solutions includes the DOE-funded HALEU program. The company reported results for the three and nine months ended September 30, 2023, compared with the same periods in 2022.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $51.3 | $33.2 | $216.6 | $167.6 |
| Gross profit | $11.3 | $2.3 | $62.3 | $69.5 |
| Operating income (loss) | ($2.9) | ($12.8) | $19.8 | $28.4 |
| Net income (loss) | $8.2 | ($6.1) | $28.1 | $30.9 |
| Diluted earnings (loss) per share | $0.52 | ($0.42) | $1.82 | $2.06 |
| Cash used in operating activities | Not presented quarterly | ($8.8) | ($35.1) |
- Q3 revenue rose 55%, principally as SWU revenue increased to $40.5 from $7.7; Technical Solutions revenue declined to $10.8 from $13.0. Gross profit improved substantially in the quarter, but Centrus still recorded an operating loss.
- For the first nine months, revenue grew 29%, while gross profit fell 10% and net income fell 9%. LEU revenue increased 51%, but LEU gross profit declined 4%; Technical Solutions revenue and gross profit decreased 33% and 75%, respectively, partly reflecting the transition from the HALEU Demonstration Contract to the HALEU Operation Contract.
- Gross margin was approximately 22% in Q3 2023 versus 7% in Q3 2022, and approximately 29% for the first nine months of 2023 versus 41% in 2022.
- At September 30, cash and cash equivalents were $183.3; cash, cash equivalents and restricted cash totaled $215.8, including $29.8 of restricted cash collateral for inventory loans. Working capital was $194.6, compared with $137.9 at year-end 2022. Management said liquidity should be adequate for at least 12 months, subject to operating conditions, customer receipts, trade restrictions and government funding.
- Total liabilities were $668.7 and stockholders’ deficit was $24.0. Debt carrying value was $95.7, including $74.3 principal on 8.25% Notes due February 2027 and $21.4 of remaining interest obligations; $6.1 was classified as current debt. Long-term inventory loans were $74.7, and total borrowed-inventory liabilities were $84.6.
- Nine-month investing cash outflow was $1.1. Financing cash inflow was $13.9, including $23.2 net proceeds from an ATM stock issuance, partly offset by $6.1 of debt-classified interest payments and share-tax withholdings. Capital expenditures of approximately $1.0 were anticipated over the following 12 months.
Material changes and unusual items
- Q3 included a $7.7 income tax benefit from a partial release of the federal deferred-tax valuation allowance, based on improved forecasted LEU income. This was a material contributor to quarterly net income; Centrus said it did not expect to realize all deferred tax assets.
- The company recorded $16.7 of previously accrued HALEU Operation Contract losses attributable to work performed in the first nine months; $3.3 of accrued contract loss remained at September 30. DOE funding then totaled approximately $38.8 against a $125.9 estimated transaction price for Phase 1, Phase 2 and additional scope.
- In the first quarter, Centrus issued 722,568 Class A shares through its ATM program, generating $23.4 in proceeds after agent fees and before $0.2 of direct issuance costs. A shelf registration effective July 2023 permits up to $200 of additional securities offerings.
- After quarter-end, Centrus announced it began Piketon enrichment operations on October 11 and delivered its first HALEU to DOE on November 7, completing Phase 1. On October 19, DOE provided $5.5 of additional funding for contract scope including facility repairs and cylinder refurbishment.
- On October 12, Centrus transferred approximately $186.5 of pension obligations to an insurer, funded by approximately $171.4 of plan assets. The company estimated about $15.1 of pension settlement income for Q4, subject to final settlement and pricing.
Outlook, risks and contingencies
- Centrus is not providing 2023 operating-results guidance, citing market uncertainty and disruption. Its LEU Order Book was approximately $1.0 billion, extending to 2030, and included about $306 of deferred revenue and customer advances. Order Book amounts depend on delivery timing, contract terms and estimated prices.
- Management described rising SWU market prices, reaching $138 per SWU at September 30, 2023, and potential growth in nuclear fuel demand. It also emphasized uncertainty around supply, pricing, customer order timing and the pace of domestic enrichment investment.
- Russian supply is central to current LEU sourcing. The TENEX contract, Russian-related sanctions and trade restrictions, transportation and payment channels, and the requirement to return natural uranium create risks to supply and delivery. Centrus reported that one processing facility would no longer receive natural uranium for TENEX, requiring alternative arrangements. A Canadian shipper’s permit was extended only through July 2024.
- HALEU Phase 2 targets a full year of production at an annual rate of 900 kilograms, with an expected contract value of approximately $90, subject to congressional appropriations. DOE cylinder availability may constrain continuous production. Additional production options are at DOE’s discretion and also depend on appropriations; commercial demand, future contracts and funding are not assured.
- DOE asserts that Centrus may be responsible for approximately $9.6 of Paducah power-plant decommissioning costs. Centrus has not accrued a liability and says it cannot estimate potential exposure. Portsmouth-related contamination and personal-injury lawsuits remain pending; Centrus believes its operations complied with regulations and has sought DOE indemnification.
- Other principal risks include long-term pension and postretirement obligations, the 2027 Notes, dependence on major customers and suppliers, and possible legal, regulatory and contract-performance exposures. The company reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether DOE appropriations and contract funding support HALEU Phase 2 and any later production, and whether cylinder supply permits the planned production rate.
- Whether Russian-origin LEU can continue to be purchased, transported, paid for and delivered under the TENEX contract and applicable trade restrictions.
- How future delivery timing, contract mix and inventory costs affect LEU gross margins and cash conversion; operating cash flow remained negative for the first nine months.
- The final Q4 accounting and realized financial effects of the pension annuity settlement, and the extent of any remaining pension and postretirement obligations.
- Developments in the DOE decommissioning-cost assertion and Portsmouth litigation, including whether DOE indemnification applies.