The following discussion should be read in conjunction with, and is qualified in
its entirety by reference to, the unaudited condensed consolidated financial
statements and related notes appearing elsewhere in this report.
This discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ significantly from the results
discussed in the forward-looking statements particularly in light of the
economic, social and market uncertainty created by the COVID-19 pandemic. See
"Forward-Looking Statements" at the beginning of this Quarterly Report on Form
10-Q.
Overview
Centrus Energy Corp., a Delaware corporation ("Centrus" or the "Company"), is a
trusted supplier of nuclear fuel and services for the nuclear power industry.
References to "Centrus", the "Company", "our", or "we" include Centrus Energy
Corp. and its wholly owned subsidiaries as well as the predecessor to Centrus,
unless the context otherwise indicates.
Centrus operates two business segments: (a) low-enriched uranium ("LEU"), which
supplies various components of nuclear fuel to utilities, and (b) technical
solutions, which provides advanced engineering, design, and manufacturing
services to government and private sector customers.
Our LEU segment provides most of the Company's revenue and involves the sale of
separative work units ("SWU") and occasionally LEU to utilities operating
commercial nuclear power plants. The company also sells natural uranium to other
nuclear fuel related companies.
LEU is a critical component in the production of nuclear fuel for reactors that
produce electricity. We supply LEU to both domestic and international utilities
for use in nuclear reactors worldwide. We provide LEU from multiple sources
including our inventory, medium- and long- term supply contracts and spot
purchases. As a long-term supplier of LEU to our customers, our objective is to
provide value through the reliability and diversity of our supply sources. Our
long-term goal is to resume commercial enrichment production, and we are
exploring approaches to that end.
Our technical solutions segment utilizes the unique technical expertise,
operational experience and specialized facilities that we developed over nearly
two decades as part of our uranium enrichment technology program. We are
leveraging these capabilities to expand and diversify our business beyond
uranium enrichment, offering new services to existing and new customers in
complementary markets.
With the specialized capabilities and workforce at our Technology and
Manufacturing Center in Oak Ridge, Tennessee, we are performing technical,
engineering and manufacturing services for a range of commercial and government
customers and actively working to secure new customers. Our experience
developing, licensing, manufacturing and operating advanced nuclear components
and systems positions us to provide critical design, engineering, manufacturing
and other services to a broad range of potential clients, including those
involving sensitive or classified technologies. This work includes design,
engineering, manufacturing and licensing services support for advanced reactor
and fuel fabrication projects as well as decontamination and decommissioning
("D&D") work.
With several decades of experience in enrichment, we continue to be a leader in
the development of an advanced U.S. uranium enrichment technology, which we
believe could play a critical role in supplying fuel for advanced reactors,
meeting U.S. national and energy security needs, and achieving our nation's
nonproliferation objectives.
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In April 2020, Centrus signed a nonbinding Letter of Intent with Advanced
Reactor Concepts ("ARC"), reflecting the parties' long-term commitment to enter
into a purchase agreement that would enable Centrus to supply commercial
high-assay, low-enriched uranium ("HALEU") fuel that ARC needs to deploy its
reactor technology in the late 2020s. In other recent developments, DOE released
the Nuclear Fuel Working Group report, which called for "immediate action to
support domestic uranium miners and restore the viability of the entire
front-end of the nuclear fuel cycle".
In October 2019, we signed a three-year cost-share contract (the "HALEU
Contract") with DOE to deploy a cascade of centrifuges to demonstrate production
of HALEU fuel with existing United States origin enrichment technology and
provide DOE with HALEU for near term use in its research and development for the
advancement of civilian nuclear energy and national security, as well as other
programmatic missions. The program has been under way since May 31, 2019, when
the Company and DOE signed a preliminary agreement that allowed work to begin
while the HALEU Contract was being finalized.
Under the HALEU Contract, DOE agreed to reimburse the Company for 80% of its
costs incurred in performing the contract, up to a maximum of $115 million. The
Company's cost share is the corresponding 20% and any costs incurred above these
amounts. Services to be provided over the three-year contract include
constructing and assembling centrifuge machines and related infrastructure in a
cascade formation. When estimates of remaining program costs to be incurred for
such an integrated, construction-type contract exceed estimates of total revenue
to be earned, a provision for the remaining loss on the contract is recorded. A
loss provision of $18.3 million was recognized in the fourth quarter of 2019.
The accrued loss on the contract is being adjusted over the remaining contract
term based on actual results and remaining program cost projections. As of March
31, 2020, the accrued contract loss balance was $15.3 million, and Cost of Sales
in the three months ended March 31, 2020 was reduced by $3.0 million for
previously accrued contract losses attributable to work performed in the first
quarter of 2020. Refer to "Technical Solutions - Government Contracting" below
for additional details. The HALEU Contract is incrementally funded and DOE is
currently obligated for costs up to approximately $53.2 million of the $115
million. The Company has received aggregate cash payments of $19.0 million
through March 31, 2020.
