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EX-32.1 - EXHIBIT 32.1 - CENTRUS ENERGY CORPexhibit_32-1x20170630.htm
EX-31.2 - EXHIBIT 31.2 - CENTRUS ENERGY CORPexhibit_31-2x20170630.htm
EX-31.1 - EXHIBIT 31.1 - CENTRUS ENERGY CORPexhibit_31-1x20170630.htm



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
centruslogocolora13.jpg
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 1-14287
Centrus Energy Corp.
Delaware
52-2107911
(State of incorporation)
(I.R.S. Employer Identification No.)
 
6901 Rockledge Drive, Suite 800, Bethesda, Maryland 20817
(301) 564-3200
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Smaller reporting company
ý
Accelerated filer
o
 
Emerging growth company
o
Non-accelerated filer
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No ý
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ý    No o
 
As of August 2, 2017, there were 7,632,669 shares of the registrant’s Class A Common Stock and 1,406,082 shares of the registrant’s Class B Common Stock outstanding.





TABLE OF CONTENTS
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 

 
FORWARD-LOOKING STATEMENTS
  
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 - that is, statements related to future events. In this context, forward-looking statements may address our expected future business and financial performance, and often contain words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “will”, “should”, “could”, “would” or “may” and other words of similar meaning. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For Centrus Energy Corp., particular risks and uncertainties that could cause our actual future results to differ materially from those expressed in our forward-looking statements include risks related to our significant long-term liabilities, including material unfunded defined benefit pension plan obligations and postretirement health and life benefit obligations; risks relating to our outstanding 8.0% paid-in-kind (“PIK”) toggle notes (the “8% PIK Toggle Notes”) maturing in September 2019, our 8.25% notes maturing in February 2027 (the “8.25% Notes”) and our Series B Senior Preferred Stock (the “Series B Preferred Stock”), including the potential termination of the guarantee by United States Enrichment Corporation (“Enrichment Corp.”) of the 8% PIK Toggle Notes; risks related to the limited trading markets in our securities; risks related to our ability to maintain the listing of our Class A Common Stock on the NYSE American LLC; risks related to decisions made by our Class B stockholders regarding their investment in the Company based upon factors that are unrelated to the Company’s performance; risks related to the use of our net operating losses (“NOLs”) and net unrealized built-in losses (“NUBILs”) to offset future taxable income and the use of the Rights Agreement (as defined herein) to prevent an “ownership change” as defined in Section 382 of the Internal Revenue Code and our ability to generate taxable income to utilize all or a portion of the NOLs and NUBILs prior to the expiration thereof; the continued impact of the March 2011 earthquake and tsunami in Japan on the nuclear industry and on our business, results of operations and prospects; the impact and potential extended duration of the current supply/demand imbalance in the market for low-enriched uranium (“LEU”); our dependence on others for deliveries of LEU including deliveries from the Russian

2



government entity Joint Stock Company “TENEX” (“TENEX”) under a commercial supply agreement with TENEX (the “Russian Supply Agreement”); risks related to our ability to sell the LEU we procure pursuant to our purchase obligations under our supply agreements, including the Russian Supply Agreement; risks relating to our sales order book, including uncertainty concerning customer actions under current contracts and in future contracting due to market conditions and lack of current production capability; risks related to the value of our intangible assets related to the sales order book and customer relationships; risks associated with our reliance on third-party suppliers to provide essential services to us; pricing trends and demand in the uranium and enrichment markets and their impact on our profitability; movement and timing of customer orders; risks related to trade barriers and contract terms that limit our ability to deliver LEU to customers; risks related to actions that may be taken by the U.S. government, the Russian government or other governments that could affect our ability or the ability of our sources of supply to perform under their contract obligations to us, including the imposition of sanctions, restrictions or other requirements; the impact of government regulation including by the U.S. Department of Energy and the U.S. Nuclear Regulatory Commission; uncertainty regarding our ability to commercially deploy competitive enrichment technology; risks and uncertainties regarding funding for the American Centrifuge project and our ability to perform under our agreement with UT-Battelle, LLC, the management and operating contractor for Oak Ridge National Laboratory, for continued research and development of the American Centrifuge technology; the potential for further demobilization or termination of the American Centrifuge project; risks related to the current demobilization of portions of the American Centrifuge project, including risks that the schedule could be delayed and costs could be higher than expected; potential strategic transactions, which could be difficult to implement, disrupt our business or change our business profile significantly; the outcome of legal proceedings and other contingencies (including lawsuits and government investigations or audits); the competitive environment for our products and services; changes in the nuclear energy industry; the impact of financial market conditions on our business, liquidity, prospects, pension assets and insurance facilities; revenue and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year; and other risks and uncertainties discussed in this and our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2016.

Readers are urged to carefully review and consider the various disclosures made in this report and in our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. We do not undertake to update our forward-looking statements to reflect events or circumstances that may arise after the date of this Quarterly Report on Form 10-Q, except as required by law.


3



 
 
CENTRUS ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share and per share data)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
147.7

 
$
260.7

Accounts receivable
60.6

 
19.9

Inventories
104.0

 
177.4

Deferred costs associated with deferred revenue
118.3

 
89.3

Other current assets
14.9

 
13.3

Total current assets
445.5

 
560.6

Property, plant and equipment, net
5.5

 
6.0

Deposits for surety bonds
29.6

 
29.5

Intangible assets, net
90.1

 
93.3

Other long-term assets
15.3

 
24.1

Total assets
$
586.0

 
$
713.5

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities
$
48.3

 
$
46.4

Payables under SWU purchase agreements
19.9

 
59.6

Inventories owed to customers and suppliers
26.8

 
57.5

Deferred revenue
166.5

 
123.6

Decontamination and decommissioning obligations
27.2

 
38.6

Total current liabilities
288.7

 
325.7

Long-term debt
159.8

 
234.1

Postretirement health and life benefit obligations
170.2

 
171.3

Pension benefit liabilities
177.4

 
179.9

Other long-term liabilities
36.1

 
38.6

Total liabilities
832.2

 
949.6

Commitments and contingencies (Note 12)


 


Stockholders’ deficit
 
 
 
Preferred stock, par value $1.00 per share, 20,000,000 shares authorized
 
 
 
Series A Participating Cumulative Preferred Stock, none issued

 

Series B Senior Preferred Stock, 7.5% cumulative, 104,574 shares issued and outstanding and an aggregate liquidation preference of $107.6 million as of June 30, 2017
4.6

 

Class A Common Stock, par value $0.10 per share, 70,000,000 shares authorized, 7,630,369 and 7,563,600 shares issued and outstanding as of June 30, 2017 and December 31, 2016
0.8

 
0.8

Class B Common Stock, par value $0.10 per share, 30,000,000 shares authorized, 1,408,382 and 1,436,400 shares issued and outstanding as of June 30, 2017 and December 31, 2016
0.1

 
0.1

Excess of capital over par value
59.7

 
59.5

Accumulated deficit
(311.5
)
 
(296.7
)
Accumulated other comprehensive income, net of tax
0.1

 
0.2

Total stockholders’ deficit
(246.2
)
 
(236.1
)
Total liabilities and stockholders’ deficit
$
586.0

 
$
713.5

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4




CENTRUS ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except share and per share data)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Separative work units
$
37.9

 
$
54.9

 
$
38.7

 
$
114.2

Uranium

 

 

 
14.3

Contract services
6.1

 
8.5

 
12.5

 
24.9

Total revenue
44.0

 
63.4

 
51.2

 
153.4

Cost of Sales:
 
 
 
 
 
 
 
Separative work units and uranium
42.1

 
49.3

 
44.4

 
114.8

Contract services
6.2

 
8.6

 
13.6

 
17.3

Total cost of sales
48.3

 
57.9

 
58.0

 
132.1

Gross profit (loss)
(4.3
)
 
5.5

 
(6.8
)
 
21.3

Advanced technology license and decommissioning costs
4.4

 
4.7

 
10.5

 
16.7

Selling, general and administrative
9.7

 
12.5

 
22.1

 
23.9

Amortization of intangible assets
2.0

 
2.7

 
3.2

 
5.9

Special charges for workforce reductions and advisory costs
2.3

 
0.6

 
4.7

 
0.6

Gains on sales of assets
(0.7
)
 
(0.4
)
 
(1.7
)
 
(0.7
)
Operating loss
(22.0
)
 
(14.6
)
 
(45.6
)
 
(25.1
)
Gain on early extinguishment of debt

 
(16.7
)
 
(33.6
)
 
(16.7
)
Interest expense
0.7

 
5.1

 
3.6

 
10.1

Investment income
(0.3
)
 
(0.1
)
 
(0.6
)
 
(0.4
)
Loss before income taxes
(22.4
)
 
(2.9
)
 
(15.0
)
 
(18.1
)
Income tax benefit

 

 
(0.2
)
 
(0.6
)
Net loss
(22.4
)
 
(2.9
)
 
(14.8
)
 
(17.5
)
Preferred stock dividends - undeclared and cumulative
2.0

 

 
3.0

 

Net loss allocable to common stockholders
$
(24.4
)
 
$
(2.9
)
 
$
(17.8
)
 
$
(17.5
)
 
 
 
 
 
 
 
 
Net loss per common share – basic and diluted
$
(2.69
)
 
$
(0.32
)
 
$
(1.96
)
 
$
(1.92
)
Average number of common shares outstanding – basic and diluted (in thousands)
9,077

 
9,080

 
9,070

 
9,071



The accompanying notes are an integral part of these condensed consolidated financial statements.


