Centrus Energy Corp.
Q3 2015 Earnings Call Transcript

Published: 11 Nov 2015

[Operator:]

Greetings and welcome to the Centrus Energy Corp.'s Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Don Hatcher. Thank you, Mr. Hatcher. You may now begin.

[Don Hatcher:]

Thanks Rob. Good morning and thank you for joining us. Today’s call will cover the third quarter of 2015 that ended September 30. Here today for the call are Dan Poneman, President and Chief Executive Officer; Steve Greene, Senior Vice President, Chief Financial Officer and Treasurer; and John Dorrian, Controller and Chief Accounting Officer. Before turning the call over to Dan, I’d like to welcome all our callers, as well as those listening to our webcast. This conference call follows our earnings release issued yesterday afternoon. We expect to file our quarterly report on Form 10-Q tomorrow due to the SEC's closure today for the Veteran's Day Holiday. All of our news releases and SEC filings including our 10-K, 10-Qs and 8-Ks are available on our website. A replay of this call will also be available later this morning on the Centrus website. I’d like to remind everyone that certain of the information that we may discuss on this call today may be considered forward-looking information that involves risk and uncertainty, including assumptions about the future performance of Centrus. Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. Finally, the forward-looking information provided today is time sensitive and is accurate only as of today November 11, 2015 unless otherwise noted. This call is the property of Centrus Energy. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Centrus is strictly prohibited. Thank you for your participation. And now, I will turn the call over to Dan Poneman.

[Daniel Poneman:]

Thanks, Don. Good morning everybody and thank you for joining us. I am going to offer some thoughts from a 30,000 foot level about the progress that we are making, what our results mean and where we are headed and then I will turn the floor over to our Chief Financial Officer, Steve Greene who can provide more detail on our third quarter results. Bottom line up front, the third quarter was difficult for Centrus but that doesn’t tell the whole story. Our revenues this quarter were low in large part because a number of significant customer orders will be delivered in the fourth quarter. In fact, we are anticipating that about 40% of our revenue for the year will come in the fourth quarter. This kind of quarter-to-quarter volatility and lumpy distribution of deliveries frequently occur in our business. The good news is that our annual projections for revenues and end of year cash balance have not changed. We are on track to finish the year with total revenues between $425 million and $450 million and a cash balance ranging between $175 million and $200 million. As Steve will explain in more detail we also had a re-measurement of our pension obligations which accounted for almost half of our net loss during the quarter. The re-measurement was made as of September 30, which as all of you know was during a low period for the market this year. Our LEU business is expected to account for about 80% of this year's annual company revenue. We've made important progress this year to strengthen our position as a long-term nuclear fuel supplier. We remain focused on aligning our sources of supply with our existing contracts, pursuing sales opportunities and adjusting our costs to fit our business objectives. We have a solid plan in place to expand our nuclear fuel business in the years to come and we are making steady progress in implementing that plan. Finally, in mid September the U.S. Department of Energy announced that it was reducing funding for the American Centrifuge Program by about 60%. While clearly we were disappointed by this decision it is important to note that the Department of Energy affirmed that it remains committed to restoring America's enrichment capability in the future and continues to support our important research and testing work in Oak Ridge, Tennessee. The Department also released a report to Congress that concluded that the American centrifuge technology is and I quote "the most technically advanced and lowest risk option for future production" of the unobligated enriched Uranium used for the production of Tritium for national security purposes. Unfortunately, the funding reduction would mean shutting down the cascade of 120 gas centrifuge machines in Piketon, Ohio where important work continues to validate solutions to the technical issue that we have discussed in our past SEC filings. We are working to find a path forward that would allow that work to continue. We are also looking at other potential uses for the Piketon facility and the impacts including layoffs and demobilization activities that we would need to look at and consider should funding for continued cascade operations not be restored. So it has been a tough quarter, but we continue to believe that we are on the right path in rebuilding our LEU business and pursuing new business opportunities and maintaining the expertise, operational excellence, cutting edge technology and national security focus that has been the hallmark of this company. With that, I will turn things over to Steve Greene. Steve?

[Stephen Greene:]

