Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 from our global network of suppliers, and (b) technical solutions, which provides advanced engineering, design, and manufacturing services to government and private sector customers and is deploying advanced nuclear fuel production capabilities to power existing and next-generation reactors around the world.
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 utilities and 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 $1 billion global order book includes long-term sales contracts with major utilities through 2030, which includes approximately $300 million in deferred revenue and advances from customers from prior years. We have secured cost-competitive supplies of SWU under long-term contracts through the end of this decade to allow us to fill our existing customer orders and make new sales. A market-related price reset provision in our largest supply contract took effect at the beginning of 2019 – when market prices for SWU were near historic lows – which has significantly lowered our cost of sales and contributed to improved margins. Spot price indicators for SWU have risen by approximately 48% since bottoming out in August 2018.
In October, the U.S. Department of Commerce reached agreement with the Russian Federation on an extension of the Russian Suspension Agreement, a trade agreement which allows for Russian-origin nuclear fuel to be imported into the United States in limited quantities. The two parties agreed to extend the agreement through 2040 and to set aside a significant portion of the import quota to execute Centrus’ long-term supply agreement with TENEX. Centrus welcomes this outcome, which provides sufficient quota for the company to continue serving its utility customers and win new U.S. sales.
Our technical solutions segment is deploying advanced nuclear fuel production capabilities to meet the evolving needs of the global nuclear industry and the U.S. government, while also levering our unique technical expertise, operational experience, and specialized facilities to expand and diversify our business beyond uranium enrichment, offering new services to existing and new customers in complementary markets.
Our goal is to restore America’s domestic uranium enrichment capability and to play a critical role in meeting U.S. national security and energy security requirements, advancing America’s nonproliferation objectives, and delivering the next-generation nuclear fuels that will power the future of nuclear energy around the world. The United States has not had a domestic uranium enrichment capability suitable to meet U.S. national security requirements since the aging Paducah Gaseous Diffusion Plant shut down in 2013. Centrus is the only American company working to deploy an enrichment technology and our AC100M centrifuge is the only deployment-ready uranium enrichment technology that can meet these requirements.
Centrus is uniquely positioned to lead the transition to a new nuclear fuel known as High-Assay, Low-Enriched Uranium, or HALEU, which is not commercially produced today but may be required by the commercial and/or government sectors for a number of advanced reactor and fuel designs currently under development. While 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 that 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.
In 2019, Centrus began work on a three-year, $115 million cost-shared contract with the U.S. Department of Energy to deploy a cascade of 16 of our AC100M centrifuges to demonstrate production of HALEU with domestic technology. As part of this effort, Centrus expects our Piketon, Ohio facility to become the first plant in the nation licensed to produce HALEU, with enrichment levels up to a U-235 concentration just below 20 percent. At the conclusion of the demonstration program in 2022, our goal is to begin commercial production and scale up the facility in modular fashion as demand for HALEU grows in the commercial and/or government sectors.
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 and production of a small quantity of HALEU. 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 September 30, 2020, the accrued contract loss balance was $9.6 million, and Cost of Sales in the three and nine months ended September 30, 2020, benefited by $3.4 million and $8.7 million, respectively, for previously accrued contract losses attributable to work performed in 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 $74.5 million of the $115 million. The Company has received aggregate cash payments of $41.5 million through September 30, 2020.
Despite the challenges of COVID-19 we have continued to make progress under the contract. On June 23, 2020, the U.S. Nuclear Regulatory Commission (“NRC”) accepted for review our application to amend our license to permit the production of HALEU up to 20% U25 enrichment. 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. Since the HALEU demonstration program will conclude in early 2022, we are focused on developing
options to sustain and expand our demonstrated capability for the period immediately following the conclusion of the program.
On September 15, 2020, the Company jointly announced with TerraPower LLC (“TerraPower”) plans to team together to establish commercial-scale, domestic HALEU production capabilities. One of the many next-generation reactor designs that will require HALEU is the recently announced Natrium™ Power Storage System designed by TerraPower and GE Hitachi Nuclear Energy (GEH). The proposed investment is part of the TerraPower-led proposal for the U.S. Department of Energy’s Advanced Reactor Demonstration Program (ARDP), a program which is intended to support the deployment of two first-of-a-kind advanced reactor designs in the next 5-7 years. The TerraPower application proposes that, if selected for ARDP, TerraPower would work with Centrus to build commercial-scale capacity to produce HALEU and fabricate it into metal fuel assemblies. The proposal was submitted to the U.S. Department of Energy in a competitive process. On October 13, 2020, the DOE announced it had selected TerraPower as one of two U.S.-based teams to receive $160 million in initial funding under the new ARDP. There can be no assurance that the Company and TerraPower will ultimately enter into a contract on terms that will be acceptable.
