Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited 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, among other things, the COVID-19 pandemic, including emerging variants, and the war in Ukraine. See “Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.
Overview
Centrus Energy Corp., a Delaware corporation (“Centrus,” the “Company”, “we” or “us”), is a trusted supplier of nuclear fuel components 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 indicates otherwise.
Centrus operates two business segments: (a) low-enriched uranium (“LEU”), which supplies various components of nuclear fuel to commercial customers 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 uranium enrichment and other capabilities necessary for production of advanced nuclear fuel 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 enriched uranium, the fissile component of nuclear fuel to customers, which are primarily utilities that operate 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 spot, medium and long-term sales contracts with major utilities and other customers to 2029. We have secured cost-competitive supplies of SWU under medium and long-term contracts through the end of this decade to help 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.
Published spot price indicators for SWU reached historic highs in April 2009 at $163 per SWU. In the years following the 2011 Fukushima accident in Japan, spot prices declined more than 75%, bottoming out in August 2018 at $34 per SWU. This was followed by a slow and steady rise, reaching $56 per SWU by December 31, 2021. In 2022, spot prices continue to increase substantially, reaching $95 per SWU by September 30, 2022. This represents an increase of 70% since the beginning of the year and 179% over the 2018 historic low. This sudden surge in the SWU spot price has been driven by uncertainty created as a result of Russia’s invasion of Ukraine, coupled with growing interest in nuclear power as a source of secure and carbon-free energy.
The war in Ukraine has escalated tensions between Russia and the international community. As a result, the United States and other countries have imposed, and may continue imposing, additional sanctions and/or export controls against certain Russian organizations and/or individuals. While sanctions imposed to date do not preclude imports of Russian uranium enrichment, it is possible that additional restrictions could arise in the future that would affect our ability to purchase and re-sell Russian uranium enrichment, which could have a negative material impact on our business. Further, sanctions could be imposed that may impact our ability to transport, import, take delivery or make payments related to the uranium enrichment we purchase.
Even if sanctions or other restrictions are not imposed, the current events in Ukraine could impact our ability to make future sales. For example, customers may be unwilling to accept material we purchase from TENEX. Further, since a portion of the price paid under the supply contract is based on commodity indices, the recent increases in market prices, as a result of the war in Ukraine, will have a corresponding impact on our cost of sales.
When Russian supply is included, the uranium enrichment segment of the global nuclear fuel market is oversupplied, but without Russian supply, the global market would be undersupplied for uranium enrichment. Changes in the supply-demand balance and in the competitive landscape arising from the war in Ukraine may affect pricing trends, change customer spending patterns, and create uncertainty in the uranium market. To address these changes, we will continue to evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions.
Our Technical Solutions segment is deploying uranium enrichment and other capabilities necessary for production of advanced nuclear fuel to meet the evolving needs of the global nuclear industry and the U.S. government, while also leveraging 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 is dedicated to the restoration of America’s domestic uranium enrichment capability to play a critical role in meeting U.S. national security and energy security requirements and advancing America’s nonproliferation, energy, and climate objectives. Our Technical Solutions segment also is focused on repairing broken and vulnerable supply chains, providing clean energy jobs, and supporting the communities in which we operate. Our goal is to deliver major components of the next-generation nuclear fuels that will power the future of nuclear energy as it provides reliable carbon-free power around the world.
The United States has not had a domestic uranium enrichment capability suitable to meet ongoing and enduring U.S. national security requirements since the Paducah Gaseous Diffusion Plant (“Paducah GDP”) shut down in 2013. Longstanding U.S. policy and binding nonproliferation agreements prohibit the use of foreign-origin enrichment technology for certain U.S. national security missions. Our AC100M centrifuge currently is the only deployment-ready U.S. uranium enrichment technology in the United States that can meet these national security requirements.
Centrus is working to pioneer U.S. production of high-assay, low-enriched uranium (“HALEU”), enabling the deployment of a new generation of HALEU-fueled reactors to meet the world’s growing need for carbon-free power. HALEU is a high-performance nuclear fuel component that is expected to be required by a number of advanced reactors, which are now under development for commercial and government uses. While existing reactors typically operate on LEU with the uranium-235 isotope concentration below 5%, HALEU is further enriched so that the uranium-235 concentration is between 5% and 20%. The higher U-235 concentration offers a number of potential advantages for advanced reactors, which may include better fuel utilization, improved performance, fewer refueling outages, simpler reactor designs, reduced waste volumes, and greater nonproliferation resistance.
The lack of a domestic HALEU supply is widely viewed as a major obstacle to the successful commercialization of these new reactors. For example, in surveys conducted by the U.S. Nuclear Industry Council in 2020 and 2021 , advanced reactor developers indicated that the number one issue that “keeps you up at night” was access to HALEU. As the only company with a license from the Nuclear Regulatory Commission (“NRC”) to enrich up to 20% uranium-235 assay HALEU, Centrus is uniquely positioned to fill a critical gap in the supply chain and facilitate the deployment of these promising next-generation reactors.
Under a three-year cost-share contract with DOE that began in 2019 (the “HALEU Contract”), Centrus has been constructing a cascade of sixteen AC100M centrifuges in Piketon, Ohio to demonstrate HALEU production. The Company’s goal is to complete the demonstration and scale up production of HALEU and LEU, meeting the needs of new and existing reactors as well as national security and other U.S. government requirements for enriched uranium.
