Item 7. 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 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 Annual Report on Form 10-K.
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, which provides a reliable source of carbon free energy. 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 nuclear fuel to utilities operating commercial nuclear power plants. The majority of these sales are for the enrichment component of LEU, which is measured in separative work units (“SWU”). Centrus also sells natural uranium (the raw material needed to produce LEU) and occasionally sells LEU with the natural uranium, uranium conversion, and SWU components combined into one sale.
LEU is a critical component in the production of nuclear fuel for reactors that produce electricity. We supply LEU and its components 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 global order book includes long-term sales contracts with major utilities through 2030. 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 56% since bottoming out in August 2018. Our sales team secured over $100 million in new commitments in November through the end of January.
In October 2020, the U.S. Department of Commerce reached agreement with the Russian Federation on an extension of the 1992 Russian Suspension Agreement (“RSA”), a trade agreement which allows for Russian-origin nuclear fuel to be exported to 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 quota for shipments to the United States through 2028 to execute Centrus’ long-term supply agreement (the “TENEX Supply Contract”) with the Russian government entity, TENEX, Joint-Stock Company (“TENEX”). This outcome allows for sufficient quota for Centrus to continue serving its utility customers.
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 technical solutions segment has as its goal the restoration of America’s domestic uranium enrichment capability 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 providing reliable carbon free power around the world. The U.S. has not had a domestic uranium enrichment capability suitable to meet U.S. national security requirements since the aging Paducah Gaseous Diffusion Plant (“Paducah GDP”) 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 (“HALEU”), which is expected to 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-share contract (the “HALEU Contract”) with the U.S. Department of Energy (“DOE”) 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 its Piketon, Ohio facility to become the first plant in the nation licensed to produce HALEU enriched to a U-235 concentration just below 20%. At the conclusion of the demonstration program funding in 2022, our goal is to scale up the facility in modular fashion as demand for HALEU grows in the commercial and/or government sectors, subject to the availability of funding and/or contracts to purchase the output of the plant. Refer to Operating Results - Technical Solutions (below) and Risk Factors, Operational Risks (above), for additional details.
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% U235 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. Advanced nuclear reactors promise to provide an important source of reliable carbon free power. 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.
In late 2020, DOE announced ten awards under its Advanced Reactor Demonstration Program (“ARDP”) aimed at helping innovative, next generation reactor designs overcome technical and financial obstacles to successfully commercialize. This includes a commitment to support construction to two demonstration reactors over the next
seven years and awards to support continued development of eight other reactor designs. Nine of the ten reactor designs chosen are expected to require HALEU fuel.
Centrus has built formal and informal relationships with most of the ARDP awardees and expects to be first to market with domestically-produced HALEU that could be used to fuel these reactors. For example, on September 15, 2020, Centrus made a joint announcement with TerraPower LLC (“TerraPower”) that the two companies plan to work together toward establishing commercial-scale domestic HALEU production capabilities. Centrus also has worked under a series of contracts with X Energy, LLC (“X-energy”), a pioneering advanced reactor and advanced nuclear fuel company, to support X-energy’s work to develop a facility to fabricate HALEU into an advanced fuel called tristructural isotropic (TRISO) fuel. TerraPower and X-energy were the two companies chosen by DOE for the largest awards under the Advanced Reactor Demonstration Program. While first year funding for the two companies totaled $160 million, DOE announced its intent to ultimately provide a combined total of $3.2 billion over a seven year period to help TerraPower and X-energy build their first reactors. The awards are subject to annual appropriations by Congress and there can be no assurance that the projects will be completed or that TerraPower and X-energy will ultimately purchase HALEU from Centrus.
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 IMSR power plants, which use 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 September 1, 2020, the Company completed the sale of 2,537,500 shares of the Company’s Class A Common Stock pursuant to the Registration Statement on Form S-3 that 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 the offering was $10.00 per share. The aggregate gross proceeds from the offering were 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.
On November 17, 2020, pursuant to a tender offer announced on October 19, 2020, the Company completed the purchase of 62,854 shares of its outstanding Series B Preferred Stock at a price per share of $954.59, less any applicable withholding taxes, for an aggregate purchase price of approximately $60 million. The purchase price per share represented a 25% discount from the aggregate liquidation preference, including accrued but unpaid dividends, of $1,272.78 per share as of September 30, 2020. These shares represented approximately 60% of the Company's outstanding Series B Preferred Stock shares as of September 30, 2020. The remaining Series B Preferred Stock shares outstanding after the transaction was 41,720 shares.
Refer to Note 21, Subsequent Events, of the consolidated financial statements for information related to an exchange in February 2021 of Series B Preferred Stock shares for Class A Common Stock shares and a warrant for the holder to acquire additional shares of Class A Common Stock.
On December 31, 2020, the Company entered into an At Market Sales Agreement with B. Riley Securities, Inc. and Lake Street Capital Markets, LLC, relating to the at the market offering of shares of the Company’s Class A Common Stock, $0.10 par value per share. The shares of Class A Common Stock were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239242), which became effective on August 5, 2020, and a prospectus supplement dated December 31, 2020 to the prospectus, dated August 5, 2020. For further details, refer to Note 21, Subsequent Events of the consolidated financial statements.
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 in Japan, the published market prices for uranium enrichment declined more than 75% through mid-2018. While the monthly price indicators have since increased, 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.