Thank you, Dan and good morning everyone. We reported revenue of $29.2 million for the third quarter a decrease of $91.5 million compared to the same quarter in 2014. Revenue for the nine-month period of 2015 was $260.3 million a decrease of $130.2 million in the same period in 2014. The timing of customer orders affected revenue in the third quarter, but as Dan mentioned, our annual outlook has not changed and we expect to generate approximately 40% of our annual revenue in the fourth quarter. As a reminder, we recognize revenue for the LEU business segment at the time product is delivered under the terms of customer contracts and a relatively small change in the timing of customer orders due to a change in the customers; refueling schedule may cause operating results to be substantially above or below expectations. The volume of SWU sales declined 88% and 58% in the three and nine-month periods of 2015 compared to 2014 reflecting this variability in timing of utility customer orders as well as the expected decline in SWU deliveries in 2015. The average price billed to customers for sales of SWU declined 24% in the three-month period and increased 6% in the nine-month period compared to 2014 reflecting the particular contracts under which SWU were sold during the periods. Cost of sales for the third quarter was $53.6 million a decrease of $72.5 million compared to the corresponding period in 2014 due to the lowest SWU sales volumes partially offset by higher direct charges. For the nine-month period of 2015 cost of sales was $273.5 million a reduction of $139.8 million compared to the same period in 2014 due to lower SWU sales volumes and lower direct charges partially offset by higher Uranium sales volumes and higher costs in the Contract Services segment commensurate with higher revenue. Since ceasing Uranium enrichment at the Paducah GDP in May 2013, we have incurred a number of expenses unrelated to production that have been charged directly to cost of sales. These charges totaled $23.9 million in the third quarter and $32.5 million in the nine months ended September 30, 2015, and $17.5 million and $66.7 million in the corresponding periods in 2014. These included a direct charge of $21.6 million resulting from our re-measurement of pension obligations on September 30, 2015. Lump sum pension payments in the first nine months of 2015 to former employees including those affected by workforce reductions resulted in an interim re-measurement under settlement accounting rules. Another re-measurement of the plans will be made on December 31. Effective with the adoption of Fresh Start accounting as of September 30, 2014 Centrus immediately recognizes actuarial gains and losses in the statement of operations in the period in which they arise. The interim re-measurement also resulted in $3.2 million charged to selling, general and administrative expenses in the third quarter of 2015. The Contract Services segment includes revenue in cost of sales for American Centrifuge work we performed under the Act II agreement as a subcontractor to UT-Battelle and Oak Ridge National Laboratory. As we reported in September, Oak Ridge National Labs informed us the DoE had decided to reduce funding for the American Centrifuge Program and therefore Oak Ridge National Labs intended the contract with us at a reduced level for the period through September 30, 2016 with the possibility for additional extensions. We have been in discussions with DoE concerning of obtaining additional funding to permit our operations at Piketon to continue, but we have no assurance that additional funding will be provided. As a result of DoE's decision we notified our American Centrifuge employees of possible layoffs. Based on the level of funding reduction we incurred a special charge of $8.7 million in the third quarter of 2015 for estimated termination benefits consisting primarily of payments under our severance plan. We expect to make payments for these workforce reductions over the next 18 months. Should funding not be restored for operations at the Piketon, Ohio facility, we could incur further costs associated with the reduction in scope, these costs could commence in the fourth quarter of 2015 as the Piketon workforce shifted to demobilization efforts and could extend into 2016. Demobilization costs have been incurred related to prior limited reductions in scope and are included in advanced technology cost. We currently estimate that we could incur demobilization costs of approximately $10 million to $15 million in the fourth quarter of 2015. This estimate is in addition to the severance costs charged in the third quarter of 2015. We had a gross loss of $24.4 million in the third quarter and $13.2 million for the nine-month period partially reflecting the pension re-measurement mentioned earlier. Americans Centrifuge costs incurred by the Company that are outside of the agreement with Oak Ridge National Labs which ended on September 30, 2015 are included in advanced technology costs, including certain demobilization and maintenance costs. Such costs totaled $1.9 million in the three months and $7.7 [ph] million in the nine months ended September 30, 2015 and $5.3 million in the three months and $12.3 million in the nine months ended September 30, 2014. Selling, general and administrative expense increased by $3.1 million in the three-month period compared to 2014 due to the pension re-measurement loss described earlier, but decreased by $0.1 million in the nine-month period compared to the prior year. Centrus reported a net loss for the third quarter of $55.1 million compared to a net income of $418.9 million in the same quarter of 2014. For the nine-month period ended September 30, 2015 we reported a net loss of $85.6 million compared to a net income of $340.1 million in the same period last year. The results reflect net reorganization gains of $426.9 million in the prior nine-month period, amortization in the current periods of intangible assets that resulted from our re-organization and an increase on our gross loss in the three-month period, partially offset by declines in advanced technology costs and a decline in our gross loss in the nine-month period. Turning to cash we reported a cash balance of $180.3 million at September 30, 2015. The sources and uses of cash flow in the nine-month period were in line with our expectations. As mentioned earlier, we are reiterating our guidance for 2015 that we expect total revenue in the range of $425 to $450 million and an end of year cash balance in a range of $175 to $200 million. That concludes the remarks for today's call. Now I would like to turn it over to the operator for any questions.

[Operator:]

Thank you. [Operator Instructions] Thank you. At this time, I will turn the floor back to management for further comments.

[Don Hatcher:]

Nothing further here. I would like to thank everyone for your participation and a reminder that this call will be rebroadcast after 11

[Daniel Poneman:]

Thank you.

[Stephen Greene:]

Thank you.

[Operator:]

Thank you. Today's conference has concluded. Thank you for your participation. You may now disconnect your lines at this time.