5




CENTRUS ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(22.4
)
 
$
(2.9
)
 
$
(14.8
)
 
$
(17.5
)
Other comprehensive loss, before tax (Note 13):
 
 
 
 
 
 
 
Amortization of prior service credits, net

 

 
(0.1
)
 
(0.1
)
Other comprehensive loss, before tax

 

 
(0.1
)
 
(0.1
)
Income tax benefit related to items of other comprehensive income

 

 

 

Other comprehensive loss, net of tax benefit

 

 
(0.1
)
 
(0.1
)
Comprehensive loss
$
(22.4
)
 
$
(2.9
)
 
$
(14.9
)
 
$
(17.6
)


The accompanying notes are an integral part of these condensed consolidated financial statements.



6




CENTRUS ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating Activities
 
 
 
Net loss
$
(14.8
)
 
$
(17.5
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
Depreciation and amortization
3.6

 
6.2

PIK interest on paid-in-kind toggle notes
0.8

 
3.4

Gain on early extinguishment of debt
(33.6
)
 
(16.7
)
Gain on sales of assets
(1.7
)
 
(0.6
)
Inventory valuation adjustments

 
0.7

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(32.1
)
 
(25.2
)
Inventories, net
42.7

 
50.0

Payables under SWU purchase agreements
(39.7
)
 
(50.9
)
Deferred revenue, net of deferred costs
13.9

 
4.4

Accounts payable and other liabilities
(24.7
)
 
(4.3
)
Other, net
(1.4
)
 
0.6

Cash used in operating activities
(87.0
)
 
(49.9
)
 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(0.1
)
 
(2.9
)
Proceeds from sales of assets
1.7

 
1.0

Deposits for surety bonds - net decrease

 
0.3

Cash provided by (used in) investing activities
1.6

 
(1.6
)
 
 
 
 
Financing Activities
 
 
 
Repurchase of debt
(27.6
)
 
(8.0
)
Cash used in financing activities
(27.6
)
 
(8.0
)
 
 
 
 
Decrease in cash and cash equivalents
(113.0
)
 
(59.5
)
Cash and cash equivalents at beginning of period
260.7

 
234.0

Cash and cash equivalents at end of period
$
147.7

 
$
174.5

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid in cash
$
2.1

 
$
3.6

Non-cash activities:
 
 
 
Conversion of interest payable-in-kind to long-term debt
$
0.8

 
$
3.4



The accompanying notes are an integral part of these condensed consolidated financial statements.

7




CENTRUS ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)
(in millions, except per share data)

 
Preferred Stock,
Series B
 
Common Stock,
Class A,
Par Value
$.10 per Share
 
Common Stock,
Class B,
Par Value
$.10 per Share
 
Excess of
Capital Over
Par Value
 
Accumulated Deficit
 
Accumulated
Other Comprehensive Income
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$

 
$
0.8

 
$
0.1

 
$
59.0

 
$
(229.7
)
 
$
4.1

 
$
(165.7
)
Net loss

 

 

 

 
(17.5
)
 

 
(17.5
)
Other comprehensive loss, net of tax benefit (Note 13)

 

 

 

 

 
(0.1
)
 
(0.1
)
Restricted stock units and stock options issued, net of amortization

 

 

 
0.3

 

 

 
0.3

Balance at June 30, 2016
$

 
$
0.8

 
$
0.1

 
$
59.3

 
$
(247.2
)
 
$
4.0

 
$
(183.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$

 
$
0.8

 
$
0.1

 
$
59.5

 
$
(296.7
)
 
$
0.2

 
$
(236.1
)
Net loss

 

 

 

 
(14.8
)
 

 
(14.8
)
Issuance of preferred stock
4.6

 

 

 

 

 

 
4.6

Other comprehensive loss, net of tax benefit (Note 13)

 

 

 

 

 
(0.1
)
 
(0.1
)
Restricted stock units and stock options issued, net of amortization

 

 

 
0.2

 

 

 
0.2

Balance at June 30, 2017
$
4.6

 
$
0.8

 
$
0.1

 
$
59.7

 
$
(311.5
)
 
$
0.1

 
$
(246.2
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


8



CENTRUS ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Centrus Energy Corp. (“Centrus” or the “Company”), which include the accounts of the Company, its principal subsidiary United States Enrichment Corporation (“Enrichment Corp.”) and its other subsidiaries, as of June 30, 2017, and for the three and six months ended June 30, 2017 and 2016, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2016, was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the financial results for the interim period. Certain information and notes normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. All material intercompany transactions have been eliminated.

Operating results for the three and six months ended June 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K for the year ended December 31, 2016.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The FASB issued amendments in 2015 and 2016 that clarify a number of specific issues as well as require additional disclosures. The revenue recognition standard will become effective for the Company beginning with the first quarter of 2018. The Company continues to evaluate the effect that the provisions of ASU 2014-09 will have on its consolidated financial statements, including whether prior periods will need to be recast. As part of this evaluation, the Company has reviewed its revenue contracts and prepared a preliminary analysis which includes key considerations of the Company’s revenue streams in relation to the new standard. The Company has not yet selected the full or modified retrospective method of adoption.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting expense recognition in the statement of operations. ASU 2016-02 will become effective for the Company beginning in the first quarter of 2019, with early adoption permitted, and is to be applied using a modified retrospective approach. The Company is evaluating the effect that the provisions of ASU 2016-02 will have on its consolidated financial statements.


9



In March 2016, the FASB issued ASU 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 became effective for the Company in the first quarter of 2017. Under ASU 2016-09, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. It is intended to reduce diversity in practice by providing guidance on eight specific cash flow issues. ASU 2016-15 will become effective for the Company beginning in the first quarter of 2018, with early adoption permitted, and is to be applied using a retrospective approach. The Company is evaluating the effect that the provisions of ASU 2016-15 will have on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will become effective for the Company beginning in the first quarter of 2018, with early adoption permitted. The Company is evaluating the effect that the provisions of ASU 2016-16 will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is to be applied retrospectively for each period presented, and will become effective for the Company beginning in the first quarter of 2018, with early adoption permitted. The Company is evaluating the effect that the provisions of ASU 2016-18 will have on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  ASU 2017-07 requires changes to the presentation of the components of net periodic benefit cost on the statement of operations by requiring service cost to be presented with other employee compensation costs and other components of net periodic benefit cost to be presented outside of any subtotal of operating income. ASU 2017-07 also stipulates that only the service cost component of net benefit cost is eligible for capitalization in assets. The guidance will become effective for the Company beginning in the first quarter of 2018, with early adoption permitted. The Company is evaluating the effect that the provisions of ASU 2017-07 will have on its consolidated financial statements.


10



2. SPECIAL CHARGES

Evolving Business Needs

Evolving business needs have resulted in workforce reductions since 2013. In the six months ended June 30, 2017, special charges included estimated employee termination benefits of $1.5 million, including $0.7 million in the three months ended June 30, 2017. Centrus expects to make payments in the third and fourth quarters of 2017 related to the $1.2 million balance payable at June 30, 2017.

In the second quarter of 2016, the Company commenced a project to align its corporate structure to the scale of its ongoing business operations and to update related information technology systems. The Company incurred advisory costs of $0.5 million related to the reengineering project in the three months ended June 30, 2016. The Company incurred advisory costs of $1.7 million and $3.3 million in the three and six months ended June 30, 2017, respectively.

Piketon Demonstration Facility

In September 2015, Centrus completed a successful three-year demonstration of its American Centrifuge technology at its facility in Piketon, Ohio. The demonstration effort was primarily funded by the U.S. government. As a result of reduced program funding, Centrus incurred a special charge in the third quarter of 2015 for estimated employee termination benefits. In the six months ended June 30, 2017, special charges included additional employee termination benefits of $0.1 million, less $0.2 million for unvested employee departures. Of the remaining $5.0 million liability as of June 30, 2017, $2.9 million is classified as current and included in Accounts Payable and Accrued Liabilities in the condensed consolidated balance sheet. The remaining $2.1 million is included in Other Long-Term Liabilities and is expected to be paid through 2019.