Refer to Part I, Item 1, Business, for additional information.
COVID-19 Update
On March 11, 2020, the World Health Organization declared 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 COVID-19 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. While 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 COVID-19 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 I, Item 1A, Risk Factors - Our business, financial and operating performance could be adversely affected by epidemics and other health related issues including but not limited to the novel coronavirus (“COVID-19”) pandemic.
Market Conditions and Outlook
The global nuclear industry outlook has begun to improve after many years of decline or stagnation. The development of advanced small and large-scale reactors, innovative advanced fuel types, and the commitment of nations to begin deploying or to increase the share of nuclear power in their nations has created optimism in the market. Part of the momentum has resulted from efforts to lower greenhouse gas emissions to combat climate change and improve health and safety. The industry continues to face headwinds, however, as low cost electricity generation sources, resistance to nuclear power, and the high costs of deploying nuclear power impede expansion of the nuclear industry. Threats of trade actions that could impact the nuclear fuel supply chain is an overhang on the industry.
While a majority of the growth of nuclear power remains centered in China, India and Russia, the U.S., with 96 commercial reactors in operation, remains the world’s largest market for nuclear fuel, but the U.S. industry remains under some duress due to low cost natural gas prices and an increase in the expansion of renewable sources, all of which have put financial pressure on some reactor operators. Eight reactors have been shut down in the U.S. in recent years and several more face the prospect of premature shut down in the near-term.
The industry continues to attempt to recover from the March 2011 incident in Fukushima, Japan, that occurred from an earthquake and tsunami that caused irreparable damage to four reactors in Fukushima. As a consequence, approximately 60 reactors in Japan and Germany were taken offline, and other countries curtailed or slowed their construction of new reactors or accelerated their retirement of existing plants. While some reactors in Japan have restarted and many are expected to restart during the next five years, supply and demand dynamics for nuclear fuel continue to be somewhat depressed.
While the market for uranium enrichment for nuclear fuel is expected to remain oversupplied into the 2020s, the market is expected to grow as the nuclear power industry expands around the world. During 2019-2020, prices for nuclear fuel, especially conversion and enrichment, rose significantly. According to the World Nuclear Association, around 10% of the world's electricity is generated by about 440 nuclear reactors, and an additional 50 or so reactors are under construction. During 2020, two nations new to nuclear energy are expected to start their first commercial reactors. The new reactor builds will have the potential to improve market conditions in the long-term.
Operating Results
Our revenues, operating results, and cash flows can fluctuate significantly from quarter to quarter and year to year. 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 2021-2022.
In 2020, we benefited from the one time collection from a customer of $32.6 million in settlement of a supply contract that was subject to the customer’s bankruptcy proceeding. 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, currently we are 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 December 31, 2020, the order book was approximately $960 million. The order book represents the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries under contract which includes approximately $328 million of Deferred Revenue and Advances from Customers. We estimate that approximately 2% of our order book is at risk related to customer operations. 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 RSA, which limits imports of Russian uranium products into the United States and applies to our sales using material procured under the TENEX Supply Contract. For further discussion of these risks and uncertainties, refer to Part I, Item 1A, Risk Factors - Restrictions on imports or sales of SWU or uranium that we buy from our Russian supplier and our other sources of supply could adversely affect profitability and the viability of our business, as well as - 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.
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;
•Future funding and demand for HALEU;
•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 77% of our total revenue in 2020. 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 medium and 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 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 denominated primarily 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 GDP and Paducah GDP.
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, 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 GDP. The HALEU Contract, once fully implemented, is expected to result in the Company having demonstrated the capability to enrich uranium to the 19.75% 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% 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 internal labor, third-party services 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 total costs at completion 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 is being adjusted over the remaining contract term based on actual results and remaining program cost projections. As of December 31, 2020, the accrued contract loss balance was $7.7 million, and Cost of Sales in 2020 benefited by $10.6 million for previously accrued contract losses attributable to work performed in 2020. Our HALEU Contract expires in 2022 and although we believe demand for HALEU will emerge over the next several years, 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.
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 LLC (“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 2020, with approximately 58% of associated costs recognized in 2019 and 42% in 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 an initial services agreement with X Energy, LLC (“X-energy”) to provide technical and resource support for conceptual design of its Tri-Structural Isotropic (TRISO) fuel manufacturing process. In November 2018, we entered into a second services agreement with X-energy to proceed with Preliminary Design of the TRSIO facility. Under both agreements, which were funded by two separate cooperative agreement awards by DOE, we provide X-energy with non-cash in-kind contributions pursuant to X-energy’s obligations under those agreements. In November 2020, the parties extended the period of performance through August 2021.
Under the X-energy agreements, services are performed pursuant to separate task orders issued and provide for time-and-materials based pricing. The cumulative task orders issued through October 2020 provided for payments to us of $13.7 million and in-kind contributions provided by us of $7.5 million. Under the current agreement effective November 2020, the cumulative value of the additional task orders issued provides for payments to us of $6.5 million and in-kind contributions to be provided by us of $2.8 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 GDP and Paducah GDP. 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 GDP and Paducah GDP. 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 I, Item 3, Legal Proceedings, for additional information.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1, Summary of Significant Accounting Policies, of our consolidated financial statements, which were prepared in accordance with generally accepted accounting principles. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and judgments that are, by their nature, subject to substantial risks and uncertainties. Critical accounting estimates are those that require management to make assumptions about matters that are uncertain at the time the estimate is made and for which different estimates, often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but are inherently uncertain and unpredictable, could have a material impact on our operating results and financial condition. It is also possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We are also subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as the healthcare environment, legislation and regulation. Additionally, changes in accounting rules or their interpretation could significantly affect our results of operations and financial condition.