HALEU is a component of an advanced nuclear reactor fuel that is not
commercially available today and may be required for a number of advanced
reactor and fuel designs currently under development in both the commercial and
government sectors. Existing reactors typically operate on LEU with the
uranium-235 isotope concentration below 5%. HALEU has a uranium-235
concentration ranging from 5% to 20%, giving it several potential technical and
economic advantages. For example, the higher concentration of uranium-235 means
that fuel assemblies and reactors can be smaller and reactors will require less
frequent refueling. Reactors can also achieve higher "burnup" rates, meaning a
smaller volume of fuel will be required overall and less waste will be produced.
HALEU may also be used in the future to fabricate next-generation fuel forms for
the existing fleet of reactors in the United States and around the world. These
new HALEU-based fuels could improve the economics of nuclear reactors and
inherent safety features while increasing the amount of electricity that can be
generated at existing reactors. HALEU fuel may also ultimately be used in new
commercial and government applications in the future, such as reactors for the
military.
We believe our investment in the HALEU technology will position the Company to
meet the needs of our customers in the future as they deploy advanced reactors
and next generation fuels. By investing in HALEU technology now, and as the only
domestically-owned company with HALEU enrichment capability, we believe the
Company could be well positioned to capitalize on a potential new market as the
demand for HALEU-based fuels increases with the development of advanced
reactors. There are no guarantees about whether or when government or commercial
demand for HALEU will materialize, and there are a number of technical,
regulatory and economic hurdles that must be overcome for these fuels and
reactors to come to the market.
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The nuclear industry in general, and the nuclear fuel industry in particular, is
in a period of significant change, which continues to affect the competitive
landscape. In the years following the 2011 Fukushima accident, the published
market prices for uranium enrichment declined more than 75% through
mid-2018. While the monthly price indicators have since gradually started to
increase, the uranium enrichment segment of the nuclear fuel market remains
oversupplied, including because foreign-owned enrichers continued to expand even
as demand fell, and faces uncertainty about future demand for nuclear power
generation. Changes in the competitive landscape affect pricing trends, change
customer spending patterns, and create uncertainty. To address these changes, we
have taken steps to adjust our cost structure; we may seek further adjustments
to our cost structure and operations and evaluate opportunities to grow our
business organically or through acquisitions and other strategic transactions.
We are also actively considering, and expect to consider from time to time in
the future, potential strategic transactions, which could involve, without
limitation, acquisitions and/or dispositions of businesses or assets, joint
ventures or investments in businesses, products or technologies or changes to
our capital structure. In connection with any such transaction, we may seek
additional debt or equity financing, contribute or dispose of assets, assume
additional indebtedness, or partner with other parties to consummate a
transaction.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel strain of
coronavirus (COVID-19) a global pandemic and recommended containment and
mitigation measures worldwide. The Company has taken actions to protect its
workforce and to maintain critical operations. Travel, operational and other
restrictions imposed by the U.S. and foreign governments may impact our ability
to make future sales and may impact the ability of our suppliers, including our
suppliers of low enriched uranium, to perform under their contracts. As of the
date of this filing, our LEU segment operations have not been materially
affected by the pandemic and we are working with our suppliers, fabricators and
customers to monitor the situation closely.
Further, the governments of states and counties in which we operate have issued
orders prohibiting holding gatherings and closing nonessential businesses. As a
result, the Company has instituted measures such as expanded telework to protect
our workforce, to comply with government orders, and to maintain critical
operations. Not all work, however, can be performed remotely. Consequently, we
have instituted limited operations for personnel working on the HALEU program to
maintain critical systems and security. Further, the actions taken by government
regulatory agencies to protect their workforce may impact our ability to obtain
the necessary reviews and approvals to complete the project. At this time, other
than the restrictions on a limited number of our employees, our technical
solutions segment's operations have not been significantly affected.
We are working closely with DOE and we are continuing to work to make progress
while implementing measures to protect our workforce. To date, there has been
minimal impact to our financial results; however, we cannot reasonably estimate
the length or severity of this pandemic, or the extent to which the disruption
may materially impact our consolidated financial position, consolidated results
of operations, and consolidated cash flows in fiscal 2020 at this time.
For further discussion, refer to Part I, Item 1A, Risk Factors - The effects of
the COVID-19 pandemic could adversely affect our business, operations, financial
condition and results of operations, and the extent to which the effects of the
pandemic will impact our business, operations, financial condition and results
of operations remains uncertain, in our Annual Report on Form 10-K for the year
ended December 31, 2019.
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Quarterly Operating Results
Our revenues, operating results and cash flows can fluctuate significantly from
quarter to quarter and year to year. Operating results for the three months
ended March 31, 2020, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2020. Our future operating results are
subject to a number of uncertainties that could affect results either positively
or negatively. Among the factors that could affect our results are:
• Additional purchases or sales of SWU and uranium;
• Conditions in the LEU and energy markets, including pricing, demand,
operations, and regulations;
• Timing of customer orders, related deliveries, and purchases of LEU or
components;
• Financial market conditions and other factors that may affect pension
and benefit liabilities and the value of related assets;
• The outcome of legal proceedings and other contingencies;
• Potential use of cash for strategic or financial initiatives;
• Actions taken by customers, including actions that might affect existing
contracts;
• Market, international trade and other conditions impacting Centrus'
customers and the industry; and
• The length and severity of the COVID-19 pandemic and its impact on our
operations.
