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.
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.
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
$2.1 million
is included in
Other Long-Term Liabilities
and is expected to be paid through 2019.
A summary of termination benefit activity and related liabilities follows (in millions):
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Liability
December 31,
2016
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Six Months Ended
June 30, 2017
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Liability
June 30,
2017
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Charges for Termination Benefits
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Paid/ Settled
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Workforce reductions:
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Evolving business needs
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$
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0.1
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$
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1.5
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$
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(0.4
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)
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$
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1.2
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Piketon demonstration facility
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5.4
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0.1
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(0.5
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)
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5.0
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$
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5.5
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$
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1.6
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$
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(0.9
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)
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$
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6.2
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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.
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
$8.1 million
for March 2016 reports on work performed in the three months ended December 31, 2015. Expenses for contract work performed in the six months ended June 30, 2016, are included in
Cost of Sales
. Expenses for work performed in the three months ended December 31, 2015, before entering into the 2016 ORNL Contract, were included in
Advanced Technology License and Decommissioning Costs
in 2015.
American Centrifuge expenses that are outside of the Company’s contracts with UT-Battelle are included in
Advanced Technology License and Decommissioning Costs,
including ongoing costs to maintain the demobilized Piketon facility and our licenses from the U.S. Nuclear Regulatory Commission (“NRC”) at that location. In the second quarter of 2016, the Company commenced the decontamination and decommissioning (“D&D”) of the Piketon facility in accordance with the requirements of NRC and the U.S. Department of Energy (“DOE”). Refer to
Note 12, Commitments and Contingencies
, for additional details.
4. RECEIVABLES
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June 30,
2017
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December 31,
2016
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(in millions)
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Utility customers and other
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$
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56.2
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|
$
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15.3
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Contract services, primarily DOE
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4.4
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4.6
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Accounts receivable
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$
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60.6
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$
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19.9
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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
$19.3 million
as of June 30, 2017, and December 31, 2016, is included in
Other Long-Term Liabilities
pending resolution of the long-term receivables from DOE described above.
5. INVENTORIES
Centrus holds uranium at licensed locations in the form of natural uranium and as the uranium component of low enriched uranium (“LEU”). Centrus also holds separative work units (“SWU”) as the SWU component of LEU at licensed locations (e.g., fabricators) to meet book transfer requests by customers. Fabricators process LEU into fuel for use in nuclear reactors. Components of inventories follow (in millions):
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June 30, 2017
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December 31, 2016
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Current
Assets
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|
Current
Liabilities
(a)
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Inventories, Net
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Current
Assets
|
|
Current
Liabilities
(a)
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Inventories, Net
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Separative work units
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$
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69.1
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|
|
$
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10.8
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|
|
$
|
58.3
|
|
|
$
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115.8
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|
|
$
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15.2
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|
|
$
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100.6
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Uranium
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34.7
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|
|
16.0
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18.7
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61.4
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42.3
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19.1
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Materials and supplies
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0.2
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|
—
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0.2
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|
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0.2
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|
|
—
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|
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0.2
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|
|
$
|
104.0
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|
|
$
|
26.8
|
|
|
$
|
77.2
|
|
|
$
|
177.4
|
|
|
$
|
57.5
|
|
|
$
|
119.9
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|
|
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(a)
|
Inventories owed to customers and suppliers, included in current liabilities, include SWU and uranium inventories owed to fabricators.
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6. PROPERTY, PLANT AND EQUIPMENT
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June 30,
2017
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December 31,
2016
|
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(in millions)
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Property, plant and equipment, gross
|
6.7
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|
|
6.8
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|
Accumulated depreciation
|
(1.2
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)
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|
(0.8
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)
|
Property, plant and equipment, net
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$
|
5.5
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$
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6.0
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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.
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|
June 30, 2017
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|
December 31, 2016
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(in millions)
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Gross Carrying Amount
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Accumulated Amortization
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Net Amount
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Gross Carrying Amount
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Accumulated Amortization
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Net Amount
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Sales order book
|
$
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54.6
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|
$
|
20.8
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|
|
$
|
33.8
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|
|
$
|
54.6
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|
|
$
|
19.9
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|
|
$
|
34.7
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Customer relationships
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68.9
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|
|
12.6
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|
56.3
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|
68.9
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|
10.3
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|
|
58.6
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Total
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$
|
123.5
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|
$
|
33.4
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|
|
$
|
90.1
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|
|
$
|
123.5
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|
|
$
|
30.2
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|
|
$
|
93.3
|
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8. DEBT
A summary of long-term debt follows (in millions):
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Maturity
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June 30,
2017
|
|
December 31, 2016
|
8.25% Notes:
|
Feb. 2027
|
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Principal
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|
$
|
74.3
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|
|
$
|
—
|
|
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
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|
0.1
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|
|
0.5
|
|
Total debt
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|
|
166.2
|
|
|
234.1
|
|
Less current portion
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|
|
6.4
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|
|
—
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|
Long-term debt
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|
|
$
|
159.8
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|
|
$
|
234.1
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(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
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:
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•
|
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;
|
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|
•
|
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.
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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.
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.
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:
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•
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Level 1 – quoted prices for identical instruments in active markets.
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•
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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.
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•
|
Level 3 – valuations derived using one or more significant inputs that are not observable.
|
Financial Instruments Recorded at Fair Value (in Millions)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
.
|
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
|
|
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.
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.
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
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
|
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
.
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
|
|