The sensitivity analyses used below are not intended to provide a reader with our predictions of the variability of the estimates used. Rather, the sensitivities used are included to allow the reader to understand a general cause and effect of changes in estimates.
We have identified the following to be our critical accounting estimates:
Revenue Recognition - Technical Solutions
Revenue for the technical solutions segment, principally representing technical, manufacturing, engineering, procurement, construction and operations services offered to public and private sector customers, is recognized over the contractual period as services are rendered. The Company recognizes revenue over time as it performs on these contracts because of the continuous transfer of control to the customer. For public sector contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and assume control of any work in progress. The Company’s private sector contracts generally contain contractual termination clauses or entitle the Company to payments for work performed to date for goods and services that do not have an alternative use. With control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. A contract may contain one or more performance obligations. Two or more promises to transfer goods or services to a customer may be considered a single performance obligation if the goods or services are highly interdependent or highly interrelated such that utility of the promised goods or services to the customer includes integration services provided by the Company.
The Company determines the transaction price for each contract based on the consideration it expects to receive for the products or services being provided under the contract. If transaction prices are not stated in the contract for each performance obligation, contractual prices are allocated to performance obligations based on estimated relative standalone selling prices of the promised services.
The Company generally uses the cost-to-cost input method of progress for performance obligations to deliver products with continual transfer of control to the customer, because it best depicts the transfer of control to the customer that occurs as the Company incurs costs. Under the cost-to-cost method, the extent of progress towards completion is measured based on the proportion of direct costs incurred to date to the total estimated direct costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred. For performance obligations to provide services to the customer, revenue is recognized over time based on direct costs incurred or the right to invoice method (in situations where the value transferred matches the Company’s billing rights) as the customer receives and consumes the benefits.
Use of the cost-to-cost method requires the Company to make reasonably dependable estimates of costs at completion associated with the design, manufacture and delivery of products and services in order to calculate revenue. Significant judgment is used to estimate total revenue and costs at completion, particularly in the assumptions related to internal labor hours and third-party services for which a vendor invoice or quote is not yet available. As a significant change in one or more estimates could affect the profitability of the Company’s contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profits/losses are recognized under the cumulative catch-up method. Under this method, the impact of the adjustments is recognized in the period the adjustment is recognized. When estimates of total costs at completion for such an integrated, construction type contract exceed total estimates of revenue to be earned on a performance obligation related to complex equipment or related services, a provision for the remaining loss on the performance obligation is recognized in the period the loss is determined.
Asset Valuations
The accounting for SWU and uranium inventories includes estimates and judgments. SWU and uranium inventory costs are determined using the average cost method. Inventories of SWU and uranium are valued at the lower of cost or net realizable value (“NRV”). NRV is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The estimated selling price for SWU and uranium is based on the pricing terms of contracts in our sales order book, and, for uranium not under contract, the estimated selling price is based primarily on published price indicators at the balance sheet date.
Intangible assets originated from our reorganization and application of fresh start accounting as of September 30, 2014. The intangible assets represented the fair value adjustment to the assets and liabilities for our LEU segment. The identifiable intangible assets relate to our order book and customer relationships. The order book intangible asset is amortized as the order book valued at emergence is reduced, principally as a result of deliveries to customers. The customer relationships intangible asset is amortized using the straight-line method over the estimated average useful life of 15 years, with 8 ¾ years of scheduled amortization remaining. The aggregate net balance of identifiable intangible assets was $69.5 million as of December 31, 2020.
The carrying values of the intangible assets are subject to impairment tests whenever events or changes in business circumstances indicate that the carrying amount of the intangible assets may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset, or asset group exceeds its fair value.
Inherent in our fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations, and strategic plans with regard to operations. A change in these underlying assumptions would cause a change in the results of the tests, which could cause the fair value of the intangible asset to be less than its respective carrying amount.
Pension and Postretirement Health and Life Benefit Costs and Obligations
We provide retirement benefits to certain employees and retirees under defined benefit pension plans and postretirement health and life benefit plans. The valuation of benefit obligations and costs is based on provisions of the plans and actuarial assumptions that involve judgments and estimates.
Assets and obligations related to our retiree benefit plans are remeasured each year as of the balance sheet date resulting in differences between actual and projected results for the year. The Company has elected the accounting option to recognize these actuarial gains and losses in the statement of operations in the fourth quarter. The alternative would be to amortize gains and losses into operating results over time. The Company’s treatment of recognizing actuarial gains and losses immediately is intended to increase transparency into how movements in plan assets and benefit obligations impact financial results. Immediate recognition of such gains and losses in the
statement of operations may cause significant fluctuations in our results of operations. In addition, an interim remeasurement and recognition of gains or losses may be required for a plan during the year if lump sum payments exceed certain levels.
