CPI Aerostructures, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. CPI manufactures structural aircraft parts and provides related engineering, program-management, supply-chain and maintenance services for commercial and defense markets. Revenue is generally recognized over time using percentage-of-completion estimates.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $20.03 million | $12.67 million; up 58.1% |
| Gross profit (loss) | $4.54 million; 22.6% gross margin | $(11.64) million; (91.9)% gross margin |
| Operating income (loss) | $2.37 million | $(14.36) million |
| Net income (loss) | $1.25 million; $0.14 per diluted share | $(9.22) million; $(1.07) per diluted share |
| Operating cash flow | $(2.89) million | $(5.73) million |
| Cash | $0.43 million | $1.04 million |
| Working capital | $72.71 million | $70.60 million |
| Debt and borrowings | $35.02 million total; $24.94 million outstanding on revolving line | $32.69 million total debt at December 31, 2016 |
| Contract costs and estimated earnings in excess of billings | $101.93 million on the balance sheet | $99.58 million at December 31, 2016 |
Interest expense was $0.39 million, versus $0.28 million in Q1 2016. The revolving loan bore interest at 4.75% at quarter-end and is secured by the company’s assets. CPI reported compliance with all amended credit-facility financial covenants. The company said existing resources and credit availability should meet working-capital needs for at least 12 months from the filing date.
Changes and operating drivers
- The sharp year-over-year earnings improvement chiefly reflects the prior-year A-10 program estimate change: Q1 2016 included an approximately $13.5 million charge, comprising an $8.9 million revenue reduction and $4.6 million increase in cost of sales. The change followed the Air Force’s decision to defer additional A-10 orders; CPI assumed the program would end at the 173 ship sets then on order.
- Q1 2017 revenue included approximately $1.4 million more military-program revenue as F-16 shipments began. Commercial subcontract revenue declined 30.2% to $7.39 million, reflecting lower activity on the Phenom, Citation X+, HondaJet and G650 programs.
- Contract-estimate revisions reduced expected gross profit by a net $1.275 million in Q1 2017, compared with $1.320 million in Q1 2016, excluding the A-10 charge. Two contracts accounted for approximately $659,000 and $436,000 of unfavorable revisions; CPI cited expected price reductions while seeking contract extensions.
- New awards were approximately $5.1 million, down from $14.1 million a year earlier. Management attributed part of the decline to a continuing congressional resolution that it believed was delaying defense awards.
- Total backlog was $400.8 million at March 31, down from $416.3 million at year-end. Funded backlog was $97.0 million; approximately 78% of total backlog was government-related. Substantially all backlog is subject to termination or rescheduling, generally without significant penalty.
Outlook, risks and other disclosures
No specific financial forecast was provided. Management stated it expected current resources and credit-facility availability to cover working-capital requirements for at least 12 months. It is pursuing improved customer payment terms, including accelerated progress payments, and exploring alternative funding sources.
Liquidity is exposed to the timing gap between percentage-of-completion earnings and cash collections. Costs and estimated earnings in excess of billings increased about $2.3 million during the quarter; the company may need to borrow or raise capital to fund work in process. Program delays or cancellations could cause material impairment of unrecoverable upfront costs. Contract revenue and profit depend on cost estimates that may change, and additional costs could arise before contract completion.
Customer concentration is significant: the two largest commercial customers represented 36% and 25% of Q1 revenue. The company reported no material change to the risk factors in its 2016 Form 10-K, no legal proceedings, and effective disclosure controls as of March 31, 2017. CPI was evaluating the impact of the new revenue-recognition standard, expected to apply beginning in fiscal 2018, and the new lease standard.
Most important facts for investors to verify
- Whether the Q1 earnings recovery is sustainable apart from the unusually large A-10 charge in the prior-year comparison.
- Progress on contract extensions and pricing for the two contracts with significant unfavorable estimate revisions, and whether further cost or margin revisions arise.
- Cash conversion, customer payment terms, and the growth and recoverability of the $101.9 million contract-asset balance.
- Availability under the $30 million revolving facility, covenant compliance, and the company’s ability to fund operations given low cash and $35.0 million of debt.
- Backlog conversion, new-award trends, and exposure to customer concentration and termination or rescheduling of orders.