Revenue
We have two reportable segments: the LEU segment and the technical solutions
segment.
Revenue from our LEU segment is derived primarily from:
• sales of the SWU component of LEU;
• sales of both the SWU and uranium components of LEU; and
• sales of natural uranium.
Our technical solutions segment reflects our technical, manufacturing,
engineering and operations services offered to public and private sector
customers, including engineering and testing activities as well as technical and
resource support currently being performed by the Company. This includes the
HALEU Contract and a variety of other contracts with public and private sector
customers.
SWU and Uranium Sales
Revenue from our LEU segment accounted for approximately 81% of our total
revenue in 2019. The majority of our customers are domestic and international
utilities that operate nuclear power plants, with international sales
constituting approximately one-third of revenue from our LEU segment in recent
years. Our agreements with electric utilities are primarily long-term,
fixed-commitment contracts under which our customers are obligated to purchase a
specified quantity of the SWU component of LEU from us. Contracts where we sell
both the SWU and uranium component of LEU to utilities or where we sell natural
uranium to other nuclear fuel related companies are generally shorter-term,
fixed-commitment contracts.
Revenue is recognized at the time LEU or uranium is delivered under the terms of
our contracts. The timing of customer deliveries is affected by, among other
things, electricity markets, reactor operations, maintenance and refueling
outages, and customer inventories. In the current market environment, some
customers are building inventories and may choose to take deliveries under
annual purchase obligations later in the year. Customer payments for the SWU
component of LEU average roughly $10 million per order. As a result, a
relatively small change in the timing of customer orders for LEU may cause
significant variability in operating results.
24
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Utility customers in general have the option to defer receipt of uranium
products purchased from Centrus beyond the contractual sale period, resulting in
the deferral of costs and revenue recognition. Refer to Note 2, Revenue and
Contracts with Customers, in the condensed consolidated financial statements for
further details.
Our financial performance over time can be significantly affected by changes in
prices for SWU and uranium. Since 2011, market prices for SWU and uranium have
significantly declined. Since our sales order book includes contracts awarded to
us in previous years, the average SWU price billed to customers typically lags
behind published price indicators by several years. While newer sales reflect
the low prices prevalent in recent years, certain contracts included in our
order book have sales prices that are significantly above current market prices.
The following chart summarizes long-term and spot SWU price indicators, and a
spot price indicator for natural uranium hexafluoride ("UF6"), as published by
TradeTech, LLC in Nuclear Market Review:
SWU and Uranium Market Price Indicators*
[[Image Removed: chart-e2a6e6926caa585f96a.jpg]]
* Source: Nuclear Market Review, a TradeTech publication, www.uranium.info
Our contracts with customers are primarily denominated in U.S. dollars, and
although revenue has not been directly affected by changes in the foreign
exchange rate of the U.S. dollar, we may have a competitive price advantage or
disadvantage obtaining new contracts in a competitive bidding process depending
upon the weakness or strength of the U.S. dollar. Costs of our primary
competitors are denominated in other currencies. Our contracts with suppliers
have historically been denominated in U.S. dollars. In 2018, however, we entered
into an agreement with Orano Cycle ("Orano") for the long-term supply of SWU.
Purchases under the contract with Orano will be payable in a combination of U.S
dollars and euros and we may be subject to exchange rate risk for the portion of
purchases payable in euros.
On occasion, we will accept payment in the form of uranium. Revenue from the
sale of SWU under such contracts is recognized at the time LEU is delivered and
is based on the fair value of the uranium at contract inception, or as the
quantity of uranium is finalized, if variable.
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Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold
and delivered during the period and unit inventory costs. Unit inventory costs
are determined using the average cost method. Changes in purchase costs have an
effect on inventory costs and cost of sales over current and future periods.
Cost of sales includes costs for inventory management at off-site licensed
locations. Cost of sales also includes certain legacy costs related to former
employees of the Portsmouth and Paducah gaseous diffusion plants.
Market Uncertainties
Imports into the United States of LEU and other uranium products produced in the
Russian Federation, including LEU imported by Centrus under the Russian Supply
Agreement, are subject, through December 31, 2020, to quotas imposed under
legislation enacted into law in September 2008 and under the 1992 Russian
Suspension Agreement ("RSA"), as amended in 2008. These quotas limit the amount
of Russian LEU that can be imported into the United States for U.S. consumption.
The U.S. Department of Commerce ("DOC") is currently conducting an
administrative review of the current status of, and compliance with, the RSA
during the period October 2017 through September 2018 (the "Second
Administrative Review") and in December 2019, initiated another review of the
period October 2018 through September 2019 (the "Third Administrative Review").
In an earlier review (the "First Administrative Review"), which covered the
period October 2016 through September 2017 and was completed in December 2017,
the DOC found that TENEX, Centrus and others had complied with the terms of the
RSA during the period of review, but deferred until the Second Administrative
Review any decision on whether the RSA continues to meet the statutory
requirements that the RSA (i) prevent the suppression or undercutting of price
levels of domestic uranium products and (ii) continue to be in the public
interest. In a preliminary determination in the Second Administrative Review,
issued in December 2019, the DOC again found that Centrus and others had
complied with the RSA, but again deferred making a determination on the
statutory requirements, which it said would be addressed in a post-preliminary
analysis, which has yet to be issued. A final determination in the Second
Administrative Review was due to be issued in June 2020. On April 24, 2020, the
DOC announced that in response to operational adjustments due to the COVID-19
pandemic, it was tolling the deadlines for all administrative reviews currently
pending with the DOC for 50 days, which means that the final determination could
be issued in early August 2020.