On October 13, 2020, Centrus announced the signing of a memorandum of understanding with Terrestrial Energy USA (“TEUSA”) to secure fuel supply for a future fleet of TEUSA’s Integral Molten Salt Reactor (IMSR) power plants. The two companies will evaluate the logistical, regulatory, and transportation requirements to establish fuel supply for Integral Molten Salt Reactor (IMSR) power plants, which use standard-assay low-enriched uranium (LEU). There can be no assurance that the Company and TEUSA will ultimately enter into a contract on terms that will be acceptable.
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.
The Company continues to look at opportunities to improve its capital structure and to enhance shareholder value. As a result, on August 21, 2020, the Company entered into an underwriting agreement relating to the offer and sale (the “Offering”) of 2,350,000 shares of the Company’s Class A common stock, par value $0.10 per share (the “Common Stock”). Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 30 days, to purchase additional shares. The Offering was made pursuant to the Registration Statement on Form S-3 which became effective on August 5, 2020, as supplemented by the prospectus supplement filed with the SEC on August 21, 2020. The price to the public in this Offering was $10.00 per share of Common Stock.
The Offering closed on August 25, 2020. On September 1, 2020, the Underwriters exercised their option to purchase 187,500 additional shares of Common Stock in the Offering at the public offering price, less the underwriting discount. After giving effect to the closing of the 187,500 additional shares, the total number of shares sold by the Company in the Offering increased to 2,537,500 shares of Common Stock. The aggregate gross proceeds from the Offering are approximately $25.4 million, before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company of $2.3 million. The Company currently intends to use the net proceeds from this Offering for general working capital purposes, to invest in technology development and to repay outstanding debt or retire shares of its Series B Senior Preferred Stock. Refer to Note 15, Subsequent Event, of the condensed consolidated financial statements regarding the Company’s announcement on October 19, 2020, of the commencement of a tender offer to purchase up to $60 million of issued and outstanding Series B Senior Preferred Stock.
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 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 from time to time issued orders imposing various restrictions including prohibiting holding gatherings and closing nonessential businesses. Many of these restrictions remain in place and we continue to monitor and adjust as necessary. 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 our suppliers and government regulatory agencies to protect their workforces may impact our ability to obtain the necessary supplies and governmental reviews and approvals to timely complete the project. To date impacts have been minimal; we are experiencing delays and anticipate increased costs from our suppliers as a result of the impact of the pandemic on their operations.
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 II, Item 1A, Risk Factors - Our business, financial and operating performance could be adversely affected by epidemics and other health related issues but not limited to the novel coronavirus (“COVID-19”) pandemic.
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 and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Our sales order book in the LEU segment consists primarily of long-term, fixed commitment contracts, and we have visibility on a significant portion of our revenue for 2020-2022. We anticipate that revenue in the fourth quarter of this year for LEU segment will be the highest of any quarter for 2020, assuming there are no interruptions to our planned customer deliveries based on changes in the market or COVID-19.
In the second quarter of 2020, we benefited from the one time collection from a customer of $32.4 million in settlement of a supply contract rejected in bankruptcy court. Excluding the one-time claim recovery in the second quarter 2020, we anticipate gross margins in the fourth quarter to be higher than the year-to-date average. Based on our current order book and under current market conditions, we anticipate fiscal year 2021 and fiscal year 2022 revenues in the LEU segment to be slightly higher than 2020 and gross margins to be similar to 2020, excluding the one-time claim recovery. With respect to our technical solutions segment, we are currently on schedule and within budget on our three year HALEU cost share contract. On October 13, 2020, DOE announced it had selected two U.S.-based teams to receive $160 million in initial funding under the new ARDP. We have preliminarily agreed to provide support to each of these teams as part of our strategy to become the preferred fuel provider to the next generation of advanced reactors. The ARDP is a cost share program with applicants required to shoulder 50% of the costs. We have yet to reach agreement on our subcontracts to support the teams and therefore are unable to provide further guidance at this time.
