Centrus Energy Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in millions of dollars except per-share data. Centrus sells low-enriched uranium (LEU) and provides contract engineering and technical services. Its longer-term objective is to resume commercial enrichment production.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $39.4 | $44.0 | $75.1 | $51.2 |
| Gross loss | $(10.7) | $(4.7) | $(16.0) | $(7.6) |
| Operating loss | $(27.4) | $(22.4) | $(53.7) | $(46.4) |
| Net loss | $(26.1) | $(22.4) | $(51.1) | $(14.8) |
| Net loss allocable to common stockholders | $(28.1) | $(24.4) | $(55.1) | $(17.8) |
| Loss per common share, basic and diluted | $(3.08) | $(2.69) | $(6.05) | $(1.96) |
- Revenue and margins: Q2 revenue fell 10% year over year as lower average SWU prices outweighed higher sales volume. Six-month revenue increased 47%, but gross loss widened; the six-month gross loss included $9.5 of DOE settlement revenue, and would have been $25.5 excluding it. Gross margin was approximately negative 27% for Q2 and negative 21% for the first half.
- Cash flow: Operating cash use was $65.7 in the first half, versus $78.0 in 2017. Investing provided $0.2 and financing used $3.0, resulting in a $68.5 decrease in cash, cash equivalents and restricted cash. Cash and cash equivalents were $140.1 at June 30, compared with $208.8 at year-end; restricted cash was an additional $36.2.
- Liquidity and balance sheet: Working capital was $114.3, down from $163.5 at year-end. Total assets were $525.8 and total liabilities were $795.6, leaving a stockholders’ deficit of $269.8. The filing states that management expects adequate liquidity for at least 12 months from the report date.
- Debt and obligations: Debt carrying value was $161.4, including $6.1 current; long-term debt was $155.3. The 8% PIK Toggle Notes, with a $32.1 carrying value, mature in September 2019 unless extension conditions are met. The 8.25% Notes mature in 2027. Pension liabilities were $155.2 and postretirement benefit obligations were $151.7.
Material changes and unusual items
- LEU Segment revenue was $32.9 in Q2, down $5.0 year over year; first-half revenue was $54.2, up $15.5. First-half SWU sales volume rose 97%, while average billed SWU prices declined 34%. The LEU Segment recorded a first-half gross loss of $23.5, versus $6.5 a year earlier.
- Contract Services Segment first-half revenue rose to $20.9 from $12.5 and generated $7.5 gross profit, compared with a $1.1 gross loss in 2017. The 2018 result included $9.5 of revenue from the DOE settlement.
- The 2017 first-half net loss included a $33.6 gain on early extinguishment of debt, making the reported year-over-year increase in 2018 net loss less indicative of operating performance. Conversely, the 2018 DOE settlement boosted current-period contract revenue.
- Adoption of ASC 606 reduced reported contract-services revenue and increased reported net loss by $1.6 in Q2 and $2.0 for the first half, compared with prior accounting. Comparative periods were not restated. A $0.3 cost classification correction had no impact on net loss.
- Cash fell partly because SWU purchase-agreement payables declined by $59.9. Inventory declined to $100.0 gross, with $54.9 net of inventory owed to customers and suppliers.
Outlook, commentary and risks
- 2018 guidance: Centrus forecast SWU and uranium revenue of $150–$175, total revenue of $175–$200, and year-end cash and cash equivalents of $100–$125. It expected nearly half of annual revenue in Q4. Management cited the timing of supply purchases and higher pension contributions as drivers of expected cash decline.
- Operating outlook: Management described the nuclear fuel market as oversupplied, with pricing pressure and uncertain demand. Average sales prices were expected to decline as more deliveries reflect recent market conditions. Centrus also cited limited uncommitted LEU demand for the remainder of the decade, with an anticipated increase in the 2020s.
- Supply and order book: Centrus signed a long-term Orano supply agreement in April, nominally beginning in 2023, with flexibility to start in 2021 or defer to 2024. The LEU order book was $1.3 billion at June 30. A bankrupt customer’s proposed rejection of its existing contract and replacement contract, subject to court approval, was expected to reduce it to $1.1 billion.
- Facility and project costs: Most Piketon decommissioning was complete, but Centrus expected approximately $12 of costs from Q3 2018 through Q2 2019 for NRC license termination and DOE lease turnover. The Piketon lease expires June 30, 2019; higher-than-estimated turnover costs could hurt earnings and liquidity. The company also warned that reduced or discontinued government funding could lead to further American Centrifuge demobilization, delay, cost or termination.
- Contingencies and other risks: Claims for certain pension and postretirement reimbursements from DOE remained unresolved and could result in additional revenue, subject to legal proceedings and valuation allowances. Other significant risks include supplier dependence, uranium market conditions, customer order timing and creditworthiness, Russian supply restrictions or sanctions, unfunded benefit obligations, and the 2019 PIK note maturity. The company reported no material changes to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Whether Q3/Q4 deliveries support the full-year revenue and cash guidance, given the expected Q4 concentration and first-half operating cash use.
- The court’s decision on the customer contract rejection and replacement, and the resulting order-book value and delivery economics.
- Funding and milestone developments for American Centrifuge, and actual costs and timing for Piketon license termination and lease turnover.
- Progress toward addressing the September 2019 PIK Toggle Notes maturity and any conditions required to extend it.
- Any resolution of DOE pension and postretirement reimbursement claims, and the impact of ASC 606 when comparing reported services revenue with prior periods.