If, in the final determination of the Second Administrative Review, the DOC
finds evidence either of non-compliance with the RSA, or that the statutory
requirements are no longer being met, it could terminate the RSA, reinitiate the
antidumping investigation that the RSA suspended, and begin collecting duties in
excess of 115% of the value of imports of Russian uranium products, including
the LEU that the Company imports under the Russian Supply Agreement.
In February 2019, the DOC formally opened negotiations with the Russian
Federation State Atomic Energy Corporation (Rosatom) with respect to a possible
extension of the term of the RSA. In connection with these negotiations, the DOC
is seeking a significant extension of the RSA. We are working with industry
stakeholders and others to ensure that the extension will include sufficient
quota to allow all existing contracts with TENEX, including the Russian Supply
Agreement, to be fully implemented, but it is possible that the terms of the
extension will not expressly protect our ability to import LEU under the Russian
Supply Agreement or require that available quota be allocated to those imports.
An extension of the RSA would continue the existing suspension of the
antidumping investigation and therefore not require payment of the duties or
duty deposits described above, as long as the suspension remained in place.
Centrus does not currently have in place any agreement with TENEX to share
quotas that may apply after 2020, when the existing quotas terminate. Unless the
RSA extension provides for sufficient quota or other relief that would allow
Centrus to deliver in the United States all the Russian LEU that we procure
under the Russian Supply Agreement, (i) our ability to meet our commitments
under our order book and to obtain new sales commitments would be substantially
jeopardized, and (ii) our ability to earn revenues with the Russian LEU we are
required to procure under the Russian Supply Agreement would be substantially
reduced. As a result, we could lose both revenue and market share to our
competitors.
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If, instead of an extension of the RSA, the DOC reached an adverse final
determination in the Second Administrative Review and elected to restart the
antidumping investigation of Russian uranium products, including LEU, we would
be obligated to deposit funds with the U.S. government to cover potential duties
(and potentially pay antidumping duties on a going-forward basis if the
antidumping investigation resulted in an antidumping order) that would render
the LEU containing the SWU that we purchase under the Russian Supply Agreement
too expensive to place into the market. Such an outcome would cause us to incur
significant losses in fulfilling our existing contracts, and make it
commercially challenging to win new contracts.
As a result of the uncertainty regarding the outcome of the pending trade
matter, customers may be reluctant to contract long-term for material from the
Company and the Company may not be able to secure adequate alternative supplies.
Further, the outcome of the pending trade matter could materially impact future
demand and market prices. For further details, refer to Part I, Item 1A, Risk
Factors - Restrictions on imports or sales of LEU or SWU that we buy could
adversely affect profitability and the viability of our business, in our Annual
Report on Form 10-K for the year ended December 31, 2019.
Technical Solutions
Our technical solutions segment reflects our technical, manufacturing,
engineering and operations services offered to public and private sector
customers, including the American Centrifuge engineering and testing activities
we have performed as a contractor for UT-Battelle and the engineering,
procurement, construction, manufacturing and operations services being performed
under the HALEU Contract. With our private sector customers, we seek to leverage
our domestic enrichment experience, engineering know-how, and precision
manufacturing facility to assist customers with a range of engineering, design,
and advanced manufacturing projects, including the production of fuel for
next-generation nuclear reactors and the development of related facilities.
Government Contracting
On October 31, 2019, we signed the three-year cost-share HALEU Contract with DOE
to deploy a cascade of centrifuges to demonstrate production of HALEU for
advanced reactors. The program has been under way since May 31, 2019, when the
Company and DOE signed an interim HALEU letter agreement that allowed work to
begin while the full contract was being finalized.
Under the HALEU Contract, DOE agreed to reimburse the Company for 80% of its
costs incurred in performing the contract, up to a maximum of $115 million. The
Company's cost share is the corresponding 20% and any costs incurred above these
amounts. Costs under the HALEU Contract include program costs, including direct
labor and materials and associated indirect costs that are classified as Cost of
Sales, and an allocation of corporate costs supporting the program that are
classified as Selling, General and Administrative Expenses. Services to be
provided over the three-year contract include constructing and assembling
centrifuge machines and related infrastructure in a cascade formation. When
estimates of remaining program costs to be incurred for such an integrated,
construction-type contract exceed estimates of total revenue to be earned, a
provision for the remaining loss on the contract is recorded to Cost of Sales in
the period the loss is determined. Our corporate costs supporting the program
are recognized as expense as incurred over the duration of the contract term. As
of December 31, 2019, the portion of our anticipated cost share under the HALEU
Contract representing our share of remaining projected program costs was
recognized in Cost of Sales as an accrued loss of $18.3 million. The accrued
loss on the contract will be adjusted over the remaining contract term based on
actual results and remaining program cost projections. As of March 31, 2020, the
accrued contract loss balance was $15.3 million, and Cost of Sales in the three
months ended March 31, 2020 was reduced by $3.0 million for previously accrued
contract losses attributable to work performed in the first quarter of 2020.