A summary of termination benefit activity and related liabilities follows (in millions):
 
 
Liability
December 31,
2016
 
Six Months Ended
June 30, 2017
 
Liability
June 30,
2017
 
 
 
 
Charges for Termination Benefits
 
Paid/ Settled
 
 
Workforce reductions:
 
 
 
 
 
 
 
 
 
Evolving business needs
 
$
0.1

 
$
1.5

 
$
(0.4
)
 
$
1.2

 
Piketon demonstration facility
 
5.4

 
0.1

 
(0.5
)
 
5.0

 
 
 
$
5.5

 
$
1.6

 
$
(0.9
)
 
$
6.2

 


3. CONTRACT SERVICES AND ADVANCED TECHNOLOGY LICENSE AND DECOMMISSIONING COSTS

The contract services segment includes Revenue and Cost of Sales for engineering and testing work Centrus performs on the American Centrifuge technology under a government contract with UT-Battelle, LLC (“UT-Battelle”), the operator of Oak Ridge National Laboratory. The current contract between Centrus and UT-Battelle (the “2017 ORNL Contract”) is for the period from October 1, 2016, through September 30, 2017 and is valued at approximately $25 million. The 2017 ORNL Contract provides for payments for monthly reports of deliverables of approximately $2.0 million per month and additional aggregate payments of $1.0 million based on completion of certain milestones. The 2017 ORNL Contract is currently being funded incrementally. Funding for the program is provided to UT-Battelle by the U.S. government.


11



The Company’s contract with UT-Battelle that ended September 30, 2016 (the “2016 ORNL Contract”), provided for payments for monthly reports of deliverables of approximately $2.7 million per month. The 2016 ORNL Contract, which was signed in March 2016, provided for payments for reports related to work performed since October 1, 2015. Revenue in the six months ended June 30, 2016, includes $16.2 million for reports on work performed in the six months ended June 30, 2016, and $8.1 million for March 2016 reports on work performed in the three months ended December 31, 2015. Expenses for contract work performed in the six months ended June 30, 2016, are included in Cost of Sales. Expenses for work performed in the three months ended December 31, 2015, before entering into the 2016 ORNL Contract, were included in Advanced Technology License and Decommissioning Costs in 2015.

American Centrifuge expenses that are outside of the Company’s contracts with UT-Battelle are included in Advanced Technology License and Decommissioning Costs, including ongoing costs to maintain the demobilized Piketon facility and our licenses from the U.S. Nuclear Regulatory Commission (“NRC”) at that location. In the second quarter of 2016, the Company commenced the decontamination and decommissioning (“D&D”) of the Piketon facility in accordance with the requirements of NRC and the U.S. Department of Energy (“DOE”). Refer to Note 12, Commitments and Contingencies, for additional details.
 
4.  RECEIVABLES
 
June 30,
2017
 
December 31,
2016
 
(in millions)
Utility customers and other
$
56.2

 
$
15.3

Contract services, primarily DOE
4.4

 
4.6

Accounts receivable
$
60.6

 
$
19.9

 
On occasion, Centrus will accept payment in the form of uranium. Revenue from the sale of SWU under such contracts is recognized at the time LEU is delivered and is based on the fair value of the uranium received in exchange for the SWU. Accounts Receivable as of June 30, 2017, includes uranium receivable with a fair value of $12.5 million.

Centrus formerly performed site services work under contracts with DOE at the former Portsmouth and Paducah gaseous diffusion plants. Overdue receivables from DOE of $14.2 million as of June 30, 2017, and $22.8 million as of December 31, 2016, are included in Other Long-Term Assets based on the extended timeframe expected to resolve the Company’s claims for payment.

Centrus has unapplied payments from DOE that may be used, at DOE’s direction, (a) to pay for future services provided by the Company, or (b) to reduce outstanding receivables balances due from DOE. The balance of unapplied payments of $19.3 million as of June 30, 2017, and December 31, 2016, is included in Other Long-Term Liabilities pending resolution of the long-term receivables from DOE described above.


12



5. INVENTORIES

Centrus holds uranium at licensed locations in the form of natural uranium and as the uranium component of low enriched uranium (“LEU”). Centrus also holds separative work units (“SWU”) as the SWU component of LEU at licensed locations (e.g., fabricators) to meet book transfer requests by customers. Fabricators process LEU into fuel for use in nuclear reactors. Components of inventories follow (in millions):
 
June 30, 2017
 
December 31, 2016
 
Current
Assets
 
Current
Liabilities
(a)
 
Inventories, Net
 
Current
Assets
 
Current
Liabilities
(a)
 
Inventories, Net
Separative work units
$
69.1

 
$
10.8

 
$
58.3

 
$
115.8

 
$
15.2

 
$
100.6

Uranium
34.7

 
16.0

 
18.7

 
61.4

 
42.3

 
19.1

Materials and supplies
0.2

 

 
0.2

 
0.2

 

 
0.2

 
$
104.0

 
$
26.8

 
$
77.2

 
$
177.4

 
$
57.5

 
$
119.9


(a)
Inventories owed to customers and suppliers, included in current liabilities, include SWU and uranium inventories owed to fabricators.


6. PROPERTY, PLANT AND EQUIPMENT
 
June 30,
2017
 
December 31,
2016
 
(in millions)
Property, plant and equipment, gross
6.7

 
6.8

Accumulated depreciation
(1.2
)
 
(0.8
)
Property, plant and equipment, net
$
5.5

 
$
6.0



7. INTANGIBLE ASSETS

Intangible assets originated from the Company’s reorganization and application of fresh start accounting as of September 30, 2014. The intangible asset related to the sales order book is amortized as the order book valued at emergence is reduced, principally as a result of deliveries to customers. The intangible asset related to customer relationships is amortized using the straight-line method over the estimated average useful life of 15 years. Amortization expense is presented below gross profit on the condensed consolidated statements of operations.
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Amount
Sales order book
$
54.6

 
$
20.8

 
$
33.8

 
$
54.6

 
$
19.9

 
$
34.7

Customer relationships
68.9

 
12.6

 
56.3

 
68.9

 
10.3

 
58.6

Total
$
123.5

 
$
33.4

 
$
90.1

 
$
123.5

 
$
30.2

 
$
93.3



13



8. DEBT

A summary of long-term debt follows (in millions):
 
Maturity
 
June 30,
2017
 
December 31, 2016
8.25% Notes:
Feb. 2027
 
 
 
 
Principal
 
 
$
74.3

 
$

Interest
 
 
61.5

 

8.25% Notes
 
 
135.8

 

8% PIK Toggle Notes
Sep. 2019 (a)
 
30.5

 
234.6

Subtotal
 
 
166.3

 
234.6

Less deferred issuance costs
 
 
0.1

 
0.5

Total debt
 
 
166.2

 
234.1

Less current portion
 
 
6.4

 

Long-term debt
 
 
$
159.8

 
$
234.1


(a) Maturity can be extended to September 2024 upon the satisfaction of certain funding conditions described below.

Note Exchange

On February 14, 2017, pursuant to an exchange offer and consent solicitation, Centrus exchanged $204.9 million principal amount of the Company’s 8% paid-in-kind (“PIK”) toggle notes (the “8% PIK Toggle Notes”) for $74.3 million principal amount of 8.25% notes due February 2027 (the “8.25% Notes”), 104,574 shares of Series B Preferred Stock with a liquidation preference of $1,000 per share, and $27.6 million of cash. The exchange is accounted for as a troubled debt restructuring (a “TDR”) under Accounting Standards Codification Subtopic 470-60, Debt-Troubled Debt Restructurings by Debtors. For an exchange classified as a TDR, if the future undiscounted cash flows of the newly issued debt and other consideration are less than the net carrying value of the original debt, a gain is recorded for the difference and the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value. Accordingly, the Company recognized the 8.25% Notes on the condensed consolidated balance sheet at $135.8 million. The Company recognized a gain of $33.6 million related to the note exchange for the quarter ended March 31, 2017, which is net of transaction costs of $9.0 million and previously deferred issuance costs related to the 8% PIK Toggle Notes of $0.4 million. Refer to Note 13, Stockholders’ Equity for details related to the newly issued preferred stock.

8.25% Notes

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 mature on February 28, 2027. As described above, all future interest payment obligations on the 8.25% Notes are included in the carrying value of the 8.25% Notes. As a result, the Company’s reported interest expense will be less than its contractual interest payments throughout the term of the 8.25% Notes. As of June 30, 2017, $6.4 million of interest is recorded as current and classified as Accounts Payable and Accrued Liabilities in the condensed consolidated balance sheet.

The 8.25% Notes rank equally in right of payment with all of our existing and future unsubordinated indebtedness other than our Issuer Senior Debt and our Limited Secured Acquisition Debt (each as defined below). The 8.25% Notes rank senior in right of payment to all of our existing and future subordinated indebtedness and to certain limited secured acquisition indebtedness of the Company (the “Limited Secured Acquisition Debt”). The Limited Secured Acquisition Debt includes (i) any indebtedness, the proceeds of which are used to finance all or a portion of an acquisition or similar transaction if any lender’s lien is solely limited to the assets acquired in such a transaction and (ii) any indebtedness, the proceeds of which are used to finance all or a portion of the American Centrifuge project or another next generation enrichment technology if any lender’s lien is solely limited to such

14



assets, provided that a lien securing the 8.25% Notes that is junior with respect to the lien securing such indebtedness, will be effected for the 8.25% Notes, which will be limited to the assets acquired with such Limited Secured Acquisition Debt.

