CPI Aerostructures, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. CPI produces structural aircraft parts for U.S. military and commercial aircraft programs, increasingly as a subcontractor to defense prime contractors. Financial statements are unaudited.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $16.61 million | $12.98 million | $50.04 million | $36.53 million |
| Gross profit / margin | $4.17 million / 25.1% | $3.38 million / 26.1% | $12.26 million / 24.5% | $9.48 million / 26.0% |
| Operating income | $2.64 million | $2.20 million | $6.85 million | $5.43 million |
| Net income | $1.81 million | $1.43 million | $4.74 million | $3.50 million |
| Diluted EPS | $0.25 | $0.21 | $0.66 | $0.53 |
- Revenue rose 28.0% in Q3 and 37.0% in the first nine months. Nine-month government subcontract revenue increased 69.2% to $38.18 million, led by Boeing A-10 and Northrop Grumman E-2D work. Government prime-contract revenue fell 39.2% to $5.00 million; commercial revenue rose 19.5% to $6.86 million.
- Nine-month gross margin declined to 24.5% from 26.0%. Management attributed the Q3 sequential margin improvement to lower supplier-surveillance travel and labor costs. SG&A rose 33.5% year over year for nine months, including higher public-company fees, compensation, computer costs, and accrued bonus.
- Working capital was $49.27 million, up from $44.38 million at year-end. Cash was $353,377, versus $823,376 at December 31, 2010. Nine-month operating cash flow was negative $11.68 million, compared with negative $2.37 million in 2010; capital expenditures were $742,904.
- Costs and estimated earnings in excess of billings on uncompleted contracts reached $65.47 million, up from $47.17 million. Accounts receivable was $9.19 million.
- Total borrowings, including the revolver and long-term debt, were $14.51 million, compared with $2.68 million at year-end. The company had $12.6 million drawn on its revolving facility, which had a temporary $13 million limit through November 30, 2011, and reported compliance with amended financial covenants. Long-term debt, including capital leases and notes payable, was $1.91 million.
Changes, outlook, and risks
- Revenue and earnings increased year over year, primarily on defense subcontract growth, while gross margins narrowed and operating cash use increased substantially.
- Management expected gross margin of 24%–25% for the remainder of 2011. Through November 5, the company reported approximately $81.5 million of new awards, versus $57.3 million in the comparable prior-year period. It also reported about $399 million of formalized bids outstanding as of September 30; award timing and outcomes were uncertain.
- Cash conversion is a significant risk: percentage-of-completion accounting and contract terms can cause costs and earnings to be recorded before billing or cash collection. The Boeing A-10 program accounted for approximately $13.5 million of the increase in contract assets; supplier performance, pending government approval of first articles, and a Boeing configuration change had delayed billings and shipments. The supplier performance issue was reported rectified after quarter-end.
- Management said upfront costs for new programs may require financing and could be impaired if programs are significantly delayed or canceled. The company also planned to move operations to a new 171,000-square-foot facility by December 31, 2011, with estimated moving and capital-addition costs of approximately $1.6 million.
- Contract estimates remain important: revisions during the first nine months reduced total estimated gross profit on contracts by approximately $2.6 million, compared with approximately $2.4 million in the prior-year period. Management cautioned that additional costs could arise before contract completion.
- Customer and program concentration is material. The A-10 and E-2D programs represented 54.6% of total nine-month revenue. The filing reports that three largest commercial customers accounted for 31%, 30%, and 13% of nine-month revenue. A $3 million temporary increase in revolver capacity was due to expire November 30, 2011.
- The effective tax rate was 29% for the first nine months, versus 34% in 2010, reflecting domestic production deductions, R&D tax credits, and stock-option tax benefits. Management reported effective disclosure controls and procedures; no material legal proceedings were reported.
Important facts for investors to verify
- Whether A-10 milestones, first-article approvals, and the configuration change were resolved and allowed the company to bill and collect the large contract-asset balance.
- Current revolver availability, renewal or replacement of the temporary capacity increase, and covenant compliance after the reporting date.
- Subsequent operating cash flow and customer collections relative to revenue and contract-asset growth.
- Progress on the facility move, actual costs, and any effects on production or liquidity.
- Customer/program concentration, contract-estimate revisions, and whether the stated margin outlook and reported contract awards translated into profitable, cash-generative work.