CPI Aerostructures, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company manufactures structural aircraft parts and provides engineering, assembly, program management, and maintenance services to defense and commercial customers. Figures below are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $20.26 million | $16.73 million | $38.45 million | $36.76 million |
| Gross profit | $4.58 million | $3.68 million | $8.63 million | $8.22 million |
| Gross margin | 22.6% | 22.0% | 22.5% | 22.4% |
| Operating income | $2.03 million | $1.68 million | $4.03 million | $4.06 million |
| Net income | $1.26 million | $0.77 million | $2.51 million | $2.01 million |
| Diluted EPS | $0.14 | $0.09 | $0.28 | $0.23 |
Q2 revenue grew 21.1% and net income rose 64.2% year over year; first-half revenue increased 4.6% and net income increased 24.8%. First-half operating income was slightly lower, as higher SG&A offset gross-profit growth. First-half effective tax rate was 20%, versus 37% in 2017, reflecting the U.S. tax-rate reduction and other tax items; 2017 periods were calculated under prior tax law.
Cash flow and liquidity: First-half operating cash flow was negative $3.58 million, compared with negative $1.11 million in 2017. Contract assets increased $4.02 million, contributing to cash use. Cash was $1.03 million at June 30, down from $1.43 million at year-end. Working capital was $80.59 million. Current assets included $115.18 million of contract assets, making cash conversion and billing progress important to monitor.
Debt: Total short- and long-term debt was approximately $35.94 million, including $27.34 million drawn on a $30 million revolving facility at 5.25%. The facility is secured by all company assets. The company was out of compliance with its leverage-ratio covenant at June 30. On August 7, BankUnited provided a commitment letter to extend the revolving and term loans to June 30, 2020 and waive the covenant breach; lender diligence and formal documents remained outstanding. The filing gives differing term-loan maturity dates in different sections, as noted below.
Material changes and operating context
- Management attributed revenue growth primarily to ramp-up of the Next Generation Jammer Pod program and T-38 kit production, partly offset by a cyclical E-2D decline.
- First-half government subcontract revenue fell 15.9% to $18.71 million, while direct military revenue increased to $4.91 million, primarily from T-38 kits. Commercial subcontract revenue rose 5.1% to $14.83 million.
- SG&A increased 10.6% in the first half to $4.61 million, including higher professional fees, salaries, benefits, and consulting costs. Q2 professional fees also reflected WMI acquisition diligence and contract work related to the bank agreement.
- Total backlog was $360.21 million at June 30, down from $388.73 million at year-end; approximately 79% was government-related. Funded backlog was $69.91 million. Management cautions that substantially all backlog is subject to termination or rescheduling, and unfunded amounts depend on future appropriations or orders.
- Remaining performance obligations were $62.60 million; management estimated about 70% would be recognized in 2018 and 30% in 2019.
Outlook, risks, and unusual items
- No full-year earnings or revenue guidance is provided. Management said existing resources, available credit, and the BankUnited commitment were expected to meet working-capital needs for at least 12 months, but the facility amendment was not yet final.
- Cash generation is exposed to contract timing: revenue is recognized using a cost-to-cost estimate method, while billing and collection may occur later. Inaccurate cost estimates, contract changes or termination could require future revenue or profit adjustments; the company may need to borrow or seek other liquidity.
- WMI acquisition litigation was pending after the company sued Air Industries, which filed counterclaims and alleged the agreement had terminated. The company sought specific performance and a preliminary injunction; the acquisition’s consummation was not considered probable. Litigation costs, management distraction, and failure or delay of the transaction could adversely affect the business.
- Management reported first-half net unfavorable contract-estimate adjustments of approximately $275,000, compared with approximately $1.63 million in 2017. One 2018 contract had an approximately $376,000 unfavorable adjustment tied to revised long-term program estimates; other adjustments related to excess overhead and material costs.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no material impact reported. Estimates remain central to revenue and profit recognition. The interest-rate swap matured in June 2018.
Important facts for investors to verify
- Whether the BankUnited amendment was formally completed, including the covenant waiver, extension dates, borrowing availability, and final loan terms.
- The company’s covenant status and the conflicting term-loan maturity disclosures: the debt note states June 30, 2019, while MD&A and the risk-factor discussion state March 31, 2019.
- Cash conversion, collections, contract-asset growth, and the timing of billings—especially given negative operating cash flow and low cash relative to contract assets.
- Developments in the WMI dispute, potential acquisition costs, and any resulting effect on liquidity or strategic plans.
- Backlog conversion and funding, major-customer concentration, and progress and profitability on newer programs and contracts with estimate revisions.