The 8.25% Notes are subordinated in right of payment to certain indebtedness and obligations of the Company, as described in the 8.25% Notes Indenture (the “Issuer Senior Debt”), including (i) any indebtedness of the Company (inclusive of any indebtedness of Enrichment Corp.) under a future credit facility up to $50 million with a maximum net borrowing of $40 million after taking into account any minimum cash balance (unless a higher amount is approved with the consent of the holders of a majority of the aggregate principal amount of the 8.25% Notes then outstanding), (ii) any revolving credit facility to finance inventory purchases and related working capital needs, and (iii) any indebtedness of the Company to Enrichment Corp. under the secured intercompany notes.

The 8.25% Notes are guaranteed on a subordinated and limited basis by, and secured by substantially all of the assets of, Enrichment Corp. The Enrichment Corp. guarantee is a secured obligation and ranks equally in right of payment with all existing and future unsubordinated indebtedness of Enrichment Corp. (other than Designated Senior Claims (as defined below) and Limited Secured Acquisition Debt) and senior in right of payment to all existing and future subordinated indebtedness of Enrichment Corp. and Limited Secured Acquisition Debt. The Enrichment Corp. guarantee is subordinated in right of payment to certain obligations of, and claims against, Enrichment Corp. described in the 8.25% Notes Indenture (collectively, the “Designated Senior Claims”), including obligations and claims:
under a future credit facility up to $50 million with a maximum net borrowing of $40 million after taking into account any minimum cash balance;
under any revolving credit facility to finance inventory purchases and related working capital needs;
held by or for the benefit of the Pension Benefit Guaranty Corporation (“PBGC”) pursuant to any settlement (including any required funding of pension plans); and
under surety bonds or similar obligations held by or on behalf of the U.S. government pursuant to regulatory requirements.

The liens securing the Enrichment Corp. guarantee of the 8% PIK Toggle Notes and the 8.25% Notes are pari passu with each other, and are junior in priority with respect to the lien securing Limited Secured Acquisition Debt, which is limited to the assets acquired with such Limited Secured Acquisition Debt.

8% PIK Toggle Notes

Interest on the 8% PIK Toggle Notes is payable semi-annually in arrears on March 31 and September 30 based on a 360-day year consisting of twelve 30-day months. The principal amount is increased by any payment of interest in the form of PIK payments. The Company has the option to pay up to 5.5% per annum of interest due on the 8% PIK Toggle Notes in the form of PIK payments. For the semi-annual interest periods ended March 31, 2017, and September 30, 2017, the Company has elected to pay interest in the form of PIK payments at 5.5% per annum.
Interest payable at June 30, 2017, is $0.6 million, of which the expected cash portion of $0.2 million is included in Accounts Payable and Accrued Liabilities and the expected PIK portion of $0.4 million is included in Other Long-Term Liabilities. Financing costs for the issuance of the 8% PIK Toggle Notes were deferred and are being amortized on a straight-line basis, which approximates the effective interest method, over the life of the 8% PIK Toggle Notes.

The 8% PIK Toggle Notes mature on September 30, 2019. However, the maturity date can be extended to September 30, 2024, upon the satisfaction of certain funding conditions described in the Indenture relating to the funding, under binding agreements, of (i) the American Centrifuge project or (ii) the implementation and deployment of a National Security Train Program utilizing American Centrifuge technology.


15



The 8% PIK Toggle Notes rank equally in right of payment with all existing and future unsubordinated indebtedness of the Company (other than the Issuer Senior Debt) and are senior in right of payment to all existing and future subordinated indebtedness of the Company. The 8% PIK Toggle Notes are subordinated in right of payment to the Issuer Senior Debt.

The 8% PIK Toggle Notes are guaranteed and secured on a subordinated, conditional, and limited basis by Enrichment Corp. Enrichment Corp. will be released from its guarantee without the consent of the holders of the 8% PIK Toggle Notes upon the occurrence of certain termination events (other than with respect to an unconditional interest claim), including (i) the involuntary termination by the PBGC of any of the qualified pension plans of the Company or Enrichment Corp., (ii) the cessation of funding prior to completion of our ongoing American Centrifuge test programs or (iii) both a decision by the Company to abandon American Centrifuge technology and either (1) the efforts by the Company to commercialize another next generation enrichment technology funded at least in part by new capital provided or to be provided by Enrichment Corp. have been terminated or are no longer being pursued or (2) the attainment of capital necessary to commercialize another next generation enrichment technology with respect to which the Company is involved which does not include new capital provided or to be provided by Enrichment Corp.

The Enrichment Corp. guarantee ranks equally in right of payment with all existing and future unsubordinated indebtedness of Enrichment Corp. (other than Designated Senior Claims and Limited Secured Acquisition Debt) and senior in right of payment to all existing and future subordinated indebtedness of Enrichment Corp. and Limited Secured Acquisition Debt. The Enrichment Corp. guarantee is subordinated in right of payment to Designated Senior Claims.

As explained above, the liens securing the Enrichment Corp. guarantee of the 8% PIK Toggle Notes and the 8.25% Notes are pari passu with each other, and are junior in priority with respect to the lien securing Limited Secured Acquisition Debt, which is limited to the assets acquired with such Limited Secured Acquisition Debt.


16



9. FAIR VALUE

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value of assets and liabilities, the following hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
 
Level 1 – quoted prices for identical instruments in active markets.
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 – valuations derived using one or more significant inputs that are not observable.

Financial Instruments Recorded at Fair Value (in Millions)
 
June 30, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
147.7

 
$

 
$

 
$
147.7

 
$
260.7

 
$

 
$

 
$
260.7

Deferred compensation asset (a)
1.2

 

 

 
1.2

 
1.1

 

 

 
1.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

Deferred compensation obligation (a)
1.2

 

 

 
1.2

 
1.1

 

 

 
1.1

 
(a)
The deferred compensation obligation represents the balance of deferred compensation plus net investment earnings. The deferred compensation plan is funded through a rabbi trust. Trust funds are invested in mutual funds for which unit prices are quoted in active markets and are classified within Level 1 of the valuation hierarchy.

There were no transfers between Level 1, 2 or 3 during the periods presented.

Other Financial Instruments

As of June 30, 2017, and December 31, 2016, the balance sheet carrying amounts for Accounts Receivable, Accounts Payable and Accrued Liabilities (excluding the deferred compensation obligation described above), and payables under SWU purchase agreements approximate fair value because of the short-term nature of the instruments.

The carrying value and estimated fair value of long-term debt follow (in millions):
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Estimated Fair Value (a)
 
Carrying Value
 
Estimated Fair Value (a)
8.25% Notes
$
135.8

(b) 
$
60.2

 
-

 
-

8% PIK Toggle Notes
30.5

 
22.7

 
234.6

 
107.4

(a) Based on the most recent trading price as of the balance sheet date, which is considered a Level 2 input as of June 30, 2017, and a Level 1 input as of December 31, 2016, based on the frequency of trading.
(b) 
The carrying value of the 8.25% Notes as of June 30, 2017, consists of the principal balance of $74.3 million and the sum of interest payment obligations until maturity. Refer to Note 8, Debt.
  


17



10. PENSION AND POSTRETIREMENT HEALTH AND LIFE BENEFITS

The components of net periodic benefit cost (credit) for the defined benefit pension plans were as follows (in millions):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Service costs
$
1.0

 
$
0.9

 
$
1.9

 
$
1.9

Interest costs
8.0

 
8.9

 
16.1

 
17.7

Expected gains on plan assets
(10.2
)
 
(10.5
)
 
(20.4
)
 
(21.0
)
Actuarial loss from remeasurement

 
0.8

 

 
0.8

Net periodic benefit cost (credit)
$
(1.2
)
 
$
0.1

 
$
(2.4
)
 
$
(0.6
)

In the second quarter of 2016, the level of lump-sum payments under the non-qualified defined benefit pension plans resulted in the remeasurement of pension obligations under settlement accounting rules. The remeasurement resulted in a loss of $0.8 million included in Selling, General and Administrative Expenses in the second quarter of 2016. The loss includes the effect of a decrease in the discount rate used in the remeasurement of pension obligations from approximately 4.5% as of December 31, 2015, to approximately 3.7% as of June 30, 2016.
    
