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 materially from results discussed in 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
Centrus Energy Corp., a Delawarecorporation (" Centrus," the "Company", "we" or "us"), is a trusted supplier of nuclear fuel and services for the nuclear power industry, which provides a reliable source of carbon free energy. References to "Centrus", the "Company", "our", or "we" include Centrus Energy Corp.and its wholly-owned subsidiaries as well as the predecessor to Centrus, unless the context indicates otherwise. Centrusoperates 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 nuclear fuel to customers that 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"). Centrusalso 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 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. As of December 31, 2021, spot price indicators for SWU were at $56, approximately a 65% increase since bottoming out at $34in August 2018. In the first quarter of 2022, the spot price indicators for SWU rose to $80which is an increase of 43% in a single quarter. This sudden surge in the spot price indicators for SWU is due to the volatility of the situation in Europe, and the dependency of the global economy on energy. The recent actions of Russian military forces in Ukrainehave escalated tensions between Russiaand the U.S.and Europe. As a result, the U.S.has imposed, and may continue imposing additional, financial and economic sanctions and export controls against certain Russian organizations and/or individuals. While sanctions imposed to date do not preclude imports of Russian uranium products, 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, even if sanctions or other restrictions are not imposed, the current events in Ukrainecould impact our ability to make future 20 -------------------------------------------------------------------------------- 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, an increase or decrease in market prices will have a corresponding impact on our cost of sales. In the years following the 2011 Fukushima accident in Japan, the published market prices for uranium enrichment declined more than 75% through mid-2018. While the monthly price indicators have since increased, the price levels are still below the prices before the Fukushima disaster. When Russian supply is included, the uranium enrichment segment of the nuclear fuel market is oversupplied, but without Russian supply, the global market is undersupplied for uranium enrichment. Changes in the supply-demand balance and in the competitive landscape affect pricing trends, change customer spending patterns, and create uncertainty. To address these changes, we have taken steps to adjust our cost structure; we may seek further adjustments to our cost structure and operations and evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions. 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 and climate objectives. Our technical solutions segment is also 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 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 Stateshas not had a domestic uranium enrichment capability suitable to meet U.S.national security requirements since the aging Paducah Gaseous Diffusion Plant ("Paducah GDP") shut down in 2013. Longstanding U.S.policy and binding nonproliferation agreements prohibit the use of foreign-origin enrichment technology for U.S.national security missions. Our AC100M centrifuge is currently the only deployment-ready U.S.uranium enrichment technology in the United Statesthat can meet these national security requirements. Centrusis 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 reactor and fuel designs, 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, 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 Councilin 2021 and 2020, 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, Centrusis 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 contract with DOEthat began in 2019, Centrushas been constructing a cascade of 16 AC100M centrifuges in Piketon, Ohioto demonstrate HALEU production. The DOEhas experienced a COVID-19 related supply chain delay in obtaining the HALEU storage cylinders it was supposed to provide under the contract. Since it is not possible to begin HALEU production without the storage cylinders, it would not be possible to complete the operational portion of the HALEU demonstration under the existing HALEU Contract, which in April 21-------------------------------------------------------------------------------- 2022, was extended to November 30, 2022, with authorization to work through August 31, 2022. As a result, the DOEelected 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 February 7, 2022, DOEissued a pre-solicitation notice for a request for proposal to complete the HALEU demonstration facility and to produce HALEU, noting that the "the Administration supports longer-term demonstration of production capability." The pre-solicitation notice outlines a two-phase approach. Phase 1 consists of completing installation of the centrifuges, which DOEexpects will take up to one year from contract signing, followed by one full year of cascade operations. The second phase consists of three optional, three-year extensions to produce HALEU, so that the prospective contract could help support a total of one to ten years of cascade operations in addition to completing construction and centrifuge installation. Centrusbelieves it is well-positioned to compete for the follow-on contract to operate the machines in Piketonbut there is no assurance that DOEwill award such contract to the Company. DOEhas not yet issued a Request for Proposals on the operations contract, but in the interim has continued to fund the existing contract and has incrementally increased the government's cost share ceiling under the HALEU Contract as funds have become available. Currently, DOEhas provided additional funding, and increased the government's cost share ceiling to $142.0 million. Additional COVID-19-related impacts, delays in DOE'sfurnishing equipment, or 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 does not currently have a contractual obligation to perform work in excess of the funding provided by DOEand, therefore, no additional loss has been accrued as of March 31, 2022. If the DOEdoes not commit to fully fund the additional costs, and the Company nevertheless commits to a plan to complete the demonstration cascade and produce HALEU, we will incur costs or losses in future periods that, if material, could have an adverse impact on our financial condition and liquidity. We believe our investment in the HALEU technology 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. 