CPI Aerostructures, Inc. — Q2 2022 Form 10-Q
Business and period: The company manufactures aircraft structural parts and systems, provides related engineering and supply-chain services, and serves defense and commercial customers. This unaudited report covers the quarter and six months ended June 30, 2022; it was signed September 29, 2022.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $18.93 million | $22.30 million | $39.06 million | $53.12 million |
| Gross profit / margin | $3.66 million / 19.3% | $3.60 million / 16.1% | $7.09 million / 18.2% | $8.52 million / 16.0% |
| Operating income | $962,298 | $918,914 | $1.26 million | $2.45 million |
| Net income | $517,636 | $623,151 | $484,705 | $1.86 million |
| Operating cash flow | Not presented by quarter | $(2.10) million | $(2.49) million |
- Six-month diluted EPS was $0.04, versus $0.15 a year earlier; Q2 diluted EPS was $0.04 versus $0.05.
- At June 30, cash was $2.63 million, working capital was $11.68 million, and current assets were $42.60 million versus current liabilities of $30.92 million.
- Debt totaled approximately $24.60 million: $21.00 million drawn on the revolver and $3.60 million of term and other debt. The revolver and term loan were secured by company assets. Operating lease liabilities totaled $7.25 million.
- Contract assets were $27.49 million, up from $24.46 million at year-end; net contract assets after contract liabilities were $22.46 million. The company cited program ramp-up and unbilled contract costs as a principal use of cash.
Changes versus prior period
- Revenue fell 15.1% in Q2 and 26.5% for the first half, principally from lower activity on Northrop Grumman E-2D and Raytheon NGJ Mid-Band programs. Growth in selected Sikorsky, Collins, Boeing and military programs partly offset declines.
- Despite lower revenue, gross margin improved in both periods, which management attributed primarily to favorable program mix. First-half gross profit declined 28.9% as lower sales outweighed the margin improvement.
- First-half net income fell to $484,705 from $1.86 million. Management said that excluding a $771,834 first-quarter severance charge, first-half net income would have been $1.26 million, down 32.3% year over year.
- Cash declined $3.68 million from December 31, 2021, reflecting $2.10 million of operating cash use and $1.56 million of debt repayments. First-half contract assets increased by $3.03 million.
Outlook, risks and notable items
- Backlog at June 30 was $504.3 million, including $133.4 million funded; approximately 99% was government-related. The company estimated about 30% of the approximately $133 million of remaining performance obligations would be recognized in fiscal 2022, with the remainder by 2024. Backlog is subject to termination, rescheduling and funding risk.
- Management said existing resources were expected to meet working-capital needs for at least 12 months and that it believed substantial going-concern risk did not exist through a year and a day from filing. It also cautioned that funding needs depend on program timing and customer and supplier payment terms, and that additional capital may not be available on acceptable terms.
- The April 2022 credit amendment extended facility maturity to September 30, 2023, required additional term-loan installments and scheduled steep increases in interest spreads, reaching Prime plus 8% in 2023. Covenant requirements were amended; an August 2022 amendment provided further covenant relief and exclusions. The company disclosed multiple covenant waivers and late-information waivers.
- A $3.6 million class-action settlement was subject to final court approval after preliminary approval. The company recorded a $3.6 million obligation and a $3.50 million insurance receivable; it said its $750,000 insurance retention had been met. A separate proposed settlement of shareholder derivative actions remained subject to court approval and included governance reforms and plaintiffs’ legal fees.
- Trading of the common stock on NYSE American was suspended in May 2022 over late SEC filings; delisting proceedings were stayed pending review. The stock had been quoted on the OTC Expert Market, where trading opportunities may be limited. The company said it was current with SEC reports upon filing this report, but could not assure relisting or resumption of trading.
- Management concluded disclosure controls were ineffective because of material weaknesses in internal control over financial reporting identified as of year-end 2021; remediation efforts were ongoing. The company also cited COVID-19 effects on customers and suppliers, contract cost-estimation uncertainty, customer concentration and potential program delays or cancellations as risks.
Key facts for investors to verify
- Current borrowing availability, compliance with amended loan covenants, upcoming principal payments and the effect of the scheduled interest-rate increases.
- Whether contract assets convert to billings and cash as expected, and whether the funded backlog and forecast revenue timing are maintained.
- Final court approval and insurance collection for the class-action settlement, and the status and cost of the derivative-action settlement.
- NYSE American review and any subsequent exchange or OTC quotation status, together with progress remediating internal-control weaknesses.
- The impact of the severance charge, contract estimate changes, customer/program concentration and any further losses or reserves on future margins and liquidity.