Rocket Lab USA, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Rocket Lab provides launch services and spacecraft systems, components, manufacturing, and mission operations. The company reports Launch Services and Space Systems as its two operating segments. Dollar amounts below are in U.S. millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $40.7 | $18.2 | Up 124% |
| Gross profit / margin | $3.7 / 9.2% | $1.4 / 7.8% | Margin improved 1.4 percentage points |
| Operating loss | $(32.8) | $(12.3) | Loss widened |
| Net loss | $(26.7) | $(15.9) | Loss widened |
| Operating cash flow | $(26.3) | $(15.5) | Cash use increased |
| Investing cash flow | $(71.8) | $(4.0) | Primarily SolAero acquisition |
| Cash and cash equivalents at period end | $603.1 | — | Down from $691.0 at Dec. 31, 2021 |
Revenue growth was driven chiefly by acquisitions and strength in organic Space Systems activity; launch revenue declined. Space Systems generated $34.1 million of revenue and $4.5 million gross profit, compared with $1.7 million and $0.8 million, respectively, in Q1 2021. Launch Services revenue was $6.6 million and the segment recorded a $0.8 million gross loss; the prior-year segment had $16.5 million revenue and $0.6 million gross profit.
Research and development expense rose 90% to $13.5 million, while selling, general and administrative expense increased 248% to $23.1 million. The latter reflected public-company costs, higher staffing and stock compensation, and a $2.5 million increase in estimated PSC contingent consideration. Stock-based compensation totaled $12.0 million versus $1.1 million in the prior-year quarter.
The net loss included a $13.5 million noncash gain from remeasuring warrants, which were exercised or redeemed during the quarter. Net loss per share was $(0.06), versus $(0.20) in Q1 2021; weighted-average shares rose to 456.5 million from 78.8 million, so per-share comparisons are affected by the post-combination share count.
At March 31, current assets were $746.2 million and current liabilities $173.4 million. Long-term borrowings totaled $100.8 million, including $2.8 million classified as current; the loan is secured by substantially all company assets, bears cash interest of at least 8.15% plus 1.25% payment-in-kind interest, and matures June 1, 2024. The company reported covenant compliance and no remaining availability under the facility. Cash exceeded borrowings by approximately $502 million, excluding lease liabilities.
Material changes and operating developments
- SolAero was acquired on January 18, 2022 for $76.7 million of acquisition-date consideration. It contributed $20.1 million of Q1 revenue and $0.9 million of operating loss. Cash paid for the acquisition, net of acquired cash and restricted cash, was $65.6 million.
- Revenue from Space Systems rose sharply following the 2021 acquisitions of PSC and ASI and the 2022 SolAero acquisition. Reported results therefore include substantial changes in the business perimeter; unaudited pro forma Q1 2022 revenue and net loss, assuming acquisitions from January 1, 2021, were $43.2 million and $(27.8) million.
- Backlog was $545.9 million at quarter-end; approximately 41% was expected to be recognized within 12 months. Contract liabilities increased to $97.1 million from $59.7 million at year-end, including balances assumed with SolAero and customer advances.
- Inventories increased to $77.9 million from $47.9 million at year-end. Property, plant and equipment rose to $99.6 million from $65.3 million, reflecting acquired assets and capital investment.
- Cash, cash equivalents and restricted cash declined by $84.3 million during the quarter. Operating cash use included higher inventory and receivables, partly offset by increased contract liabilities; investing cash use included the SolAero acquisition and $6.2 million of property, equipment and software purchases.
Outlook, risks and unusual items
- Management said existing cash and expected customer payments should fund working capital and capital expenditure needs for at least the next 12 months, while noting the company may seek additional financing and that future capital needs depend on growth, development spending, acquisitions and other factors.
- Rocket Lab anticipated building approximately 12–15 launch vehicles in 2022. It had launched one vehicle through March 31 and three through May 16, 2022. No formal revenue or earnings guidance was provided in the supplied filing text.
- Management expects capital and operating spending to rise with Neutron development, production expansion, new products, hiring, acquisitions and public-company requirements. It expects cost of revenue to increase in absolute dollars, while expressing the expectation that production efficiencies could reduce it as a percentage of revenue over time.
- Neutron development continued, including construction of a 250,000-square-foot production complex in Virginia. The planned vehicle is designed for payloads up to approximately 13,000 kg to low Earth orbit.
- Key risks include launch failure or inability to achieve planned launch cadence, customer funding or contract cancellations, supply-chain disruption and cost inflation, competition and regulation, dependence on government and commercial space spending, foreign-exchange movements, COVID-19-related disruption, and the ability to finance growth and integrate acquisitions.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2022 because previously identified material weaknesses in internal control over financial reporting remained. Management described remediation work involving staffing, review controls, risk assessment, and IT and application controls; design and operating effectiveness still require validation over time.
- The company carried a $6.2 million provision for losses on remaining launches under a legacy fixed-price customer agreement. Management stated that pending legal matters were not expected to have a material adverse effect.
- The common stock did not meet the specified $20 price condition by February 21, 2022, so 32.2 million potential Business Combination earnout shares will not be issued. The filing separately describes other acquisition-related contingent consideration and compensation arrangements.
Important facts for investors to verify
- How much of reported growth and backlog conversion is attributable to acquired businesses versus organic demand, and whether acquisition pro forma results are comparable to future periods.
- Whether launch cadence, launch economics and segment margins improve: Q1 launch revenue was down 60% year over year, and management reported Q1 revenue value per launch of $6.3 million against cost per launch of $7.5 million.
- Progress converting the $545.9 million backlog into revenue and cash, including contract termination rights and customer advances.
- Cash consumption, acquisition and capital spending plans, and the company’s ability to fund growth while servicing the secured loan.
- Remediation and independent validation of the material weaknesses in financial reporting controls.
- Resolution and cash impact of acquisition earnouts, the legacy launch-loss provision, and other contractual commitments.