The demonstration contract was originally set to expire on June 1, 2022. However, the DOE experienced a COVID-19 related supply chain delay in obtaining the HALEU storage cylinders it was required to provide under the contract. Since it is not possible to begin HALEU production without the storage cylinders, it was not possible to complete the operational portion of the HALEU demonstration under the existing HALEU Contract. The HALEU Contract has been extended to November 30, 2022. Also, the DOE elected to change the scope of the HALEU Contract and move the operational portion of the demonstration to a new, competitively-awarded contract that would provide for operations beyond the term of the existing HALEU Contract.
On June 28, 2022, the DOE released a request for proposals (“RFP”) for the completion and operation of the demonstration cascade. The RFP provides for a 50/50 cost share contract for the initial phase of the base contract to complete the cascade and begin operations. The second phase includes continued operations and maintenance on a cost-plus-incentive-fee basis. Finally, the RFP includes options to extend performance for up to an additional nine years comprised of three options of three-years each, also on a cost-plus-incentive-fee basis. The award of a contract and the exercise of any options is subject to appropriation. If a contract is awarded to the Company under the terms proposed by DOE in the RFP, the cost share in Phase 1 could have a material impact on the Company’s liquidity during the initial phase of the base contract, although the degree of impact cannot be estimated at this time. DOE has incrementally increased funds on the existing HALEU contract with total funding to date of $158.9 million.
Additional COVID-19-related impacts, or additional changes to the existing scope of the HALEU Contract could result in further material increases to our estimate of the costs required to complete the existing HALEU Contract, as well as delay completion of the contract. The Company currently does not have a contractual obligation to perform work in excess of the funding provided by DOE and, therefore, no additional loss has been accrued as of September 30, 2022. If the DOE does not commit to additional costs, above the existing funding, we may incur costs or losses in future periods that, if material, could have an adverse impact on our financial condition and liquidity.
The Inflation Reduction Act signed into law on August 16, 2022, includes a $700 million appropriation for the DOE HALEU Availability Program, with the goal of making HALEU commercially available by 2026 of which $500 million will be available to support new production and $200 million for resolving related supply chain challenges such as HALEU transportation. On October 6, 2022, the Department of Energy issued a “Sources Sought” notice outlining a potential 10-year program to support the construction and operation of HALEU enrichment in the United States via government purchases of up to 25 metric tons of HALEU per year. The Sources Sought notice is a preliminary step, not a formal request for proposals, and the Department would require additional annual appropriations beyond what is contained in the Inflation Reduction Act to fully implement that program. On October 14, 2022, the Company attended an Industry Day, where the DOE provided additional information on the potential procurement activity. The Company is evaluating its next steps associated with participating in a potential future request for proposal.
The war in Ukraine has contributed to a significant increase in market prices for enrichment and prompted calls for public and private investment in new, domestic uranium enrichment capacity not only for HALEU production but also for LEU production to support the existing fleet of reactors. As a result, Centrus is exploring the opportunity to deploy LEU enrichment alongside HALEU enrichment to meet a range of commercial and U.S. government requirements, which would bring cost synergies while increasing revenue opportunities. Our ability to deploy LEU and/or HALEU enrichment, and the timing, sequencing, and scale of those capabilities, is subject to the availability of funding and/or offtake commitments.
We believe our investments in our enrichment technology and the HALEU demonstration will position the Company to meet the needs of government and commercial customers in the future as they deploy advanced reactors and next generation fuels, and also offers potential cost synergies for a return to LEU production. At present, there are a number of advanced reactors under development that would use HALEU fuel. For example, of the ten advanced reactor designs selected by the DOE for its Advanced Reactor Demonstration Program, nine will require HALEU. In addition, the first non-light water reactor to have begun active NRC-license review requires HALEU. The U.S. Department of Defense recently awarded a contract to construct a prototype HALEU-fueled mobile microreactor in the next three to four years as part of a program called “Project Pele.” The U.S. Air Force also announced plans to deploy a microreactor at Eielson Air Force Base in Alaska. While the use of HALEU is not an express requirement of the Air Force program, the vast majority of microreactor designs are expected to need HALEU. In addition, the Defense Advanced Research Projects Agency (“DARPA”) is funding an effort called Demonstration Rocket for Agile Cislunar Operations (“DRACO”), which aims to demonstrate a HALEU-fueled nuclear thermal propulsion system that could eventually support missions to the moon and Mars.
Advanced nuclear reactors promise to provide an important source of reliable carbon-free power. By investing in HALEU technology now, and as the only American-based company with an NRC license currently pursuing HALEU enrichment capability, we believe the Company is well positioned to capitalize on a potential new market as the demand for HALEU-based fuels is expected to increase in the mid- to late-2020s with the development of advanced reactors. However, 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. Also, foreign government-owned, government-operated, and other new competitors could seek to enter the market and offer HALEU at competitive prices. There is one known foreign government-owned source which currently has the capability to produce HALEU, although this source is currently subject to trade restrictions that limit the amount of material from this source which may be imported into the United States with more restrictions potentially under consideration. Other foreign government-owned entities that are not currently subject to U.S. trade restrictions, however, may enter the market. One such foreign-government owned entity has expressed an interest in and potential capability for HALEU production but has not committed publicly to enter the market to enrich above 10% uranium-235 enrichment assays. This entity has indicated publicly that it would take six to seven years to be able to produce HALEU.
We are also actively considering and expect to consider from time to time in the future, potential strategic transactions, which could involve, without limitation, acquisitions and/or dispositions of businesses or assets, joint ventures or investments in businesses, products or technologies or changes to our capital structure. In connection with any such transaction, we may seek additional debt or equity financing, contribute or dispose of assets, assume additional indebtedness, or partner with other parties to consummate a transaction.