The components of net periodic benefit cost for the postretirement health and life benefit plans were as follows (in millions):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Interest costs
$
1.8

 
$
1.9

 
$
3.6

 
$
4.0

Expected gains on plan assets

 

 

 
(0.1
)
Amortization of prior service credits, net

 

 
(0.1
)
 
(0.1
)
Net periodic benefit cost
$
1.8

 
$
1.9

 
$
3.5

 
$
3.8




18



11. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is calculated by dividing income (loss) allocable to common stockholders by the weighted average number of shares of common stock outstanding during the period. In calculating diluted net income (loss) per common share, the number of shares is increased by the weighted average number of potential shares related to stock compensation awards. No dilutive effect is recognized in a period in which a net loss has occurred.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net loss allocable to common stockholders (in millions)
$
(24.4
)
 
$
(2.9
)
 
$
(17.8
)
 
$
(17.5
)
 
 
 
 
 
 
 
 
Shares in thousands:
 
 
 
 
 
 
 
Average common shares outstanding - basic
9,077

 
9,080

 
9,070

 
9,071

Potentially dilutive shares related to stock options (a)

 

 

 

Average common shares outstanding - diluted
9,077

 
9,080

 
9,070

 
9,071

 
 
 
 
 
 
 
 
Net loss per common share – basic and diluted
(2.69
)
 
$
(0.32
)
 
$
(1.96
)
 
$
(1.92
)
 
 
 
 
 
 
 
 
(a) Common stock equivalents excluded from the diluted calculation as a result of a net loss in the period (in thousands)
56

 
14

 
84

 
7

 
 
 
 
 
 
 
 
Options outstanding and considered anti-dilutive as their exercise price exceeded the average share market price (in thousands)
30

 
375

 
30

 
490


12. COMMITMENTS AND CONTINGENCIES

American Centrifuge

Milestones Under the 2002 DOE-USEC Agreement

The Company and DOE signed an agreement dated June 17, 2002, as amended (the “2002 DOE-USEC Agreement”), pursuant to which the parties made long-term commitments directed at resolving issues related to the stability and security of the domestic uranium enrichment industry. DOE consented to the assumption by Centrus of the 2002 DOE-USEC Agreement and other agreements between the Company and DOE subject to an express reservation of all rights, remedies and defenses by DOE and Centrus under those agreements as part of Centrus’ Chapter 11 bankruptcy process. The 2002 DOE-USEC Agreement requires Centrus to develop, demonstrate and deploy advanced enrichment technology in accordance with milestones and provides for remedies in the event of a failure to meet a milestone under certain circumstances.

DOE has specific remedies under the 2002 DOE-USEC Agreement if Centrus fails to meet a milestone that would adversely impact its ability to begin commercial operations of the American Centrifuge Plant on schedule, and such delay was within Centrus’ control or was due to its fault or negligence or if Centrus abandons or constructively abandons the commercial deployment of an advanced enrichment technology. These remedies include terminating the 2002 DOE-USEC Agreement, revoking Centrus’ access to DOE’s centrifuge technology that is required for the success of the American Centrifuge project, requiring Centrus to transfer certain rights in the American Centrifuge technology and facilities to DOE, and requiring Centrus to reimburse DOE for certain costs associated with the American Centrifuge project.


19



The 2002 DOE-USEC Agreement provides that if a delaying event beyond the control and without the fault or negligence of Centrus occurs that could affect Centrus’ ability to meet an American Centrifuge Plant milestone, DOE and Centrus will jointly meet to discuss in good faith possible adjustments to the milestones as appropriate to accommodate the delaying event. The Company notified DOE that it had not met the June 2014 milestone within the time period provided due to events beyond its control and without the fault or negligence of the Company. The assumption of the 2002 DOE-USEC Agreement provided for under the Plan of Reorganization did not affect the ability of either party to assert all rights, remedies and defenses under the agreement and all such rights, remedies and defenses are specifically preserved and all time limits tolled expressly including all rights, remedies and defenses and time limits relating to any missed milestones. DOE and Centrus have agreed that all rights, remedies and defenses of the parties with respect to any missed milestones since March 5, 2014, including the June 2014 and November 2014 milestones, and all other matters under the 2002 DOE-USEC Agreement continued to be preserved, and that the time limits for each party to respond to any missed milestones continue to be tolled.

Piketon Facility Costs and D&D Obligations

Effective October 1, 2015, the U.S. government discontinued funding of the American Centrifuge demonstration cascade at Piketon. Funding for American Centrifuge is now limited to research and development work at the Company’s facilities in Oak Ridge, Tennessee. As a result of reduced program funding, Centrus incurred a special charge in the third quarter of 2015 for estimated employee termination benefits, and began reductions in force. Refer to Note 2, Special Charges, for details. Centrus began to incur expenditures in the second quarter of 2016 associated with the D&D of the Piketon facility in accordance with the requirements of the NRC and DOE. Centrus leases the Piketon facility from DOE. At the conclusion of the lease on June 30, 2019, without mutual agreement between Centrus and DOE regarding other possible uses for the facility, Centrus is obligated to return the facility to DOE in a condition that meets NRC requirements and in the same condition as the facility was in when it was leased to Centrus (other than due to normal wear and tear). Centrus must remove all Company-owned capital improvements at the Piketon facility, unless otherwise consented to by DOE, by the conclusion of the lease term. The D&D work is expected to extend through 2017 and be substantially completed by year-end. As of June 30, 2017, Centrus has accrued $27.2 million on the balance sheet as Decontamination and Decommissioning Obligations for the estimated fair value of the remaining costs to complete the D&D work.

Centrus is required to provide financial assurance to the NRC and DOE for D&D costs under a regulatorily-prescribed methodology that includes potential contingent costs and reserves. As of June 30, 2017, Centrus has provided financial assurance to the NRC and DOE in the form of surety bonds totaling $29.6 million, which are fully cash collateralized by Centrus. Centrus expects to receive cash when surety bonds are reduced and/or cancelled as the Company fulfills its D&D and lease obligations.



20



13.  STOCKHOLDERS’ EQUITY

Series B Preferred Stock

On February 14, 2017, Centrus issued 104,574 shares of Series B Preferred Stock as part of the securities exchange described in Note 8, Debt. The issuance of the Series B Preferred Stock was a non-cash financing transaction. The Series B Preferred Stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share (the “Liquidation Preference”). The Series B Preferred Stock is recorded on the condensed consolidated balance sheet at fair value less transaction costs, or $4.6 million as of June 30, 2017.

Holders of the Series B Preferred Stock are entitled to cumulative dividends of 7.5% per annum of the Liquidation Preference. Centrus is obligated to pay cash dividends on the Series B Preferred Stock in an amount equal to the Liquidation Preference to the extent that dividends are declared by the Board and:
(a)
its pension plans and Enrichment Corp.’s pension plans are at least 90% funded on a variable rate premium calculation in the current plan year;
(b)
its net income calculated in accordance with GAAP (excluding the effect of pension remeasurement) for the immediately preceding fiscal quarter exceeds $7.5 million;
(c)
its free cash flow (defined as the sum of cash provided by (used in) operating activities and cash provided by (used in) investing activities) for the immediately preceding four fiscal quarters exceeds $35 million;
(d)
the balance of cash and cash equivalents calculated in accordance with GAAP on the last day of the immediately preceding quarter would exceed $150 million after pro forma application of the dividend payment; and
(e)
dividends may be legally paid under Delaware law.

Centrus has not met these criteria as of June 30, 2017, and has not declared or paid dividends on the Series B Preferred Stock as of June 30, 2017. Dividends on the Series B Preferred Stock are cumulative to the extent not paid at any quarter-end, whether or not declared and whether or not there are assets of the Company legally available for the payment of such dividends in whole or in part. As of June 30, 2017, the Series B Preferred Stock has an aggregate liquidation preference of $107.6 million, including accumulated dividends of $3.0 million.

Outstanding shares of the Series B Senior Preferred Stock are redeemable at the Company’s option, in whole or in part, for an amount of cash equal to the Liquidation Preference, plus an amount equal to the accrued and unpaid dividends, if any, whether or not declared, through date of redemption.

Rights Agreement

On April 6, 2016 (the “Effective Date”), the Company’s Board of Directors (the “Board”) adopted a Section 382 Rights Agreement (the “Rights Agreement”). The Board adopted the Rights Agreement in an effort to protect shareholder value by, among other things, attempting to protect against a possible limitation on the Company’s ability to use its net operating loss carryforwards and other tax benefits, which may be used to reduce potential future income tax obligations. As reported on the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, the Company had federal net operating losses of $725.8 million as of December 31, 2016, that currently expire through 2036.

In connection with the adoption of the Rights Agreement, the Board declared a dividend of one preferred-share-purchase-right for each share of the Company’s Class A Common Stock and Class B Common Stock outstanding as of the Effective Date. The rights initially trade together with the common stock and are not exercisable. In the absence of further action by the Board, the rights would generally become exercisable and allow a holder to acquire shares of a new series of the Company’s preferred stock if any person or group acquires 4.99% or more of the outstanding shares of the Company’s common stock, or if a person or group that already owns 4.99% or more of the Company’s Class A Common Stock acquires additional shares representing 0.5% or more of the outstanding shares

21



of the Company’s Class A Common Stock. The rights beneficially owned by the acquirer would become null and void, resulting in significant dilution in the ownership interest of such acquirer.