Effective June 1, 2019, with the commencement of the HALEU work, ongoing costs
of the Piketon facility that were included in Advanced Technology Costs on the
consolidated statement of operations prior to June 1, 2019, are included in Cost
of Sales of the technical solutions segment with the exception of costs for two
minor items that must be repaired under a previous agreement with DOE.
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Over the past five years, our government contracts with UT-Battelle have
provided for engineering and testing work on the American Centrifuge technology
at our facilities in Oak Ridge, Tennessee. Our completed fixed-price contract
with UT-Battelle for the period from October 2017 through September 2018
generated revenue of approximately $16.0 million upon completion of defined
milestones. Although the contract expired September 30, 2018, we continued to
perform work towards the expected milestones as the parties worked toward a
successor agreement. Costs for work performed in the first quarter of 2019 were
classified as Cost of Sales. As the scope of work became more limited than
originally anticipated, costs for work performed in the second quarter and most
of the third quarter of 2019 were classified as Advanced Technology Costs. A
successor fixed-price agreement was entered into with UT-Battelle in September
2019 and was completed in 2019 resulting in revenue of $1.2 million. In February
2020, an additional $4.4 million fixed-price agreement was entered into with
UT-Battelle with scheduled completion in the second quarter of 2020. The Company
began this scope of work in 2019. Revenue was $3.5 million in the first quarter
of 2020, with approximately 70% of associated costs recognized in 2019 and 30%
in the first quarter of 2020.
We continue to invest in advanced technology because of the potential for future
growth into new areas of business for the Company, while also preserving our
unique workforce at our Technology and Manufacturing Center in Oak Ridge,
Tennessee.
In addition, we have entered into other contracts with DOE, other agencies and
their contractors to provide engineering, design and manufacturing services.
Commercial Contracting
In March 2018, we entered into a services agreement with X Energy, LLC
("X-energy") to provide X-energy with technical and resource support for
criticality safety evaluation of processing equipment, design of fresh fuel
transport packages, and conceptual mock-up of a nuclear fuel production
facility. In November 2018, we entered into a second services agreement with
X-energy to provide technical and resource support to the design and license
application development of its nuclear fuel production facility. Under both
agreements, we provide X-energy with non-cash in-kind contributions subject to a
cooperative agreement between X-energy and the United States government. In
November 2019, the parties extended the period of performance through June 30,
2020.
Under the X-energy agreements, services are performed pursuant to separate task
orders issued and provide for time-and-materials based pricing. The cumulative
value of task orders issued provides for payments to us of $11.9 million and
in-kind contributions to be provided by us of $6.5 million. Revenue in 2018-2019
for payments received or pending totaled $9.1 million, and in-kind contributions
provided by us totaled $5.0 million.
In addition, we have entered into other contracts for engineering, design, and
advanced manufacturing services with other commercial entities.
Prior Site Services Work
We formerly performed sites services work under contracts with DOE and its
contractors at the former Portsmouth (Ohio) and Paducah (Kentucky) Gaseous
Diffusion Plants. The Company and DOE have yet to fully settle the Company's
claims for reimbursements for certain pension and postretirement benefits costs
related to past contract work performed at the Portsmouth and Paducah plant
sites. There is the potential to recognize additional income for this work
pending the outcome of legal proceedings related to the Company's claims for
payment and the potential release of previously established valuation allowances
on receivables. Refer to Part II, Item 1, Legal Proceedings, for additional
information.
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Results of Operations
Segment Information
The following table presents elements of the accompanying condensed consolidated
statements of operations that are categorized by segment (dollar amounts in
millions):
Three Months Ended
March 31,
2020 2019 $ Change % Change
LEU segment
Revenue:
SWU revenue $ 30.7 $ 12.4 $ 18.3 148 %
Uranium revenue - 22.7 (22.7 ) (100 )%
Total 30.7 35.1 (4.4 ) (13 )%
Cost of sales 13.3 38.3 25.0 65 %
Gross profit (loss) $ 17.4 $ (3.2 ) $ 20.6
Technical solutions segment
Revenue $ 14.3 $ 3.6 $ 10.7 297 %
Cost of sales 12.1 5.9 (6.2 ) (105 )%
Gross profit (loss) $ 2.2 $ (2.3 ) $ 4.5
Total
Revenue $ 45.0 $ 38.7 $ 6.3 16 %
Cost of sales 25.4 44.2 18.8 43 %
Gross profit (loss) $ 19.6 $ (5.5 ) $ 25.1
Revenue
Revenue from the LEU segment declined $4.4 million (or 13%) in the three months
ended March 31, 2020, compared to the corresponding period in 2019. Revenue from
the sales of SWU increased $18.3 million (or 148%), reflecting an increase in
the average SWU selling price partially offset by a 7% decline in sales volume.
The average price billed to customers for sales of SWU increased 166%,
reflecting the particular contracts under which SWU were sold during the
periods. There were no uranium sales in the three months ended March 31, 2020.