Components of retirement benefit expense/income other than service cost are presented in our consolidated statement of operations as Nonoperating Components of Net Periodic Benefit Expense (Income). These components consist primarily of the return on plan assets, offset by interest cost as the discounted present value of benefit obligations nears payment. Results also reflect claims experience, changes in mortality and healthcare claim assumptions and changes in market interest rates. Service cost is recognized in Cost of Sales for the LEU segment and to Selling, General and Administrative expense.
Nonoperating components of net periodic benefit expense (income) netted to income of $1.6 million in 2020 and income of $4.3 million in 2019, including a net actuarial loss of $7.2 million in 2020 and a net actuarial gain of $4.0 million in 2019. In 2020, the net actuarial loss reflected a decline in market interest rates from approximately 3.3% to 2.5%, partially offset by favorable investment returns relative to the expected return assumption, changes in mortality and healthcare claim assumptions, and favorable claims experience. In 2019, the net actuarial gain reflected favorable investment returns relative to the expected return assumption, changes in mortality and healthcare claim assumptions, and favorable claims experience, partially offset by a decline in market interest rates from approximately 4.3% to 3.3%.
Changes in actuarial assumptions could impact the measurement of benefit obligations and benefit costs, as follows:
•The expected return on benefit plan assets is approximately 6.5% for 2021. The expected return is based on historical returns and expectations of future returns for the composition of the plans’ equity and debt securities. A one-half percentage point decrease in the expected return on plan assets would increase annual pension costs by $3.1 million in 2021. However, the net impact of any changes in the expected return on benefit plan assets on the final benefit cost recognized for fiscal year 2021 would be $0 since the actual return on assets would effectively be reflected at December 31, 2021, under our mark-to-market accounting methodology.
•The present value of pension obligations is calculated by discounting long-term obligations using a market interest rate. This discount rate is the estimated rate at which the benefit obligations could be effectively settled on the measurement date and is based on yields of high quality fixed income investments whose cash flows match the timing and amount of expected benefit payments of the plan. Discount rates of approximately 2.5% were used as of December 31, 2020. A one-half percentage point reduction in the discount rate would increase the valuation of pension benefit obligations by $40.7 million and postretirement health and life benefit obligations by $7.8 million, and the resulting changes in the valuations would decrease the service cost and interest cost components of annual pension costs and postretirement health and life benefit costs by $2.8 million and $0.5 million, respectively.
•The healthcare costs trend rates are 5.5% projected in 2021 reducing to a final trend rate of 5% by 2022. The healthcare costs trend rate represents our estimate of the annual rate of increase in the gross cost of providing benefits. The trend rate is a reflection of health care inflation assumptions, changes in healthcare utilization and delivery patterns, technological advances, and changes in the health status of our plan participants.
In December 2012, we invoiced DOE for $42.8 million, representing its share of pension and postretirement benefits costs related to the transition of Portsmouth site employees to DOE’s D&D contractor, as permitted by CAS and based on CAS calculation methodology. DOE has denied our claim. As a result, the Company filed an appeal of the decision in the U.S. Court of Federal Claims in January 2015. There is no assurance we will be successful in our appeal, and we have not recognized income or a receivable due to uncertainty regarding the amounts owed and the timing of collection. The parties are engaged in settlement discussions, and further action on the case is stayed pending the outcome of such discussions. On January 13, 2021, the Company and the DOE
reached a tentative agreement to settle the litigation. The settlement is subject to the approval by the DOE, the U.S. Department of Justice, the Company’s Board of Directors, and the Court. If the settlement is ultimately approved by all parties, the DOE is expected to pay the Company $43.5 million (inclusive of any interest due). The Company can give no assurance whether or when the tentative settlement will receive the required approvals or whether the Company will ultimately recover some, all or none of the proposed settlement amount.
Income Taxes
During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. To the extent that the final tax outcome of these matters is different than the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made.
Accounting standards prescribe a minimum recognition threshold that a tax position is required to meet before the related tax benefit may be recognized in the financial statements. As of December 31, 2020, the liability for unrecognized tax benefits, included in Other Long-Term Liabilities, was $0.8 million and accrued interest and penalties totaled less than $0.1 million.
Accounting for income taxes involves estimates and judgments relating to the tax bases of assets and liabilities and the future recoverability of deferred tax assets. In assessing the realization of deferred tax assets, we determine whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income in future years when deferred tax assets are recoverable or are expected to reverse. Factors that may affect estimates of future taxable income include, but are not limited to, competition, changes in revenue, costs or profit margins, market share and developments related to the American Centrifuge technology. In practice, positive and negative evidence is reviewed with objective evidence receiving greater weight. If, based on the weight of available evidence, it is more likely than not that all, or some portion, of the deferred tax assets will not be realized, we record a valuation allowance. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed for all, or some portion, of the deferred tax assets. A cumulative loss in recent years is a significant piece of negative evidence and one of the most difficult forms of negative evidence to overcome. We have incurred cumulative operating losses since 2011.