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 DOEfor 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 Defensealso plans 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 Forcealso announced plans to deploy a microreactor at Eielson Air Force Basein Alaskathat uses HALEU fuel. While the use of HALEU is not an express requirement of the Air Forceprogram, the vast majority of microreactor designs are expected to need HALEU. 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 more 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 Stateswith more restrictions currently being proposed by some in the U.S. Congress. Other foreign government-owned entities which 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% 22 --------------------------------------------------------------------------------
uranium 235 enrichment tests. This entity has publicly indicated 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.
The Company has taken actions to protect its workforce and to maintain critical operations during the COVID-19 pandemic. Travel, operational, and other restrictions imposed by the
U.S.and foreign governments may impact our ability to make future sales and may impact the ability of our suppliers, including our suppliers of low enriched uranium, to perform under their contracts. As of the date of this filing, our LEU segment operations have not been materially affected by the COVID-19 pandemic and we continue to work with our suppliers, fabricators, and customers to monitor the situation closely, including with respect to the impact of emerging variants. However, over the course of the HALEU Contract, our technical solutions segment has been impacted by supply chain disruptions and increased costs as a result of the pandemic. Further, the governments of states and counties in which we operate have from time to time issued orders imposing various restrictions, including prohibiting holding gatherings and closing nonessential businesses. Some of these restrictions remain in place and we continue to monitor and adjust as necessary. The Company has issued a policy requiring vaccinations subject to medical, religious, and other exemptions as required by law. In some cases, state laws preclude us from fully implementing our vaccination policy. The Company has also continued other measures to protect its workforce such as expanded telework to protect its workforce, to comply with government orders, and to maintain critical operations. We are working closely with DOEand we are continuing to make progress while implementing measures to protect our workforce. Further, the actions taken by our suppliers and government regulatory agencies to protect their workforces may impact our ability to obtain the necessary supplies and governmental reviews and approvals to timely complete the HALEU project. We are experiencing delays by our suppliers and increased costs from them as a result of the impact of the COVID-19. 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 for the period ending March 31, 2022.
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 January 2022, there were 57 reactors under construction worldwide, almost a third of which are in China. The United States, with 93 operating reactors, remains the world's largest market for nuclear fuel. The nuclear industry in the United States, Japan, and Europefaces 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. Eight U.S.reactors have prematurely shut down in recent years and several 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. 23 -------------------------------------------------------------------------------- As a consequence of the March 2011earthquake and tsunami in Japan, over 60 reactors in Japanand Germanywere taken offline, and other countries curtailed or slowed their construction of new reactors or accelerated the retirement of existing plants. While ten reactors in Japanhave restarted and more are expected to restart, supply and demand dynamics for nuclear fuel continue to be impacted. Due to the war in Ukraine, the European Unionis encouraging its member countries to reconsider the early retirement of existing plants in order to reduce reliance on Russian gas imports. In October 2020, the U.S. Department of Commercereached agreement with the Russian Federationon an extension of the 1992 Russian Suspension Agreement, a trade agreement which allows for Russian-origin nuclear fuel to be exported to the United Statesin 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 Statesthrough 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 Centrusto continue serving its utility customers. The war in Ukrainehas escalated tensions between Russiaand the United States. In response to the war and the actions of Russian forces in Ukraine, the U.S.government and other governments have imposed financial and economic sanctions and export controls against a wide range of Russian organizations and/or individuals, and may impose additional sanctions in the future. Our contract counterparty in Russiais not subject to sanctions as of the date of this filing. In response to the war in Ukraine, there have been proposals in U.S. Congressand elsewhere to ban imports of uranium that could affect our ability to import LEU in one or more years under the Russian Suspension Agreement but none of these have been adopted as of the date of this filing.