The Board may exempt any acquisition of the Company’s common stock from the provisions of the Rights Agreement if it determines that doing so would not jeopardize or endanger the Company's use of its tax assets or is otherwise in the best interests of the Company. The Board also has the ability to amend or terminate the Rights Agreement prior to a triggering event.

Effective on February 14, 2017, in connection with the settlement and completion of the exchange offer and consent solicitation, the Company amended the Rights Agreement solely to exclude acquisitions of the Series B Preferred Stock issued as part of the exchange offer and consent solicitation from the definition of “Common Shares.”

The Company’s stockholders approved the Rights Agreement at the 2017 annual meeting of stockholders on May 31, 2017. Unless earlier terminated in accordance with the Rights Agreement, the rights issued under the Rights Agreement expire on April 6, 2019.

Stock-Based Compensation

A summary of stock-based compensation costs follows (in millions):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Total stock-based compensation costs:
 
 
 
 
 
 
 
Restricted stock units
$

 
$

 
$

 
$
0.1

Stock options
0.1

 
0.1

 
0.2

 
0.2

Expense included in selling, general and administrative expense
$
0.1

 
$
0.1

 
$
0.2

 
$
0.3

 
 
 
 
 
 
 
 
Total recognized tax benefit
$

 
$

 
$

 
$


As of June 30, 2017, there was $0.6 million of unrecognized compensation cost related to unvested stock-based payments granted, of which $0.5 million relates to stock options and $0.1 million relates to unvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years.

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period. Stock options vest and become exercisable in equal annual installments over a three- or four-year period and expire 10 years from the date of grant.

Assumptions used in the Black-Scholes option pricing model to value option grants follow. There were no option grants in the six months ended June 30, 2017.
 
Six Months Ended
June 30, 2016
Risk-free interest rate
1.9%
Expected volatility
75%
Expected option life (years)
6
Weighted-average grant date fair value
$1.77
Options granted (in thousands)
15


22



A total of 25,000 restricted stock units were issued to non-employee, independent members of the Board of Directors on May 31, 2017. The restricted stock units vest over one year, absent a defined event that would accelerate vesting. Settlement of restricted stock units is made in shares of Class A Common Stock only upon the director’s retirement or other end of service.

Shares Outstanding

A total of 38,751 shares of Class A Common Stock were issued in settlement of vested restricted stock units to three former members of the Board of Directors following the end of their service on May 31, 2017.

Shares of Class B Common Stock that are sold in the market are converted to shares of Class A Common Stock. In the three months ended June 30, 2017, a total of 28,018 shares of Class B Common Stock were sold in the market and converted to shares of Class A Common Stock as of June 30, 2017.

Changes in the number of shares outstanding follow:
 
Preferred Stock,
Series B
 
Common Stock,
Class A
 
Common Stock,
Class B
 
 
 
 
 
 
Balance at December 31, 2015

 
7,563,600

 
1,436,400

Balance at June 30, 2016

 
7,563,600

 
1,436,400

 
 
 
 
 
 
Balance at December 31, 2016

 
7,563,600

 
1,436,400

Issuance of Preferred Stock
104,574

 

 

Issuance of Class A Common Stock

 
38,751

 

Conversion of Common Stock from Class B to Class A

 
28,018

 
(28,018
)
Balance at June 30, 2017
104,574

 
7,630,369

 
1,408,382



Accumulated Other Comprehensive Income

The sole component of accumulated other comprehensive income (“AOCI”) relates to activity in the accounting for pension and postretirement health and life benefit plans. Amortization of prior service credits is reclassified from AOCI and included in the computation of net periodic benefit cost as detailed in Note 10, Pension and Post-Retirement Health and Life Benefits.


23



14. SEGMENT INFORMATION

Centrus has two reportable segments: the LEU segment with two components, SWU and uranium, and the contract services segment. The LEU segment includes sales of the SWU component of LEU, sales of both the SWU and uranium components of LEU, and sales of uranium. The contract services segment includes revenue and cost of sales for work that Centrus performs under a fixed-price agreement as a contractor to UT-Battelle. The contract services segment also includes limited services provided by Centrus to DOE and its contractors at the Piketon facility. Gross profit is Centrus’ measure for segment reporting. There were no intersegment sales in the periods presented. For additional details on each segment, refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Revenue
 
 
 
 
 
 
 
LEU segment:
 
 
 
 
 
 
 
Separative work units
$
37.9

 
$
54.9

 
$
38.7

 
$
114.2

Uranium

 

 

 
14.3

 
37.9

 
54.9

 
38.7

 
128.5

Contract services segment
6.1

 
8.5

 
12.5

 
24.9

Revenue
$
44.0

 
$
63.4

 
$
51.2

 
$
153.4

 
 
 
 
 
 
 
 
Segment Gross Profit (Loss)
 
 
 
 
 

 
 

LEU segment
$
(4.2
)
 
$
5.6

 
$
(5.7
)
 
$
13.7

Contract services segment
(0.1
)
 
(0.1
)
 
(1.1
)
 
7.6

Gross profit (loss)
$
(4.3
)
 
$
5.5

 
$
(6.8
)

$
21.3



24



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 condensed consolidated financial statements and related notes appearing elsewhere in this report.

Overview

Centrus Energy Corp. (“Centrus” or the “Company”) is a trusted supplier of low-enriched uranium (“LEU”) for commercial nuclear power plants. References to “Centrus”, the “Company”, or “we” include Centrus Energy Corp. and its wholly owned subsidiaries as well as the predecessor to Centrus, unless the context otherwise indicates. LEU is a critical component in the production of nuclear fuel for reactors that produce electricity. We supply LEU to both domestic and international utilities for use in nuclear reactors worldwide. We are a leader in the development of advanced uranium enrichment technology and are performing research and demonstration work to support U.S. energy and national security through our contract with UT-Battelle, LLC (“UT-Battelle”), the operator of Oak Ridge National Laboratory (“ORNL”).

As a long-term supplier of LEU to our customers, our goal is to provide value through the reliability and diversity of our supply sources. We provide LEU from multiple sources including our inventory, long- and mid-term supply contracts and spot purchases. Our long-term objective is to resume commercial enrichment production and we are exploring alternative approaches to that end.

We have a contract with UT-Battelle to conduct research and development of our advanced centrifuge technology for the U.S. government. We believe that this technology could play a critical role in meeting our national and energy security needs and achieving our nation’s non-proliferation objectives.

The nuclear industry in general, and the nuclear fuel industry in particular, is in a period of significant change, which could significantly transform the competitive landscape Centrus faces. The nuclear fuel cycle industry remains oversupplied, creating downward pressures on commodity pricing, with uncertainty regarding the timing of industry expansion globally.  Changes in the competitive landscape may adversely affect pricing trends, change customer spending patterns, or create uncertainty. To address these changes, we may seek to adjust our cost structure and operations and evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions. We are 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. 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.

Business Segments

Centrus has two reportable segments: the LEU segment with two components, separative work units (“SWU”) and uranium, and the contract services segment.

LEU Segment

Revenue from Sales of SWU and Uranium

The LEU segment is currently our primary business focus. Revenue from our LEU segment is derived primarily from:
 
sales of the SWU component of LEU,
sales of both the SWU and uranium components of LEU, and
sales of natural uranium.


25



Revenue for our LEU segment accounted for approximately 88% of our total revenue in 2016. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting 25% of revenue from our LEU segment in 2016. Our agreements with electric utilities are primarily long-term, fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of the SWU component of LEU (or the SWU and uranium components of LEU) from us. Our agreements for natural uranium sales are generally shorter-term, fixed-commitment contracts.

Our revenues, operating results and cash flows can fluctuate significantly from quarter to quarter and year to year. Revenue is recognized at the time LEU or uranium is delivered under the terms of our contracts. The timing of customer demand is affected by, among other things, electricity markets, reactor operations, maintenance and refueling outages, and customer inventories. In the current market environment, some customers are building inventories and may choose to take deliveries under annual purchase obligations later in the year. Customer payments for the SWU component of LEU average roughly $10-15 million per order. As a result, a relatively small change in the timing of customer orders for LEU may cause significant variability in operating results.