Our order book of sales under contract in the LEU segment extends to 2030. As of September 30, 2020, the order book was $1.0 billion. The order book represents the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries under contract which includes $0.3 billion of Deferred Revenue and Advances from Customers. Due to the nature of the long term contracts and our order book, we have visibility of a significant portion of our anticipated revenue for 2021 and 2022 in the LEU segment. However, these long term contracts are subject to significant risks and uncertainties, including potential import laws and restrictions, including under the Russian Suspension Agreement (“RSA”), which limits imports of Russian uranium products into the United States and applies to our sales using material procured under the Russian Supply Agreement.. For further discussion of these risks and uncertainties, refer to Part II, Item 1A, Risk Factors - Restrictions on imports or sales of SWU or uranium that we buy from our Russian supplier could adversely affect profitability and the viability of our business, including new restrictions as a result of the extension of the RSA or future amendments to the RSA on terms unfavorable to us, as well as - Duties or restrictions on imports or sales of SWU or uranium that we buy from foreign suppliers, or sanctions applicable to those suppliers or their affiliates, could adversely affect profitability and the viability of our business, and Part I, Item 1A, Risk Factors - The dollar amount of the sales order book, as stated at any given time, is not necessarily indicative of future sales revenues and is subject to uncertainty in our Annual Report on Form 10-K for the year ended December 31, 2019.
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 the following:
•Additional purchases or sales of SWU and uranium;
•Conditions in the LEU and energy markets, including pricing, demand, operations, government restrictions on imports, exports or investments, and regulations of our business and activities and those of our customers, suppliers, contractors, and subcontractors;
•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 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 utilities and 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. Based on customers’ individual needs, some customers are building inventories and may choose to take deliveries under annual purchase obligations later in the year or in subsequent years. 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.
Utility customers in general have the option to defer receipt of SWU and 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 significantly declined until mid-2018, when they began to trend upward. 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 older 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*
* 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 materially 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. On occasion, we will accept payment in euros for spot sales that may be subject to short-term exchange rate risk. Costs of our primary competitors are denominated in other currencies. Our contracts with suppliers are denominated in U.S. dollars.
On occasion, we will accept payment for SWU 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.
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, to quotas imposed under legislation enacted into law in September 2008 and under the 1992 Russian Suspension Agreement (“RSA”), as amended in 2008 and 2020. The legislation currently imposes limits on the amount of Russian LEU that can be imported into the United States through 2020. The RSA is a trade agreement between the United States and Russia that suspends an antidumping duty investigation of Russian uranium, and imposes quantitative limits on exports of Russian uranium products, including LEU, to the United States. Under an amendment signed on October 5, 2020, the RSA’s export limits (equivalent to import quotas) have been extended through at least 2040.
These limits imposed under the legislation and the RSA apply to the Company’s imports of Russian uranium products procured from TENEX under the Russian Supply Agreement. Any changes in these limits will affect our ability to implement the Russian Supply Agreement through sales to customers who take delivery in the United States, which is our most significant market.
The most recent amendment to the RSA was signed on October 5, 2020 by the U.S. Department of Commerce (the “DOC”) and the Russian State Atomic Energy Corporation (“ROSATOM”). Under the terms of this amendment, the exports of Russian LEU to the United States are limited to amounts that represent the following percentages of U.S. demand for SWU, as measured using an agreed formula in the RSA that relies upon the lower scenario for SWU demand published by the World Nuclear Association in its 2019 publication, “The Nuclear Fuel Report, Global Scenarios for Demand and Supply Availability 2019-2040”:
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Export Limit Year
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Percentage of U.S. Enrichment Demand*
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2021
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24%
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2022
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20%
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2023
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24%
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2024-2027
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20% per year
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2028-2040
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15% per year
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*The actual export limits are measured by the quantity of the assay U-235 in the imported material and vary from year to year and the percentage of U.S. demand represented by each export limit is determined by a methodology used by the DOC for RSA purposes.
The RSA provides for a revision of the export limits in 2023, 2029 and 2035 to take account of revisions of SWU demand forecasts that will be published by the WNA in the future.
The amended RSA expressly allocates a portion of the annual export limits in 2021-2028 to the Company for LEU procured through purchases of SWU from TENEX under the Russian Supply Agreement. The actual size of the annual export limits allocated to the Russian Supply Agreement are confidential, but a public version of the export limits shows that they represent a significant portion of the total export limits provided under the RSA in 2021-2028. The export limits provided for the Russian Supply Agreement are expected to be adequate to support the Company’s long term strategic goals and to permit enriched uranium procured from TENEX during the remaining term of the Russian Supply Agreement to be imported to supply U.S. utilities, thereby securing a key part of the Company’s supply base for the benefit of its customers and providing the revenues needed by the Company to support its work on high-assay low-enriched uranium (HALEU) and other advanced technology projects in the United States.