COVID-19 Update
During the height of the COVID-19 pandemic, the Company implemented measures to protect its workforce and to maintain critical operations. Over the course of the HALEU Contract, our Technical Solutions segment was impacted by supply chain disruptions and increased costs as a result of the pandemic. We also experienced delays by our suppliers and increased costs from them as a result of the impact of COVID-19. Since then, government requirements and public health guidelines including Center for Disease Control (CDC) guidance, as well as business and industry best practices regarding COVID-19 and COVID-19 vaccines, changed as the public vaccination rates increased, new information became available, and further research was conducted. As a result, we have adjusted our measures accordingly. However, we continue to follow CDC guidance and monitor any new development relating to COVID-19 transmission rates to ensure we take appropriate actions to maintain the health and safety of our employees and our operations.
For further discussion, refer to Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.
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.
According to the World Nuclear Association, as of September 2022, there were 60 reactors under construction worldwide, about a third of which are in China. The United States, with 92 operating reactors, remains the world’s largest market for nuclear fuel. The nuclear industry in the United States, Japan, and Europe faces headwinds as well as opportunities. In the United States, the industry has been under pressure from lower cost natural gas resources, until recently as gas prices have been rising, and the expansion of subsidized renewable energy. Twelve U.S. reactors have prematurely shut down in the past ten years and others could shut down in the next few years. At the same time, there are active efforts to develop, demonstrate, and deploy next generation reactors in the United States, many of which are expected to require HALEU.
As a consequence of the March 2011 earthquake and tsunami in Japan, over 60 reactors in Japan and Germany were taken offline, and other countries curtailed or slowed their construction of new reactors or accelerated the retirement of existing plants. While ten reactors in Japan have restarted, an additional seven are expected to restart in 2023, with more reactors expected to follow in subsequent years. Due to the war in Ukraine, the European Union is encouraging its member countries to reconsider the planned early retirement of existing plants in order to reduce reliance on Russian gas imports.
In October 2020, the U.S. Department of Commerce reached an agreement with the Russian Federation on an extension of the 1992 Russian Suspension Agreement, a trade agreement that 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 Centrus’ shipments to the United States through 2028 to perform under our long-term supply (purchase) agreement (the “TENEX Supply Contract”) with the Russian government entity, TENEX, Joint-Stock Company (“TENEX”). This outcome allowed for sufficient quota for Centrus to continue serving its utility customers.
The war in Ukraine has escalated tensions between Russia and the international community. As a result, the United States and other countries have imposed, and may continue imposing, additional sanctions and export controls against certain Russian organizations and/or individuals. While sanctions imposed to date do not preclude the import of Russian uranium products into the United States, it is possible that additional restrictions could be
added in the future that would affect our ability to purchase and re-sell Russian uranium enrichment, which could have a negative material impact on our business. Further, sanctions by the United States, Russia or other countries may impact our ability and cost to transport, export, import, take delivery, or make payments related to the LEU we purchase, and may require us to increase purchases from non-Russian sources to the extent available.
In response to the war in Ukraine, there have been proposals in U.S. Congress and elsewhere to ban imports of uranium products that could affect our ability to import LEU in one or more years under the TENEX Supply Contract but none of these have been adopted as of the date of this filing.
The expanding sanctions imposed by the United States and foreign governments on the mechanisms used to make payments to Russia and to obtain services including transportation and other services have increased the risk that implementation of the TENEX Supply Contract may be disrupted in the future. Accordingly, we continue to monitor the situation closely and assess the potential impact of any new sanctions and how the impact on the Company might be mitigated.
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 2022-2027. Operating results for the three and nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Given the current uncertainty and disruption in the market, due to among other things, the war in Ukraine, we are no longer providing guidance on our results of operations for 2022. Please see Forward Looking Statements at the beginning of this Quarterly Report on Form 10-Q.
Our order book of sales under contract in the LEU segment extends to 2029. As of September 30, 2022 and December 31, 2021, our order book was approximately $1.0 billion. The order book is the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries, and includes approximately $0.3 billion of deferred revenue and advances from customers as of September 30, 2022, whereby customers have made advance payments to be applied against future deliveries. No orders in our order book are considered at risk related to customer operations. These medium and long-term contracts are subject to significant risks and uncertainties, including existing import laws and restrictions such as, the Russian Suspension Agreement, which limits imports of Russian uranium products into the United States and applies to our sales using material procured under the TENEX Supply Contract as well as the potential for additional sanctions and other restrictions in response to the evolving situation regarding the war in Ukraine.
Our future operating results are subject to uncertainties that could affect results either positively or negatively. Among the factors that could affect our results are the following:
•Armed conflicts, including the war in Ukraine, government actions and other events or third-party actions that disrupt supply chains, production, transportation, payments, and importation of nuclear materials or other critical supplies or services;
•The potential for sanctions and other measures affecting purchases of SWU or uranium or goods or services required for the purchase or delivery of such SWU or uranium;
•The availability and terms of 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;
•Costs, 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 and suppliers, 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.
For further discussion of these uncertainties, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.
Revenue
We have two reportable segments: the LEU segment and the Technical Solutions segment.
Revenue from our LEU segment is derived primarily from the following:
•sales of the SWU component of LEU,
•sales of natural uranium, and
•sales of enriched uranium product that include both the natural uranium and SWU components of LEU.
