CPI Aerostructures, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. CPI manufactures structural aircraft parts and assemblies for commercial and defense markets and provides related engineering, program management, supply-chain, and maintenance services. The interim financial statements are unaudited.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $(23.75) million | $21.11 million | $(1.87) million | $41.04 million |
| Gross profit (loss) | $(42.96) million | $4.24 million | $(38.47) million | $8.68 million |
| Operating income (loss) | $(44.75) million | $2.74 million | $(42.10) million | $5.30 million |
| Net income (loss) | $(29.69) million | $1.78 million | $(27.96) million | $3.46 million |
| Basic and diluted EPS | $(3.50) | $0.21 | $(3.31) | $0.41 |
The negative 2014 revenue and gross profit reflect a large cumulative contract-estimate adjustment, not ordinary-period sales activity. Reported results include a $44.7 million revenue reduction and $2.6 million cost-of-sales charge on the A-10 Wing Replacement Program (WRP). The filing does not present a meaningful normalized margin excluding these adjustments.
- Cash flow: Six-month operating cash use was $9.45 million, versus $7.63 million used in 2013. Investing cash use was $0.32 million. Financing provided $8.57 million, primarily from $8.5 million of additional revolver borrowings. Cash declined to $0.97 million from $2.17 million at year-end.
- Liquidity and debt: Working capital was $46.22 million, down 48% from $88.44 million at December 31, 2013. The company had $29.85 million drawn on its $35 million revolving facility and $2.75 million of term and other long-term debt, or $32.60 million total debt. Revolver borrowings bore 3.25% interest and the facilities were secured by company assets.
- Balance-sheet items: Costs and estimated earnings in excess of billings were $73.56 million, down from $112.60 million at year-end. A noncurrent recoverable/deferred tax asset increased to $15.76 million from $1.13 million, reflecting tax benefits associated with losses and tax-loss carrybacks.
Material changes and management commentary
- Management concluded the A-10 WRP would likely not reach the originally anticipated 242 aircraft. The company reduced estimated program revenue by approximately 41%, recording a $44.7 million inception-to-date revenue reversal in Q2. The filing cites uncertainty about A-10 fleet retirement, a House-passed 2015 appropriations bill with no funding for A-10 operations, and rescission of 2014 wing-procurement funding.
- Management also recorded $2.6 million of additional A-10 costs, citing reduced prospects for supplier cost reductions. Contract-estimate revisions reduced estimated gross profit by approximately $41.82 million in the first half; approximately 95% related to the A-10 program.
- Commercial subcontract revenue rose 14% to $15.0 million in the first half, driven by Embraer and Cessna production. New awards were approximately $19.2 million versus $13.2 million in the prior-year period.
- Total backlog was $390.71 million at June 30, down from $431.44 million at year-end; $96.40 million was funded. Government backlog totaled $222.56 million and commercial backlog $168.15 million. Management cautions that substantially all backlog may be terminated or rescheduled, often without significant penalty, and unfunded backlog depends on future orders and appropriations.
- SG&A increased 7.4% to $3.62 million for the first half, primarily due to salary and benefit increases, including a $100,000 former-CEO separation payment.
- The company reported a $14.44 million income-tax benefit for the first half, largely from carrying federal and state tax losses back to recover taxes previously paid. The filing reports a $15.22 million benefit for Q2.
Outlook, risks, and contingencies
No quantitative earnings or revenue guidance is provided. On August 6, 2014, lenders waived the company’s June 30 net-income covenant noncompliance and amended the credit agreement to require repayment of revolver borrowings to the extent the company receives A-10 contract reimbursement payments. The filing does not specify the amount or timing of such receipts or repayments.
Key risks include further contract-estimate changes under percentage-of-completion accounting, A-10 cancellation or reduced production, unrecoverable upfront program costs, cash-flow shortfalls, and reliance on borrowing or alternative funding. Customer concentration is significant: the three largest commercial customers represented 29%, 21%, and 15% of first-half revenue before the A-10 estimate adjustment. Management said disclosure controls were effective; it reported no material change in internal control and no legal proceedings.
Important facts for investors to verify
- Whether the A-10 program will be terminated or reduced further, and the ultimate recoverability of related contract costs, billings, and reimbursements.
- The terms and continuing effect of the August 6 lender waiver, covenant requirements, and any mandatory revolver repayments.
- Cash conversion and near-term liquidity needs, given operating cash use, low cash on hand, and significant unbilled contract balances.
- The quality and funding status of backlog, particularly unfunded government and commercial orders that may be rescheduled or terminated.
- The filing’s backlog discussion contains a garbled statement of the government share of total backlog (“00%”); the component figures indicate government backlog of $222.56 million out of $390.71 million total.