Revenue from the technical solutions segment increased $10.7 million (or 297%)
in the three months ended March 31, 2020, compared to the corresponding period
in 2019. The increase was primarily the result of work performed under the HALEU
Contract. Revenue in the current period included work performed under the
UT-Battelle contract and revenue in the prior period included work performed
under an agreement with DOE to decontaminate and decommission its K-1600
facility in Tennessee. The K-1600 contract was completed in October 2019.
Cost of Sales
Cost of sales for the LEU segment declined $25.0 million (or 65%) in the three
months ended March 31, 2020, compared to the corresponding period in 2019,
reflecting declines in SWU and uranium sales volumes and a decline in the
average cost of sales per SWU. The average cost of sales per SWU declined
approximately 26% in the three months ended March 31, 2020, compared to the
corresponding period in 2019, primarily due to lower pricing in supply
contracts. Cost of sales includes legacy costs related to former employees of
the Portsmouth and Paducah Gaseous Diffusion Plants of $0.9 million in the three
months ended March 31, 2020 and $1.0 million in the three months ended March 31,
2019.
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Cost of sales for the technical solutions segment increased $6.2 million (or
105%) in the three months ended March 31, 2020, compared to the corresponding
period in 2019, reflecting in part the mix of technical solutions work performed
in each of the periods including work performed under the HALEU Contract in the
current period. Cost of sales in the current period was reduced by $3.0 million
for previously accrued contract losses attributable to work performed under the
HALEU Contract in the first quarter of 2020. For details on HALEU Contract
accounting, refer to "Technical Solutions - Government Contracting" above.
Gross Profit (Loss)
We realized a gross profit of $19.6 million in the three months ended March 31,
2020, compared to a gross loss of $5.5 million in the corresponding period in
2019.
The gross profit for the LEU segment was $17.4 million in the three months ended
March 31, 2020, compared to a gross loss of $3.2 million in the corresponding
period in 2019. The improvement for the LEU segment was primarily due to the
increase in average SWU selling price and the decline in the average cost of
sales per SWU.
For the technical solutions segment, we realized a gross profit of $2.2 million
for the three months ended March 31, 2020, compared to a gross loss of $2.3
million in the corresponding period in 2019. The gross profit in the current
period was primarily attributable to the UT-Battelle contract awarded in
February 2020. The Company began this scope of work in 2019 and associated costs
were recognized in both 2019 and the first quarter of 2020.
Non-Segment Information
The following table presents elements of the accompanying condensed consolidated
statements of operations that are not categorized by segment (dollar amounts in
millions):
Three Months Ended
March 31,
2020 2019 $ Change % Change
Gross profit (loss) $ 19.6 (5.5 ) $ 25.1 456 %
Advanced technology costs 0.9 6.6 5.7 86 %
Selling, general and administrative 8.5 8.1 (0.4 ) (5 )%
Amortization of intangible assets 1.4 1.1 (0.3 ) (27 )%
Special charges (credits) for workforce
reductions (0.1 ) (0.1 ) - - %
Gain on sales of assets - (0.4 ) (0.4 ) (100 )%
Operating income (loss) 8.9 (20.8 ) 29.7 143 %
Nonoperating components of net periodic
benefit expense (income) (2.2 ) (0.1 ) 2.1 2,100 %
Interest expense 0.1 1.0 0.9 90 %
Investment income (0.4 ) (0.7 ) (0.3 ) (43 )%
Income (loss) before income taxes 11.4 (21.0 ) 32.4 154 %
Income tax expense (benefit) 0.1 (0.1 ) (0.2 ) (200 )%
Net income (loss) 11.3 (20.9 ) 32.2 154 %
Preferred stock dividends - undeclared
and cumulative 2.0 2.0 - - %
Net income (loss) allocable to common
stockholders $ 9.3 $ (22.9 ) $ 32.2 141 %
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Advanced Technology Costs
Advanced technology costs consist of American Centrifuge expenses that are
outside of our customer contracts in the technical solutions segment, including
costs for work at the Piketon facility prior to the commencement of the HALEU
work in June 2019. Costs declined $5.7 million (or 86%) in the three months
ended March 31, 2020, compared to the corresponding period in 2019.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $0.4 million (or
5%) in the three months ended March 31, 2020, compared to the corresponding
period in 2019. Consulting costs increased $0.8 million and compensation and
benefit costs declined $0.4 million.
Amortization of Intangible Assets
Amortization expense for the intangible asset related to the September 2014
sales order book is a function of SWU sales volume under that order book, which
increased $0.3 million in the three months ended March 31, 2020, compared to the
corresponding period in 2019. Amortization expense for the intangible asset
related to customer relationships is amortized on a straight-line basis.
Special Charges (Credits) for Workforce Reductions
Special charges (credits) in both the three months ended March 31, 2020 and 2019
consisted of income of $0.1 million for the reversal of accrued termination
benefits related to unvested employee departures.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to
income of $2.2 million for the three months ended March 31, 2020, compared to
income of $0.1 million in the corresponding period in 2019. Nonoperating
components of net periodic benefit expense (income) consist primarily of the
expected return on plan assets, offset by interest cost as the discounted
present value of benefit obligations nears payment. Interest cost declined in
2020 as a result of lower market interest rates.
