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 war in Ukraine. See “Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.
Overview
Centrus, 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) 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 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.
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 increased substantially, reaching $110 per SWU by December 31, 2022. In 2023, spot prices continue to increase, reaching $130 on March 31, 2023. This represents an increase of 18% since the beginning of the year and 282% over the 2018 historic low. This surge in the SWU spot price beginning in 2022 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.
When Russian supply is included, the uranium enrichment segment of the global nuclear fuel market is oversupplied, but without Russian supply, the global market for uranium enrichment would be undersupplied. Changes in the supply-demand balance and in the competitive landscape arising from the war in Ukraine may continue to affect pricing trends, change customer spending patterns, and create uncertainty in the uranium market. At the same time, there remains uncertainty about future demand for nuclear power generation. To address these changes and uncertainties, we will continue to evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions.
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.
Under the HALEU Demonstration Contract, Centrus constructed a cascade of sixteen AC100M centrifuges in Piketon, Ohio, for the DOE to demonstrate HALEU production. The Company’s goal is to complete the demonstration and scale up production of HALEU, to meet the needs of new and existing reactors as well as national security and other U.S. government requirements for enriched uranium.
The HALEU Demonstration Contract was originally set to expire on June 1, 2022. However, the DOE extended the Contract to November 30, 2022 with closeout activities to be completed later this year. Due to challenges DOE experienced in providing withdrawal cylinders as government furnished equipment, the DOE elected to change the scope of the HALEU Demonstration Contract and moved the operational portion of the demonstration to a new, competitively-awarded contract that would provide for operations beyond the term of the HALEU Demonstration Contract. DOE incrementally funded the HALEU Demonstration Contract with total funding to date of $173.0 million.
On November 10, 2022, after a competitive solicitation, the DOE awarded the HALEU Operation Contract to the Company with work beginning December 1, 2022. The base contract value is approximately $150 million in two phases through 2024. Phase 1 includes an approximately $30 million cost share contribution from Centrus matched by approximately $30 million from the DOE to complete construction of the cascade, begin operations and produce the initial 20 kilograms of HALEU UF6 by December 31, 2023.
Phase 2 of the contract includes continued operations and maintenance, and production for a full year at an annual production rate of 900 kilograms of HALEU UF6, by no later than December 31, 2024. The DOE will own the HALEU produced from the demonstration cascade and Centrus will be compensated on a cost-plus-incentive-fee basis, with an expected Phase 2 contract value of approximately $90 million, subject to appropriations. The HALEU Operation Contract also gives DOE options to pay for up to nine additional years of production from the cascade beyond the base contract; those options are at the DOE’s sole discretion and subject to the availability of Congressional appropriations. Concurrently, pursuant to an amendment to our lease for the Piketon facility, the DOE assumed all D&D liabilities arising out of the HALEU Operation Contract. At this time, work is progressing on-schedule and on-budget for production of the initial 20 kilograms of HALEU UF6. DOE is funding the contract incrementally with total funding to date of $33.0 million.
On February 9, 2023, the Company announced that construction and initial testing of the cascade and most of the support systems was complete. Before HALEU production can begin, the Company needs to finish construction of the remaining support systems, including a fissile materials storage area, to allow HALEU produced for the DOE to be stored onsite, and complete final operational readiness reviews with the NRC to obtain approval for production to begin. The operational readiness reviews are required under the Company’s NRC license, which was successfully amended in 2021 to allow for HALEU production and made the Piketon site the only NRC-licensed HALEU production facility in the United States.
The DOE is contemplating additional contracts to ensure availability of HALEU for the ARDP and for the advanced reactor market, in general, and received a $700 million appropriation from the Inflation Reduction Act as a down payment on establishing a domestic supply chain for HALEU. Centrus believes it is well positioned to compete for any follow-on contract(s) to expand HALEU production capability at the Piketon site.
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 off-take 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 ARDP, nine will require HALEU. In addition, the first non-light water reactor to have begun active NRC-license review requires HALEU. In June 2022, the U.S. Department of Defense awarded a contract to construct a prototype HALEU-fueled mobile microreactor by 2024 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 is funding an effort called Demonstration Rocket for Agile Cislunar Operations, which aims to demonstrate a HALEU-fueled nuclear thermal propulsion system that could eventually support missions to the moon and Mars.