At the time the most recent RSA amendment was signed, the DOC was 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 these proceedings, the DOC was reviewing whether TENEX, Centrus, and others had complied with the terms of the RSA during the period of review and whether the RSA continued 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. A determination that the RSA had been violated or did not meet the statutory requirements could have led to the termination of the RSA and the restart of an antidumping investigation from the early 1990s that could have resulted in high duties being imposed on imports of Russian uranium products, including material imported by the Company under the Russian Supply Agreement.
Following the signing of the amendment of the RSA on October 5, 2020, the DOC rescinded both the Second Administrative Review and the Third Administrative Review. At present, there are no reviews pending with respect to the RSA
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 cost-share HALEU Contract with DOE to deploy a cascade of centrifuges to demonstrate production of HALEU for advanced reactors. The three-year 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. 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 and our production facility in Piketon, Ohio. The Company entered into this cost-share contract with DOE as a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah Gaseous Diffusion Facility. The HALEU Contract, once fully implemented, will result in the Company having demonstrated the capability to enrich uranium to the 19.75 percent concentration in the uranium -235 isotope that is required by many of the advanced reactor concepts now under development. Moreover, by 2022 the Company expects to have secured an NRC license for production on 19.75 percent HALEU, opening the door to the possibility of significant sales of HALEU to both commercial and government customers. In the latter category, the Company is closely following the development of mobile and micro-nuclear power plants, which in time could provide a significant source of demand for HALEU-based nuclear fuel.
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 and production of a small quantity of HALEU. 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 September 30, 2020, the accrued contract loss balance was $9.6 million, and Cost of Sales in the three and nine months ended September 30, 2020, benefited by $3.4 million and $8.7 million, respectively for previously accrued contract losses attributable to work performed in the three and nine months ended September 30, 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 were repaired under a previous agreement with DOE.
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. In February 2020, an additional $4.4 million fixed-price agreement was entered into with UT-Battelle. The Company, which had already begun this scope of work in 2019, completed the work during the second quarter of 2020. Revenue was $4.4 million in the nine months ended September 30, 2020, with approximately 58% of associated costs recognized in 2019 and 42% in the nine months ended September 30, 2020.
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 June 2020, the parties extended the period of performance through October 31, 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 $13.7 million and in-kind contributions to be provided by us of $7.5 million. Revenue through September 30, 2020 for payments received or pending, totaled $12.6 million, and in-kind contributions provided by us totaled $6.9 million.
In October 2020, we extended the period of performance through August 2021. The cumulative value of the additional task orders issued provides for payments to us of $6.1 million and in-kind contributions to be provided by us of $2.7 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.
Results of Operations
Segment Information
The following tables present elements of the accompanying condensed consolidated statements of operations that are categorized by segment (dollar amounts in millions):
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|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
LEU segment
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
SWU revenue
|
$
|
0.1
|
|
|
$
|
75.0
|
|
|
$
|
(74.9)
|
|
|
(100)
|
%
|
Uranium revenue
|
18.6
|
|
|
12.8
|
|
|
5.8
|
|
|
45
|
%
|
Total
|
18.7
|
|
|
87.8
|
|
|
(69.1)
|
|
|
(79)
|
%
|
Cost of sales
|
19.6
|
|
|
54.4
|
|
|
34.8
|
|
|
64
|
%
|
Gross profit (loss)
|
$
|
(0.9)
|
|
|
$
|
33.4
|
|
|
$
|
(34.3)
|
|
|
|
|
|
|
|
|
|
|
|
Technical solutions segment
|
|
|
|
|
|
|
|
Revenue
|
$
|
14.9
|
|
|
$
|
