CPI Aerostructures, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. CPI manufactures structural aircraft components and provides engineering, program-management, supply-chain, and maintenance services for defense and commercial markets. Results include WMI, acquired in December 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $25.58 million | $18.19 million; up 40.6% |
| Gross profit / margin | $5.42 million / 21.2% | $4.05 million / 22.3% |
| Operating income / margin | $2.61 million / 10.2% | $2.00 million / 11.0% |
| Net income | $1.66 million | $1.26 million |
| Diluted EPS | $0.14 | $0.14 |
| Operating cash flow | $(2.33) million | $(2.57) million |
| Cash and restricted cash at quarter-end | $2.62 million, including $2.00 million restricted | Cash alone was $0.62 million |
Revenue growth was driven primarily by higher Next Generation Jammer production, with contributions from WMI and increased E-2D, F-35, and HondaJet activity. Government subcontract revenue rose 104.9%; commercial subcontract revenue declined 11%, principally due to lower G650 revenue. Net income increased, but EPS was unchanged as weighted-average shares increased to 11.79 million diluted from 8.94 million.
Working capital was $97.64 million, down 0.7% from year-end. Current assets were $142.68 million and current liabilities $45.04 million. Total debt was approximately $29.85 million, including $23.74 million drawn on the revolver; the revolver rate was 6.25%, and the facilities mature June 30, 2020. The company reported covenant compliance. The credit facility is secured by company assets.
Material changes and outlook
- Contract assets increased $7.42 million to $120.75 million; net contract assets were $117.25 million. Management attributed the increase principally to costs on newer programs, including Next Generation Jammer pod 2.0 and HondaJet engine-inlet work. Inventory rose to $11.09 million.
- Backlog was $452.88 million at March 31, down from $457.38 million at year-end; $85.67 million was funded. Approximately 84% was government-related. The filing notes that substantially all backlog may be terminated or rescheduled, and funded backlog does not represent the full value of contracts.
- Remaining performance obligations were $99.3 million; management estimated approximately 78% would be recognized as revenue in 2019 and 22% in 2020. This is not full-year revenue guidance.
- Management said available resources and credit-facility availability, together with a BankUnited commitment to extend the facility, should meet working-capital needs for at least 12 months from the filing date. Cash use reflects contract costs incurred before billing and collection; the company is pursuing improved customer payment terms and alternative funding sources.
- Q1 contract estimate revisions increased expected gross profit by a net $391,000, versus a net $320,000 decrease in Q1 2018. Management cautioned that contract-cost estimates may change and that additional costs could arise before completion.
- The WMI acquisition purchase price was $7.9 million, with $2 million held in escrow. The working-capital adjustment was disputed, with final resolution expected no later than Q3 2019. Purchase accounting fair values remained provisional.
- Adoption of lease accounting on January 1, 2019 resulted in initial recognition of approximately $5.3 million of right-of-use assets and $5.8 million of lease liabilities. At March 31, lease liabilities totaled $5.43 million.
Risks, controls, and unusual items
- Cash conversion and liquidity depend on billing and collecting contract assets; contract accounting relies on estimates of costs, revenue, and progress that can require later adjustments. Program delays or cancellations could also result in impairment of unrecoverable upfront costs.
- Revenue and contract assets are concentrated among a limited number of customers. Four commercial customers represented 25%, 13%, 13%, and 12% of Q1 revenue; major customers also represented substantial portions of contract assets and receivables.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because a material weakness involving review controls failing to timely identify an invoice miscoding and revenue overstatement remained. Corrective controls were implemented in Q1 but had not been fully tested. The assessment excluded WMI during its first year of integration.
- No material changes to the risk factors in the 2018 Form 10-K were reported. No legal proceedings were listed.
Important facts for investors to verify
- Whether the new financial-reporting controls are fully tested and the material weakness remediated.
- Timing and outcome of the WMI purchase-price working-capital dispute and final acquisition accounting.
- Conversion of the large contract-asset balance into billings and cash, and the resulting borrowing needs.
- Progress on the stated credit-facility extension, availability, covenant compliance, and the June 2020 maturity.
- Execution and funding of backlog and remaining performance obligations, including customer concentration and contract termination or rescheduling exposure.