Redwire Corporation (RDW) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where indicated.
Business context
Redwire develops and supplies space infrastructure, components and related services for government and commercial customers. It reports one operating segment. The October 2022 acquisition of QinetiQ Space NV (Space NV) contributed materially to year-over-year revenue growth.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $62.6m | $37.2m | $180.3m | $106.8m |
| Gross margin | $17.1m (27%) | $7.9m (21%) | $47.2m (26%) | $20.1m (19%) |
| Operating income (loss) | ($2.7m) | ($10.3m) | ($8.8m) | ($120.7m) |
| Net income (loss) | ($6.3m) | ($10.4m) | ($19.0m) | ($104.7m) |
| Net loss available to common shareholders | ($9.1m) | ($10.4m) | ($31.0m) | ($104.7m) |
| Adjusted EBITDA (non-GAAP) | $4.9m | ($1.5m) | $13.6m | ($10.2m) |
Q3 revenue increased 68%; nine-month revenue increased 69%. Management attributed growth to Space NV, higher production volumes, larger average contracts and contract mix. Gross margin improved, which management linked to more profitable awards and completion of lower-margin contracts. SG&A was 29% of revenue in both 2023 periods, versus 41% in Q3 2022 and 50% for the first nine months of 2022.
- Cash flow: Operating cash outflow was $14.5m for the first nine months, compared with $26.8m in 2022. Investing outflow was $5.2m; financing inflow was $2.3m. Cash declined $17.5m from year-end 2022 to $10.9m.
- Liquidity: At September 30, cash was $10.9m, available revolver capacity was $20.0m, and unused B. Riley equity-facility capacity was $23.3m, subject to limitations. Management said available sources should meet working-capital needs and covenant requirements for at least 12 months from issuance of the statements.
- Debt: Gross debt was $83.3m ($81.9m net of discounts and issuance costs), versus $78.9m gross at December 31, 2022. Adams Street borrowing rates were high and variable; disclosed effective rates ranged from 12.15% to 16.35%. The company reported compliance with amended covenants at quarter-end.
- Backlog and obligations: Contracted backlog was $253.4m at September 30, up from $158.9m at September 30, 2022, but down from $313.1m at December 31, 2022. Remaining performance obligations were $223.3m; Redwire expected about 66% to become revenue within 12 months. Q3 book-to-bill was 0.74; last-twelve-month book-to-bill was 1.38.
Material changes and unusual items
- The 2022 comparative period included an $80.5m impairment charge; no impairment was recorded in the first nine months of 2023. This largely explains the sharp improvement in nine-month operating and net losses.
- Space NV contributed $13.5m of Q3 revenue and $40.0m of nine-month revenue. It also added $11.7m and $32.6m of cost of sales, respectively.
- Nine-month interest expense rose 44% to $7.9m, primarily due to higher variable interest rates. The private-warrant fair-value change produced $2.5m of expense in the first nine months of 2023, compared with $16.0m of income in 2022.
- Series A preferred-stock dividends reduced earnings available to common shareholders by $2.9m in Q3 and $12.0m year to date. The preferred stock had a $179.3m liquidation preference at quarter-end and was convertible into approximately 30.2m common shares.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management cited inflation, interest rates, market volatility, supply-chain pressures and regulatory challenges. Backlog may be reduced by contract changes or cancellations, and some multiyear government contracts depend on annual funding. Government-customer concentration, contract estimates and execution, acquisition integration, foreign currency exposure, and the company’s need for financing are also relevant risks.
Disclosure controls and procedures were assessed as ineffective at September 30, 2023 because material weaknesses in internal control over financial reporting remained. Management reported remediation work underway and said full remediation would likely extend beyond December 31, 2023; one previously identified risk-assessment weakness was considered remediated. A securities class action and related derivative litigation remained pending, with possible loss not reasonably estimable. The SEC review and DOJ inquiry described in the filing were closed.
Important facts for investors to verify
- Whether operating cash use, contract-asset growth and the decline in cash improve as revenue converts to customer billings and collections.
- Whether backlog converts to revenue as expected, particularly given Q3 book-to-bill below 1.0 and annual funding or cancellation risks.
- Debt service capacity, borrowing costs, covenant compliance when the net-leverage test resumes for the quarter ending December 31, 2023, and availability of additional financing.
- Progress and cost of remediating remaining internal-control weaknesses, and whether disclosure controls become effective.
- The effects of preferred-stock dividends, liquidation rights and potential conversion dilution on common shareholders.
- Resolution and potential financial impact of pending litigation, which the filing says cannot currently be estimated.