CPI Aerostructures, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company makes aircraft structural parts and systems for defense and commercial markets, and provides related engineering, assembly, kitting, and supply-chain services. The 10-Q was signed December 31, 2020, after reporting delays; comparative figures reflect restated prior-period financial statements where indicated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $25.58 million | $22.69 million | $62.18 million | $64.78 million |
| Gross profit | $4.18 million | $1.93 million | $7.46 million | $6.66 million |
| Gross margin | 16.4% | 8.5% | 12.0% | 10.3% |
| Operating income (loss) | $1.13 million | $(0.87) million | $(1.50) million | $(1.60) million |
| Net income (loss) | $0.82 million | $(1.26) million | $(2.59) million | $(3.07) million |
| Basic and diluted EPS | $0.07 | $(0.11) | $(0.22) | $(0.26) |
Q3 revenue increased 12.7%, chiefly from Northrop Grumman E-2D and other defense programs; stronger defense mix lifted gross profit and margin. Nine-month revenue declined 4%, primarily due to lower Raytheon Next Generation Jammer and G650 activity, while gross profit improved on mix. Commercial subcontract revenue fell 55.9% year to date; government subcontract and direct military revenue rose.
Cash flow, balance sheet, and debt
- Cash was $3.59 million at September 30, versus $4.05 million at year-end; restricted cash was $1.38 million. Operating cash use was $3.28 million for the first nine months, compared with $4.04 million in 2019. Investing cash use was $0.01 million; financing provided $2.83 million, including a $4.80 million PPP loan.
- Working capital was $12.49 million, down from $13.85 million at December 31, 2019. Current assets were $40.07 million and current liabilities $27.58 million. Contract assets increased to $18.41 million from $15.28 million, and inventory increased to $8.74 million from $5.89 million.
- Total debt, including the PPP loan and financing leases, was approximately $33.93 million. BankUnited borrowings included $20.7 million outstanding on the revolver at 4% and a term loan with approximately $7.93 million principal. The amended facilities mature May 2, 2022; the revolver commitment was reduced to $24 million. The company reported covenant compliance at quarter-end and $3.9 million of liquidity above its $3 million minimum covenant.
- The $4.80 million PPP loan bears 1% interest. The lender approved the company’s full-forgiveness application and submitted it to the SBA; final SBA approval was not assured as of the filing.
Backlog, outlook, and principal risks
- Total backlog was $536.9 million at September 30 ($189.6 million funded; $347.3 million unfunded), versus $561.9 million at year-end. About 89% was government-related; management said approximately 97% of funded orders were military. Backlog is not guaranteed: many orders are terminable or reschedulable, and government funding may be appropriated periodically. The company expected to recognize about 15% of remaining performance-obligation transaction price in 2020 and the balance by 2022.
- Management cited continuing operating losses, negative year-to-date operating cash flow, and shareholders’ deficit as going-concern risks. It pointed to the amended credit facility, cost and working-capital actions, customer advances and progress-payment efforts, exit from an unprofitable program, and a military-weighted funded backlog. Management concluded that resources should be sufficient through at least a year and a day from the filing date.
- COVID-19 uncertainty may disrupt suppliers, staffing, customer schedules, commercial aerospace demand, and collections. The company remained open as an essential business, but said the pandemic could adversely affect 2020 results, liquidity, and cash flow. It had curtailed discretionary spending, deferred travel, frozen hiring, and managed material flows.
- On December 23, 2020, CPI agreed to exit its HondaJet engine-inlet program. Honda was to buy approximately $0.6 million of inventory and assume certain supplier orders; CPI remained responsible for any remaining supplier termination liability. The company expected its accrued loss reserve to cover such liabilities.
- Other significant matters include a shareholder class action and derivative suits related to prior financial disclosures, an SEC Division of Enforcement subpoena and investigation, and a prior-period restatement. The company said it intended to defend the litigation and cooperate with the SEC; outcomes could not be predicted.
Reporting and control issues
Management concluded that internal control over financial reporting and disclosure controls were not effective as of September 30, 2020, due to material weaknesses involving the control environment, revenue recognition, complex transactions, and IT general controls. Prior revenue-recognition errors led to restatements. Remediation was underway, but management gave no assurance that it would be successful. The company had also faced NYSE American filing-compliance concerns; it expected this filing to restore timely-filing compliance, but future compliance was not assured.
Important facts for investors to verify
- Whether the SBA ultimately forgave the PPP loan in full and whether the company continued to meet BankUnited covenants and minimum-liquidity requirements.
- Whether operating cash flow improved and contract assets, inventory, and customer payment terms converted into cash as expected.
- Whether backlog converts to funded orders and revenue, especially given termination rights, government appropriations, and commercial aerospace weakness.
- The final costs and cash effects of the Honda program exit and the December 2020 settlement releasing $1.381 million of escrow; CPI relinquished its claim to an additional disputed amount of about $2.1 million.
- Progress in remediating material weaknesses, the effects of the SEC investigation and shareholder litigation, and the company’s ability to file future reports on time.