CPI Aerostructures, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing was signed May 13, 2022. The 2020 comparative figures are restated.
Business context and financial performance
CPI Aero manufactures structural aircraft parts and aerosystems for defense and commercial customers, and provides related engineering, assembly and supply-chain services. It reports one operating segment.
| Metric | Q3 2021 | Q3 2020 restated | Nine months 2021 | Nine months 2020 restated |
|---|---|---|---|---|
| Revenue | $23.9 million | $25.6 million | $77.0 million | $62.2 million |
| Gross profit | $3.7 million | $4.2 million | $12.2 million | $6.2 million |
| Gross margin | 15.3% | 16.4% | 15.8% | 9.9% |
| Operating income (loss) | $0.9 million | $1.2 million | $3.3 million | $(2.8) million |
| Net income (loss) | $5.4 million | $0.8 million | $7.3 million | $(3.9) million |
| Basic EPS | $0.44 | $0.07 | $0.60 | $(0.33) |
Q3 revenue fell 6.6% year over year, reflecting lower T-38 kit and E-2D kitting activity, partly offset by F-35 and Raytheon Next Generation Jammer work. Nine-month revenue rose 23.9%, primarily on those defense programs. Q3 gross profit declined 13.2% amid lower sales and less favorable program mix; nine-month gross profit nearly doubled on higher revenue and more favorable mix.
Net income included $4.795 million of other income from forgiveness of the PPP loan. Accordingly, reported net profit materially benefited from a nonrecurring item. Interest expense was $0.253 million for Q3 and $0.841 million for the nine months.
Cash flow, debt and liquidity
- Operating cash flow was negative $1.3 million for the nine months, versus negative $3.3 million in the restated 2020 period. Investing cash outflow was $0.02 million; financing cash outflow was $1.6 million.
- Cash declined to $3.1 million from $6.0 million at year-end 2020. Working capital was $13.1 million, compared with $7.7 million at December 31, 2020; contract assets were $22.8 million.
- At September 30, debt included $21.0 million drawn on the revolver and approximately $6.1 million of long-term debt, or about $27.1 million in total. The facility was secured by company assets. The filing does not provide a clear value for borrowing availability at the reporting date.
- Total liabilities were $54.6 million and shareholders’ deficit was $5.0 million. Management cited prior operating losses and negative operating cash flow as going-concern risks, while stating it believed liquidity and debt resources would be adequate through a year and a day from the filing date, relying on lender amendments, customer advances, cost controls and backlog.
Changes, outlook and material risks
- Total backlog at September 30 was $405.5 million, down from $476.2 million at December 31, 2020; funded backlog was $137.7 million. Approximately 96% of backlog was government-related. The company expected to recognize about 19% of remaining performance-obligation transaction value in Q4 2021 and the rest by 2025. Backlog is subject to funding, rescheduling and termination risks.
- The $4.795 million PPP loan was forgiven in July 2021. The company recorded a $3.206 million litigation settlement obligation and a $2.850 million insurance recovery receivable for a $3.6 million class-action settlement, subject to court approval; the insurer was expected to cover the settlement beyond the company’s $750,000 retention. Related shareholder derivative suits were stayed. The SEC staff had said it did not intend to recommend an enforcement action, while noting that this was not exoneration.
- Previously issued 2019 and 2020 statements and 2020 quarterly statements were restated for inventory-costing errors and inadequate loss-contract and inventory reserves. These issues increased reported net losses for 2020 and 2019 by $2.334 million and $2.300 million, respectively. The company identified a material weakness in internal control over financial reporting; disclosure controls were reported ineffective. Remediation efforts were underway.
- The company received NYSE American notices for late filings and failure to meet certain equity/listing standards. It warned that delisting proceedings could follow if required filings were not completed by the May 24, 2022 cure deadline; it also had a plan to regain financial-listing compliance by March 17, 2023.
- Credit amendments extended facility maturity, changed covenants and provided waivers for certain covenant and reporting non-compliance. A later amendment extended maturity to September 30, 2023 and scheduled higher interest rates. The company cautioned that future covenant breaches could trigger default and enforcement against collateral.
- Management described COVID-related absenteeism as having eased since May 2021, while continuing to cite possible customer, supplier and operating impacts. Subsequent to the quarter, it began a 2022 cost-reduction program, including headcount reductions and furloughs, with expected savings beginning in Q2 2022. The filing also identified potential supply-chain, commodity-price and labor risks related to the war in Ukraine, without reporting a material operating impact at that time.
Important facts for investors to verify
- Whether inventory-costing and reserve-control weaknesses have been fully remediated, and whether any further restatements or audit findings emerge.
- Current lender covenant compliance, actual revolver availability, borrowing costs and ability to meet scheduled repayments.
- NYSE American listing status and completion of all overdue SEC filings.
- Cash conversion from the large contract-asset balance and funded backlog, including program timing, customer funding and concentration risks.
- Final court approval and insurance payment for the class-action settlement, including any remaining company cost.