The extension of the sanctions imposed by the
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 2022-2026. Operating results for the three months ended
March 31, 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. Withrespect to our technical solutions segment, work under the HALEU Contract currently remains on schedule but we have been experiencing increased delays from vendors and increased costs due to the continuing COVID-19 pandemic. We are working with DOEto minimize the impacts and to obtain funding for these increased costs. Additional funding commitments from DOEand a contract amendment will be required to complete the project. Refer to Overview above for additional details. 24 -------------------------------------------------------------------------------- Our order book of sales under contract in the LEU segment extends to 2029. As of March 31, 2022and 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 billionof deferred revenue and advances from customers as of March 31, 2022, whereby customers have made advance payments to be applied against future deliveries. We estimate that approximately 2% of our order book is 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 under current contracts such as, the Russian Suspension Agreement, which limits imports of Russian uranium products into the United Statesand applies to our sales using material procured under the TENEX Supply Contract as well as the potential for sanctions and other restrictions on trade with Russiaor in dealings with Russian persons and entities, in response to the evolving situation regarding the war in Ukraine. Our future operating results are subject to a number of uncertainties that could affect results either positively or negatively. Among the factors that could affect our results are the following: •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 SWU or uranium purchases;
•The availability and terms of additional purchases or sales of SWUs and uranium;
• Conditions in the LEU and energy markets, including prices, demand, operations, government restrictions on imports, exports or investments, and regulations of our business and those of our customers, suppliers, contractors and subcontractors;
• Timing of customer orders, associated 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 employee benefit liabilities and the value of related assets;
•The outcome of legal proceedings and other contingencies;
•Potential use of cash for strategic or financial initiatives;
•Actions taken by customers, including actions that may affect existing contracts;
• Market, international trade and other conditions affecting
•The duration 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.
We have two segments to present: the LEU segment and the technical solutions segment.
Revenues from our LEU segment are primarily derived from the following:
•sales of the SWU component of LEU;
•sales of natural uranium, and
•sales of enriched uranium products comprising both the natural uranium and SWU components of LEU.
25 -------------------------------------------------------------------------------- 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 50% of our total revenue for the three months ended
March 31, 2022. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately one-third of revenue from our LEU segment in recent years. Our agreements with electric utilities are primarily medium and long-term fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of the SWU component of LEU from us. Contracts where we sell both the SWU and 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 $6.1 millionper order in the three months ended March 31, 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 Centrusbeyond the contractual sale period, resulting in the deferral of costs and revenue recognition. Refer to Note 2, Revenue and Contracts with Customers, in the unaudited 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 Ukrainehas 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 behind published price indicators by several years. While newer sales reflect the low prices prevalent in recent years, certain older contracts included in our order book have sales prices that are significantly above current market prices. Recent proposals to severely limit or cut off suppliers of LEU from Russiahave 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. Without Russian supply it is estimated that demand for enrichment for reactors outside of Russiawould far exceed supply, 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. 26 -------------------------------------------------------------------------------- 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, LLCin Nuclear Market Review: SWU and Uranium Market Price Indicators* [[Image Removed: leu-20220331_g1.jpg]]
*Source: Nuclear Market Review, a
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. 27 --------------------------------------------------------------------------------
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 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.