Our inability to overcome the strong negative objective evidence of a cumulative loss in recent years with sufficient objective positive evidence of future taxable income to realize our deferred tax assets required us to record a valuation allowance. All available positive and negative evidence is analyzed quarterly to determine the amount of the valuation allowance. A full valuation allowance was first recorded in the fourth quarter of 2011 for the federal and state net deferred tax assets. In the second quarter of 2020, the valuation allowance on the state net deferred tax assets for the LEU segment was released due to a return to profitability that led to cumulative pre-tax income over a rolling three-year period for state income tax purposes. However, we continue to maintain a full valuation allowance against federal net deferred tax assets and state net deferred tax assets for the rest of our business due to cumulative three-year pre-tax losses and significant federal and state net operating losses. We will continue to evaluate future financial performance to determine whether such performance is both sustained and significant enough to provide sufficient evidence to support reversal of all or a portion of the federal and remaining state valuation allowance. Based upon current and forecasted pre-tax income, we believe it is reasonably possible that sufficient positive evidence may become available to allow us to conclude that some or a significant portion of the federal valuation allowance will no longer be needed within the next 12 months. The exact timing and amount of the valuation allowance release are dependent upon the actual level of profitability that is achieved as well as the analysis of other positive and negative evidence. As of December 31, 2020, the valuation allowance against the federal and state net deferred tax assets was $486.0 million. State net deferred tax assets, for which no valuation allowance is needed, of $1.9 million were recorded as a component of Other Long-Term Assets as of December 31, 2020.
Results of Operations
Segment Information
The following table presents elements of the accompanying consolidated statements of operations that are categorized by segment (dollar amounts in millions):
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|
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|
|
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Year Ended
December 31,
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2020
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2019
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$ Change
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% Change
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LEU segment
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|
|
|
|
|
|
|
Revenue:
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|
|
|
|
|
|
|
SWU revenue
|
$
|
151.5
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|
|
$
|
123.7
|
|
|
$
|
27.8
|
|
|
22
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%
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Uranium revenue
|
39.0
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|
|
45.7
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|
|
(6.7)
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|
|
(15)
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%
|
Total
|
190.5
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|
|
169.4
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|
|
21.1
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|
|
12
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%
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Cost of sales
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92.7
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|
|
118.6
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|
|
25.9
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|
|
22
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%
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Gross profit
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$
|
97.8
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|
|
$
|
50.8
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|
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$
|
47.0
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|
|
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|
|
|
|
|
|
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|
Technical solutions segment
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|
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Revenue
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$
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56.7
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|
|
$
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40.3
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|
|
$
|
16.4
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|
|
41
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%
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Cost of sales
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56.9
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|
|
58.6
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|
|
1.7
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|
|
3
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%
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Gross (loss)
|
$
|
(0.2)
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|
|
$
|
(18.3)
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|
|
$
|
18.1
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|
|
|
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|
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|
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Total
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Revenue
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$
|
247.2
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$
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209.7
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$
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37.5
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18
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%
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Cost of sales
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149.6
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|
|
177.2
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|
|
27.6
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|
|
16
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%
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Gross profit
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$
|
97.6
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|
|
$
|
32.5
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|
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$
|
65.1
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|
|
|
Revenue
Revenue from the LEU segment increased $21.1 million (or 12%) in 2020 compared to 2019. SWU revenue increased $27.8 million (or 22%) in 2020 compared to 2019. SWU revenue in 2020 includes $32.6 million collected from a customer in settlement of a supply contract that was subject to the customer’s bankruptcy proceeding. Excluding these proceeds, the average SWU price billed to customers increased 13%, reflecting the particular contracts under which SWU were sold during the periods. The volume of SWU sales decreased 15%. Uranium revenue decreased $6.7 million (or 15%) in 2020 compared to 2019. The volume of uranium sales decreased 23% and the average uranium price billed to customers increased 10%.
Revenue from the technical solutions segment increased $16.4 million (or 41%) in 2020 compared to 2019. The increase was primarily the result of work performed under the HALEU Contract. Revenue in 2020 included work performed under the UT-Battelle contract and revenue in 2019 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 on time and budget.
Cost of Sales
Cost of sales for the LEU segment decreased $25.9 million (or 22%) in 2020 compared to 2019, reflecting the decreases in SWU and uranium sales volumes and a decrease in the average cost of sales per SWU. In 2020, the average cost of sales per SWU decreased 12%, primarily due to lower pricing under the TENEX Supply Contract. Cost of sales includes legacy costs related to former employees of the Portsmouth GDP and Paducah GDP of $3.7 million in 2020 and $4.1 million in 2019. Valuation adjustments for our uranium inventory to reflect declines in
uranium market price indicators totaled $2.3 million in 2019 and there were no valuation adjustments in 2020. The average uranium unit cost of sales increased 15% in 2020 compared to 2019.
Cost of sales for the technical solutions segment decreased $1.7 million (or 3%) in 2020 compared to 2019, reflecting the mix of technical solutions work performed in each of the periods. In 2019, our share of remaining projected program costs under the HALEU Contract as of December 31, 2019, was recognized in Cost of Sales as an accrued loss of $18.3 million. The accrued loss on the contract is adjusted over the remaining contract term based on actual results and remaining program cost projections. For details on HALEU Contract accounting, refer to “Technical Solutions - Government Contracting” above.
Gross Profit (Loss)
We recognized a gross profit of $97.6 million in 2020, an improvement of $65.1 million compared to the gross profit of $32.5 million in 2019.
