CPI Aerostructures, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. CPI produces structural aircraft parts for U.S. defense and commercial aerospace customers. Financial statements are unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $17.43 million | $12.54 million | $33.44 million | $23.55 million |
| Gross profit | $4.24 million | $3.35 million | $8.09 million | $6.10 million |
| Gross margin | 24.4% | 26.7% | 24.2% | 25.9% |
| Operating income | $2.16 million | $1.87 million | $4.21 million | $3.23 million |
| Net income | $1.57 million | $1.21 million | $2.94 million | $2.07 million |
| Diluted EPS | $0.22 | $0.18 | $0.41 | $0.32 |
- Second-quarter revenue rose 38.9% year over year; first-half revenue rose 42.0%. First-half government subcontract revenue increased 92.6% to $26.20 million, driven mainly by Boeing’s A-10 and Northrop Grumman’s E-2D programs. Prime government revenue declined 43.5% to $3.13 million, while commercial revenue declined 6.9% to $4.11 million.
- Margins contracted year over year despite higher gross profit. Management attributed pressure to lower margin on a C-5 TOP order and supplier-surveillance travel and labor for early production on major programs. SG&A increased 35.3% in the first half to $3.88 million, including higher stock-option expense, staffing, computer costs, and accrued bonuses.
- First-half operating cash flow was negative $7.19 million, versus negative $2.47 million in 2010; capital expenditures were $0.26 million. Cash declined to $0.67 million from $0.82 million at year-end. The principal working-capital use was a $13.72 million increase in costs and estimated earnings in excess of billings.
Liquidity, debt, and other key metrics
- Working capital was $48.22 million at June 30, up from $44.38 million at December 31, 2010. Current assets included $60.88 million of costs and estimated earnings in excess of billings.
- Total debt and short-term borrowings were $9.63 million, compared with $2.68 million at year-end. The revolving credit facility was expanded in May from $4 million to $10 million and extended to August 2014; $7.8 million was outstanding at quarter-end. CPI reported compliance with amended financial covenants at June 30.
- First-half income-tax provision was $1.17 million, or 28% of pretax income, down from 34% in the comparable period. Management cited domestic production deductions, a research-and-development tax-credit refund, and a stock-option tax benefit.
Outlook, risks, and notable items
- Management expected gross margin of 24%–25% for the remainder of 2011, below its prior forecast range of 25%–27%. It said added supplier-development and new-program costs were expected to continue through year-end. No revenue or earnings guidance was provided.
- New awards totaled approximately $58.6 million in the first half, versus $31.1 million in the first half of 2010. Formalized bids outstanding were approximately $446 million; award timing and probability were uncertain.
- The A-10 program accounted for approximately $9.3 million of the first-half increase in unbilled contract assets. Vendor performance issues, pending government approval of first articles, and a Boeing configuration change delayed milestone billing or shipment, materially affecting liquidity.
- Percentage-of-completion accounting relies on estimates of contract costs and profits. Contract estimate revisions reduced total expected gross profit by approximately $1.8 million in the first half of 2011, compared with $2.0 million in 2010. Further cost overruns or program delays/cancellations could reduce earnings, impair unrecovered upfront costs, and increase borrowing needs.
- CPI signed a lease for a new approximately 171,000-square-foot assembly facility and office, with operations expected to move by December 31, 2011. Estimated move and related capital/equipment costs were approximately $1.2 million.
- Customer concentration is significant: two programs represented 57.8% of first-half total revenue; the three largest commercial customers represented 77% of first-half revenue. The company reported no legal proceedings and effective disclosure controls as of June 30.
Investor verification priorities
- Track A-10 milestone billing, first-article approval, configuration changes, and conversion of the $60.88 million unbilled contract balance into cash.
- Verify whether margins stabilize within management’s 24%–25% remainder-of-year range and whether supplier-development costs persist as expected.
- Monitor borrowing, covenant compliance, and cash needs against continued upfront spending and the facility move.
- Assess contract-estimate changes, program/customer concentration, and the timing and conversion of the $58.6 million in awards and $446 million bid pipeline.