CPI Aerostructures, Inc. — Q3 2016 Form 10-Q
Period: Three and nine months ended September 30, 2016; unaudited. CPI manufactures structural aircraft parts and provides related engineering, program management, supply-chain and maintenance services for commercial and defense markets.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $22.1 million | $26.8 million | $57.1 million | $68.6 million |
| Gross profit (loss) | $5.0 million | $5.6 million | $(1.6) million | $13.0 million |
| Operating income (loss) | $3.0 million | $3.7 million | $(8.2) million | $7.1 million |
| Net income (loss) | $1.7 million | $2.4 million | $(5.7) million | $4.4 million |
| Basic EPS | $0.19 | $0.29 | $(0.67) | $0.51 |
- Q3 revenue fell 17.5%, mainly due to timing of work on the E-2D multiyear program. Nine-month revenue declined 16.8%, primarily because of the A-10 contract estimate change.
- Gross margin was approximately 22.7% in Q3 versus 20.9% a year earlier; the nine-month gross margin was negative, approximately 2.8%, versus 19.0% in 2015.
- Nine-month operating cash flow was negative $6.8 million, versus positive $1.6 million in 2015. Cash at September 30 was $0.7 million, down from $1.0 million at year-end 2015. Capital expenditures were $0.1 million.
- Working capital was $67.4 million, little changed from year-end. Total debt was $32.4 million versus $25.2 million at December 31, 2015. This included $21.9 million drawn on the revolving facility, at 4.25%, and a new $10 million term loan. The company reported compliance with amended financial covenants.
- Accounts receivable included a $470,748 allowance for doubtful accounts, up from $75,000 at year-end; the company recorded approximately $395,749 of bad-debt expense for disputed customer receivables.
Material changes and unusual items
- A-10 estimate revision: After the Air Force deferred a decision on additional A-10 orders, CPI concluded that orders beyond the existing 173 ship sets were not probable. The Q1 2016 revision reduced revenue by approximately $8.9 million and increased cost of sales by approximately $4.6 million, a total charge of about $13.5 million. It was the principal cause of the nine-month GAAP loss.
- Management presented non-GAAP results excluding the A-10 program. Adjusted nine-month net income was $3.9 million, or $0.45 per diluted share, compared with adjusted net income of $4.4 million, or $0.51 per diluted share, in 2015. These figures are not substitutes for GAAP results.
- Contract estimate revisions, excluding the A-10 item, reduced estimated gross profit by a net $1.6 million in the first nine months, compared with a $0.3 million reduction in 2015. The filing also reports contract-loss accruals of $2.0 million at quarter-end.
- The nine-month income tax benefit of $3.4 million included recognition of a deferred tax asset; management expected it to be reduced as it anticipated taxable income in subsequent quarters.
- New contract awards through September were $30.4 million, compared with $48.0 million in 2015, largely reflecting award timing, including Cessna Citation X+. Total backlog rose to $441.5 million from $387.3 million at year-end, but funded backlog fell to $89.0 million from $101.1 million. Approximately 75% of total backlog was government-related; substantially all backlog was subject to termination or rescheduling.
- Revenue and contract assets are recognized using percentage-of-completion estimates. The filing cautions that revisions, cancellations or delays can change reported earnings and cash flows, and that upfront costs may be impaired if programs are delayed or cancelled.
Outlook, risks and controls
The filing provides no specific revenue or earnings guidance. Management cited efforts to improve customer payment terms, obtain accelerated progress payments and explore other funding sources. Risks include contract-estimate uncertainty, program timing or cancellation, cash conversion, customer concentration and dependence on a limited number of programs and customers. The three largest commercial customers represented 35%, 30% and 13% of nine-month revenue. The BankUnited facility is secured by company assets; a portion of the term loan must be repaid if specified A-10 reimbursement payments are received. Management reported disclosure controls effective at September 30, 2016, following remediation of a previously identified weakness involving review of a request for equitable adjustment. No legal proceedings were reported, and the filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $13.5 million A-10 charge and assumptions about the 173-ship-set order limit fully reflect potential reimbursement or termination-liability recoveries.
- Whether cash generation improves, given negative year-to-date operating cash flow, low cash, and substantial unbilled contract assets.
- Customer payment, collectability and concentration trends, including the disputed receivables reserve and concentration in contract assets.
- Funded backlog conversion, new award timing, and exposure to cancellations or rescheduling of unfunded backlog.
- Future covenant headroom and borrowing costs under the amended credit facility, as well as any required repayment triggered by A-10 reimbursements.