The gross profit for the LEU segment was $97.8 million in 2020 compared to $50.8 million in 2019. The improvement for the LEU segment of $47.0 million was primarily due to the recovery on bankruptcy court claims of $32.6 million and the increase in the average SWU sales price, partially offset by the declines in SWU and uranium sales volumes.
For the technical solutions segment, we recognized a gross loss of $0.2 million in 2020 compared to a gross loss of $18.3 million in 2019. The gross loss for 2019 reflects the accrued contract loss of $18.3 million related to projected costs for the HALEU program.
Non-Segment Information
The following table presents elements of the accompanying consolidated statements of operations that are not categorized by segment (dollar amounts in millions):
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|
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|
|
|
Year Ended
December 31,
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|
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2020
|
|
2019
|
|
$ Change
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% Change
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Gross profit
|
$
|
97.6
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|
|
32.5
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|
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$
|
65.1
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|
|
(200)
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%
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Advanced technology costs
|
2.8
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|
|
14.6
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|
|
11.8
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|
|
81
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%
|
Selling, general and administrative
|
36.0
|
|
|
33.7
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|
|
(2.3)
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|
|
(7)
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%
|
Amortization of intangible assets
|
6.8
|
|
|
6.5
|
|
|
(0.3)
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|
|
(5)
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%
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Special charges (credits) for workforce reductions
|
0.6
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|
|
(1.9)
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|
|
(2.5)
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|
|
132
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%
|
Other (income) expense, net
|
0.4
|
|
|
(0.7)
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|
|
(1.1)
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|
|
(157)
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%
|
Operating income (loss)
|
51.0
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|
|
(19.7)
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|
|
70.7
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|
|
359
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%
|
Nonoperating components of net periodic benefit expense (income)
|
(1.6)
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|
|
(4.3)
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|
|
(2.7)
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|
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63
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%
|
Interest expense
|
0.1
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|
|
3.0
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|
|
2.9
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|
|
97
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%
|
Investment income
|
(0.5)
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|
|
(2.2)
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|
|
(1.7)
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|
|
(77)
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%
|
Income (loss) before income taxes
|
53.0
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|
|
(16.2)
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|
|
69.2
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|
|
427
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%
|
Income tax expense (benefit)
|
(1.4)
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|
|
0.3
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|
|
1.7
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|
|
-
|
Net income (loss)
|
54.4
|
|
|
(16.5)
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|
|
70.9
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|
|
430
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%
|
Preferred stock dividends - undeclared and cumulative
|
6.7
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|
|
7.8
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|
|
1.1
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|
|
14
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%
|
Net income (loss) allocable to common stockholders
|
$
|
47.7
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|
|
$
|
(24.3)
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|
|
$
|
72.0
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|
|
296
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%
|
Advanced Technology Costs
Advanced technology costs consist of American Centrifuge and related 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 $11.8 million (or 81%) in 2020 compared to 2019.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses increased $2.3 million (or 7%) in 2020 compared to 2019. Incentive compensation expense increased $2.9 million, primarily related to a remeasurement of obligations under long-term incentive plans which are based on our stock price, which has increased over 500% in the past two years. Consulting costs related to capital financing evaluation, claim recoveries and international trade increased $1.5 million in 2020 compared to 2019 and other consulting costs decreased $1.2 million. Salary and benefit costs decreased $0.6 million, travel expenses decreased by $0.5 million, and other SG&A expenses increased by a net $0.2 million.
Amortization of Intangible Assets
Amortization of intangible assets increased $0.3 million (or 5%) in 2020 compared to 2019. 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, and 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 increased $2.5 million (or 132%) in 2020 compared to 2019. Special charges in 2020 consisted of estimated employee termination benefits of $0.6 million. Special charges in 2019 included a credit of $2.9 million for the reversal of accrued termination benefits for employees who were retained with the signing of the HALEU letter agreement in May 2019.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to income of $1.6 million in 2020, compared to income of $4.3 million in 2019. Nonoperating components of net periodic benefit expense (income) consist primarily of the return on plan assets, offset by interest cost as the discounted present value of benefit obligations nears payment. Results also reflect claims experience, changes in mortality and healthcare claim assumptions and changes in market interest rates.
In both 2020 and 2019, the net gains reflect favorable investment returns relative to the expected return assumption, changes in mortality and healthcare claim assumptions, and favorable claims experience, partially offset by declines in market interest rates. Gains were partially offset by declines in market interest rates, which increases the present value calculation for outstanding pension liabilities.
Interest Expense
Interest expense declined $2.9 million (or 97%) in 2020, compared to 2019, primarily as a result of the repayment of the Company’s outstanding 8% paid-in-kind (“PIK”) toggle notes (the “8% PIK Toggle Notes”) that matured on September 30, 2019.
Income Tax Expense (Benefit)
The income tax benefit was $1.4 million in 2020 and the income tax expense was $0.3 million in 2019. The income tax benefit in 2020 relates to the release of the state valuation allowance against state net deferred tax assets for the LEU segment of $2.0 million offset primarily by state income tax expense of $0.6 million. The state income tax expense in 2020 and 2019 primarily relates to an accrual for a current unrecognized tax benefit offset by the reversal of a previously accrued unrecognized tax benefit.