We are also actively considering and expect to consider potential strategic transactions from time to time, 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. For further discussion, refer to Liquidity and Capital Resources 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 nuclear power 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 WNA, as of March 2023, there were over 50 reactors under construction worldwide, about a third of which are in China. The United States, with over 90 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 the expansion of subsidized renewable energy as well as relatively low cost natural gas resources in recent years, although natural gas prices in the U.S. electricity sector tripled between 2020 and 2022 according to data from US EIA. 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, two large reactors are currently under construction, and the DOE recently released a report outlining a pathway to deployment of approximately 200 gigawatts of additional capacity by 2050 which would triple the nuclear energy capacity in the United States.
The IEA projects that global nuclear energy generation will grow substantially in the next three decades. In the IEA’s 2022 World Energy Outlook, nuclear generation is forecasted to grow by 25 percent by 2030 and 46 percent by 2040 under the “Stated Policies” scenario. In the “Net Zero Emissions by 2050” scenario, nuclear generation would grow by 46 percent by 2030 and more than double by 2040. Notably, these estimates of the global growth of nuclear generation represent a significant increase from the IEA’s 2021 World Energy Outlook, reflecting improving expectations for the future prospects of nuclear energy.
![IEAI Graphic.jpg](https://content.edgar-online.com/edgar_conv_img/2023/05/09/0001065059-23-000015_leu-20230331_g1.jpg)
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. Ten reactors in Japan have restarted and an additional seven are expected to restart in 2023; more of Japan’s reactors are expected to restart in subsequent years. Due to the war in Ukraine, the EU 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 DOC reached an agreement with the Russian Federation on an extension of the RSA, 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 TENEX Supply Contract. This outcome allowed for sufficient quota for Centrus to continue serving its utility customers and support its investments in building new capacity.
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 products, services, 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, or implement the TENEX Supply Contract, 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. For example, due to restrictions imposed by Canada on the ability of Canadian Persons to provide ocean transportation services to Russia, a permit is required for our shipper, a Canadian company, to transport to the United States, the LEU that we procure under the TENEX Supply Contract. A Canadian permit issued to our shipper and was recently extended to July 2024, but for so long as the sanctions remain in place, the shipper will require further extensions for us to continue use the shipper for imports of this LEU beyond 2024.
In response to the war in Ukraine, there have been proposals in the 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 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.
For further discussion of these risks and uncertainties, refer to Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022.
Operating Results
Our revenues, operating results, and cash flows can fluctuate significantly from quarter to quarter and year to year. Our 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 2023-2027.
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 2023. Please see Forward Looking Statements at the beginning of this Quarterly Report on Form 10-Q.
Our Order Book in the LEU segment extends to 2029. As of March 31, 2023 and December 31, 2022, 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 March 31, 2023, 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. However, these medium and long-term contracts are subject to significant risks and uncertainties, including existing import laws and restrictions such as 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, 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 sales or purchases of SWU or uranium or goods or services required for the sale, 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 LEU 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; and
•Market, international trade, and other conditions impacting Centrus’ customers and the industry.
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, 2022.
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 Operation Contract and other contracts with public and private sector customers.
SWU and Uranium Sales
Revenue from our LEU segment accounted for approximately 88% of our total revenue for the three months ended March 31, 2023. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately 45% of revenue from our LEU segment since 2021. 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. Individual customer orders for the SWU component of LEU fulfilled in the three months ended March 31, 2023 averaged approximately $5.8 million per order. As a result, a relatively small shift 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 sales Order Book have 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 WNA, 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 and/or government sources to come on line.
The following chart summarizes long-term and spot SWU price indicators, and a spot price indicator for 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 sales that may be subject to 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 and 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 Operation 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.
