Terran Orbital Corporation (NYSE: LLAP) is a leading manufacturer of satellite products primarily serving the aerospace and defense industries. The company provides end-to-end satellite solutions by combining satellite design, production, launch planning, mission operations, and on-orbit support to meet the needs of its military, civil, and commercial customers. Despite facing some operational challenges, Terran Orbital is positioning itself to capitalize on the growing demand for small satellites.

Financials

In the fiscal year 2023, Terran Orbital reported annual revenue of $135,915,000, a decrease from the previous year. The company's net income for the year was -$151,843,000, and its operating cash flow and free cash flow were -$55,720,000 and -$78,867,000, respectively. These financial results reflected the company's ongoing efforts to scale its operations and invest in its manufacturing capabilities.

During the first quarter of 2024, Terran Orbital's revenue decreased by 3% to $27,235,000 compared to the same period in the prior year. The decline was primarily driven by unfavorable estimate-at-completion (EAC) adjustments on a single program due to challenges with a subcontractor. Gross loss for the quarter was $6,156,000, and adjusted gross loss was $3,424,000. Selling, general, and administrative expenses decreased to $28,308,000, down from $32,530,000 in the same quarter of the previous year.

Backlog and Rivada Agreement

The company's backlog as of March 31, 2024, stood at $2.7 billion, with $2.4 billion related to the Rivada Agreement and the remaining $300 million from non-Rivada programs. Terran Orbital expected to fully recognize this backlog as revenue by the end of 2026. The company's management highlighted the importance of the Rivada Agreement, which provided for the development, production, and operation of 300 satellites, including 12 in-orbit spares and ground station equipment, for a total purchase price of approximately $2.4 billion.

Recent Developments

One of the key operational highlights for Terran Orbital during the quarter was the successful completion of the 60,000 square foot addition to its original manufacturing facility. The company now has well over 40 space vehicles in the final stages of assembly on its manufacturing floor and expects to launch just under 50 space vehicles this year, a record for the company.

Terran Orbital has also made substantial investments in its design and manufacturing capabilities, including the completion of its advanced printed circuit board assembly lines, which have a capacity to assemble over 5,000 printed circuit boards per month. The company has seen an estimated 30% reduction in certain elements of its standard satellite bus costs and nearly 100% yields from its PCBA lines.

Strategic Focus and Partnerships

The company's strategic focus on vertical integration has been a key driver of its operational improvements. By controlling its supply chain, Terran Orbital has been able to mitigate the impact of supply chain challenges and pivot quickly to alternative solutions when necessary. This was evident in the company's decision to replace a problematic subcontractor on a program, which, while negatively impacting the current quarter's results, has helped protect the program's schedule and financial impact in the long run.

Terran Orbital's partnership with Lockheed Martin, one of its largest stakeholders and partners, continues to be a significant part of its business. The company recently announced its selection by Lockheed Martin to build 18 space vehicles for Transport Layer Tranche 2 of the Space Development Agency's Proliferated Warfighter Space Architecture. This award expands Terran Orbital's participation in the SDA's mission architecture, further solidifying its position as a key supplier to the U.S. government.

The company's strategic review process, which included a $1 per share all-cash proposal from Lockheed Martin, is still ongoing. While Lockheed Martin has withdrawn its proposal, the special committee of Terran Orbital's board continues to evaluate all strategic alternatives, including direct engagement with Lockheed Martin. The company values its partnership with Lockheed Martin and looks forward to continued collaboration under their strategic cooperation agreement, which runs through 2035.

Liquidity

Terran Orbital's liquidity position remains a concern, with $43.7 million in cash and cash equivalents as of March 31, 2024, and $316.7 million in gross debt obligations. The company's primary corporate debt agreements contain a covenant requiring its Consolidated Adjusted EBITDA to be at least $0 by December 31, 2024, which the company is working to address through its business plan and potential capital-raising activities.

Outlook

Despite the challenges, Terran Orbital remains optimistic about its long-term prospects. The company is focused on efficient and successful execution of its new and existing contracts, with the goal of becoming adjusted EBITDA positive in 2024. The company's management believes that its investments in manufacturing capacity and automation, as well as its strategic partnerships, position it well to capitalize on the growing demand for small satellites in the aerospace and defense industries.

Conclusion

Terran Orbital is navigating the complexities of the small satellite market, facing both operational and financial challenges. However, the company's focus on vertical integration, strategic partnerships, and investments in its manufacturing capabilities suggest that it is well-positioned to overcome these obstacles and continue to grow its business in the years to come.