CPI Aerostructures, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. CPI manufactures structural aircraft parts and assemblies for commercial and defense markets and provides related engineering, program-management, supply-chain, and maintenance services.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $22.28 million; up 1.5% year over year | $34.95 million; down 16.4% |
| Gross profit (loss) | $5.03 million; approximately 22.6% margin | $(6.61) million; approximately (18.9)% margin |
| Operating income (loss) | $3.17 million | $(11.19) million |
| Net income (loss) and EPS | $1.79 million; $0.21 per diluted share | $(7.43) million; $(0.86) per share |
| Operating cash flow | Not presented separately for the quarter | $(7.33) million, versus $2.43 million provided in first-half 2015 |
Second-quarter revenue growth primarily reflected higher E-2D program activity; improved gross profit also reflected a more favorable program mix. First-half results were sharply affected by an A-10 contract estimate change. Excluding A-10 effects, the company reported non-GAAP adjusted first-half revenue of $39.29 million, gross profit of $8.69 million, and net income of $2.20 million, or $0.26 per diluted share. These adjusted figures are not substitutes for GAAP results.
Liquidity, debt, and backlog
- At June 30, cash was $0.81 million, working capital was $64.92 million, and current assets and liabilities were $105.87 million and $40.96 million, respectively.
- Total debt and short-term borrowings were $32.80 million, including $22.44 million outstanding on the revolving facility. The company reported compliance with amended credit covenants. Its BankUnited facility includes a $30 million revolver and $10 million term loan, is secured by company assets, and carried a reported 4.25% rate on the outstanding balance.
- First-half operating cash use of $7.33 million contributed to cash declining from $1.00 million at year-end 2015. The filing notes that contract work-in-process can require cash before customer billing and collection.
- Total backlog was $395.39 million, up from $387.32 million at December 31, 2015; $95.69 million was funded. Approximately 74% of total backlog was government-related. Substantially all backlog is subject to termination or rescheduling, and unfunded backlog depends on future appropriations or customer orders.
- New awards through June 30 totaled approximately $19.0 million, versus $16.2 million in the comparable 2015 period.
Material changes, outlook, and risks
- A-10 estimate and unusual charge: After the U.S. Air Force deferred a decision to increase A-10 orders, CPI concluded additional orders beyond the 173 ship sets then on order were not probable. The first-quarter estimate change reduced revenue by approximately $8.9 million and increased cost of sales by approximately $4.6 million, an aggregate charge of about $13.5 million. Management’s outlook for additional A-10 orders was therefore uncertain; no specific financial guidance was provided.
- Contract estimates: Excluding A-10, revisions to estimated contract profits reduced first-half gross profit by approximately $1.17 million, compared with a $0.17 million reduction in first-half 2015. Management cautioned that additional costs on open contracts are possible. Percentage-of-completion accounting relies on estimates that may require later revenue or cost adjustments.
- Customer reimbursement: CPI had a pending Request for Equitable Adjustment with Boeing related to A-10. The filing does not provide a clear expected recovery amount or timing. Under the amended credit agreement, a portion of any reimbursement received must be used to repay the term loan.
- Customer concentration: Three largest commercial customers represented 39%, 30%, and 14% of first-half revenue, respectively, increasing concentration risk. Work-in-process balances also were concentrated among several large commercial customers.
- Controls: The company reported a material weakness relating to review controls for revenue recognition on a customer reimbursement request, and said disclosure controls were ineffective as of December 31, 2015 and March 31, 2016. After remediation measures, including more timely review of unusual transactions and added accounting expertise, management concluded controls were effective at June 30, 2016.
- The filing reported no legal proceedings and no material changes to the risk factors in the 2015 Form 10-K. It also noted that the company was evaluating the impact of the forthcoming revenue-recognition and lease accounting standards.
Important facts for investors to verify
- Whether A-10 orders remain limited to 173 ship sets and whether the Boeing reimbursement request produces a recovery.
- Progress in restoring profitability and cash generation after the first-half contract charge and operating cash outflow.
- Updated contract cost estimates, loss-contract exposure, and the timing of conversion of unbilled work-in-process to cash.
- Funding, cancellation, and rescheduling risks within the $395.39 million backlog, especially its unfunded portion.
- Continued compliance with amended debt covenants, borrowing costs, and repayment requirements if Boeing reimbursement is received.
- Whether remediation of the revenue-recognition control weakness is sustained in subsequent periods.