October 31, 2019, we signed the cost-share HALEU Contract with DOEto 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 DOEsigned 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 DOEas a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah GDP. The HALEU Contract, if fully implemented, is expected to result in the Company having constructed the AC100M technology and prepared the systems to enrich uranium to the 20% concentration in the uranium-235 isotope that is required by many of the advanced reactor concepts now under development. Centrusis the only company with an NRC license to enrich HALEU. As discussed under the caption Overview, the DOEexperienced a COVID-related delay that prevented it from obtaining the HALEU storage cylinders it was to provide under the contract. Since it is not possible to operate the cascade without the cylinders from DOE, it will not be possible to complete the operational portion of the demonstration prior to the November 30, 2022, expiration of the current contract. As a result, DOEchanged the scope of the existing contract and indicated that it intends to move the operational portion of the demonstration into a separate, competitively-awarded contract that will allow for a longer period of demonstration and operations. Centrusbelieves it is well-positioned to compete for a follow-on contract to operate the machines in Piketonbut a Request for Proposals has not been issued yet and there is no assurance that DOEwill award such a contract to the Company. While 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. There are also a number of technical, regulatory and economic hurdles that must be overcome for these fuels and reactors to come to the market. Additional COVID-19-related impacts, delays in DOEfurnishing equipment, or 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 demonstration cascade and produce HALEU, as well as delay completion of the HALEU Contract. The Company does not currently have a contractual obligation to perform work in excess of the funding provided by DOEand, therefore, no additional costs have been accrued as of March 31, 2022. If the DOEelects not to provide funding for production and the Company nonetheless commits to a plan to complete the demonstration cascade and produce HALEU, we may incur material additional costs or losses in future periods that could have an adverse impact on our financial condition and liquidity.
Since March of 2018,
Centrushas 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 2021to 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 DOEcooperative agreement titled Advanced Reactor Demonstration Program 28 --------------------------------------------------------------------------------
(“ARDP”). At our discretion, task orders under the new agreement may include in-kind contributions that we currently do not, but may provide in the future.
Results of Operations Segment Information The following tables present elements of the accompanying unaudited consolidated statements of operations that are categorized by segment (dollar amounts in millions): Three Months Ended March 31, 2022 2021 $ Change % Change LEU segment Revenue: SWU revenue $ 12.8
$ 38.1 $ (25.3)(66) % Uranium revenue 4.9 - 4.9 n/a Total 17.7 38.1 (20.4) (54) % Cost of sales 14.8 25.4 (10.6) (42) % Gross profit $ 2.9 $ 12.7 $ (9.8)Technical solutions segment Revenue $ 17.6 $ 17.5 $ 0.11 % Cost of sales 14.2 18.5 (4.3) (23) % Gross profit (loss) $ 3.4 $ (1.0) $ 4.4Total Revenue $ 35.3 $ 55.6 $ (20.3)(37) % Cost of sales 29.0 43.9 (14.9) (34) % Gross profit $ 6.3 $ 11.7 $ (5.4)Revenue Revenue from the LEU segment decreased $20.4 million(or 54%) in the three months ended March 31, 2022, compared to the corresponding period in 2021. The volume of SWU sold decreased 21% for the three months ended March 31, 2022and the average SWU price decreased 58% largely due to the variability in timing of utility customer orders and the particular contracts under which SWU were sold during the periods.