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 March 31, 2023 Compared with Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | $ Change | | % Change |
LEU segment | | | | | | | |
Revenue: | | | | | | | |
SWU revenue | $ | 58.8 | | | $ | 12.8 | | | $ | 46.0 | | | 359 | % |
Uranium revenue | — | | | 4.9 | | | (4.9) | | | (100) | % |
Total | 58.8 | | | 17.7 | | | 41.1 | | | 232 | % |
Cost of sales | 34.9 | | | 14.8 | | | 20.1 | | | 136 | % |
Gross profit | $ | 23.9 | | | $ | 2.9 | | | $ | 21.0 | | | 724 | % |
| | | | | | | |
Technical Solutions segment | | | | | | | |
Revenue | $ | 8.1 | | | $ | 17.6 | | | $ | (9.5) | | | (54) | % |
Cost of sales | 9.0 | | | 14.2 | | | (5.2) | | | (37) | % |
Gross profit (loss) | $ | (0.9) | | | $ | 3.4 | | | $ | (4.3) | | | (126) | % |
| | | | | | | |
Total | | | | | | | |
Revenue | $ | 66.9 | | | $ | 35.3 | | | $ | 31.6 | | | 90 | % |
Cost of sales | 43.9 | | | 29.0 | | | 14.9 | | | 51 | % |
Gross profit | $ | 23.0 | | | $ | 6.3 | | | $ | 16.7 | | | 265 | % |
Revenue
Revenue from the LEU segment was $58.8 million and $17.7 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $41.1 million (or 232%). The increase is primarily due to a 206% increase in the volume of SWU sold and a 53% increase in the average price of SWU sold.
Revenue from the Technical Solutions segment was $8.1 million and $17.6 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $9.5 million (or 54%). The decrease was primarily related to a $11.6 million decrease in revenue generated by the HALEU Demonstration Contract, as well as a $5.6 million decrease across other contracts, partially offset by $7.7 million in revenue generated by the HALEU Operation Contract.
Cost of Sales
Cost of sales for the LEU segment was $34.9 million and $14.8 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $20.1 million (or 136%). The increase is primarily due to a 206% increase in the volume of SWU sold.
Cost of sales for the Technical Solutions segment was $9.0 million and $14.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $5.2 million (or 37%). The decrease of $5.2 million for the three months ended March 31, 2023, is related to a reduction in costs of approximately $7.3 million associated with the HALEU Demonstration Contract and $6.1 million associated with other contracts, partially offset by $8.2 million of costs incurred for the HALEU Operation Contract. For details on HALEU Demonstration Contract and HALEU Operation Contract accounting, refer to “Technical Solutions Segment” above.
Gross Profit
Gross profit for the LEU segment was $23.9 million and $2.9 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $21.0 million (or 724%). The $21.0 million increase in gross profit for the three months ended March 31, 2023 was due primarily to an increase in the average profit margin per SWU and an increase in SWU sales volume.
Gross profit/(loss) for the Technical Solutions segment was ($0.9) million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $4.3 million (or 126%). The gross profit change was attributable to the wind down of the HALEU Demonstration Contract.
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 March 31, 2023 Compared with Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | $ Change | | % Change |
Gross profit | $ | 23.0 | | | $ | 6.3 | | | $ | 16.7 | | | 265 | % |
Advanced technology costs | 3.4 | | | 1.1 | | | 2.3 | | | 209 | % |
Selling, general and administrative | 10.3 | | | 7.5 | | | 2.8 | | | 37 | % |
Amortization of intangible assets | 1.1 | | | 1.1 | | | — | | | — | % |
Special charges for workforce reductions | (0.1) | | | — | | | (0.1) | | | n/a |
Operating income (loss) | 8.3 | | | (3.4) | | | 11.7 | | | 344 | % |
Nonoperating components of net periodic benefit loss (income) | 0.3 | | | (3.3) | | | 3.6 | | | 109 | % |
Interest expense | 0.3 | | | — | | | 0.3 | | | n/a |
Investment income | (1.9) | | | — | | | (1.9) | | | n/a |
Income (loss) before income taxes | 9.6 | | | (0.1) | | | 9.7 | | | 9,700 | % |
Income tax expense | 2.4 | | | 0.3 | | | 2.1 | | | 700 | % |
Net income (loss) | $ | 7.2 | | | $ | (0.4) | | | $ | 7.6 | | | 1,900 | % |
Advanced Technology Costs
Advanced technology costs were $3.4 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $2.3 million (or 209%). 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.
Selling, General and Administrative
Selling, general and administrative costs were $10.3 million and $7.5 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $2.8 million (or 37%). This increase was due primarily to an increase in employee-related expenses, including equity related compensation.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) were $0.3 million and ($3.3) million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $3.6 million (or 109%). 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 $2.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $2.1 million (or 700%). 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. 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, 2022. Based on Centrus’ analysis, there was no change to the tax valuation allowance during the three months ended March 31, 2023.
Net Income (Loss)
Net income/(loss) was $7.2 million and ($0.4) million for the three months ended March 31, 2023 and 2022, respectively, an increase of $7.6 million (or 1,900%). The $7.6 million increase in net income for the three months ended March 31, 2023 was primarily attributable to a $21.0 million increase in gross profit from the LEU segment, partially offset by a $4.3 million decrease in gross profit from the Technical Solutions segment.
