Aerojet Rocketdyne Holdings, Inc. (AJRD) is a leading technology-based designer, developer, and manufacturer of aerospace and defense products and systems for the United States government, including the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), and major aerospace and defense prime contractors. The company's operations are organized into two segments: Aerospace and Defense, and Real Estate.

The Aerospace and Defense segment, which accounts for the majority of the company's revenue, is a critical supplier of propulsion and energetics systems for the U.S. government and its prime contractors. Aerojet Rocketdyne's products are used in a wide range of applications, including tactical missiles, strategic missiles, space launch vehicles, missile defense systems, and hypersonic weapons. The company's portfolio includes well-known programs such as the RS-25 engines for the Space Launch System, the Standard Missile, and the Patriot Advanced Capability-3 (PAC-3) missile.

The Real Estate segment focuses on the re-zoning, entitlement, sale, and leasing of the company's excess real estate assets, primarily located in the Sacramento, California metropolitan area. This segment contributes a small but steady stream of revenue and income to the overall business.

Financials

Aerojet Rocketdyne has demonstrated solid financial performance in recent years. In 2022, the company reported annual net income of $74.0 million and annual revenue of $2,237.6 million. However, the company's annual operating cash flow was -$48.7 million, and its annual free cash flow was -$89.4 million, reflecting the capital-intensive nature of its business and the ongoing investments required to support its operations and growth initiatives.

For the first quarter of 2023, Aerojet Rocketdyne reported net sales of $566.3 million, up from $511.1 million in the same period of 2022. The increase was primarily driven by higher sales on the Next Generation Interceptor (NGI), RL10, and Patriot GEM-T programs. Net income for the quarter was $27.8 million, unchanged from the first quarter of 2022. The company's operating cash flow in the first quarter of 2023 was -$32.8 million, and its free cash flow was -$34.4 million.

Segmental Performance

The Aerospace and Defense segment generated net sales of $565.7 million in the first quarter of 2023, up from $510.5 million in the same period of 2022. Segment performance, which represents net sales less applicable costs and expenses, was $61.1 million, compared to $55.2 million in the first quarter of 2022. The increase in segment performance was primarily due to higher sales volume, partially offset by an out-of-period adjustment related to the company's accounting for excess costs on fixed-price contracts.

The Real Estate segment contributed $0.6 million in net sales and a segment performance of -$0.3 million in the first quarter of 2023, unchanged from the same period in 2022.

Backlog and Outlook

As of March 31, 2023, Aerojet Rocketdyne's total backlog stood at $6.8 billion, including $3.0 billion in funded backlog and $3.8 billion in unfunded backlog. The company expects to recognize approximately 35% of the remaining performance obligations as sales over the next twelve months, an additional 27% the following twelve months, and 38% thereafter.

The company has not provided specific financial guidance for the full year 2023. However, management has highlighted several key factors that are expected to impact the company's performance, including the ongoing integration of recent acquisitions, the continued ramp-up of production on key programs, and the potential impact of macroeconomic and geopolitical uncertainties on the company's operations and customer demand.

Liquidity

As of March 31, 2023, Aerojet Rocketdyne had $272.5 million in cash and cash equivalents, as well as $627.4 million in available borrowings under its Senior Credit Facility. The company's debt totaled $299.7 million, including a $259.0 million term loan and $41.5 million in finance leases.

The company's liquidity position and capital structure provide it with the financial flexibility to support its ongoing operations and strategic initiatives. However, the company's liquidity could be impacted by a variety of factors, including reductions or changes in U.S. government spending, cost overruns on its contracts, environmental liabilities, and pension funding requirements.

Environmental Matters and Liabilities

Aerojet Rocketdyne is involved in various environmental remediation activities at its current and former facilities, as well as at third-party sites where it has been designated as a potentially responsible party. As of March 31, 2023, the company had accrued $285.3 million for environmental reserves, with an estimated range of liability between $285.3 million and $441.4 million.

Approximately 98% of the company's environmental liabilities are related to its Aerospace and Defense segment and are partially recoverable from the U.S. government through the company's contracts. The company's most significant environmental sites are located in Sacramento, California and the Baldwin Park Operable Unit in California, which together account for $269.3 million, or 94%, of the total environmental reserves.

Retirement Benefits and Pension Obligations

Aerojet Rocketdyne maintains defined benefit pension plans and other postretirement benefit plans for its employees. As of March 31, 2023, the company's pension plans were underfunded by $227.2 million. The company generally recovers a portion of its pension contributions as allowable costs on its U.S. government contracts, but there are differences between when the company contributes to the plans and when the costs are recoverable.

The company's pension and postretirement benefit obligations are subject to various risks, including changes in discount rates, investment performance, and actuarial assumptions. These factors could have a material impact on the company's financial condition and cash flows in future periods.

Risks and Challenges

Aerojet Rocketdyne faces a variety of risks and uncertainties that could impact its financial performance and future prospects. These include:

1. Dependence on U.S. government spending and contracts: A significant portion of the company's revenue is derived from U.S. government contracts, making it vulnerable to changes in government spending priorities and budget constraints.

2. Cost overruns and contract performance: The company's fixed-price contracts present the risk of unreimbursed cost overruns, which could result in lower than expected profits and margins.

3. Environmental liabilities: The company's extensive environmental remediation activities and associated costs could have a material impact on its financial condition and cash flows.

4. Pension and postretirement benefit obligations: The company's defined benefit pension and other postretirement benefit plans are subject to various risks that could increase its funding requirements and impact its financial performance.

5. Cyber and other security threats: The company is subject to the risk of cyber attacks and other security breaches that could disrupt its operations and compromise sensitive information.

6. Regulatory and compliance risks: Aerojet Rocketdyne must comply with a complex regulatory environment, including various government contracting rules and environmental regulations, which could result in fines, penalties, or other liabilities.

Conclusion

Aerojet Rocketdyne is a leading provider of critical aerospace and defense products and systems to the U.S. government and its prime contractors. The company has demonstrated solid financial performance, with annual net income of $74.0 million and annual revenue of $2,237.6 million in 2022. However, the company's capital-intensive business model has resulted in negative operating and free cash flow in recent years.

Looking ahead, Aerojet Rocketdyne faces a range of risks and uncertainties, including its dependence on U.S. government spending, the potential for cost overruns on its contracts, environmental liabilities, and pension funding obligations. The company's ability to navigate these challenges and continue to deliver innovative solutions to its customers will be key to its long-term success.