CPI Aerostructures, Inc. — Q3 2014 Form 10-Q
Business context and period. The company manufactures structural parts and assemblies for commercial and defense aircraft and provides related engineering, program-management, supply-chain, and maintenance services. This unaudited filing covers the three and nine months ended September 30, 2014; balance-sheet comparisons are against December 31, 2013.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $21.49 million | $20.66 million | $19.62 million | $61.70 million |
| Gross profit (loss) | $4.47 million | $4.48 million | $(34.00) million | $13.15 million |
| Operating income (loss) | $2.67 million | $2.97 million | $(39.43) million | $8.27 million |
| Net income (loss) | $1.70 million | $1.91 million | $(26.93) million | $5.37 million |
| Basic EPS | $0.20 | $0.23 | $(3.18) | $0.64 |
- Q3 gross margin was approximately 20.8%, versus 21.7% a year earlier. The filing’s nine-month gross loss reflects the A-10 program estimate change described below.
- Nine-month operating cash flow was negative $7.64 million, compared with negative $8.42 million in 2013. Capital expenditures were $0.51 million. Cash declined to $0.83 million from $2.17 million at year-end 2013.
- Working capital was $48.72 million, down 45% from $88.44 million. Current assets were $88.79 million and current liabilities $40.07 million at September 30.
- Debt, including the revolving facility, totaled approximately $30.86 million, versus $24.57 million at December 31, 2013. The $35 million revolving facility had $28.35 million outstanding at 3.25%; the company reported compliance with amended financial covenants. The facility and term loan are secured by company assets.
- The company said existing resources and available credit should meet current working-capital needs for at least 12 months. It also noted that contract accounting estimates can differ significantly from cash receipts and that it may need borrowing or other liquidity to fund work in process.
Material changes and management commentary
- The principal event was a revised outlook for the U.S. Air Force A-10 Wing Replacement Program. In response to uncertainty about the aircraft’s future and government funding, the company reduced estimated A-10 program revenue by approximately 41%, recording a cumulative $44.7 million revenue reduction and a further $2.6 million cost-of-sales adjustment. Both were recorded in Q2 and are reflected in nine-month results.
- Management said the 2015 Department of Defense appropriations bill passed by the House provided no funding for A-10 operations in fiscal 2015 and rescinded certain 2014 funding intended for additional wings. The company concluded the program was unlikely to reach the originally anticipated 242 aircraft.
- The nine-month revenue decline was primarily due to the A-10 adjustment. Commercial subcontract revenue increased 34.9% to $25.92 million, driven by Embraer and Cessna programs; government subcontract revenue was negative $7.04 million after the A-10 adjustment.
- New contract awards from the start of the year through September were approximately $87.8 million, compared with $83.1 million in the same period of 2013. Total backlog fell to $372.84 million from $431.44 million at December 31, 2013; funded backlog rose to $141.46 million while unfunded backlog declined to $231.38 million. Approximately 57% of total backlog was government-related.
- SG&A increased 11.1% for the nine months, primarily reflecting higher salaries and benefits, including a $100,000 separation payment to the former CEO, and increased computer expenses. Q3 SG&A also included higher board-option expense, accounting and legal fees, and consulting fees related to the former CEO’s separation agreement.
- The nine-month tax benefit of $12.87 million resulted from carrying losses back to recover prior taxes and carrying forward remaining losses. The company disclosed an immaterial $661,000 error in prior interim tax-benefit and deferred-tax-asset amounts and corrected it in the nine-month statements.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management’s liquidity outlook was for resources, including credit availability, to cover current working-capital needs for at least 12 months.
- Backlog is substantially subject to termination at will and rescheduling, often without significant penalty; unfunded backlog depends on future orders and appropriations. Customer concentration is also notable: three commercial customers represented 26%, 22%, and 11% of nine-month revenue, respectively, before the A-10 revenue adjustment.
- Percentage-of-completion accounting relies on estimates of contract revenue and costs; revisions can create significant current-period adjustments. The company warned that further cost overruns, program delays, or cancellations could cause additional charges and affect liquidity.
- The filing reported no material changes to the risk factors in the 2013 Form 10-K, no legal proceedings, and effective disclosure controls as of September 30, 2014.
Important facts for investors to verify
- Whether A-10 program termination, funding, or production developments require further revenue or cost revisions.
- Whether the $48.72 million working-capital position and remaining revolving-credit availability are adequate as contract spending and collections evolve.
- The collectability and timing of the $77.79 million balance-sheet asset for costs and estimated earnings in excess of billings, and the accuracy of remaining contract-cost estimates.
- How much of the $372.84 million backlog becomes funded orders, given its termination and rescheduling provisions and the decline in unfunded backlog.
- The impact of customer concentration and any additional tax-accounting adjustments following the disclosed immaterial error correction.