Revenues from uranium sales increased to
Revenue in the technical solutions segment increased slightly by
Cost of sales
Cost of sales for the LEU segment decreased
$10.6 million(or 42%) in the three months ended March 31, 2022, compared to the corresponding period in 2021, largely reflecting decreases in SWU sales volume, and decreases in the average SWU unit cost. The volume of SWU sold decreased 21% for the three-month period and the average SWU unit cost decreased 44%. 29 -------------------------------------------------------------------------------- Cost of sales in the three months ended March 31, 2022and 2021 included $0and $15.9 million, respectively, of previously deferred costs from Deferred Costs Associated with Deferred Revenue that reflected higher inventory costs from 2017-2018. Cost of sales also includes legacy costs related to former employees of the Portsmouth GDP and Paducah GDP of $0.6 millionin the three months ended March 31, 2022compared to $0.7 millionin the corresponding period in 2021. Cost of sales for the technical solutions segment decreased $4.3 million(or 23%) in the three months ended March 31, 2022, compared to the corresponding period in 2021, which included a rent credit related to the Piketonfacility of approximately $1.6 million. The remainder of the decrease was due to a reduction in costs of approximately $6.9 millionassociated with the HALEU Contract, offset by new contract work of approximately $5.2 million. For details on HALEU Contract accounting, refer to "Technical Solutions - Government Contracting" above. Gross Profit
We made a gross profit of
Our LEU segment realized a gross profit of
$2.9 millionin the three months ended March 31, 2022, compared to $12.7 millionin the corresponding period in 2021. The decrease in gross profit was due primarily to a decrease in SWU sales volume as well as decreases in the average profit margin per SWU unit. For the technical solutions segment, we realized a gross profit of $3.4 millionin the three months ended March 31, 2022, compared to a gross loss of $1.0 millionfor the corresponding period in 2021. The increase in gross profit was primarily related to a $1.6 millionrent credit for the Piketon Facility, with the remainder of the increase primarily attributable to the Company's HALEU costs being fully recoverable in the current year as it has contributed its contractually required cost share as of December 31, 2021.
The following tables present elements of the accompanying unaudited consolidated statements of operations that are not categorized by segment (dollar amounts in millions): Three Months Ended March 31, 2022 2021 $ Change % Change Gross profit
$ 6.3 $ 11.7 $ (5.4)(46) % Advanced technology costs 1.1 0.5 0.6 120 % Selling, general and administrative 7.5 8.2 (0.7) (9) % Amortization of intangible assets 1.1 2.1 (1.0) (48) % Operating income (loss) (3.4) 0.9 (4.3) (478) %
Non-operating components of net periodic benefit income (3.3)
(4.3) 1.0 23 % Income (loss) before income taxes (0.1) 5.2 (5.3) (102) % Income tax expense 0.3 0.1 0.2 200 % Net income (loss)
$ (0.4) $ 5.1 $ (5.5)30
Amortization of intangible assets
Amortization of intangible assets decreased
$1.0 million(or 48%) in the three months ended March 31, 2022, compared to the corresponding period in 2021. Amortization expense for the intangible asset related to the September 2014sales 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.
Non-operating components of net periodic benefit expenditure (revenue)
Nonoperating components of net periodic benefit expense (income) netted to income of
$3.3 millionfor the three months ended March 31, 2022, compared to income of $4.3 millionin the corresponding period in 2021. 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.
Net profit (net loss)
Net loss was
$0.4 millionin the three months ended March 31, 2022, compared to net income of $5.1 millionin the corresponding period in the prior year. The decrease in net income was primarily due to a $9.8 milliondecrease in the gross profit in the LEU segment, partially offset by a $4.4 millionincrease in the gross profit in the technical solutions segment, as discussed above. 31 --------------------------------------------------------------------------------
Net earnings (loss) per share
See Note 9, Net earnings (loss) per share.
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 completed
2022 2021 Numerator (in millions): Net income (loss) $ (0.4)
$ 5.1Less: Preferred stock dividends - undeclared and cumulative - 0.7 Less: Distributed earnings allocable to retired preferred shares - 6.6 Net loss allocable to common stockholders $
Plus: Distributed earnings attributable to withdrawn preferred shares $
Adjusted net income (loss), including distributed earnings attributable to withdrawn preferred shares (non-GAAP)
Denominator (in thousands) (a): Average common shares outstanding - basic 14,547 12,818 Average common shares outstanding - diluted (b) 14,547 12,818 Net loss per share (in dollars): Basic
$ (0.03) $ (0.17)Diluted $ (0.03) $ (0.17)Plus: Effect of distributed earnings allocable to retired preferred shares, per common share (in dollars): Basic $ - $ 0.51Diluted $ - $ 0.50Adjusted Net Income (Loss) per Share (Non-GAAP) (in dollars): Basic $ (0.03) $ 0.34Diluted $ (0.03) $ 0.33
(a) For further details on the average number of shares outstanding, refer to Note 9, Net earnings (loss) per share of the unaudited consolidated financial statements.