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 61% and 74% of our total revenue for the three and nine months ended September 30, 2022, respectively. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately 50% of revenue from our LEU segment since 2020. 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 natural 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 averaged approximately $7.6 million per order in the nine months ended September 30, 2022. As a result, a relatively small change in the timing of customer orders for LEU may cause significant variability in our operating results year over year.
Utility customers, in general, have the option to make payment but 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 Consolidated Financial Statements for further details.
Our financial performance over time can be affected significantly by changes in prices for SWU and natural uranium. Market prices for SWU and uranium significantly declined from 2011 until mid-2018, when they began to trend upward. More recently, market uncertainty in the wake of the Russian invasion of Ukraine has driven SWU and uranium prices sharply higher. Since our sales order book includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags published price indicators by several years. While some 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.
Recent proposals to severely limit or cut off supply of LEU from Russia have drawn attention to the potential for significant tightening of supplies in the market. Russian enrichment plants represent 46% of the world’s capacity, and Russian capacity significantly exceeds its domestic needs. According to data from the World Nuclear Association, the annual enrichment requirements of reactors worldwide outside of Russia vastly exceeds the available supply of non-Russian enrichment, which potentially threatens the viability of some reactors, including those in the United States. While inventories and increased production at non-Russian plants may mitigate the shortfall, these options would not fully replace Russian supply. Deployment of new capacity ultimately could replace Russian enrichment but this capacity will take a number of years and significant funding from private or government sources to come on line.
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*![leu-20220930_g1.jpg](https://content.edgar-online.com/edgar_conv_img/2022/11/09/0001065059-22-000034_leu-20220930_g1.jpg)
* 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 primarily denominated in U.S. dollars. We have a SWU supply agreement, nominally commencing in 2023, with prices payable in a combination of U.S. dollars and euros, but with a contract-defined exchange rate.
On occasion, we will accept payment for SWU in the form of natural 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 natural uranium at contract inception, or as the quantity of natural uranium is finalized, if variable.
Cost of sales for SWU and natural uranium is based on the amount of SWU and natural 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. 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 government and private sector customers, we seek to leverage our domestic enrichment technology and 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. 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 near Piketon, Ohio.
Government Contracting
On October 31, 2019, we signed the three-year cost-share HALEU Contract with DOE to deploy a cascade of centrifuges to demonstrate production of HALEU for advanced reactors. The 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. 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. Centrus is competing for a follow-on contract to complete construction, make the cascade operational, and then operate the cascade and produce HALEU. Centrus is the only company with an NRC license to enrich HALEU.
Commercial Contracting
Since March of 2018, Centrus has provided design, technical, and resource support for X-energy related to its Tri-Structural Isotropic (“TRISO”) fuel manufacturing process. Currently, work is being performed under a services agreement with X-energy signed in August 2021 to provide services for detailed design of the TRISO fuel fabrication facility and various support services for establishing their TRISO Research and Development Center. X-energy is funded under the current DOE cooperative agreement titled Advanced Reactor Demonstration Program (“ARDP”). At our discretion, the task orders under the new agreement may include in-kind contributions that we are not currently providing, but, may provide in the future. The existing contractual scope of work expires on December 31, 2022, and may or may not be extended at the discretion of the X-energy.
Prior Site Services Work
We formerly performed sites services work under contracts with DOE and its contractors at the former Portsmouth GDP. In September 2021, the Company and DOE fully settled the Company’s claims for reimbursement of certain pension and postretirement benefit costs incurred in connection with a past cost-reimbursable contract for work performed at the Portsmouth GDP. Under the terms of the settlement agreement, DOE paid the Company $43.5 million in September 2021, of which $33.8 million was contributed in September 2021 to the pension plan for its subsidiary United States Enrichment Corp. (“Enrichment Corp.”) and $9.7 million was deposited in October 2021 in a trust for payment of postretirement health benefits payable by Enrichment Corp. The payment of $43.5 million is included in revenue of the Technical Solutions segment for the three and nine months ended September 30, 2021.
Results of Operations
Segment Information
The following tables present elements of the accompanying Consolidated Statements of Operations and Comprehensive Income that are categorized by segment (dollar amounts in millions):
Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
LEU segment | | | | | | | |
Revenue: | | | | | | | |
SWU revenue | $ | 7.7 | | | $ | 19.1 | | | $ | (11.4) | | | (60) | % |
Uranium revenue | 12.5 | | | 12.9 | | | (0.4) | | | (3) | % |
Total | 20.2 | | | 32.0 | | | (11.8) | | | (37) | % |
Cost of sales | 18.9 | | | 23.7 | | | (4.8) | | | (20) | % |
Gross profit | $ | 1.3 | | | $ | 8.3 | | | $ | (7.0) | | | (84) | % |
| | | | | | | |
Technical Solutions segment | | | | | | | |
Revenue | $ | 13.0 | | | $ | 59.3 | | | $ | (46.3) | | | (78) | % |
Cost of sales | 12.0 | | | 18.1 | | | (6.1) | | | (34) | % |
Gross profit | $ | 1.0 | | | $ | 41.2 | | | $ | (40.2) | | | (98) | % |
| | | | | | | |
Total | | | | | | | |
Revenue | $ | 33.2 | | | $ | 91.3 | | | $ | (58.1) | | | (64) | % |
Cost of sales | 30.9 | | | 41.8 | | | (10.9) | | | (26) | % |
Gross profit | $ | 2.3 | | | $ | 49.5 | | | $ | (47.2) | | | (95) | % |
Revenue
Revenue from the LEU segment was $20.2 million and $32.0 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $11.8 million (or 37%). The decrease is due to a 76% decrease in the average price of SWU sold, partially offset by a 60% increase in the volume of SWU sold, for the three months ended September 30, 2022, largely due to the variability in timing of utility customer orders and related contracts.
