CPI Aerostructures, Inc. — Q1 2022 Form 10-Q
Business and period: The company manufactures structural aircraft parts and aerospace systems, serves defense and commercial customers, and provides related engineering, supply-chain and maintenance services. This unaudited report covers the three months ended March 31, 2022; the comparable period is Q1 2021. The filing was signed September 6, 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 or comparison |
|---|---|---|
| Revenue | $20.14 million | $30.82 million; down 34.7% |
| Gross profit and margin | $3.43 million; 17.1% | $4.92 million; 16.0% |
| Operating income | $297,000 | $1.53 million |
| Net income (loss), per financial statements | $(32,931) | $1.23 million |
| Operating cash flow | $(2.45) million | $(4.88) million |
| Cash | $2.93 million | $6.31 million at December 31, 2021 |
| Working capital | $11.52 million | $12.18 million at December 31, 2021 |
- Cash declined by $3.38 million during the quarter. Contract assets were $25.76 million, up from $24.46 million at year-end, reflecting revenue recognized in excess of customer billings.
- Gross debt was approximately $25.25 million at March 31, comprising $21.0 million drawn on the line of credit and debt reported as current and long-term. Shareholders’ deficit was $5.34 million.
- Revenue fell mainly with lower Northrop Grumman E2D and WOWP program activity, as well as lower Raytheon NGJ and commercial G650 revenue. Management cited increased Sikorsky HIRRS activity as an offset.
- Cost of sales fell 35.5%, while gross margin improved to 17.1% from 16.0%. Favorable and unfavorable contract-estimate adjustments were $1.28 million and $(959,000), respectively, for a net favorable adjustment of $318,000.
- Management identified $771,834 of Q1 severance charges. The MD&A states that excluding this charge, net income would have been $736,653, or $0.06 per share.
Outlook, financing, risks and unusual items
- Backlog at March 31 was $504.3 million, including $126.8 million funded; approximately 98% was attributable to government contracts. The company expected to recognize approximately 48% of remaining performance obligations in fiscal 2022 and the balance by 2024. Backlog is subject to funding, termination and rescheduling risks.
- Management cited a shareholders’ deficit and historical operating losses and negative operating cash flows as going-concern risks. It said resources were expected to meet needs for at least 12 months and that substantial going-concern risk did not exist based on its plans, including extended credit, customer progress payments, cost controls and a largely military funded backlog.
- After quarter-end, an April 2022 credit amendment extended facility maturity to September 30, 2023 and increased interest-rate margins on a stepped schedule, reaching Prime plus 8% from January through September 2023. The August amendment further revised covenant terms and excluded specified losses, reserves and severance costs from covenant calculations. The amendments included waivers or consents for certain covenant and reporting matters.
- The class-action settlement is $3.6 million, subject to court approval. At quarter-end the company recorded a $3.6 million settlement obligation and a $3.47 million insurance receivable; the filing says the insurer is expected to fund the settlement after the company’s retention and covered expenses. Related derivative suits had a proposed settlement pending court approval.
- The SEC staff concluded its investigation and said it did not intend to recommend enforcement against the company based on information then available; the filing cautions that this is not exoneration and does not preclude later action.
- COVID-19 impacts had decreased, according to management, but intermittent illness and absenteeism remained possible. The company also cited uncertain customer and supplier conditions and the risk that program delays or cancellations could impair unrecovered costs.
- Management reported a material weakness in internal control over financial reporting identified as of December 31, 2021 and said remediation efforts were continuing.
- The filing notes delayed SEC reports, NYSE American trading suspension and delisting proceedings, and quotation on the OTC Expert Market. The company said it intended to become current with its reports, but could not assure relisting or resumed trading.
Important facts for investors to verify
- Reconcile the filing’s inconsistent Q1 results: the financial statements report a $32,931 net loss and $3,137,657 of SG&A, while the MD&A reports a $35,181 net loss and $3,138,932 of SG&A. The MD&A also gives conflicting tax-provision amounts.
- Confirm current cash generation, contract-asset conversion and customer progress-payment availability, given negative operating cash flow and the cash decline.
- Review compliance with amended debt covenants, future stepped-up interest costs, repayment requirements and any additional lender waivers.
- Track court approval and insurance payment for the class-action settlement, along with the status and costs of the derivative-action settlement.
- Check the status of SEC filing compliance, NYSE American delisting proceedings, OTC quotation and remediation of the material weakness.