Utility customers in general have the option to defer physical receipt of LEU or uranium purchased from Centrus beyond the contractual sale period. In such cases, title to LEU or uranium is transferred to the customer and a performance obligation for Centrus is created and a receivable is recorded. Cash is collected for the receivable under normal credit terms. The performance obligation is represented as Deferred Revenue on the balance sheet and the customer-titled product is classified as Deferred Costs Associated with Deferred Revenue. Risk of loss remains with Centrus until physical delivery occurs. The recognition of revenue and related cost of sales occurs at the time physical delivery occurs and risk of loss transfers to the customer. The timing of physical delivery, subject to notice period requirements, is at the option of the customer. Deferred revenue and deferred cost activity in the six months ended June 30, 2017, follows:
(in millions)
 
Deferred Revenue
 
Deferred Cost
 
Gross Profit Deferred or (Recognized)
 
Margin
 
 
 
 
 
Balance at December 31, 2016
 
$
123.6

 
$
89.3

 
$
34.3

 
28%
Deferred sales in the period
 
57.8

 
39.2

 
18.6

 
32%
Previously deferred sales recognized in the period
 
(14.9
)
 
(10.2
)
 
(4.7
)
 
32%
Balance at June 30, 2017
 
$
166.5

 
$
118.3

 
$
48.2

 
29%


Our financial performance over time can be significantly affected by changes in prices for SWU and uranium. Since 2011, market prices for SWU and uranium have significantly declined. 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, which means that average prices under contract today exceed current market prices. The long-term SWU price indicator, as published by TradeTech, LLC in Nuclear Market Review, is an indication of base-year prices under new long-term enrichment contracts in our primary markets. The following chart summarizes TradeTech’s long-term and spot SWU price indicators, the long-term price for uranium hexafluoride (“UF6”), as calculated by Centrus using indicators published in Nuclear Market Review, and TradeTech’s spot price indicator for UF6:

 

26



SWU and Uranium Market Price Indicators
leu-2016093_chartx39098a02.jpg

Our contracts with customers and suppliers are denominated in U.S. dollars, and although revenue has not been directly 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. Costs of our primary competitors are denominated in other currencies.

On occasion, Centrus will accept payment in the form of uranium. Revenue from the sale of SWU under such contracts is recognized at the time LEU is delivered and is based on the fair value of the uranium received in exchange for the SWU.

Cost of Sales for SWU and Uranium

Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold and delivered during the period and unit inventory costs. Unit inventory costs are determined using the monthly moving average cost method. Changes in purchase costs have an effect on inventory costs and cost of sales over current and future periods. Cost of sales includes costs for inventory management at off-site licensed locations. Cost of sales also includes legacy costs related to former employees of the Portsmouth and Paducah gaseous diffusion plants. Actuarial gains and losses related to the retiree benefit plans are recognized immediately in the statements of operations when plan obligations are remeasured at year-end or when lump-sum payments reach certain levels.


27



Contract Services Segment

The contract services segment includes revenue and cost of sales for American Centrifuge work we perform as a contractor to UT-Battelle. Direct costs incurred in performing the contract work are consistent with the funding levels. Centrus records an unbilled receivable and revenue based on the progress towards the achievement of monthly deliverables. Monthly reports and invoices affirming the achievement of monthly deliverables are submitted shortly following each month. The achievement of monthly deliverables has resulted in revenue consistent with the funding levels. The contract services segment also includes limited services provided by Centrus to the U.S. Department of Energy (“DOE”) and its contractors at the Piketon facility.  

American Centrifuge

The Company has a long record as a global leader in advanced technology, manufacturing and engineering. Our manufacturing, engineering and testing facilities and our highly-trained workforce are deeply engaged in advancing the next generation of uranium enrichment technology. We are exploring a number of options for returning to domestic production in the future.

In September 2015, Centrus completed a successful three-year demonstration of the existing American Centrifuge technology at its facility in Piketon, Ohio, with 120 machines linked together in a cascade to simulate industrial operating conditions. Since then our government contracts with UT-Battelle have provided for continued engineering and testing work on the American Centrifuge technology at the Company’s facilities in Oak Ridge, Tennessee. Our current contract with UT-Battelle (the “2017 ORNL Contract”) is for the period from October 1, 2016, through September 30, 2017, and is valued at approximately $25 million. The 2017 ORNL Contract provides for payments for monthly reports of approximately $2.0 million per month and additional aggregate payments of $1.0 million based on completion of certain milestones. The 2017 ORNL Contract is currently being funded incrementally. Funding for the program is provided to UT-Battelle by the U.S. government which is currently operating under a continuing resolution.

The Company’s contract with UT-Battelle that ended September 30, 2016 (the “2016 ORNL Contract”), provided for payments for monthly reports of approximately $2.7 million per month. The 2016 ORNL Contract, which was signed in March 2016, provided for payment for reports related to work performed since October 1, 2015. Revenue in the six months ended June 30, 2016, includes $16.2 million for reports on work performed in the six months ended June 30, 2016, and $8.1 million for March 2016 reports on work performed in the three months ended December 31, 2015. Expenses for contract work performed in the six months ended June 30, 2016, are included in Cost of Sales. Expenses for work performed in the three months ended December 31, 2015, before entering into the 2016 ORNL Contract, were included in Advanced Technology License and Decommissioning Costs in 2015.

American Centrifuge expenses that are outside of our contracts with UT-Battelle are included in Advanced Technology License and Decommissioning Costs, including ongoing costs to maintain the demobilized Piketon facility and our NRC licenses at that location. In the second quarter of 2016, the Company commenced with the decontamination and decommissioning (“D&D”) of the Piketon facility in accordance with the requirements of the NRC and DOE. For additional details on costs, schedule and accrued liabilities related to the D&D of the Piketon facility, refer to Results of Operations below and American Centrifuge - Piketon Facility Costs and D&D Obligations in Note 12, Commitments and Contingencies, of the condensed consolidated financial statements.


28



Site Services Work and Related Receivables

We formerly performed work under contracts with DOE and its contractors to maintain and prepare the former Portsmouth Gaseous Diffusion Plant (the “Portsmouth GDP”) for D&D. In September 2011, our contracts for maintaining the Portsmouth facilities and performing services for DOE at Portsmouth expired and we completed the transition of facilities to DOE’s D&D contractor for the Portsmouth site. Additionally, we provided limited services to DOE and its contractors at the Paducah Gaseous Diffusion Plant (the “Paducah GDP”) until the leased portions of the Paducah GDP were returned to DOE on October 21, 2014.

There is the potential for additional revenue to be recognized, based on the outcome of DOE reviews and audits, as the result of the release of previously established receivable related reserves. However, uncertainty exists because contract billing periods since June 2002 have not been finalized with DOE, and we have not yet recognized this additional revenue. Certain receivables from DOE are included in other long-term assets based on the extended timeframe expected to resolve claims for payment. Additional details are provided in Note 4, Receivables to the condensed consolidated financial statements.
 
2017 Outlook

We anticipate SWU and uranium revenue in 2017 in a range of $175 million to $200 million, reflecting an expected decline in SWU and uranium volumes delivered compared to 2016. We anticipate total revenue in a range of $200 million to $225 million. Our revenues continue to be most heavily weighted to the fourth quarter, and we expect more than one-half of our annual revenue in the fourth quarter of 2017, compared to 44 percent in the fourth quarter of 2016. We expect to end 2017 with a cash and cash equivalents balance in a range of $150 million to $175 million.

Our financial guidance is subject to a number of assumptions and uncertainties that could affect results either positively or negatively. Variations from our expectations could cause differences between our guidance and our ultimate results. Among the factors that could affect our results are:
Additional short-term purchases or sales of SWU and uranium;
Timing of customer orders, related deliveries, and purchases of LEU or components;
The outcome of legal proceedings and other contingencies;
Execution and funding of a new agreement with UT-Battelle, the operator of ORNL, for the continuation of American Centrifuge development and testing activities in Oak Ridge following the expiration of the agreement on September 30, 2017;
Potential use of cash for strategic initiatives; and
Additional costs for decontamination and decommissioning of the Company’s facility in Ohio.


29



Results of Operations

Segment Information

The following tables present elements of the accompanying condensed consolidated statements of operations that are categorized by segment (dollar amounts in millions):
 
Three Months Ended 
 June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
LEU segment
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
SWU revenue
$
37.9

 
$
54.9

 
$
(17.0
)
 
(31
)%
Uranium revenue

 

 

 

Total
37.9

 
54.9

 
(17.0
)
 
(31
)%
Cost of sales
42.1

 
49.3

 
7.2

 
15
 %
Gross profit (loss)
$
(4.2
)
 
$
5.6

 
$
(9.8
)
 
(175
)%
 
 
 
 
 
 
 
 
Contract services segment
 
 
 
 
 

 
 

Revenue
$
6.1

 
$
8.5

 
$
(2.4
)
 
(28
)%
Cost of sales
6.2

 
8.6

 
2.4

 
28
 %
Gross profit (loss)
$
(0.1
)
 
$
(0.1
)
 
$

 
 %
 
 
 
 
 
 
 
 
Total
 
 
 
 
 

 
 

Revenue
$
44.0

 
$
63.4

 
$
(19.4
)
 
(31
)%
Cost of sales
48.3

 
57.9

 
9.6

 
17
 %
Gross profit (loss)
$
(4.3
)
 
$
5.5

 
$
(9.8
)
 
(178
)%


 
Six Months Ended 
 June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
LEU segment
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
SWU revenue
$
38.7

 
$
114.2

 
$
(75.5
)
 
(66
)%
Uranium revenue

 
14.3

 
(14.3
)
 
(100
)%
Total
38.7

 
128.5

 
(89.8
)
 
(70
)%
Cost of sales
44.4

 
114.8

 
70.4

 
61
 %
Gross profit (loss)
$
(5.7
)
 
