Redwire Corporation (NYSE: RDW) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts below are in U.S. dollars; “million” values are rounded. Redwire develops space infrastructure, components, and related engineering services and reports one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $37.2m | $32.7m | $106.8m | $96.5m |
| Gross profit / margin | $7.9m / 21% | $5.9m / 18% | $20.1m / 19% | $22.1m / 23% |
| Operating income (loss) | $(10.3)m | $(31.1)m | $(120.7)m | $(53.8)m |
| Net income (loss) | $(10.4)m | $(24.3)m | $(104.7)m | $(47.8)m |
| Net loss per share | $(0.16) | $(0.55) | $(1.66) | $(1.21) |
| Adjusted EBITDA (non-GAAP) | $(1.5)m | $(0.8)m | $(10.2)m | $1.8m |
- Revenue mix and growth: Q3 revenue increased 14%, primarily from Techshot, contract mix, and delivery timing. Nine-month revenue increased 11%, including $5.1m contributed by Techshot. Nine-month revenue by customer group was $46.4m civil space, $29.2m national security, and $31.2m commercial and other.
- Cash flow: Operating cash use was $26.8m for the first nine months, versus $34.3m a year earlier. Investing cash use was $3.4m; financing provided $16.9m. Cash fell by $13.5m from year-end 2021 to $7.0m.
- Liquidity and debt: Reported available liquidity was $17.0m at September 30, comprising $7.0m cash and $10.0m available credit. Debt was $94.7m gross, or $93.0m net of discounts and issuance costs; long-term debt, net, was $89.5m. Current liabilities were $63.6m versus current assets of $49.4m.
- Backlog: Contracted backlog was $158.9m, compared with $139.7m at December 31, 2021; total backlog, including uncontracted amounts, was $304.0m. Remaining performance obligations were $125.7m, of which the company expected to recognize about 86% within 12 months. Q3 book-to-bill was 0.91; nine-month book-to-bill was 1.18.
Material changes and unusual items
- Q3 gross margin improved to 21% from 18%, while nine-month gross margin declined to 19% from 23%, reflecting contract mix, higher production costs, inflation, supply constraints, and unfavorable contract cost estimates.
- Nine-month results included $80.5m of non-cash impairment charges: $39.3m goodwill, $28.2m intangible assets, and $12.9m property and equipment. The goodwill impairment related to Mission Solutions and reflected reduced revenue forecasts, higher production costs, and subcontractor delays.
- Q3 SG&A fell 55%, mainly because equity compensation was $19.6m lower than in the prior-year quarter. Nine-month SG&A declined 7%, partly offset by workforce, Techshot, litigation, and public-company costs.
- Nine-month other income included a $16.0m gain from a decline in the fair value of private warrants. This non-cash gain helped reduce the reported net loss but does not represent operating cash generation.
- Revenue estimate-at-completion adjustments were unfavorable by $1.2m in Q3 and $4.4m for the nine months, before tax. Contract assets rose to $16.3m from $11.7m at year-end, while deferred revenue rose to $17.4m from $15.7m.
Outlook, risks, and subsequent events
- Management gave no specific revenue or earnings guidance. It said it expected to keep investing in capacity, infrastructure, and technology through the remainder of 2022, while pursuing cost reductions and improved cash-flow management. Management believed existing liquidity would cover working capital needs and covenant compliance for at least 12 months from issuance, but cautioned that continued cash use could make longer-term needs challenging.
- Management cited inflation, supply-chain disruption, labor shortages, rising rates, COVID-19 effects, and supplier stress as factors delaying programs and increasing costs. Fixed-price contract estimates, customer funding timing, and conversion of backlog to revenue are also risks.
- In August, the credit agreement’s leverage covenant was suspended through June 2023, with a $5.0m minimum-liquidity covenant through September 2023; interest on specified Adams Street debt increased by 2 percentage points and accrues in kind until leverage compliance. A subsequent October amendment extended covenant suspension through September 2023, with testing resuming in December 2023 under revised leverage limits. Redwire reported compliance with amended covenants as of September 30.
- After quarter-end, Redwire sold $80.0m of Series A convertible preferred stock to AEI and Bain Capital and a further $1.25m to other investors. It used part of the proceeds to fund its October 31 acquisition of QinetiQ Space NV for €32.0m, subject to adjustments. The filing estimated final net proceeds of approximately $37m–$40m after transaction and acquisition-related costs and adjustments. Preferred stock is convertible at an initial $3.05 per common share and carries dividends of 13% per year if paid in cash or 15% if paid in kind; it has senior rights and voting power on an as-converted basis.
- Disclosure controls were deemed ineffective as of September 30, 2022. The company reported material weaknesses involving management tone, accounting resources and segregation of duties, risk assessment, accounting controls, complex transactions, and IT general controls. Management said remediation was underway and likely to extend beyond year-end 2022.
- Redwire disclosed a securities class action and a related derivative action; it disputes the allegations. The company could not estimate possible losses. It also reported an ongoing SEC matter following an internal investigation into potential accounting issues; the investigation found no need to restate prior financial statements.
Most important facts for investors to verify
- Whether operating cash use, margins, and contract cost estimates improve, and how much of the reported backlog converts to funded revenue.
- The company’s cash position and access to credit after the Space NV acquisition, preferred-stock financing, and transaction adjustments; also monitor debt service, PIK interest, and covenant testing.
- The effect of preferred-stock dividends, conversion, voting rights, and potential dilution on common shareholders.
- Progress and costs in remediating the material weaknesses, and any developments in the SEC matter and shareholder litigation.
- Whether Mission Solutions and other reporting units face further impairment, and whether acquisition integration and expected Space NV benefits are realized.