Revenue from uranium sales was $12.5 million and 12.9 million in the three months ended September 30, 2022 and 2021, respectively.
Revenue from the Technical Solutions segment was $13.0 million and $59.3 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $46.3 million (or 78%). Revenue in the third quarter of 2021 included $43.5 million related to the settlement of the Company’s claims for reimbursements for certain pension and postretirement benefits costs incurred in connection with a past cost-reimbursable contract performed at the Portsmouth GDP. Excluding this settlement, the decrease in revenue in the three months ended September 30, 2022, was primarily related to a $1.2 million decrease in revenue generated by the HALEU Contract and a $0.8 million decrease in revenue generated by the X-Energy contract, as well as a $0.8 million decrease across other contracts.
Cost of Sales
Cost of sales for the LEU segment was $18.9 million and $23.7 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $4.8 million (or 20%). The decrease is primarily a result of a $4.8 million charge to cost of sales for the three months ended September 30, 2021 for the revaluation of obligations for SWU borrowed.
Cost of sales for the Technical Solutions segment was $12.0 million and $18.1 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $6.1 million (or 34%). The decrease of $6.1 million in the three months ended September 30, 2022, is related to a reduction in costs of approximately $4.5 million associated with the HALEU Contract, $0.9 million associated with the X-energy contract, and $0.7 million associated with other contracts. For details on HALEU Contract accounting, refer to “Technical Solutions - Government Contracting” above.
Gross Profit
Gross profit for the LEU segment was $1.3 million and $8.3 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $7.0 million (or 84%). The $7.0 million decrease in gross profit in the three months ended September 30, 2022, was due primarily to a decrease in the average profit margin per SWU, which was partially offset by an increase in SWU sales volume.
Gross profit for the Technical Solutions segment was $1.0 million and $41.2 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $40.2 million (or 98%). Gross profit in the three months ended September 30, 2021, included $43.5 million of revenue related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE. Excluding the settlement with DOE, gross profit increased $3.3 million in the three-month period mainly due to a $3.2 million increase in the gross profit generated from the HALEU Contract. The increase related to the HALEU Contract is primarily attributable to the Company’s costs under the HALEU Contract being fully recoverable in the current year, as the Company had contributed its contractually required cost share prior to December 31, 2021.
Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
LEU segment | | | | | | | |
Revenue: | | | | | | | |
SWU revenue | $ | 106.0 | | | $ | 102.4 | | | $ | 3.6 | | | 4 | % |
Uranium revenue | 17.4 | | | 12.9 | | | 4.5 | | | 35 | % |
Total | 123.4 | | | 115.3 | | | 8.1 | | | 7 | % |
Cost of sales | 59.8 | | | 76.1 | | | (16.3) | | | (21) | % |
Gross profit | $ | 63.6 | | | $ | 39.2 | | | $ | 24.4 | | | 62 | % |
| | | | | | | |
Technical Solutions segment | | | | | | | |
Revenue | $ | 44.2 | | | $ | 94.0 | | | $ | (49.8) | | | (53) | % |
Cost of sales | 38.3 | | | 54.9 | | | (16.6) | | | (30) | % |
Gross profit | $ | 5.9 | | | $ | 39.1 | | | $ | (33.2) | | | (85) | % |
| | | | | | | |
Total | | | | | | | |
Revenue | $ | 167.6 | | | $ | 209.3 | | | $ | (41.7) | | | (20) | % |
Cost of sales | 98.1 | | | 131.0 | | | (32.9) | | | (25) | % |
Gross profit | $ | 69.5 | | | $ | 78.3 | | | $ | (8.8) | | | (11) | % |
Revenue
Revenue from the LEU segment was $123.4 million and $115.3 million in the nine months ended September 30, 2022 and 2021, respectively, an increase of $8.1 million (or 7%). The increase is due to a 19% increase in the average price of SWU, partially offset by a 13% decrease in the volume of SWU sold in the nine months ended September 30, 2022, largely due to the variability in timing of utility customer orders and the contracts under which SWU were sold during the periods.
Revenue from uranium sales was $17.4 million and $12.9 million in the nine months ended September 30, 2022 and 2021, respectively. For the nine-month period, the average price increased 30%, partially offset by a decrease in sales volume of 16%.
Revenue from the Technical Solutions segment was $44.2 million and $94.0 million in the nine months ended September 30, 2022 and 2021, respectively, a decrease of $49.8 million (or 53%). Revenue in the third quarter of 2021 included $43.5 million related to the settlement of the Company’s claims for reimbursements for certain pension and postretirement benefits costs incurred in connection with a past cost-reimbursable contract performed at the Portsmouth GDP. Excluding the settlement with DOE, the $6.3 million decrease in revenue in the nine months ended September 30, 2022, was primarily related to a $7.8 million decrease in revenue from the HALEU Contract and a $2.6 million decrease in revenue from X-energy, partially offset by a $4.1 million increase in revenue generated from other contracts.
Cost of Sales
Cost of sales for the LEU segment was $59.8 million and $76.1 million in the nine months ended September 30, 2022 and 2021, respectively, a decrease of $16.3 million (or 21%). The decrease largely reflects decreases in the volume of SWU sold and in the average SWU unit cost. The volume of SWU sold decreased 13% for the nine months ended September 30, 2022 and the average SWU unit cost decreased 21%. Cost of sales for the nine months ended September 30, 2022 and 2021, included $5.5 million and $4.8 million, respectively, for the revaluation of obligations for SWU borrowed in 2018-2022.
