CPI Aerostructures, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. CPI manufactures structural aircraft parts and assemblies for commercial and defense markets and provides related engineering, program-management, supply-chain, and repair services. It recognizes most contract revenue using percentage-of-completion accounting.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $26.8 million | $21.5 million | $68.6 million | $19.6 million |
| Gross profit (loss) | $5.6 million | $4.5 million | $13.0 million | $(34.0) million |
| Gross margin | 20.9% | 20.8% | 19.0% | Not meaningful due to A-10 contract charge |
| Operating income (loss) | $3.7 million | $2.7 million | $7.1 million | $(39.4) million |
| Net income (loss) | $2.4 million | $1.7 million | $4.4 million | $(26.9) million |
| Basic EPS | $0.29 | $0.20 | $0.51 | $(3.18) |
Q3 revenue increased 24.7% year over year, primarily due to increased E-2D program work. Nine-month commercial subcontract revenue rose 19.7% to $31.0 million, with growth on Embraer and Honda programs. The 2015 nine-month gross margin was 23.4% excluding the A-10 program, which contributes revenue with zero gross margin following the prior-year loss estimate.
Cash flow and liquidity: Operating cash flow was $1.6 million for the first nine months, compared with cash used of $7.6 million in 2014. Cash was $1.9 million at quarter-end; working capital was $67.6 million. Costs and estimated earnings in excess of billings were $96.5 million, up from $79.1 million at year-end 2014, and increased about $17.5 million during the period. The company attributed cash-flow pressure to up-front contract costs and timing of customer billings.
Debt: Total short- and long-term debt was approximately $26.3 million, including $24.7 million drawn on a $35 million revolving facility. The company reported $10.3 million of revolver availability and compliance with financial covenants. The facility matures December 5, 2016. Borrowings under the facility bore 3.50% interest at quarter-end; the term loan is effectively fixed at 4.11% through an interest-rate swap.
Material changes and operating developments
- The large year-over-year improvement in nine-month results principally reflects the approximately $39.9 million unfavorable A-10 Wing Replacement Program estimate recorded in 2014. The company said 2015 versus 2014 nine-month gross-profit comparisons are not informative for this reason.
- Contract estimate revisions reduced expected total gross profit by a net $333,000 in the first nine months of 2015, versus a $42.3 million reduction in 2014. One contract had an approximately $803,000 unfavorable adjustment for technical issues, excess engineering time, and procurement costs.
- New awards through September 30 were approximately $48.0 million, down from $87.8 million in 2014, which included a five-year E-2D subcontract award of approximately $65 million. Total backlog rose to $421.7 million from $403.6 million at December 31, 2014; about 71% was government-related. Funded backlog was $125.7 million and unfunded backlog was $295.9 million.
- Customer concentration is significant: the three largest commercial customers represented 22%, 19%, and 18% of nine-month revenue. Backlog is substantially subject to termination or rescheduling, and government funding may be appropriated periodically rather than for the full contract term.
Outlook, risks, and other disclosures
The filing provides no specific earnings or revenue guidance. Management said it is pursuing improved customer payment terms, including accelerated progress payments, and exploring alternative funding sources. It cautioned that percentage-of-completion estimates may differ from actual results and cash receipts; inaccurate contract estimates or cancellations could require later revenue adjustments. Program delays or cancellations could also impair unrecoverable up-front costs and materially affect liquidity. The company reported no material changes to the risk factors in its 2014 Form 10-K and no legal proceedings. Management stated disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Progress and final cost estimates for the A-10 program and the contract with technical issues; assess the potential for further material estimate changes.
- Conversion of the $96.5 million contract asset into billings and cash, and whether working-capital needs can be funded without increased borrowing.
- Funding, timing, cancellation terms, and expected conversion of the $421.7 million backlog, particularly its unfunded portion.
- Customer concentration and the company’s ability to maintain margins and payment terms across major commercial and government programs.
- Revolving-facility covenant compliance, availability, and refinancing or repayment plans ahead of the December 2016 maturity.