Centrus Energy Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods unless stated otherwise. Centrus supplies low-enriched uranium (LEU) and uranium, and provides technical, engineering and contract services.
Financial performance and liquidity
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $34.1 million (prior year $50.3 million) | $109.2 million (prior year $101.5 million) |
| Gross profit (loss) | $7.8 million (prior year $11.3 million) | $(8.2) million (prior year $3.7 million) |
| Operating loss | $(9.1) million (prior year $(8.5) million) | $(62.8) million (prior year $(54.9) million) |
| Net loss | $(7.8) million (prior year $(8.5) million) | $(58.9) million (prior year $(23.3) million) |
| Net loss per common share | $(1.06) | $(7.11) |
For the first nine months, LEU-segment revenue was $83.1 million and gross loss was $15.5 million; contract-services revenue was $26.1 million and gross profit was $7.3 million. Contract-services results included $9.5 million of revenue from a DOE settlement. Excluding that revenue, consolidated nine-month gross loss was $17.7 million. The prior-year nine-month net loss included a $33.6 million gain on early debt extinguishment.
Cash flow: Operating activities used $77.7 million in the first nine months, versus $86.6 million used in 2017. Investing activities provided $0.3 million; financing activities used $6.1 million, including interest classified as debt. Cash, cash equivalents and restricted cash declined $83.5 million to $161.3 million, comprising $124.9 million cash and $36.4 million restricted financial-assurance deposits.
Balance sheet at September 30: Total assets were $506.0 million and total liabilities $783.5 million, with stockholders’ deficit of $277.5 million. Working capital was $70.2 million, down from $163.5 million at year-end 2017. Debt was $159.3 million carrying value: $39.1 million current and $120.2 million long-term. The 8% PIK Toggle Notes, with $33.0 million principal, mature in September 2019 unless specified funding conditions permit extension; the 8.25% Notes mature in 2027. Pension liabilities were $143.5 million and postretirement benefit obligations were $150.9 million.
Material changes and notable items
- Q3 revenue fell 32%, principally as SWU revenue declined to $17.6 million from $43.5 million; uranium revenue contributed $11.3 million. Nine-month revenue rose 8%, but LEU gross results deteriorated as sales reflected lower prices on more recent contracts. Nine-month SWU average selling price fell 37% year over year.
- Contract-services nine-month revenue increased to $26.1 million from $19.3 million, including the DOE settlement revenue. Revenue also reflected services for X-energy and work under UT-Battelle contracts.
- LEU sales order book was $1.1 billion at September 30, down from $1.3 billion at year-end 2017, reflecting deliveries, new contracts and rejection of a customer contract in bankruptcy proceedings.
- Centrus adopted ASC 606 in 2018; prior-year comparisons were not restated. Adoption increased Q3 reported revenue and reduced net loss by $1.9 million versus the prior accounting method; the nine-month reported impact was a $0.1 million reduction in revenue and increase in net loss.
- In October 2018, subsidiaries filed approximately $314 million in claims over rejection and breach of a long-term FirstEnergy-related contract. No related amount was recorded in the financial statements.
Outlook, risks and contingencies
Management maintained 2018 guidance of $150–$175 million in SWU and uranium revenue, $175–$200 million in total revenue, and $100–$125 million in year-end cash and cash equivalents. Nearly half of expected 2018 revenue was anticipated in Q4. Management stated it expected adequate liquidity for at least 12 months from the filing date, while noting dependence on customer order and payment timing, operations and government contract funding.
The UT-Battelle contract expired September 30, 2018; Centrus continued work while seeking a successor agreement, but gave no assurance one would be executed. The DOE lease for the Piketon facility expires June 30, 2019 absent agreement on another use. Centrus expected approximately $10 million of facility-maintenance costs from Q4 2018 through Q2 2019, in addition to accrued lease-turnover obligations and termination benefits. It was seeking cancellation of cash-collateralized surety bonds to release funds.
Key risks include persistent LEU market oversupply and pricing pressure; reliance on external suppliers, including TENEX; customer order timing and contract changes; the 2019 PIK note maturity; unfunded pension and postretirement obligations; uncertain U.S. government funding and American Centrifuge deployment; and legal, regulatory, trade and foreign-exchange exposures. DOE pension and postretirement reimbursement claims remained unresolved and could result in additional revenue, subject to proceedings and valuation allowances. The filing reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether Q4 deliveries and customer orders support management’s full-year revenue and cash guidance.
- Progress on a successor UT-Battelle agreement, federal funding, and the Piketon lease’s June 2019 expiration and related costs or collateral releases.
- Funding or refinancing plans for the $33.0 million PIK notes due September 2019 and the terms required for any maturity extension.
- Status and collectability of the approximately $314 million FirstEnergy-related claims; the claims are not recorded and recovery is uncertain.
- Developments in DOE reimbursement claims and the degree to which the $1.1 billion LEU order book converts to deliveries, revenue and cash.