CPI Aerostructures, Inc. — Q2 2021 Form 10-Q
Period: Three and six months ended June 30, 2021. The company manufactures structural aircraft parts and aerospace systems for defense and commercial markets, and provides related engineering, assembly, kitting, and supply-chain services. The 2020 comparative results are restated.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020, restated | Six months 2021 | Six months 2020, restated |
|---|---|---|---|---|
| Revenue | $22.30 million | $19.74 million | $53.12 million | $36.60 million |
| Gross profit | $3.60 million | $1.82 million | $8.52 million | $1.97 million |
| Gross margin | 16.1% | 9.2% | 16.0% | 5.4% |
| Operating income (loss) | $0.92 million | $(1.00) million | $2.45 million | $(3.94) million |
| Net income (loss), per financial statements | $0.62 million | $(1.36) million | $1.86 million | $(4.72) million |
- Revenue increased 13.0% in Q2 and 45.1% year to date. Management attributed growth mainly to Raytheon’s Next Generation Jammer pod and other defense programs; lower T-38, commercial subcontract, and direct military program revenue partly offset growth.
- Gross profit improved with higher sales, favorable program mix, and reductions in inventory and loss-contract reserves. Six-month contract estimate changes were a net unfavorable $0.35 million.
- Cash was $2.60 million at June 30, down from $6.03 million at year-end 2020. Operating cash flow was negative $2.49 million for the six months; capital spending was $0.01 million.
- Working capital was approximately $7.97 million. Current assets were $42.64 million and current liabilities $34.68 million.
- At June 30, debt comprised $21.0 million outstanding on the revolving facility and approximately $11.51 million of other debt, including the term loan. Total liabilities were $60.63 million; shareholders’ deficit was $10.56 million. The facility was secured by company assets.
- Backlog was $428.7 million, including $157.1 million funded; approximately 96% of total backlog was government-related. The company estimated that about 32% of remaining performance-obligation transaction value of approximately $157 million would be recognized in 2021, with the balance by 2025. Backlog is subject to termination or rescheduling and is not equivalent to firm, immediately available revenue.
Material changes, outlook, and risks
- Restatement and controls: Prior 2019–2020 financial statements were restated for inventory costing errors and insufficient inventory and loss-contract reserves. The errors arose from system, unit-of-measure, accrual, overhead, and reserve-control deficiencies. Management identified a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective. Remediation efforts included new finance leadership, system changes, and revised inventory and reserve procedures.
- Funding and going concern: Management cited negative operating cash flow in prior periods, a shareholders’ deficit, and significant liquidity risk, while concluding its plans and resources were expected to support operations for at least a year from issuance. Plans included seeking customer progress payments, controlling spending and inventory, and focusing on military programs. Subsequent credit amendments extended facility maturity to September 30, 2023, but increased interest rates and included additional principal payments and covenant changes. The filing also says there was no availability under the facility in its later risk-factor discussion.
- PPP loan: The $4.795 million PPP loan was fully forgiven on July 1, 2021, with notice received July 13. Forgiveness was to be recognized in Q3 2021; the SBA retains audit rights.
- Litigation: A class action settlement of $3.6 million was reached subject to court approval. The company recorded a $3.37 million settlement obligation and a $2.85 million insurance receivable at June 30; the insurer was expected to pay the settlement after the company’s $750,000 retention. Related derivative actions were stayed. The SEC staff concluded its investigation without recommending enforcement action, while cautioning that this did not constitute exoneration.
- Listing and filing risks: The company received NYSE American notices for late filings and failure to meet certain equity and loss-based listing standards. It faced potential delisting if it failed to meet filing deadlines or make progress under its compliance plan. This report was signed April 19, 2022, well after the quarter ended.
- COVID-19: Absenteeism and operating precautions affected the business early in 2021. Management reported reduced impact from May 2021 and a return to a single day shift, but warned that pandemic effects on customers, suppliers, operations, and cash flow remained uncertain.
- No formal earnings guidance is provided. Backlog conversion estimates and management’s liquidity assessment are forward-looking and depend on customer funding, program timing, execution, and cash collection.
Most important facts to verify
- Reconcile net income: the financial statements report $623,151 for Q2 and $1,855,694 for the six months, while MD&A reports $619,606 and $1,851,849, respectively. MD&A also describes diluted loss per share for periods with reported net income.
- Confirm actual cash availability, borrowing capacity, covenant compliance, and the impact of subsequent credit amendments and higher interest costs.
- Track progress on remediation of the material weakness and whether subsequent filings and NYSE American listing requirements were met.
- Monitor cash conversion, contract-asset growth, reserve adjustments, and the timing and firmness of funded backlog.
- Confirm court approval and final insurance payment of the class action settlement, and monitor any remaining legal or regulatory developments.