16.9
|
|
|
$
|
(2.0)
|
|
|
(12)
|
%
|
Cost of sales
|
14.8
|
|
|
14.8
|
|
|
—
|
|
|
—
|
%
|
Gross profit (loss)
|
$
|
0.1
|
|
|
$
|
2.1
|
|
|
$
|
(2.0)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
$
|
33.6
|
|
|
$
|
104.7
|
|
|
$
|
(71.1)
|
|
|
(68)
|
%
|
Cost of sales
|
34.4
|
|
|
69.2
|
|
|
34.8
|
|
|
50
|
%
|
Gross profit (loss)
|
$
|
(0.8)
|
|
|
$
|
35.5
|
|
|
$
|
(36.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
LEU segment
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
SWU revenue
|
$
|
89.4
|
|
|
$
|
87.4
|
|
|
$
|
2.0
|
|
|
2
|
%
|
Uranium revenue
|
23.4
|
|
|
38.1
|
|
|
(14.7)
|
|
|
(39)
|
%
|
Total
|
112.8
|
|
|
125.5
|
|
|
(12.7)
|
|
|
(10)
|
%
|
Cost of sales
|
51.8
|
|
|
100.4
|
|
|
48.6
|
|
|
48
|
%
|
Gross profit (loss)
|
$
|
61.0
|
|
|
$
|
25.1
|
|
|
$
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
Technical solutions segment
|
|
|
|
|
|
|
|
Revenue
|
$
|
41.5
|
|
|
$
|
28.5
|
|
|
$
|
13.0
|
|
|
46
|
%
|
Cost of sales
|
39.9
|
|
|
27.9
|
|
|
(12.0)
|
|
|
(43)
|
%
|
Gross profit (loss)
|
$
|
1.6
|
|
|
$
|
0.6
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
$
|
154.3
|
|
|
$
|
154.0
|
|
|
$
|
0.3
|
|
|
—
|
%
|
Cost of sales
|
91.7
|
|
|
128.3
|
|
|
36.6
|
|
|
29
|
%
|
Gross profit (loss)
|
$
|
62.6
|
|
|
$
|
25.7
|
|
|
$
|
36.9
|
|
|
|
Revenue
Revenue from the LEU segment declined $69.1 million (or 79%) in the three months and $12.7 million (or 10%) in the nine months ended September 30, 2020, compared to the corresponding periods in 2019. There were no SWU deliveries in the three months ended September 30, 2020, with revenue of $0.1 million for ancillary services. SWU sales volume in the nine months ended September 30, 2020 declined 54% compared to the corresponding period in 2019 reflecting the variability in timing of utility customer orders. SWU revenue in the nine months ended September 30, 2020 includes $32.4 million collected in the second quarter from a customer in settlement of a supply contract rejected in bankruptcy court. Excluding these proceeds, the average price per SWU increased 42% in the nine-month period compared to 2019, reflecting the particular contracts under which SWU were sold during the periods.
Revenue from uranium sales increased $5.8 million in the three months and declined $14.7 million in nine months ended September 30, 2020, compared to the corresponding periods in 2019. For the nine-month period, the volume of uranium sold declined 45% and the average price increased 12%.
Revenue from the technical solutions segment declined $2.0 million (or 12%) in the three months and increased $13.0 million (or 46%) in the nine months ended September 30, 2020, compared to the corresponding periods in 2019. The increases were primarily the result of work performed under the HALEU Contract. Revenue in the current periods included work performed under the UT-Battelle contract and revenue in the prior periods 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 $34.8 million (or 64%) in the three months and $48.6 million (or 48%) in the nine months ended September 30, 2020, compared to the corresponding periods in 2019. There were no SWU deliveries in the three months ended September 30, 2020. For the nine-month period, the decline in cost of sales reflects the 54% decline in SWU sales volume and the 45% decline in uranium sales volume, partially offset by a 10% increase in the average unit cost of sales for uranium. Cost of sales includes legacy costs related to former employees of the Portsmouth and Paducah Gaseous Diffusion Plants of $2.4 million in the nine months ended September 30, 2020 compared to $2.8 million in the nine months ended September 30, 2019. The average cost of sales per SWU excluding legacy costs declined approximately 3% in the nine months ended September 30, 2020, compared to the corresponding period in 2019. Our inventories are valued at the lower of cost or net realizable value. Valuation adjustments for our uranium inventory to reflect declines in uranium market price indicators totaled $2.3 million in the nine months ended September 30, 2019.
Cost of sales for the technical solutions segment was flat in the three months and increased $12.0 million (or 43%) in the nine months ended September 30, 2020, compared to the corresponding periods 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 benefited by $3.4 million in the three months and $8.7 million in the nine months ended September 30, 2020, for previously accrued contract losses attributable to work performed under the HALEU Contract in 2020. For details on HALEU Contract accounting, refer to “Technical Solutions - Government Contracting” above.
