CPI Aerostructures, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The company manufactures structural aircraft parts and provides engineering, assembly, program-management, and maintenance services to commercial and defense customers. This unaudited report covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $19.94 million | $20.71 million | $58.40 million | $57.47 million |
| Gross profit / margin | $4.80 million / 24.1% | $4.91 million / 23.7% | $13.43 million / 23.0% | $13.13 million / 22.9% |
| Operating income | $2.21 million | $2.87 million | $6.24 million | $6.92 million |
| Net income | $1.33 million | $1.70 million | $3.84 million | $3.71 million |
| Diluted EPS | $0.15 | $0.19 | $0.43 | $0.42 |
| Interest expense | $575,000 | $403,000 | $1.44 million | $1.26 million |
For the nine months, operating cash flow was negative $3.05 million, capital expenditures were $521,000, and financing provided $2.97 million. Cash declined by $602,000 to $829,000. Working capital was $81.49 million. Contract assets were $114.09 million, a $2.94 million increase from year-end 2017, underscoring the gap that can arise between recognized earnings and cash collection.
At September 30, total debt was approximately $35.69 million, including $27.54 million drawn on the revolving facility and $8.10 million of long-term debt before unamortized issuance costs. The revolver bore interest at 5.75%; the facility is secured by company assets. Total assets were $127.10 million and shareholders’ equity was $78.75 million.
Material changes and drivers
- Q3 revenue fell 3.7%, mainly from the cyclical E-2D program wind-down, partly offset by higher direct U.S. government sales, including T-38 kits. Nine-month revenue rose 1.6%, reflecting growth in the next-generation jammer pod program and T-38 kits, offset by lower E-2D sales.
- Q3 gross profit declined 2.3%; nine-month gross profit increased 2.3%. Q3 operating income declined 22.8%, while nine-month operating income fell 9.9%, in both cases affected by higher SG&A.
- SG&A rose 26.4% in Q3 and 15.8% for the nine months. Higher professional fees included legal, due-diligence, and transaction work relating to the proposed Welding Metallurgy, Inc. (WMI) acquisition; other increases included salaries, benefits, and computer costs.
- Nine-month net income increased 3.6%, while Q3 net income declined 21.7%. The 2018 effective tax rate was 20%, versus 35% in 2017, reflecting U.S. tax reform and other tax effects; the periods are not directly comparable.
- Backlog was $442.23 million at September 30, up from $388.73 million at year-end 2017. Approximately 83% was government-related. Most backlog is subject to termination or rescheduling, and unfunded amounts depend on future orders and appropriations.
Outlook, risks, and unusual items
- The filing reports $77.44 million in remaining performance obligations at September 30; management estimated recognizing approximately 31% in 2018 and 69% in 2019. This is not a general earnings or revenue forecast.
- Management said existing resources and credit-facility availability should cover current working-capital needs for at least 12 months from the filing date. It also noted that contract work-in-process, slower billing, program delays, or cancellations could pressure cash and could require additional borrowing or capital.
- The company was not in compliance with its leverage-ratio covenant at September 30. The bank waived the noncompliance, and the August 2018 amendment extended the revolving and term-loan maturities to June 30, 2020. The facility requires repayment of a portion of qualifying public-offering proceeds and maintenance of at least $3 million in specified cash or revolver availability.
- After quarter-end, the company completed an October 19 public offering of 2.76 million shares at $6.25 per share, with approximately $16.10 million of net proceeds. It used $4.1 million to prepay facility debt. The November 9 covenant waiver is also a subsequent event.
- WMI litigation and the proposed acquisition remained unresolved in the filing. A court-ordered October stipulation withdrew the seller’s purported termination and set steps toward closing, subject to receipt of audited financial statements and satisfaction of other conditions. A November 9 court-ordered amendment set a deadline for the replacement auditor’s report. The company warned that failure or delay in closing could forfeit potential benefits, consume management resources, and add costs.
- Contract estimates are significant: nine-month estimate revisions reduced expected contract gross profit by a net $683,000, compared with a $1.68 million reduction in 2017. The company cautioned that further costs or estimate changes could occur. Customer concentration is also notable: four commercial customers represented 61% of nine-month revenue.
- ASC 606 was adopted January 1, 2018, with no material impact reported. The company expected to adopt the new lease standard on January 1, 2019 and was still assessing its financial impact.
Most important facts for investors to verify
- Whether contract assets convert to billings and cash as expected, given negative operating cash flow and low cash on hand.
- Revolver availability and covenant compliance after the offering-related debt prepayment and subsequent waiver.
- Progress, final costs, and outcome of the WMI acquisition and related litigation.
- Backlog funding, order timing, and contract-margin assumptions, particularly for programs with delays or estimate revisions.
- Customer concentration and the impact of the E-2D program transition on revenue and margins.