Net Income (Loss)
Net income was $54.4 million in 2020, compared to a net loss of $16.5 million in 2019. The favorable variance of $70.9 million was primarily a result of a $65.1 million favorable variance in gross profit, a $11.5 million decrease in advanced technology costs, and a $2.9 decrease in interest expense, partially offset by a $2.7 million unfavorable variance in nonoperating components of net periodic benefit expense (income), a $2.5 million unfavorable variance in special charges (credits) and a $2.3 million increase in selling, general and administrative expenses.
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 liquidation preference at origination. We did not meet the criteria for a dividend payment obligation for the years ended December 31, 2020 and 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. Refer to Note 16, Stockholders’ Equity, of the consolidated financial statements.
Net Income per Share
The Company measures Net Income per Share both on a GAAP basis and adjusted to exclude deemed dividends allocable to retired preferred stock shares (“Adjusted Net Income per Share”). We believe Adjusted Net Income per Share, a non-GAAP financial measure, provides investors with additional understanding of the Company’s financial performance and period-to-period comparability.
On November 17, 2020, the Company completed the purchase of 62,854 shares of its outstanding Series B Preferred Stock at a price per share of $954.59, less any applicable withholding taxes. (Refer below to Liquidity and Capital Resources for details.) The purchase price per share represented a 25% discount from the aggregate liquidation preference, including accrued but unpaid dividends, of $1,272.78 per share as of September 30, 2020. Since origination, the carrying value on the Balance Sheet was $43.80 per share based on values assigned in the originating securities exchange. The liquidation amount at origination was $1,000.00 per share.
The aggregate purchase price of approximately $60 million, less accrued but unpaid dividends attributable to the purchased and retired Series B preferred shares, is considered for purposes of Net Income per Share to be a deemed dividend to the extent it exceeds the carrying value on the Balance Sheet, or $41.9 million.
Below we present Net Income Per Share and Adjusted Net Income per Share. The non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with our GAAP results. The non-GAAP financial measure should be viewed in addition to, and not as a substitute for, or superior to, the financial measure calculated in accordance with GAAP. The non-GAAP financial measure used by the Company may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Year Ended
December 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator (in millions):
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
16.4
|
|
|
$
|
(2.8)
|
|
|
$
|
54.4
|
|
|
$
|
(16.5)
|
|
Preferred stock dividends - undeclared and cumulative
|
0.8
|
|
|
1.9
|
|
|
6.7
|
|
|
7.8
|
|
Distributed earnings allocable to retired preferred shares
|
41.9
|
|
|
—
|
|
|
41.9
|
|
|
—
|
|
Net income (loss) allocable to common stockholders
|
$
|
(26.3)
|
|
|
$
|
(4.7)
|
|
|
$
|
5.8
|
|
|
$
|
(24.3)
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss), including distributed earnings allocable to retired preferred shares (Non-GAAP)
|
$
|
15.6
|
|
|
$
|
(4.7)
|
|
|
$
|
47.7
|
|
|
$
|
(24.3)
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands) (a):
|
|
|
|
|
|
|
|
Average common shares outstanding - basic
|
10,322
|
|
|
9,583
|
|
|
9,825
|
|
|
9,566
|
|
Average common shares outstanding - diluted (b)
|
10,322
|
|
|
9,583
|
|
|
10,123
|
|
|
9,566
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Share (in dollars):
|
|
|
|
|
|
|
|
Basic
|
$
|
(2.55)
|
|
|
$
|
(0.49)
|
|
|
$
|
0.59
|
|
|
$
|
(2.54)
|
|
Diluted
|
$
|
(2.55)
|
|
|
$
|
(0.49)
|
|
|
$
|
0.57
|
|
|
$
|
(2.54)
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss) per Share (Non-GAAP) (in dollars):
|
|
|
|
|
|
|
|
Basic
|
$
|
1.51
|
|
|
$
|
(0.49)
|
|
|
$
|
4.85
|
|
|
$
|
(2.54)
|
|
Diluted
|
$
|
1.46
|
|
|
$
|
(0.49)
|
|
|
$
|
4.71
|
|
|
$
|
(2.54)
|
|
(a) For details related to average shares outstanding, refer to Note 15, Net Income (Loss) Per Share of the consolidated financial statements.
(b) For purposes of Adjusted Net Income (Loss) per Share for the three months ended December 31, 2020, average common shares outstanding - diluted is 10,659,000 shares. No dilutive effect is recognized in a period in which a net loss has occurred.
Liquidity and Capital Resources
We ended 2020 with a consolidated cash balance of $152.0 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 $55.8 million through December 31, 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 GDP. The HALEU Contract, once fully implemented, is expected to result in the Company having the first NRC-licensed HALEU production facility in the United States and will have demonstrated the ability to enrich uranium to a 19.75% concentration of the U-235 isotope. HALEU is expected to be required by many of the advanced reactor designs now under development, including nine out of the ten reactor designs that were selected in 2020 for the U.S. Department of Energy’s Advanced Reactor Demonstration Program. HALEU may also be used in advanced nuclear fuels under development for the existing fleet of reactors. In addition to commercial demand, HALEU may be needed for microreactor designs that are now under development for the U.S. Department of Defense. Our HALEU Contract expires in 2022 and although we believe demand for HALEU will emerge over the next several years, 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.