Gross Profit (Loss)
We realized a gross loss of $0.8 million in the three months ended September 30, 2020, compared to a gross profit of $35.5 million in the corresponding period in 2019. In the nine months ended September 30, 2020, we realized a gross profit of $62.6 million compared to a gross profit of $25.7 million in the corresponding period in 2019.
Our LEU segment realized a gross loss of $0.9 million in the three months ended September 30, 2020, compared to a gross profit of $33.4 million in the corresponding periods in 2019. In the nine months ended September 30, 2020, our LEU segment realized a gross profit of $61.0 million compared to a gross profit of $25.1 million in the corresponding period in 2019. The improvement for the LEU segment in the nine months ended September 30, 2020 was primarily due to the recovery on bankruptcy court claims of $32.4 million and the increase in the average SWU sales price, partially offset by the decline in SWU sales volume.
For the technical solutions segment, we realized a gross profit of $0.1 million in the three months ended September 30, 2020 compared to a gross profit of $2.1 million for the corresponding period in 2019. We realized a gross profit of $1.6 million for the nine months ended September 30, 2020, compared to a gross profit of $0.6 million in the corresponding period in 2019. The gross profit in the current nine-month 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 half of 2020.
Non-Segment Information
The following tables present elements of the accompanying condensed consolidated statements of operations that are not categorized by segment (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Gross profit (loss)
|
$
|
(0.8)
|
|
|
35.5
|
|
|
$
|
(36.3)
|
|
|
102
|
%
|
Advanced technology costs
|
0.2
|
|
|
1.3
|
|
|
1.1
|
|
|
85
|
%
|
Selling, general and administrative
|
6.7
|
|
|
8.7
|
|
|
2.0
|
|
|
23
|
%
|
Amortization of intangible assets
|
1.2
|
|
|
1.8
|
|
|
0.6
|
|
|
33
|
%
|
Special charges for workforce reductions
|
0.6
|
|
|
0.8
|
|
|
0.2
|
|
|
25
|
%
|
Gain on sales of assets
|
—
|
|
|
(0.2)
|
|
|
(0.2)
|
|
|
(100)
|
%
|
Operating income (loss)
|
(9.5)
|
|
|
23.1
|
|
|
(32.6)
|
|
|
141
|
%
|
Nonoperating components of net periodic benefit expense (income)
|
(2.2)
|
|
|
(0.1)
|
|
|
2.1
|
|
|
2,100
|
%
|
Interest expense
|
—
|
|
|
0.9
|
|
|
0.9
|
|
|
100
|
%
|
Investment income
|
(0.1)
|
|
|
(0.5)
|
|
|
(0.4)
|
|
|
(80)
|
%
|
Income (loss) before income taxes
|
(7.2)
|
|
|
22.8
|
|
|
(30.0)
|
|
|
132
|
%
|
Income tax expense (benefit)
|
(0.2)
|
|
|
—
|
|
|
0.2
|
|
|
—
|
%
|
Net income (loss)
|
(7.0)
|
|
|
22.8
|
|
|
(29.8)
|
|
|
131
|
%
|
Preferred stock dividends - undeclared and cumulative
|
1.9
|
|
|
1.9
|
|
|
—
|
|
|
—
|
%
|
Net income (loss) allocable to common stockholders
|
$
|
(8.9)
|
|
|
$
|
20.9
|
|
|
$
|
(29.8)
|
|
|
143
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Gross profit (loss)
|
$
|
62.6
|
|
|
25.7
|
|
|
$
|
36.9
|
|
|
(144)
|
%
|
Advanced technology costs
|
1.8
|
|
|
13.0
|
|
|
11.2
|
|
|
86
|
%
|
Selling, general and administrative
|
25.6
|
|
|
24.5
|
|
|
(1.1)
|
|
|
(4)
|
%
|
Amortization of intangible assets
|
4.3
|
|
|
4.1
|
|
|
(0.2)
|
|
|
(5)
|
%
|
Special charges (credits) for workforce reductions
|
0.5
|
|
|
(2.2)
|
|
|
(2.7)
|
|
|
123
|
%
|
Gain on sales of assets
|
—
|
|
|
(0.7)
|
|
|
(0.7)
|
|
|
(100)
|
%
|
Operating income (loss)
|
30.4
|
|
|
(13.0)
|
|
|
43.4
|
|
|
334
|
%
|
Nonoperating components of net periodic benefit expense (income)
|
(6.6)
|
|
|
(0.2)
|
|
|
6.4
|
|
|
3,200
|
%
|
Interest expense
|
0.1
|
|
|
2.9
|
|
|
2.8
|
|
|
97
|
%
|
Investment income
|
(0.5)
|
|
|
(1.9)
|
|
|
(1.4)
|
|
|
(74)
|
%
|
Income (loss) before income taxes
|
37.4
|
|
|
(13.8)
|
|
|
51.2
|
|
|
371
|
%
|
Income tax expense (benefit)
|
(0.6)
|
|
|
(0.1)
|
|
|
0.5
|
|
|
500
|
%
|
Net income (loss)
|
38.0
|
|
|
(13.7)
|
|
|
51.7
|
|
|
377
|
%
|
Preferred stock dividends - undeclared and cumulative
|
5.9
|
|
|
5.9
|
|
|
—
|
|
|
—
|
%
|
Net income (loss) allocable to common stockholders
|
$
|
32.1
|
|
|
$
|
(19.6)
|
|
|
$
|
51.7
|
|
|
264
|
%
|
