CPI Aerostructures, Inc. — Q1 2021 Form 10-Q
Business and period: The company manufactures aircraft structures and systems for defense and commercial customers and provides related engineering, assembly and supply-chain services. This report covers the three months ended March 31, 2021; the filing was signed December 27, 2021, after the company disclosed it had missed its filing deadline.
Financial performance and position
| Metric | Q1 2021 | Q1 2020, restated |
|---|---|---|
| Revenue | $30.82 million | $16.86 million |
| Gross profit (margin) | $4.92 million (16.0%) | $0.15 million (0.9%) |
| Operating income (loss) | $1.53 million | $(2.94) million |
| Net income (loss) | $1.23 million; $0.10 per diluted share | $(3.36) million; $(0.29) per diluted share |
| Cash from operations | $(4.88) million | $(1.43) million |
- Revenue rose 82.8%, chiefly on higher work for Raytheon’s Next Generation Jammer pod and Northrop Grumman programs; lower G650 and HondaJet sales partly offset growth.
- Management attributed the improvement in gross profit to a greater contribution from higher-margin defense programs. SG&A increased 9.6% to $3.39 million, primarily due to legal fees. Contract estimate changes reduced gross profit by a net $0.13 million, compared with a $1.34 million reduction in Q1 2020.
- Cash fell to $0.82 million from $6.03 million at year-end. Working capital was $8.29 million. Accounts receivable increased to $8.23 million and contract assets to $26.70 million from $4.96 million and $19.73 million, respectively.
- Total current assets were $44.74 million and current liabilities $36.44 million. Total liabilities were $64.26 million versus assets of $52.85 million, leaving a shareholders’ deficit of $11.41 million.
- Borrowings included a $21.0 million revolving credit balance and current and long-term debt of $7.35 million and $4.75 million. The filing reports total debt of approximately $33.10 million, including the PPP loan. The BankUnited facility was secured by company assets.
Material changes, outlook and risks
- Backlog: Total backlog was $451.0 million at March 31, down from $476.2 million at December 31, 2020; $162.7 million was funded. Approximately 96% of total backlog was government-related. The company expected to recognize about 48% of remaining performance obligations in 2021 and the balance by 2023. Backlog is subject to cancellation or rescheduling, often without significant penalty.
- Liquidity and debt: Operating cash use exceeded net income, largely reflecting growth in receivables and contract assets. Management said existing resources were expected to meet working-capital needs for at least 12 months, while warning that needs depend on program awards and customer and supplier payment terms. The filing also cites the deficit and past operating losses and negative operating cash flow as going-concern risks. Subsequent credit amendments extended facility maturity to December 31, 2022, changed availability and covenants, and included lender waivers of certain covenant non-compliance and late financial information.
- Restatement and controls: The comparative Q1 2020 results are restated: net loss increased by $544,836 to $3.36 million, largely from inventory costing errors and insufficient loss-contract and inventory reserves. The company identified errors involving inventory-system processing, units of measure, accrual cut-off and overhead absorption. Management reported material weaknesses in internal control over financial reporting and described remediation efforts. The filing states the errors and reserves did not affect reported revenue or cash flows for the affected 2020 periods.
- Contingencies and regulatory matters: A class-action settlement of $3.6 million was reached subject to court approval; the company recorded a $3.39 million settlement obligation and a $2.85 million insurance receivable at March 31. Related shareholder derivative actions were stayed. SEC staff said it did not intend to recommend enforcement against the company based on information then available, while cautioning this was not exoneration or a guarantee against future action.
- Listing and filing status: NYSE American cited both late SEC filings and failure to meet certain equity and earnings listing standards. It accepted the company’s compliance plans, with deadlines stated in the filing; failure to make progress or regain compliance could lead to delisting proceedings. The cover page also indicates the company had not filed all required reports during the preceding 12 months.
- COVID-19: The company reported COVID-related absenteeism in Q1 and measures including added shifts, remote work, reduced discretionary spending and closer materials management. It said the impact could adversely affect 2021 results, financial position and cash flow; conditions had improved since May 2021.
- Concentration: Two customers represented 39% and 25% of Q1 revenue. Management also noted that contract revenue and margins depend on estimates of costs to complete, making results sensitive to changes in contract assumptions.
- The $4.795 million PPP loan and accrued interest were fully forgiven in July 2021; forgiveness was to be recognized in Q3 2021. The filing provides no specific earnings guidance.
Important facts for investors to verify
- Reconcile the Q1 cash decline and the growth in contract assets and receivables with subsequent customer billings and collections.
- Review the restated 2020 and 2019 filings, the identified material weaknesses, and evidence that inventory costing and reserve controls have been remediated.
- Confirm current borrowing availability, covenant compliance, debt maturities and the effect of the credit amendments and waivers.
- Track NYSE American filing and listing-plan deadlines and any change in delisting risk.
- Check court approval and payment status of the class-action settlement and the related insurance recovery.
- Assess backlog funding, conversion timing, cancellation exposure and dependence on major customers and defense programs.