Income Tax Expense (Benefit)
The income tax expense was $0.1 million in the three months ended March 31,
2020, and the income tax benefit was $0.1 million in the three months ended
March 31, 2019. The 2020 income tax expense resulted primarily from an accrual
for a current unrecognized tax benefit. The 2019 income tax benefit resulted
from discrete items to reverse previously accrued liabilities for unrecognized
tax benefits.
Net Income (Loss)
Our net income was $11.3 million in the three months ended March 31, 2020,
compared to a net loss of $20.9 million in the three months ended March 31,
2019. The favorable variance of $32.2 million was primarily a result of a $25.1
million increase in gross profit, a $5.7 million decline in advanced technology
costs, and a $2.1 million increase in nonoperating components of net periodic
benefit income.
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Preferred Stock Dividends - Undeclared and Cumulative
Holders of the Series B Preferred Stock are entitled to cumulative dividends of
7.5% per annum of the aggregate liquidation preference at origination of $104.6
million. We did not meet the criteria for a dividend payment obligation for the
three months ended March 31, 2020 and the corresponding period in 2019, and we
have not declared, accrued or paid dividends on the Series B Preferred Stock
since issuance on February 14, 2017. Dividends on the Series B Preferred Stock
are cumulative to the extent not paid at any quarter-end, whether or not
declared and whether or not there are assets of the Company legally available
for the payment of such dividends in whole or in part.
Liquidity and Capital Resources
We ended the first quarter of 2020 with a consolidated cash balance of $109.2
million. We anticipate having adequate liquidity to support our business
operations for at least the next 12 months from the date of this report. Our
view of liquidity is dependent on, among other things, conditions affecting our
operations, including market, international trade, COVID-19 and other conditions
and the level of expenditures and government funding for our services contracts
and the timing of customer payments. Liquidity requirements for our existing
operations are affected primarily by the timing and amount of customer sales and
our inventory purchases.
We believe our sales order book in our LEU segment is a source of stability for
our liquidity position. Subject to market conditions, we see the potential for
growing uncommitted demand for LEU during the next few years with accelerated
open demand in 2025 and beyond.
Cash resources and net sales proceeds from our LEU segment fund technology costs
that are outside of our customer contracts in the technical solutions segment
and general corporate expenses, including cash interest payments on our debt. We
believe our investment in advanced U.S. uranium enrichment technology will
position the Company to meet the needs of our customers as they deploy advanced
reactors and next generation fuels. We signed the three-year HALEU Contract with
DOE in October 2019 to deploy a cascade of centrifuges to demonstrate production
of HALEU for advanced reactors. Under the agreement, the Company is contributing
a portion of the program costs. The program has been under way since May 31,
2019, when Centrus and DOE signed a preliminary letter agreement that allowed
work to begin while the full contract was being finalized.
Under the HALEU Contract, DOE agreed to reimburse the Company for 80% of its
costs incurred in performing the contract, up to a maximum of $115 million. The
Company's cost share is the corresponding 20% and any costs incurred above these
amounts. The HALEU Contract is incrementally funded and DOE is currently
obligated for costs up to approximately $53.2 million of the $115 million. The
Company has received aggregate cash payments of $19.0 million through March 31,
2020.
There are no guarantees about whether or when government or commercial demand
for HALEU will materialize, and there are a number of technical, regulatory and
economic hurdles that must be overcome for these fuels and reactors to come to
the market.
We lease facilities and related personal property in Piketon, Ohio from DOE. In
connection with the HALEU program, DOE and Centrus renewed the lease agreement
in 2019 and extended the lease term through May 31, 2022. Any facilities or
equipment constructed or installed under contract with DOE will be owned by DOE,
may be returned to DOE in an "as is" condition at the end of the lease term, and
DOE would be responsible for its D&D. If we determine the equipment and
facilities may benefit Centrus after completion of the HALEU program, we can
extend the facility lease and ownership of the equipment will be transferred to
us, subject to mutual agreement regarding D&D and other issues.
In the event that funding by the U.S. government for research, development and
demonstration of gas centrifuge technology is reduced or discontinued, such
actions may have a material adverse impact on our ability to deploy the American
Centrifuge technology and on our liquidity.
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Capital expenditures of approximately $2 to $3 million are anticipated over the
next 12 months.
The change in cash, cash equivalents and restricted cash from our condensed
consolidated statements of cash flows are as follows on a summarized basis (in
millions):
Three Months Ended
March 31,
2020 2019
Cash used in operating activities $ (18.5 ) $ (31.9 )
Cash provided by investing activities - -
Cash used in financing activities (3.0 ) (3.1 )
Decrease in cash, cash equivalents and restricted cash $ (21.5 ) $ (35.0 )
Operating Activities
In the three months ended March 31, 2020, net cash used in operating activities
was $18.5 million. The net reduction of $23.3 million in deferred revenue and
advances from customers reflects revenue recognized in the current period
related to payments received in advance in a prior period. Uses of cash are
reflected in the decrease in pension and postretirement benefit liabilities of
$8.6 million. The uses of cash were partially offset by net income of $11.3
million in the quarter, net of non-cash expenses.
