CPI Aerostructures, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CPI Aero manufactures aircraft structural parts and systems and provides related engineering, supply-chain, kitting, and maintenance services, primarily for defense and commercial aerospace customers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $20.55M | $18.93M | $42.56M | $39.06M |
| Gross profit / margin | $4.60M / 22.4% | $3.66M / 19.3% | $9.27M / 21.8% | $7.09M / 18.2% |
| Operating income | $1.80M | $0.96M | $3.59M | $1.26M |
| Net income | $1.16M | $0.52M | $2.14M | $0.48M |
| Diluted EPS | $0.09 | $0.04 | $0.17 | $0.04 |
Q2 revenue increased 8.6% year over year; first-half revenue rose 9.0%. Growth was led by Raytheon NGJ Pods and B-52 Radar Racks, partly offset by lower Sikorsky HIRSS work. First-half gross margin expanded 3.6 percentage points. Interest expense rose 50.3% to $1.15M for the first half, primarily due to higher rates, partly offset by lower debt. The reported first-half net-income increase was 341.6%; excluding $771,834 of 2022 severance charges, management reported growth of 70.3%.
- Cash flow and liquidity: First-half operating cash flow was $875,137, versus cash used of $2.10M in 2022. Investing used $59,265 and financing used $1.58M, including debt payments and issuance costs. Cash declined to $3.08M from $3.85M at year-end. Working capital was $14.48M, up from $12.90M.
- Working-capital exposure: Contract assets were $30.96M and accounts receivable were $8.62M at June 30; contract liabilities were $8.61M. Management notes that revenue recognition may precede customer billing and cash receipt.
- Debt: Revolver borrowings were $21.0M; term-loan principal was $133,333. The stated rate was 11.75%, and debt is secured by company assets. The credit facility matures November 30, 2024, with borrowing limits scheduled to step down; the filing says there was no current availability under the revolver. Total debt carrying value, including other debt, was $21.26M.
- Orders: Backlog totaled $510.2M ($118.2M funded), down from $514.5M at December 31, 2022; approximately 98% was government or military-contractor related. The filing cautions that substantially all backlog may be terminated or rescheduled without significant penalty. Remaining performance obligations were approximately $118.2M.
Material developments, outlook, and risks
- Management said existing resources were expected to cover current working-capital needs for at least 12 months from issuance of the statements. It also cautioned that needs vary with program awards and customer and supplier payment terms, and that additional capital may not be available on acceptable terms.
- First-half contract estimate changes reduced gross profit by a net $276,713, versus a net favorable $539,191 in the prior-year period. The company recorded unfavorable adjustments on 32 contracts and favorable adjustments on 24 contracts.
- The $3.6M class-action settlement was paid from escrow on May 5, 2023; the company reported that insurance covered amounts beyond its $750,000 retention. A separate proposed shareholder derivative settlement, including $585,000 in attorneys’ fees and governance reforms, had received preliminary approval, but final approval remained pending.
- Management disclosed ineffective disclosure controls as of June 30, 2023 and material weaknesses, including a new weakness related to accounting for goods in transit and its effect on revenue and cost of sales. Remediation was not complete.
- Customer concentration is significant: the two largest customers represented 32% and 29% of first-half revenue. Management also monitors inflation, interest rates, supply-chain and labor conditions; most long-term customer and supplier contracts have fixed pricing.
Important facts for investors to verify
- Whether the company remains compliant with credit-facility covenants and can meet the scheduled revolver paydowns and November 2024 maturity, particularly with no borrowing availability reported.
- Whether contract assets convert to billings and cash as expected, and whether estimates at completion or customer delays cause further margin changes.
- Progress in remediating the disclosed material weaknesses and the status and final terms of the derivative-action settlement.
- Backlog funding, cancellation or rescheduling risk, and continued dependence on a small number of customers.