CPI Aerostructures, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The statements are unaudited; 2019 comparative results were restated. The report was signed November 16, 2020, and the company disclosed that it was delinquent in required filings.
Business context and reporting period
CPI produces structural aircraft parts and aerosystems for commercial and defense customers, and provides related engineering, assembly, kitting, supply-chain and maintenance services. It reports one operating segment. Results reflect the pandemic period: CPI remained open as an essential business, while reporting modified work arrangements and potential supply-chain and workforce disruptions.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $19.74 million | $20.10 million | $36.60 million | $42.09 million |
| Gross profit (margin) | $2.58 million (13.1%) | $2.24 million (11.2%) | $3.28 million (9.0%) | $4.73 million (11.2%) |
| Operating loss | $0.24 million | $0.30 million | $2.63 million | $0.73 million |
| Net loss | $0.60 million | $0.88 million | $3.41 million | $1.82 million |
| Loss per diluted share | $0.05 | $0.07 | $0.29 | $0.15 |
First-half operating cash flow was negative $0.85 million, versus negative $3.39 million in 2019. Investing cash outflow was $0.01 million; financing provided $3.56 million, including the $4.795 million PPP loan. Cash was $6.75 million at June 30, plus $1.38 million restricted cash. Working capital was $12.70 million, down from $13.85 million at year-end 2019.
At June 30, total liabilities were $58.01 million and shareholders’ deficit was $10.61 million. Debt reported at $34.55 million included $26.74 million drawn on the revolving facility and the PPP loan; long-term debt maturities included $4.73 million current and $3.08 million noncurrent. The revolver bore 6.25% interest and was originally due June 2021.
Material changes versus the prior comparable period
- Q2 revenue declined 1.8%; first-half revenue declined about 13%. Commercial subcontract revenue fell 61% in Q2 and 43% in the first half, with lower G650 and Embraer activity among the cited factors.
- Q2 gross profit increased 15%, helped by program mix, despite slightly lower revenue. First-half gross profit fell 30.7%, mainly with lower revenue. First-half net loss widened to $3.41 million from $1.82 million.
- Revenue mix shifted: Q2 kitting and supply-chain revenue rose to $10.09 million from $2.99 million a year earlier, while aerosystems revenue fell to $2.29 million from $6.42 million.
- Inventory rose to $7.66 million from $5.89 million at December 31, 2019. Accounts payable and accrued expenses also increased.
- Funded backlog increased to $208.98 million from $147.65 million at year-end; total backlog was $546.42 million versus $561.88 million. About 90% of total backlog was government-related.
Outlook, risks, contingencies and unusual items
- Outlook: No specific full-year revenue or earnings guidance is provided. CPI expected to recognize about 27% of its $209 million remaining performance obligations in fiscal 2020 and the balance by fiscal 2022. Management cited approximately $209 million of funded backlog, about 98% for military programs, and stated it believed liquidity and debt resources would support going-concern status for at least a year and a day from filing.
- COVID-19: Management warned of supply-chain disruption, absenteeism, lower commercial aerospace demand, customer schedule changes and potential cash-flow pressure. It described spending cuts, a hiring freeze, deferred travel and closer inventory management as mitigation steps; the full impact remained uncertain.
- Credit facility amendment: On August 24, 2020, after the reporting date, $6 million of revolver borrowings was converted to term debt, revolver availability reduced to $24 million, and facility maturities extended to May 2, 2022. Amendments included covenant waivers and revised tests; a $3 million minimum liquidity covenant remained. Future covenant compliance is a risk.
- PPP loan: CPI applied for full forgiveness in October; the lender approved and forwarded the application to the SBA on November 2, 2020. Final forgiveness was not assured.
- Controls and filing status: Management concluded disclosure controls were ineffective as of June 30, 2020 and identified material weaknesses, including in revenue recognition, complex transactions and IT controls. Prior-period financial statements had been restated. The company was working on remediation and faced NYSE American filing-compliance deadlines.
- Contingencies: The WMI acquisition working-capital dispute includes approximately $1.38 million of restricted escrow cash and a disputed additional amount; a court denied CPI’s motion on procedural grounds without resolving the dispute. CPI also disclosed shareholder class and derivative lawsuits and an SEC investigation relating to prior reporting, its 2018 offering and other matters.
- Concentration and estimation risk: The two largest customers represented 39% and 10% of first-half revenue. Contract revenue depends on cost-to-cost estimates; first-half 2020 contract estimate changes produced a net $43,359 reduction in gross profit, versus a $633,014 increase in 2019.
Important facts for investors to verify
- Final SBA decision on forgiveness of the $4.795 million PPP loan.
- Available borrowing capacity, covenant compliance and liquidity under the amended BankUnited facility.
- Progress and effectiveness of internal-control remediation, and timely filing and exchange-listing compliance.
- Developments in the WMI working-capital dispute, shareholder litigation and SEC investigation.
- Whether funded backlog converts to revenue as expected, particularly amid COVID-related commercial and program changes.
- Reconciliation of the 2019 first-half revenue comparative: the financial statements show $42,090,096, while one MD&A passage cites $42,090,906.