Cost of sales for the Technical Solutions segment was $38.3 million and $54.9 million in the nine months ended September 30, 2022 and 2021, respectively, a decrease of $16.6 million (or 30%). The decrease of $16.6 million in the nine months ended September 30, 2022, is related to a reduction in costs of approximately $18.1 million associated with the HALEU Contract and a reduction in costs of approximately $3.0 million associated with the X-energy contract, partially offset by a $4.5 million increase in costs related to costs incurred by new contract work. For details on HALEU Contract accounting, refer to “Technical Solutions - Government Contracting” above.
Gross Profit
Gross profit for the LEU segment was $63.6 million and $39.2 million in the nine months ended September 30, 2022 and 2021, respectively, an increase of $24.4 million (or 62%). The increase in gross profit was due primarily to an increase in the average profit margin per SWU, which was partially offset by a decrease in SWU sales volume.
Gross profit for the Technical Solutions segment was $5.9 million and $39.1 million in the nine months ended September 30, 2022 and 2021, respectively, a decrease of $33.2 million (or 85%). Gross profit in the nine months ended September 30, 2021 included $43.5 million of revenue related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE. Excluding the settlement with DOE, gross profit from the Technical Solutions segment increased $10.3 million over the nine months ended September 30, 2021. This increase in gross profit in the nine months ended September 30, 2022 is related to a $10.2 million increase in the gross profit generated from the HALEU Contract which included a $1.6 million rent credit for the Piketon Facility, and a $0.4 million increase in gross profit generated from the X-energy contract. The remaining $0.3 million net decrease in the gross margin is attributable to the Company’s other contracts. The increase related to the HALEU Contract is primarily attributable to the Company’s costs under the HALEU Contract being fully recoverable in the current year as the Company had contributed its contractually required cost share prior to December 31, 2021.
Non-Segment Information
The following tables present elements of the accompanying Consolidated Statements of Operations and Comprehensive Income that are not categorized by segment (dollar amounts in millions):
Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
Gross profit | $ | 2.3 | | | $ | 49.5 | | | $ | (47.2) | | | (95) | % |
Advanced technology costs | 5.4 | | | 0.6 | | | 4.8 | | | 800 | % |
Selling, general and administrative | 8.6 | | | 9.0 | | | (0.4) | | | (4) | % |
Amortization of intangible assets | 1.1 | | | 1.7 | | | (0.6) | | | (35) | % |
| | | | | | | |
Operating income (loss) | (12.8) | | | 38.2 | | | (51.0) | | | (134) | % |
Nonoperating components of net periodic benefit income | (4.4) | | | (4.3) | | | (0.1) | | | 2 | % |
Interest expense | 0.1 | | | — | | | 0.1 | | | n/a |
Investment income | (0.6) | | | — | | | (0.6) | | | n/a |
Income (loss) before income taxes | (7.9) | | | 42.5 | | | (50.4) | | | (119) | % |
Income tax expense (benefit) | (1.8) | | | 0.4 | | | (2.2) | | | (550) | % |
Net income (loss) | $ | (6.1) | | | $ | 42.1 | | | $ | (48.2) | | | (114) | % |
Advanced Technology Costs
Advanced technology costs were $5.4 million and $0.6 million in the three months ended September 30, 2022 and 2021, respectively, an increase of $4.8 million (or 800%). Advanced technology costs consist of American Centrifuge work and related expenses that are outside of our customer contracts in the Technical Solutions segment, including bid and proposal activities and work to improve our centrifuge technology.
Amortization of Intangible Assets
Amortization of intangible assets was $1.1 million and $1.7 million in the three months ended September 30, 2022 and 2021, respectively, an increase of $0.6 million (or 35%). 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.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to income of $4.4 million and $4.3 million in the three months ended September 30, 2022 and 2021, respectively, an increase of $0.1 million (or 2%).
Nonoperating components of net periodic benefit expense (income) consist primarily of the expected return on plan assets, offset by interest cost as the discounted present value of benefit obligations nears payment, as described in Note 8, Pension and Postretirement Health and Life Benefits of the Consolidated Financial Statements.
Income Tax Expense (Benefit)
Income tax benefit was $1.8 million and income tax expense was $0.4 million in the three months ended September 30, 2022 and 2021, respectively, a decrease of $2.2 million (or 550%). Income tax expense in all periods resulted from applying the annual effective tax rate to year-to-date income from continuing operations adjusted for discrete items; however, the company had minimal income tax expense for the three months ended September 30, 2021 as it was in a full federal valuation allowance. The Company had released a portion of its federal valuation allowance at the end of 2021 however the Company had a loss before income taxes and was not able to utilize any deferred tax assets for the three months ended September 30, 2022. For more information about the valuation allowance, see Note 13, Income Taxes, in our Consolidated Financial Statements on Form 10-K for the year ended December 31, 2021. Based on Centrus’ analysis, there was no change to the tax valuation allowance during the three months ended September 30, 2022.
Net Income (Loss)
Net loss was $6.1 million in the three months ended September 30, 2022, compared to net income of $42.1 million in the three months ended September 30, 2021, a decrease of $48.2 million (or 114%). The $48.2 million decrease in net income for the three months ended September 30, 2022 was primarily attributable to a $40.2 million decrease in gross profit from the Technical Solutions segment and a $7.0 million decrease in gross profit from the LEU segment. The decrease in gross profit from the Technical Solutions segment was driven by the $43.5 million of revenue in the three months ended September 30, 2021 related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE.
Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
Gross profit | $ | 69.5 | | | $ | 78.3 | | | $ | (8.8) | | | (11) | % |
Advanced technology costs | 10.0 | | | 1.3 | | | 8.7 | | | 669 | % |
Selling, general and administrative | 24.4 | | | 25.0 | | | (0.6) | | | (2) | % |
Amortization of intangible assets | 6.2 | | | 5.4 | | | 0.8 | | | 15 | % |
Special charges for workforce reductions | 0.5 | | | — | | | 0.5 | | | n/a |
Operating income | 28.4 | | | 46.6 | | | (18.2) | | | (39) | % |
Nonoperating components of net periodic benefit income | (11.1) | | | (12.9) | | | 1.8 | | | (14) | % |
Interest expense | 0.1 | | | — | | | 0.1 | | | n/a |
Investment income | (0.8) | | | — | | | (0.8) | | | n/a |
Income before income taxes | 40.2 | | | 59.5 | | | (19.3) | | | (32) | % |
Income tax expense | 9.3 | | | 0.7 | | | 8.6 | | | 1229 | % |
Net income | $ | 30.9 | | | $ | 58.8 | | | $ | (27.9) | | | (47) | % |
| | | | | | | |
Advanced Technology Costs
Advanced technology costs were $10.0 million and $1.3 million in the nine months ended September 30, 2022 and 2021, respectively, an increase of $8.7 million (or 669%). Advanced technology costs consist of American Centrifuge work and related expenses that are outside of our customer contracts in the Technical Solutions segment, including bid and proposal activities and work to improve our centrifuge technology.
Amortization of Intangible Assets
Amortization of intangible assets was $6.2 million and $5.4 million in the nine months ended September 30, 2022 and 2021, respectively, an increase of $0.8 million (or 15%). 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.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to income of $11.1 million and $12.9 million for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $1.8 million, or (14%). Nonoperating components of net periodic benefit expense (income) consist primarily of the expected return on plan assets, offset by interest cost as the discounted present value of benefit obligations nears payment, as described in Note 8, Pension and Postretirement Health and Life Benefits, of the Consolidated Financial Statements.
Income Tax Expense
Income tax expense was $9.3 million and $0.7 million in the nine months ended September 30, 2022 and 2021, respectively, an increase of $8.6 million (or 1229%). Income tax expense in all periods resulted from applying the annual effective tax rate to year-to-date income from continuing operations adjusted for discrete items; however, the company had minimal income tax expense for the nine months ended September 30, 2021 as it was in a full federal valuation allowance. The Company had released a portion of its federal valuation allowance at the end of 2021 which has enabled it to use its deferred tax assets for the income from continuing operations in the nine months ended September 30, 2022. For more information about the valuation allowance, see Note 13, Income Taxes, in our Consolidated Financial Statements on Form 10-K for the year ended December 31, 2021. Based on Centrus’ analysis, there was no change to the tax valuation allowance in the nine months ended September 30, 2022.
Net Income
Net income was $30.9 million and $58.8 million in the nine months ended September 30, 2022 and 2021, respectively, a decrease of $27.9 million (or 47%). The $27.9 million decrease in net income for the nine months ended September 30, 2022 was primarily attributable to a decrease in gross profit of $33.2 million in the Technical Solutions segment, an increase in Advanced Technology Costs of $8.7 million, and an increase in income tax expense of $8.6 million, discussed above. This was partially offset by an increase in gross profit of $24.4 million in the LEU segment. The decrease in gross profit from the Technical Solutions segment was driven by the $43.5 million of revenue in the nine months ended September 30, 2021 related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE.
Net Income (Loss) per Share
Refer to Note 9, Net Income (Loss) per Share, of the Consolidated Financial Statements.
The Company measures Net Income (Loss) and Net Income (Loss) per Share both on a GAAP basis and on an adjusted basis to exclude deemed dividends allocable to retired preferred stock shares (“Adjusted Net Income (Loss)” and “Adjusted Net Income (Loss) per Share”). We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share, which are non-GAAP financial measures, provide investors with additional understanding of the Company’s financial performance as well as its strategic financial planning analysis and period-to-period comparability. These metrics are useful to investors because they reflect how management evaluates the Company’s ongoing operating performance from period-to-period after removing certain transactions and activities that affect comparability of the metrics and are not reflective of the Company’s core operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator (in millions): | | | | | | | |
Net income (loss) | $ | (6.1) | | | $ | 42.1 | | | $ | 30.9 | | | $ | 58.8 | |
Less: Preferred stock dividends - undeclared and cumulative | — | | | 0.7 | | | — | | | 2.1 | |
Less: Distributed earnings allocable to retired preferred shares | — | | | — | | | — | | | 6.6 | |
Net income (loss) allocable to common stockholders | $ | (6.1) | | | $ | 41.4 | | | $ | 30.9 | | | $ | 50.1 | |
| | | | | | | |
Plus: Distributed earnings allocable to retired preferred shares | $ | — | | | $ | — | | | $ | — | | | $ | 6.6 | |
| | | | | | | |
Adjusted net income (loss), including distributed earnings allocable to retired preferred shares (Non-GAAP) | $ | (6.1) | | | $ | 41.4 | | | $ | 30.9 | | | $ | 56.7 | |
| | | | | | | |
Denominator (in thousands) (a): | | | | | | | |
Average common shares outstanding - basic | 14,623 | | | 13,741 | | | 14,586 | | | 13,365 | |
Average common shares outstanding - diluted | 14,623 | | | 14,056 | | | 14,974 | | | 13,702 | |
| | | | | | | |
Net income (loss) per share (in dollars): | | | | | | | |
Basic | $ | (0.42) | | | $ | 3.01 | | | $ | 2.12 | | | $ | 3.75 | |
Diluted | $ | (0.42) | | | $ | 2.95 | | | $ | 2.06 | | | $ | 3.66 | |
| | | | | | | |
Plus: Effect of distributed earnings allocable to retired preferred shares, per common share (in dollars): | | | | | | | |
Basic | $ | — | | | $ | — | | | $ | — | | | $ | 0.49 | |
Diluted | $ | — | | | $ | — | | | $ | — | | | $ | 0.48 | |
| | | | | | | |
Adjusted Net Income (Loss) per Share (Non-GAAP) (in dollars): | | | | | | | |
Basic | $ | (0.42) | | | $ | 3.01 | | | $ | 2.12 | | | $ | 4.24 | |
Diluted | $ | (0.42) | | | $ | 2.95 | | | $ | 2.06 | | | $ | 4.14 | |
(a) For details related to average shares outstanding, refer to Note 9, Net Income (Loss) per Share of the Consolidated Financial Statements.