$
13.7

 
$
(19.4
)
 
(142
)%
 
 
 
 
 
 
 
 
Contract services segment
 
 
 
 
 

 
 

Revenue
$
12.5

 
$
24.9

 
$
(12.4
)
 
(50
)%
Cost of sales
13.6

 
17.3

 
3.7

 
21
 %
Gross profit (loss)
$
(1.1
)
 
$
7.6

 
$
(8.7
)
 
(114
)%
 
 
 
 
 
 
 
 
Total
 
 
 
 
 

 
 

Revenue
$
51.2

 
$
153.4

 
$
(102.2
)
 
(67
)%
Cost of sales
58.0

 
132.1

 
74.1

 
56
 %
Gross profit (loss)
$
(6.8
)
 
$
21.3

 
$
(28.1
)
 
(132
)%



30




Revenue

Revenue from the LEU segment declined $17.0 million (or 31%) in the three months and $89.8 million (or 70%) in the six months ended June 30, 2017, compared to the corresponding periods in 2016. The volume of SWU sales declined 8% in the three-month period and 54% in the six-month period. More than one-half of our annual revenue is expected in the fourth quarter of 2017. SWU volumes delivered are expected to decline in 2017 compared to 2016. Refer to 2017 Outlook above. The average price billed to customers for sales of SWU declined 24% in the three-month period and 26% in the six-month period, reflecting the particular contracts under which SWU were sold during the periods. The average SWU price for sales during the full year 2017 is expected to be approximately 3% lower than in 2016.

Revenue from the contract services segment declined $2.4 million (or 28%) in the three months ended June 30, 2017, compared to the corresponding period in 2016, reflecting the reduced scope of contract work for American Centrifuge technology services in the current period. Revenue from the contract services segment declined $12.4 million (or 50%) in the six months ended June 30, 2017, compared to the corresponding period in 2016, due to the reduced scope of work and the timing of revenue recognition in the prior period. As a result of the contract signed with UT-Battelle in March 2016, revenue in the six months ended June 30, 2016, included $16.2 million for work in the six months ended June 30, 2016, as well as $8.1 million for March 2016 reports on work performed in the fourth quarter of 2015.

Cost of Sales

Cost of sales for the LEU segment declined $7.2 million (or 15%) in the three months and $70.4 million (or 61%) in the six months ended June 30, 2017, compared to the corresponding periods in 2016, primarily due to the declines in SWU sales volumes noted above and declines in the average cost of sales per SWU.

Cost of sales is affected by sales volumes, unit costs of inventory, and direct charges to cost of sales such as inventory valuation adjustments and legacy costs related to former GDP employees and other residual costs related to the Paducah GDP. Refer to Impact of Legacy Costs below.

Our inventories are valued at the lower of cost or net realizable value. Valuation adjustments for our uranium inventory to reflect declines in uranium market price indicators totaled $0.7 million in the six months ended June 30, 2016, including $0.2 million in second quarter of 2016.

Cost of sales for the contract services segment declined $2.4 million (or 28%) in the three months and $3.7 million (or 21%) in the six months ended June 30, 2017, compared to the corresponding periods in 2016, due to the reduced scope of contract work.
 
Gross Profit (Loss)

We realized a gross loss of $4.3 million in the three months ended June 30, 2017, a decline of $9.8 million compared to the gross profit of $5.5 million in the corresponding period in 2016. We realized a decline in gross profit of $9.8 million for the LEU segment primarily due to the decline in the average SWU price, partially offset by a decline in the average SWU cost.

We realized a gross loss of $6.8 million in the six months ended June 30, 2017, a decline of $28.1 million compared to the gross profit of $21.3 million in the corresponding period in 2016. We realized a decline in gross profit of $19.4 million for the LEU segment primarily due to the decline in the average SWU price and the decline in SWU sales volume for the six months compared to the prior period, partially offset by a decline in the average SWU cost. We expect a positive gross profit for our LEU segment for the full year 2017.


31



We realized a decline in gross profit of $8.7 million for the contract services segment in the six months ended June 30, 2017, compared to the corresponding period in 2016. Revenue for the contract services segment in the six months ended June 30, 2016, included a billing for March 2016 reports on work performed in the fourth quarter of 2015. Related expenses were included in Advanced Technology License and Decommissioning Costs in 2015 as they were incurred before a contract was in place. We realized a gross loss of $1.1 million for the contract services segment in the six months ended June 30, 2017, due to costs incurred which are not fully recoverable from the revenue under the contract with UT-Battelle.

Impact of Legacy Costs

The Company ceased uranium enrichment at the Portsmouth GDP in 2001 and the Paducah GDP in 2013. Included in cost of sales are costs related to benefits for former GDP employees and other residual costs related to the Paducah GDP. These legacy costs are distinct from the Company’s current costs of acquiring SWU and uranium for sale. The following table presents the impact of legacy costs on gross profit for the LEU segment (dollar amounts in millions):
 
Six Months Ended 
 June 30,
 
2017
 
2016
LEU segment (GAAP)
 
 
 
Gross profit (loss)
$
(5.7
)
 
$
13.7

Gross margin
(14.7
)%
 
10.7
%
 
 
 
 
Legacy costs included in cost of sales:
 
 
 
Pension and postretirement health and life benefits (a)
$
0.9

 
$
2.1

Disability obligations and other (b)
(0.1
)
 
3.4

Legacy costs
$
0.8

 
$
5.5

 
 
 
 
LEU segment excluding legacy costs (non-GAAP)
 
 
 
Gross profit (loss) excluding legacy costs
$
(4.9
)
 
$
19.2

Gross margin excluding legacy costs
(12.7
)%
 
14.9
%
 
 
 
 
(a) Costs for pension and postretirement health and life benefits are affected by actuarial assumptions and other factors.
(b) Costs for disability payment obligations are affected by disability status changes and other factors related to the fixed population receiving benefits.

We believe the non-GAAP financial measures above, when considered together with the corresponding GAAP measures and the reconciliation above, can provide additional understanding of the Company’s financial performance and underlying profitability. Management uses the non-GAAP financial measures to provide investors with a more complete understanding of the Company’s historical results and trends.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with our GAAP results. The non-GAAP financial measures should be viewed in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.

32



Non-Segment Information

The following tables present elements of the accompanying condensed consolidated statements of operations that are not categorized by segment (dollar amounts in millions):
 
Three Months Ended 
 June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Gross profit (loss)
$
(4.3
)
 
$
5.5

 
$
(9.8
)
 
(178
)%
Advanced technology license and decommissioning costs
4.4

 
4.7

 
0.3

 
6
 %
Selling, general and administrative
9.7

 
12.5

 
2.8

 
22
 %
Amortization of intangible assets
2.0

 
2.7

 
0.7

 
26
 %
Special charges for workforce reductions and advisory costs
2.3

 
0.6

 
(1.7
)
 
(283
)%
Gains on sales of assets
(0.7
)
 
(0.4
)
 
0.3

 
75
 %
Operating loss
(22.0
)
 
(14.6
)
 
(7.4
)
 
(51
)%
Gain on early extinguishment of debt

 
(16.7
)
 
(16.7
)
 
(100
)%
Interest expense
0.7

 
5.1

 
4.4

 
86
 %
Investment income
(0.3
)
 
(0.1
)
 
0.2

 
200
 %
Loss before income taxes
(22.4
)
 
(2.9
)
 
(19.5
)
 
(672
)%
Income tax benefit

 

 

 

Net loss
(22.4
)
 
(2.9
)
 
(19.5
)
 
(672
)%
Preferred stock dividends - undeclared and cumulative
2.0

 

 
2.0

 

Net loss allocable to common stockholders
$
(24.4
)
 
$
(2.9
)
 
$
(21.5
)
 
(741
)%


 
Six Months Ended 
 June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Gross profit (loss)
$
(6.8
)
 
$
21.3

 
$
(28.1
)
 
(132
)%
Advanced technology license and decommissioning costs
10.5

 
16.7

 
6.2

 
37
 %
Selling, general and administrative
22.1

 
23.9

 
1.8

 
8
 %
Amortization of intangible assets
3.2

 
5.9

 
2.7

 
46
 %
Special charges for workforce reductions and advisory costs
4.7

 
0.6

 
(4.1
)
 
(683
)%
Gains on sales of assets
(1.7
)
 
(0.7
)
 
1.0

 
143
 %
Operating loss
(45.6
)
 
(25.1
)
 
(20.5
)
 
(82
)%
Gain on early extinguishment of debt
(33.6
)
 
(16.7
)
 
16.9

 
101
 %
Interest expense
3.6

 
10.1

 
6.5

 
64
 %
Investment income
(0.6
)
 
(0.4
)
 
0.2

 
50
 %
Loss before income taxes
(15.0
)
 
(18.1
)
 
3.1

 
17
 %
Income tax benefit
(0.2
)
 
(0.6
)
 
(0.4
)
 
(67
)%
Net loss
(14.8
)
 
(17.5
)
 
2.7