(b) For purposes of calculating the Adjusted Net Income (Loss) per Share of
$0.33, for the three months ended March 31, 2021, average common shares outstanding - diluted are 13,196,000 shares. No dilutive effect is recognized in a period in which a net loss has occurred and thus Net Loss per Share of $(0.17)for the three months ended March 31, 2021, was calculated using average common shares outstanding of 12,818,000. 32 --------------------------------------------------------------------------------
Cash and capital resources
We ended the first quarter of 2022 with a consolidated cash balance of
$168.5 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 DOEin October 2019. Under the HALEU Contract, the Company is contributing a portion of the program costs. The program has been under way since May 31, 2019, when Centrusand DOEsigned 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 DOEas 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 are able to win a contract from DOEto operate the cascade, our goal is to scale up the facility in modular fashion 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. At this time, however, there is no assurance that sufficient government or commercial funding or demand for material will be timely secured, or that we will be awarded a contract by the DOEto operate or that we will be permitted by DOEto expand the demonstration cascade. 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. In the event that 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 DOEcontract 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
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. 33 -------------------------------------------------------------------------------- The change in cash, cash equivalents and restricted cash from our unaudited consolidated statements of cash flows are as follows on a summarized basis (in millions): Three Months Ended March 31, 2022 2021 Cash used in operating activities $ (12.6)
$ (8.5)Cash used in investing activities (0.1) (0.4) Cash provided by (used in) financing activities (3.2) 20.2 Increase (decrease) in cash, cash equivalents and restricted cash $ (15.9) $ 11.3Operating Activities
Within three months
In the three months ended
March 31, 2021, net cash used in operating activities was $8.5 million. The increase in inventories of $10.3 millionand decrease in payables under SWU purchase agreements of $4.4 millionreflect a significant use of cash. The net decrease in cash year-over-year is also the result of a net reduction of $12.5 millionin 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 $7.4 million. The net income of $5.1 millionin the three months ended March 31, 2021, net of non-cash expenses, and the $14.2 milliondecrease in accounts receivable reflect sources of cash. Investing Activities
Capital expenditures were
In both the three months ended
March 31, 2022and 2021, payments of $3.1 millionof interest classified as debt are classified as a financing activity. Refer to Note 6, Debt, of the unaudited consolidated financial statements regarding the accounting for the 8.25% notes (the "8.25% Notes") maturing in February 2027. In the three months ended March 31, 2021, net cash provided by financing activities also included net proceeds of $23.2 millionfrom the issuance of common stock pursuant to a Registration Statement on Form S-3.
The following table summarizes the Company’s working capital (in millions):
March 31, December 31, 2022 2021 Cash and cash equivalents
$ 168.5 $ 193.8Accounts receivable 12.5 29.1 Inventories, net 89.1 82.7 Current debt (6.1) (6.1)
Deferred revenue and customer advances, net of deferred charges
(159.5) (159.8) Other current assets and liabilities, net (33.9) (67.1) Working capital
$ 70.6 $ 72.634
-------------------------------------------------------------------------------- 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 28and August 31based 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 unaudited 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 SWU’s long-term purchase contracts
Refer to Note 11, Commitments and contingencies, to the unaudited consolidated financial statements for additional information.
DOE Technology License
We have a non-exclusive license in
DOEinventions that pertain to enriching uranium using gas centrifuge technology. The license agreement with DOEprovides 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 DOEcentrifuge technology. There is a minimum annual royalty payment of $100,000and the maximum cumulative royalty over the life of the license is $100 million. There is currently no commercial enrichment facility producing LEU using DOEcentrifuge technology. We are continuing to advance our U.S.centrifuge technology that has evolved from DOEinventions 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
In addition to our commitments to purchase SWU and the license agreement with
regarding the American Centrifuge technology, there were no significant off-balance sheet arrangements
Estimates of critical accounting policies
There have been no material changes to the critical accounting estimates disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K.
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