In the corresponding period in 2019, net cash used in operating activities was
$31.9 million. Sources of cash included the monetization of inventory purchased
in prior periods, with inventories declining $25.6 million in the three-month
period and the net reduction in receivables from utility customers of $22.4
million. The net reduction of $46.0 million in the SWU purchase payables
balance, due to the timing of purchase deliveries, was a significant use of cash
in the period. Uses of cash also included the net loss of $20.9 million in the
quarter, net of non-cash expenses.
Investing Activities
There were no significant capital expenditures or other investing activities in
either of the three months ended March 31, 2020 and 2019.
Financing Activities
In both the three months ended March 31, 2020 and 2019, payments of $3.1 million
of interest classified as debt are classified as a financing activity. Refer to
Note 7, Debt, of the condensed consolidated financial statements regarding the
accounting for the 8.25% Notes.
Working Capital
The following table summarizes the Company's working capital (in millions):
March 31, December 31,
2020 2019
Cash and cash equivalents $ 109.2 $ 130.7
Accounts receivable 17.5 21.1
Inventories, net 60.5 58.9
Current debt (6.1 ) (6.1 )
Deferred revenue and advances from customers, net of
deferred costs
(98.9 ) (122.2 )
Other current assets and liabilities, net (49.0 ) (49.6 )
Working capital $ 33.2 $ 32.8
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Capital Structure and Financial Resources
Interest on the 8.25% Notes is payable semi-annually in arrears as of February
28 and August 31 based on a 360-day year consisting of twelve 30-day months. The
8.25% Notes are guaranteed on a subordinated and limited basis by, and secured
by substantially all assets of, Enrichment Corp. The 8.25% Notes mature on
February 28, 2027. Additional terms and conditions of the 8.25% Notes are
described in Note 7, Debt, of the condensed consolidated financial statements
and Note 9, Debt, of the consolidated financial statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019.
Holders of the Series B Preferred Stock are entitled to cumulative dividends of
7.5% per annum of the liquidation preference at origination of $104.6 million.
We are obligated to pay cash dividends on our Series B Preferred Stock to the
extent certain criteria are met and dividends are declared by the Board of
Directors. We have not met these criteria for the periods from issuance through
March 31, 2020, and have not declared, accrued or paid dividends on the Series B
Preferred Stock as of March 31, 2020. Additional terms and conditions of the
Series B Preferred Stock, including the criteria that must be met for the
payment of dividends, are described in Note 16, Stockholders' Equity, of the
consolidated financial statements of the Company's Annual Report on Form 10-K
for the year ended December 31, 2019.
The nuclear industry in general, and the nuclear fuel industry in particular,
are in a period of significant change. We are actively considering, and expect
to consider from time to time in the future, potential strategic transactions,
which at any given time may be in various stages of discussions, diligence or
negotiation. If we pursue opportunities that require capital, we believe we
would seek to satisfy these needs through a combination of working capital, cash
generated from operations or additional debt or equity financing.
We are managing our working capital to seek to improve the long-term value of
our LEU and technical solutions businesses and are planning to continue funding
the Company's qualified pension plans in the ordinary course because we believe
that is in the best interest of all stakeholders. We expect that any other uses
of working capital will be undertaken in light of these strategic priorities and
will be based on the Company's determination as to the relative strength of its
operating performance and prospects, financial position and expected liquidity
requirements. In addition, we expect that any such other uses of working capital
will be subject to compliance with contractual restrictions to which the Company
and its subsidiaries are subject, including the terms and conditions of their
debt securities and credit facilities. We continually evaluate alternatives to
manage our capital structure, and may opportunistically repurchase, exchange or
redeem Company securities from time to time.
Commitments under Long-Term SWU Purchase Agreements
The Company purchases SWU contained in LEU from Russia supplied to us under a
long-term agreement, as amended, signed in 2011 with the Russian government
owned entity TENEX. Under a 2018 agreement, the Company will purchase SWU
contained in LEU from Orano. Refer to Note 11, Commitments and Contingencies, of
the condensed consolidated financial statements for additional information.
DOE Technology License
We have a non-exclusive license in DOE inventions that pertain to enriching
uranium using gas centrifuge technology. The license agreement with DOE provides
for annual royalty payments based on a varying percentage (1% up to 2%) of our
annual revenues from sales of the SWU component of LEU produced by us using DOE
centrifuge technology. There is a minimum annual royalty payment of $100,000 and
the maximum cumulative royalty over the life of the license is $100 million.
There is currently no commercial enrichment facility producing LEU using DOE
centrifuge technology. We are continuing to advance our U.S. centrifuge
technology that has evolved from DOE inventions at specialized facilities in Oak
Ridge, Tennessee, with a view to deploying a commercial enrichment facility over
the long term once market conditions recover.
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Off-Balance Sheet Arrangements
Other than outstanding surety bonds, our SWU purchase commitments and the
license agreement with DOE relating to the American Centrifuge technology, there
were no material off-balance sheet arrangements at March 31, 2020, or December
31, 2019.
New Accounting Standards
Reference is made to New Accounting Standards in Note 1, Basis of Presentation,
of the unaudited condensed consolidated financial statements for information on
new accounting standards.
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