Liquidity and Capital Resources
We ended the third quarter of 2022, with a consolidated cash balance of $131.7 million. We anticipate having adequate liquidity to support our business operations for at least the next 12 months from the date of this Quarterly 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, 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. Under the HALEU Contract, the Company contributed its required contribution through November 30, 2021. 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.
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. 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 ARDP. Our HALEU Contract expires in November 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. If we win a contract from DOE to operate the cascade, our goal is to modularly scale up the facility as demand for HALEU grows in the commercial and government sectors, subject to the availability of funding and/or contracts to purchase the output of the plant. For further discussion, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.
On June 28, 2022, the DOE released an RFP for the completion and operation of the demonstration cascade. If a contract is awarded to the Company under the terms proposed by DOE, the cost share could have a material impact on the Company’s liquidity during Phase 1 of the base contract but the degree of impact cannot be estimated at this time. If funding by the U.S. government for research, development and demonstration of gas centrifuge technology is reduced or discontinued, or we are not awarded a DOE contract to operate the cascade we are now constructing under the HALEU Contract, such actions may have a material adverse impact on our ability to deploy the American Centrifuge technology and on our liquidity.
Capital expenditures of approximately $1.0 million are anticipated over the next 12 months.
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.
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):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash provided by (used in) operating activities | $ | (35.1) | | | $ | 0.8 | |
Cash used in investing activities | (0.6) | | | (0.7) | |
Cash provided by (used in) financing activities | (8.1) | | | 18.9 | |
Increase (decrease) in cash, cash equivalents and restricted cash | $ | (43.8) | | | $ | 19.0 | |
Operating Activities
In the nine months ended September 30, 2022, net cash used in operating activities was $35.1 million. The net decrease was due to an increase in payments made to suppliers of approximately $24.0 million as well as a decrease in cash collected from customers of approximately $24.0 million, which resulted from the timing of customer shipments and related contract terms. This remaining difference was primarily related to a reduction in disbursements from prior year for our Technical Solutions segment.
In the nine months ended September 30, 2021, net cash provided by operating activities was $0.8 million. Net income of $58.8 million in the nine-month period, net of non-cash expenses, was a significant source of cash. Income included the $43.5 million recovery of claims for reimbursement for costs related to past contract services performed. The net increase is also the result of the $12.7 million decrease in accounts receivable. The increase in cash is partially offset by a net reduction of $7.8 million in deferred revenue and advances from customers which reflects revenue recognized in the current period related to payments received in advance in a prior period. Uses of cash are also reflected in the decrease in pension and postretirement benefit liabilities of $55.3 million and the decrease in payables under SWU purchase agreements of $19.0 million.
Investing Activities
Capital expenditures were $0.6 million and $0.7 million in the nine months ended September 30, 2022 and 2021, respectively.
Financing Activities
In both the nine months ended September 30, 2022 and 2021, payments of $6.1 million of interest classified as debt are classified as a financing activity. Refer to Note 6, Debt, of the Consolidated Financial Statements regarding the accounting for the 8.25% notes (the “8.25% Notes”) maturing in February 2027. In the nine months ended September 30, 2021, net cash provided by financing activities also included net proceeds of $27.2 million raised from the issuance of common stock pursuant to a Registration Statement on Form S-3.
Working Capital
The following table summarizes the Company’s working capital (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 131.7 | | | $ | 193.8 | |
Accounts receivable | 7.4 | | | 29.1 | |
Inventories, net | 133.9 | | | 82.7 | |
Current debt | (6.1) | | | (6.1) | |
Deferred revenue and advances from customers, net of deferred costs | (129.6) | | | (159.8) | |
Other current assets and liabilities, net | (26.3) | | | (67.1) | |
Working capital | $ | 111.0 | | | $ | 72.6 | |
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 our 8.25% Notes. 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 6, Debt, of the Consolidated Financial Statements and Note 8, Debt, of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Commitments under Long-Term SWU Purchase Agreements
Refer to Note 11, 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, with a view to deploying a commercial enrichment facility over the long term once market conditions recover.
Off-Balance Sheet Arrangements
Other than our SWU purchase commitments and the license agreement with DOE relating to the American Centrifuge technology, there were no material off-balance sheet arrangements at September 30, 2022.
Critical Accounting Policies Estimates
There have been no significant changes to the critical accounting estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.