We have taken steps over the last several years to reduce the size and volatility of our defined benefit pension obligations, including making the option for pension-eligible employees to receive a lump sum payment upon termination of their employment. In the fourth quarter of 2020, the Company entered into an arrangement with an insurance company to transfer certain future benefit obligations and administrative costs for our primary qualified pension plan. In this transaction, we transferred approximately $30 million of pension plan assets to the insurance company in order to reduce our pension plan obligations by approximately $30 million. This transaction will save administrative costs associated with the Pension Benefit Guaranty Corporation and reduce the volatility of future pension obligations.
Capital expenditures of approximately $1 to $2 million are anticipated over the next 12 months.
The change in cash, cash equivalents and restricted cash from our consolidated statements of cash flows are as follows on a summarized basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2020
|
|
2019
|
Cash provided by operating activities
|
$
|
67.1
|
|
|
$
|
11.3
|
|
Cash provided by (used in) investing activities
|
$
|
(1.4)
|
|
|
0.6
|
|
Cash used in financing activities
|
(44.4)
|
|
|
(35.0)
|
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
21.3
|
|
|
$
|
(23.1)
|
|
Operating Activities
During 2020, net cash provided by operating activities was $67.1 million. Net income of $54.4 million in 2020, net of non-cash expenses, was a significant source of cash. Income included $32.6 million on recovery of bankruptcy court claims. The net increase is also the result of a decrease in inventories of $25.8 million and a $13.2 million increase in payables under SWU purchase agreements. These increases were partially offset by a $32.7 million reduction in pension and postretirement benefit liabilities.
During 2019, net cash provided by operating activities was $11.3 million. Sources of cash included the $44.0 million increase in deferred revenue and advances from customers, net of deferred costs and the $29.3 million reduction in accounts receivable. The net reduction of $37.9 million in the SWU purchase payables balance, due to the timing of purchase deliveries, was a significant use of cash in 2019. Uses of cash also included the $19.5 million increase in pension and postretirement benefits and the net loss of $16.5 million.
Investing Activities
Investing activities in 2020 consisted of capital expenditures of $1.4 million. In 2019, sales of assets and property yielded net proceeds of $0.7 million. There were no significant capital expenditures in 2019.
Financing Activities
In 2020, net cash used in financing activities included the purchase of preferred stock for $61.6 million, including transaction costs, pursuant to a tender offer and net proceeds received of $23.1 million from the issuance of common stock pursuant to a Registration Statement on Form S-3. In 2019, net cash used for financing included the repayment of $27.5 million of principal due on maturity of the 8% PIK Toggle Notes. In both 2020 and 2019, payments of $6.1 million of interest classified as debt are classified as a financing activity. Refer to Note 9, Debt, of the consolidated financial statements regarding the accounting for the 8.25% Notes.
Working Capital
The following table summarizes the Company’s working capital (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
152.0
|
|
|
$
|
130.7
|
|
Accounts receivable
|
29.6
|
|
|
21.1
|
|
Inventories, net
|
59.9
|
|
|
58.9
|
|
Current debt
|
(6.1)
|
|
|
(6.1)
|
|
Deferred revenue and advances from customers, net of deferred costs
|
(131.3)
|
|
|
(122.2)
|
|
Other current assets and liabilities, net
|
(64.1)
|
|
|
(49.6)
|
|
Working capital
|
$
|
40.0
|
|
|
$
|
32.8
|
|
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.
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 9, Debt, of the consolidated financial statements.
The Company continues to look at opportunities to improve its capital structure and to enhance shareholder value. As a result, on September 1, 2020, the Company completed the sale of 2,537,500 shares of the Company’s Class A Common Stock pursuant to the Registration Statement on Form S-3 that 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 the offering was $10.00 per share. The aggregate gross proceeds from the offering were 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.
On November 17, 2020, pursuant to a tender offer announced on October 19, 2020, the Company completed the purchase of 62,854 shares of its outstanding Series B Preferred Stock at a price per share of $954.59, less any applicable withholding taxes, for an aggregate purchase price of approximately $60 million. The purchase price per share represented a 25% discount from the aggregate liquidation preference, including accrued but unpaid dividends, of $1,272.78 per share as of September 30, 2020. These shares represented approximately 60% of the Company's outstanding Series B Preferred Shares as of September 30, 2020. The remaining Series B Preferred shares outstanding after the transaction was 41,720 shares.
Refer to Note 21, Subsequent Events, of the consolidated financial statements for information related to an exchange in February 2021 of Series B Preferred Stock shares for Class A Common Stock shares and a warrant for the holder to acquire additional shares of Class A Common Stock.
Holders of the Series B Preferred Stock are entitled to cumulative dividends of 7.5% per annum of the liquidation preference at origination. We are obligated to pay cash dividends on our Series B Preferred Stock to the extent dividends are declared by the Board of Directors and certain criteria are met. We have not met these criteria for the periods from issuance through December 31, 2020, and have not declared, accrued or paid dividends on the Series B Preferred Stock as of December 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.
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 TENEX. Under a 2018 agreement, the Company will purchase SWU contained in LEU from Orano with deliveries starting as early as 2021. Refer to Note 17, Commitments and Contingencies, of the 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, and Piketon, Ohio, 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 December 31, 2020 or December 31, 2019.
New Accounting Standards
Reference is made to New Accounting Standards in Note 1, Summary of Significant Accounting Policies, of the consolidated financial statements for information on new accounting standards.