CPI Aerostructures, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. CPI manufactures structural aircraft parts and provides related engineering, program management, supply-chain and maintenance services for commercial and defense markets.
Financial performance
- Revenue: Q2 revenue was $21.94 million; first-half revenue was $41.82 million. The filing reports comparative 2014 revenue as negative $23.75 million for Q2 and negative $1.87 million for the first half, reflecting a substantial A-10 program estimate change in 2014 rather than a like-for-like operating comparison.
- Profit: Q2 net income was $990,108, or $0.12 per diluted share; first-half net income was $1.92 million, or $0.22 per diluted share. First-half operating income was $3.38 million and pretax income was $2.90 million.
- Gross margin: Reported gross margin was 17.5% for Q2 and 17.8% for the first half. Excluding the A-10 program, management reported margins of 23.7% and 23.4%, respectively. The A-10 work continued to generate revenue without gross profit after its estimated loss was recognized in 2014.
- Cash flow: First-half operating cash flow was $2.43 million, compared with cash used of $9.45 million in the 2014 period. Cash ended at $788,691, down from $1.50 million at year-end. The period included an $8.13 million tax refund and an $11.13 million increase in costs and estimated earnings in excess of billings.
- Liquidity: Working capital was $64.04 million, up 5.2% from December 31, 2014. Contract assets—costs and estimated earnings in excess of billings—were $90.18 million on the balance sheet.
- Debt: Total short-term borrowings and long-term debt were $24.37 million, down from $27.41 million at year-end. The company had $22.5 million drawn on its $35 million revolving facility, leaving $12.5 million available, and reported compliance with amended financial covenants. The revolver matures December 5, 2016.
Changes and operating developments
- Results improved sharply against 2014, primarily because the second-quarter 2014 A-10 estimate revision drove large negative revenue and losses. Management cautions that comparisons are not informative on a like-for-like basis.
- Commercial subcontract revenue rose 32.1% year over year for the first half, attributed to higher production on Embraer and Honda programs. Management reported an approximately $170,000 reduction in estimated total gross profit on contracts from estimate revisions during the first half of 2015.
- New contract awards through June 30 were approximately $24.2 million, versus $19.2 million in the comparable 2014 period.
- Total backlog increased to $446.6 million from $403.6 million at year-end. Approximately 70% was government-related; $316.0 million of total backlog was unfunded. Commercial backlog declined to $132.7 million from $148.9 million.
Outlook, risks and notable items
- The filing gives no quantified revenue or earnings guidance. Management said non-A-10 gross margins were in the middle of the expected range for the company’s current program mix.
- Percentage-of-completion accounting depends on estimates of contract revenue and costs. Revisions, delays, terminations or cost overruns could materially affect results; reported earnings may not convert promptly to cash.
- Management noted that some programs require upfront spending without progress payments. Delays or cancellations could make costs unrecoverable and materially affect liquidity. CPI was seeking improved customer payment terms and alternative funding sources.
- Substantially all backlog is subject to termination at will and rescheduling without significant penalty; unfunded backlog depends on future appropriations or purchase orders.
- Customer concentration is notable: the three largest commercial customers represented 24%, 19% and 14% of first-half revenue. The filing reports no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of June 30, 2015.
- The company received approximately $8.1 million of a tax refund in June 2015, related to carrying back tax losses. It reported an approximately $4.3 million net operating loss carryforward, expiring in 2029. The 2015 tax estimate did not include an R&D credit because extension of the credit had not yet occurred.
Important facts for investors to verify
- Review the original financial statements and XBRL for the unusually negative 2014 revenue figures and the related A-10 estimate adjustment.
- Assess the collectability and timing of the $90.2 million contract asset balance, the concentration of contract assets and receivables, and the cash conversion of reported earnings.
- Confirm the funding, timing and termination exposure of the $316.0 million unfunded backlog, along with customer order patterns and program performance.
- Monitor liquidity, borrowing availability, covenant compliance and the December 2016 revolver maturity, particularly if contract cash receipts are delayed.