Redwire Corporation (NYSE: RDW) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Filed August 9, 2023. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context
Redwire develops and manufactures space infrastructure, systems, and components for civil space, national security, and commercial markets. Government agencies and government contractors comprise the majority of revenue. The company reports one operating segment. Q2 and first-half results include revenue and costs from the QinetiQ Space NV acquisition, completed October 31, 2022.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $60.1m | $36.7m | $117.7m | $69.6m |
| Gross profit / margin | $15.9m / 26% | $7.0m / 19% | $30.1m / 26% | $12.2m / 17% |
| Operating loss | $3.9m | $92.8m | $6.1m | $110.3m |
| Net loss | $5.5m | $77.0m | $12.7m | $94.3m |
| Net loss per common share | $(0.16) | $(1.22) | $(0.34) | $(1.50) |
| Adjusted EBITDA (non-GAAP) | $4.4m | $(4.1)m | $8.7m | $(8.7)m |
| Cash used in operating activities | Not separately stated | Not separately stated | $11.2m | $15.6m |
Q2 SG&A was $17.7m, approximately 29% of revenue, versus $17.6m and 48% a year earlier. First-half SG&A was $33.7m, down 12% year over year. Preferred-stock dividends were $4.8m for Q2 and $9.2m for the first half, reducing earnings available to common shareholders.
Liquidity, debt, and operating indicators
- Cash and cash equivalents were $11.2m at June 30, 2023, down from $28.3m at December 31, 2022. Current assets were $89.2m and current liabilities $93.2m.
- Six-month investing cash outflow was $2.5m and financing cash outflow was $3.4m. Operating cash use improved by $4.4m year over year, but working capital consumed cash, including a $11.9m increase in contract assets.
- Debt was $77.3m principal, or $75.8m net of discounts and issuance costs. The Adams Street term loans carry effective rates of about 12%; the company reported no revolving borrowings and $25.0m of revolver availability. It also reported $20.6m of unused B. Riley equity-facility capacity, subject to restrictions.
- Contracted backlog was $272.8m, versus $313.1m at year-end 2022 and $162.1m at June 30, 2022. Remaining performance obligations were $253.1m; management expected approximately 67% to be recognized within 12 months.
- Book-to-bill was 0.76 for Q2 and 1.49 on a last-twelve-month basis. Management’s stated goal is a ratio above 1.0.
Material changes and management commentary
- Revenue increased 64% in Q2 and 69% in the first half. Management attributed growth to the Space NV acquisition, contract mix, product delivery timing, and growth in deployables and engineering services. Space NV contributed $14.2m of Q2 revenue and $26.5m for the first half.
- Gross margin improved to 26% from 19% in Q2 and to 26% from 17% for the first half. Management cited cost reductions, more profitable new awards, and completion of lower-margin contracts, along with Space NV contributions.
- Net loss narrowed substantially, but comparisons are affected by the prior-year $80.5m impairment charge. No impairment was recorded in 2023. The 2022 charge related to property and equipment, intangible assets, and goodwill.
- Interest expense rose to $2.7m in Q2 and $5.3m in the first half, primarily reflecting higher variable rates and, in the first half, accrued paid-in-kind interest. The 2% incremental PIK interest ended effective May 1, 2023 after the company met specified requirements. Leverage-covenant compliance was suspended through September 30, 2023, with testing to resume for the quarter ending December 31, 2023.
- Management stated existing liquidity should be sufficient for working capital and covenant compliance for at least 12 months from issuance of the financial statements. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were ineffective at June 30, 2023 because of material weaknesses in financial reporting controls, including accounting resources, risk assessment, review of financial reporting and contract estimates, complex transactions, and IT general controls. Remediation is ongoing and may extend beyond December 31, 2023; the company did not estimate its cost.
- The company received a DOJ Civil Investigative Demand concerning potential antitrust violations and said it intended to cooperate. It also disclosed a securities class action and a stayed derivative action; possible losses could not be reasonably estimated. The company reported that the SEC closed a separate accounting inquiry on August 1, 2023.
- Series A convertible preferred stock had a $176.5m liquidation preference at quarter-end, a 13% cash dividend rate or 15% PIK rate, and was convertible into approximately 29.2m common shares. It is senior to common stock and creates potential dilution and dividend claims.
- Management cited inflation, supply-chain disruption, labor shortages, interest rates, and contract cost and schedule uncertainty. Euro exchange-rate movements can also affect reported sales and gross margins.
- Contract revenue and margin depend on estimates of costs and completion, which management said involve significant judgment; adverse estimate changes can materially affect results. Government contracts may be audited, adjusted, partially funded, or terminated.
Important facts for investors to verify
- Whether improved gross margins and positive Adjusted EBITDA are sustainable, particularly after separating acquisition effects and non-GAAP adjustments.
- Cash burn, working-capital conversion, and whether the stated liquidity sources remain available on acceptable terms.
- Backlog conversion, new awards, funding conditions, and the significance of Q2 book-to-bill below 1.0.
- Debt-service costs, PIK accruals, and the company’s ability to meet leverage testing when it resumes.
- Progress and cost of remediating material weaknesses, plus developments in the DOJ inquiry and disclosed litigation.
- Preferred-stock dividends, liquidation preference, conversion terms, and resulting dilution to common shareholders.