Liquidity and Capital Resources
As of March 31, 2023, the Company had a consolidated cash and cash equivalents balance of $188.8 million. In addition, there was $29.8 million of restricted cash related to three inventory loans, which required a cash deposit into an escrow fund. See Note 3, Cash, Cash Equivalents, Restricted Cash of the Consolidated Financial Statements. The Company anticipates 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, 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.
The Company believes its 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 Demonstration Contract with DOE in October 2019. Under the HALEU Demonstration 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 Demonstration Contract period of performance ended in November 2022.
On November 10, 2022, the Company was awarded the HALEU Operation Contract. The HALEU Operation Contract provides for a 50/50 cost share contract for Phase 1 of the base contract to complete the cascade, begin operations and complete the initial, small quantity demonstration HALEU. Phase 2 includes continued operations and maintenance on a cost-plus-incentive-fee basis. Finally, the HALEU Operation Contract includes options for the government to unilaterally 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 Company’s 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.
Although the Company believes 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. 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, 2022.
If funding by the U.S. Government of gas centrifuge technology is reduced or discontinued, or we are not awarded a future DOE contract to continue to operate the cascade, 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 also actively considering and expect to consider potential strategic transactions from time to time, which at any given time may be in various stages of discussion diligence, or negotiation. These 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 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):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash used in operating activities | $ | (9.7) | | | $ | (12.6) | |
Cash used in investing activities | (0.3) | | | (0.1) | |
Cash provided by (used in) financing activities | 18.9 | | | (3.2) | |
Increase (decrease) in cash, cash equivalents and restricted cash | $ | 8.9 | | | $ | (15.9) | |
Operating Activities
For the three months ended March 31, 2023, net cash used in operating activities was $9.7 million. The net decrease was primarily due to $89.1 million of disbursements for operations, of which $59.4 million relates to payments for LEU inventory deliveries and cash outflows for the Technical Solutions segment, with the remaining disbursements including corporate administration, benefits claims, and advance technology costs. These cash outflows were partially offset by $74.8 million in cash collected from customers.
For the three months ended March 31, 2022, net cash used in operating activities was $12.6 million. The net decrease is due in large part to the decrease in payables under SWU purchase agreements of $28.3 million and a decrease in pension and postretirement benefit liabilities of $5.1 million, which was partially offset by a $16.6 million decrease in accounts receivable.
Investing Activities
Capital expenditures were $0.3 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.
Financing Activities
For the three months ended March 31, 2023, cash of $22.0 million was provided from the net proceeds related to the issuance of 722,568 shares of Class A Common Stock under an ATM offering. For both the three months ended March 31, 2023 and 2022, payments of $3.1 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 maturing in February 2027.
Working Capital
The following table summarizes the Company’s working capital (in millions):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 188.8 | | | $ | 179.9 | |
Accounts receivable | 34.1 | | | 38.1 | |
Inventories, net | 192.2 | | | 148.4 | |
Current debt | (6.1) | | | (6.1) | |
Deferred revenue and advances from customers, net of deferred costs | (137.6) | | | (137.5) | |
Other current assets and liabilities, net | (79.0) | | | (84.9) | |
Working capital | $ | 192.4 | | | $ | 137.9 | |
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 because we believe these uses of working capital are 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.
Common Stock Issuance
The Company sold an aggregate of 722,568 shares of its Class A Common Stock at the market price for a total of $24.4 million in the three months ended March 31, 2023. After expenses and commissions paid to the agents, the Company’s proceeds totaled $23.4 million. Additionally, the Company recorded direct costs of $0.2 million related to the issuance. Of the total proceeds, $1.2 million is included in Accounts Receivable at March 31, 2023. 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 two prospectus supplements dated December 31, 2020 and December 5, 2022, respectively. At present, the Company has $1.7 million remaining available for sale under the shelf registration statement, and may sell additional shares through the ATM offering. The Company has used and/or intends to use the net proceeds from this offering for working capital and general corporate purposes including, but not limited to, capital expenditures, investment in technology development and deployment, repayment of indebtedness, potential acquisitions and other business opportunities.
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, 2022.
Contractual Commitments
There have been no material changes to our contractual commitments from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 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 March 31, 2023.
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, 2022.