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 and to continue to advance our advanced technology. Costs declined $1.1 million (or 85%) in the three months and $11.2 million (or 86%) in the nine months ended September 30, 2020, compared to the corresponding periods in 2019.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses decreased $2.0 million (or 23%) in the three months compared to the corresponding period in 2019, primarily a result of a decrease in consulting costs of $1.3 million and a decrease in compensation expense of $0.8 million. The decrease in compensation expense is primarily due to a remeasurement of obligations under long-term incentive plans associated with the stock price. Other SG&A expenses increased by a net $0.1 million.
SG&A expenses increased $1.1 million (or 4%) in the nine months ended September 30, 2020, compared to the corresponding period in 2019, primarily due to an increase in consulting costs of $1.7 million related to initiatives including capital financing evaluation, claim recoveries and international trade. Travel and recruiting expenses declined by a total of $0.5 million and other SG&A expenses declined by a net $0.1 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 decreased $0.6 million in the three months and increased $0.2 million in the nine months ended September 30, 2020, compared to the corresponding periods 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 for workforce reductions totaled $0.6 million in the three months ended September 30, 2020 and $0.8 million in the three months ended September 30, 2020, consisting of estimated employee termination benefits. Special charges (credits) in the nine months ended September 30, 2019 included income of $2.9 million for the reversal of accrued termination benefits for employees who were retained for the HALEU program.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to income of $2.2 million and $6.6 million for the three and nine months ended September 30, 2020, respectively, compared to income of $0.1 million and $0.2 million in the corresponding periods 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 benefit was $0.2 million in the three months ended September 30, 2020, and $0.6 million in the nine months ended September 30, 2020. In the nine-month period, Centrus released its tax valuation allowance against the state deferred income taxes as a discrete item resulting in an income tax benefit of $0.8 million, recorded an income tax benefit of $0.1 million from the true-up to the 2019 tax provision and recorded current income tax expense of $0.3 million.
For the full year 2020, Centrus expects the income tax benefit to be $0.1 million representing the income tax benefit from discrete items offset by the income tax expense accrued through its annual effective tax rate.
The income tax benefit was $0.1 million in the nine months ended September 30, 2019, resulting from discrete items to reverse previously accrued liabilities for unrecognized tax benefits.
Net Income (Loss)
We generated a net loss of $7.0 million in the three months and net income of $38.0 million in the nine months ended September 30, 2020, compared to net income of $22.8 million and a net loss of $13.7 million in the corresponding periods in the prior year. The unfavorable variance of $29.8 million for the three months ended September 30, 2020, was primarily a result of a $36.3 million decrease in gross profit, partially offset by a $3.9 million decrease in operating expenses. The favorable variance of $51.7 million for the nine months ended September 30, 2020, was primarily a result of a $36.9 million increase in gross profit, a $11.2 million decline in advanced technology costs, and a $6.4 million increase in nonoperating components of net periodic benefit income.
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 and nine months ended September 30, 2020 and the corresponding periods 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 third quarter of 2020 with a consolidated cash balance of $152.8 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 restrictions, 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 $74.5 million of the $115 million. The Company has received aggregate cash payments of $41.5 million through September 30, 2020.
The Company entered into this cost-share contract with DOE as a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah Gaseous Diffusion Plant. The HALEU Contract, once fully implemented, will result in the Company having demonstrated the capability to enrich uranium to the 19.75 percent concentration in the uranium-235 isotope that is required by many of the advanced reactor concepts now under development. Moreover, by 2022 the Company expects to have secured an NRC license for production on 19.75 percent HALEU, opening the door to the possibility of significant sales of HALEU to both commercial and government customers. In the latter category, the Company is closely following the development of mobile and micro-nuclear power plants, which in time could provide a significant source of demand for HALEU-based nuclear fuel. Although we believe significant demand for HALEU will emerge, 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 Contract, 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 Contract, 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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
Cash provided by (used in) operating activities
|
$
|
5.2
|
|
|
$
|
(26.5)
|
|
Cash (used in) provided by investing activities
|
(0.9)
|
|
|
0.7
|
|
Cash provided by (used in) financing activities
|
17.8
|
|
|
(33.8)
|
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
22.1
|
|
|
$
|
(59.6)
|
|
Operating Activities
In the nine months ended September 30, 2020, net cash provided by operating activities was $5.2 million. The net income of $38.0 million in the nine-month period, net of non-cash expenses, was a significant source of cash. Income included the $32.4 million on recovery of bankruptcy court claims. The net increase is also the result of a decrease in inventories of $17.1 million. These increases were partially offset by a net reduction of $17.5 million in deferred revenue and advances from customers which reflects revenue recognized in the current period related to payments received in advance in a prior period. Uses of cash are also reflected in the decrease in pension and postretirement benefit liabilities of $28.1 million.
In the nine months ended September 30, 2019, net cash used in operating activities was $26.5 million. The net reduction of $33.0 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 a $9.3 million increase in net inventories and the net loss of $13.7 million in the nine months, net of non-cash expenses. Sources of cash included the net reduction in receivables of $31.3 million in the nine-month period.
Investing Activities
Investing activities in the nine months ended September 30, 2020 consisted of capital expenditures of $0.9 million. In the nine months ended September 30, 2019, sales of assets and property yielded net proceeds of $0.7 million.
Financing Activities
In the nine months ended September 30, 2020, net cash provided by financing activities include net proceeds of $23.8 million from the issuance of common stock pursuant to a Registration Statement on Form S-3. In the nine months ended September 30, 2019, net cash used for financing included the repayment of $27.5 million of principal due on maturity of the 8% PIK Notes. In both the nine months ended September 30, 2020 and 2019, payments of $6.1 million of interest classified as debt are classified as a financing activity. Refer to Note 7, Debt, of the condensed consolidated financial statements regarding the accounting for the 8.25% Notes.
Working Capital
The following table summarizes the Company’s working capital (in millions):
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September 30,
2020
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December 31,
2019
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Cash and cash equivalents
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$
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152.8
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$
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130.7
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Accounts receivable
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14.1
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21.1
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Inventories, net
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58.8
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|
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58.9
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Current debt
|
(6.1)
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|
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(6.1)
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Deferred revenue and advances from customers, net of deferred costs
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(104.3)
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(122.2)
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Other current assets and liabilities, net
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(44.8)
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(49.6)
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Working capital
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$
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70.5
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$
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32.8
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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.
Common Stock Issuance
On August 21, 2020, the Company entered into an underwriting agreement relating to the offer and sale (the “Offering”) of 2,350,000 shares of the Company’s Class A common stock, par value $0.10 per share (the “Common Stock”). Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 30 days, to purchase additional shares. The Offering was made pursuant to the Registration Statement on Form S-3 which became effective on August 5, 2020, as supplemented by the prospectus supplement filed with the SEC on August 21, 2020. The price to the public in this Offering was $10.00 per share of Common Stock.
The Offering closed on August 25, 2020. On September 1, 2020, the Underwriters exercised their option to purchase 187,500 additional shares of Common Stock in the Offering at the public offering price, less the underwriting discount. After giving effect to the closing of the 187,500 additional shares, the total number of shares sold by the Company in the Offering increased to 2,537,500 shares of Common Stock. The aggregate gross proceeds from the Offering are approximately $25.4 million, before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company of $2.3 million. The Company currently intends to use the net proceeds from this Offering for general working capital purposes, to invest in technology development and to repay outstanding debt or retire shares of its Series B Senior Preferred Stock, including shares of Series B Senior Preferred Stock of existing stockholders who have indicated interest in purchasing shares of Class A Common Stock in this Offering.
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 September 30, 2020, and have not declared, accrued or paid dividends on the Series B Preferred Stock as of September 30, 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.
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 13, 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.
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 September 30, 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.