CPI Aerostructures, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. CPI manufactures structural aircraft parts for U.S. military programs and commercial aircraft customers. Financial statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $20.66 million | $21.34 million | $61.70 million | $61.92 million |
| Gross profit | $4.48 million | $5.80 million | $13.15 million | $16.54 million |
| Gross margin | 21.7% | 27.2% | 21.3% | 26.7% |
| Operating income | $2.97 million | $4.19 million | $8.27 million | $11.25 million |
| Net income | $1.91 million | $2.80 million | $5.37 million | $7.41 million |
| Diluted EPS | $0.23 | $0.33 | $0.63 | $0.96 |
- Nine-month revenue declined 0.3%, while net income fell about 28%. Management attributed lower earnings principally to reduced gross margins.
- Nine-month selling, general and administrative expenses decreased 7.7% to $4.88 million, reflecting lower officer bonus accruals and professional fees, partly offset by higher salaries.
- Cash used in operating activities was $8.42 million in the first nine months, compared with $17.76 million in the prior-year period. Capital expenditures were $0.60 million.
- Cash was $0.84 million at September 30, down from $2.71 million at year-end 2012. Working capital was $86.26 million, versus $79.71 million at year-end.
- Total debt was $34.94 million, including $31.45 million outstanding on the revolving facility and $3.49 million of long-term debt. The revolving facility limit was $35 million; the company reported compliance with financial covenants.
Material changes and operating drivers
- Government prime-contract revenue declined 80% year over year for the nine months, consistent with CPI’s stated move away from government prime work. Government subcontract revenue rose 7.7%; commercial revenue rose 5.6%.
- Management cited increased A-10, UTC Aerospace, and G650 production, partly offset by lower E-2D production.
- Gross margins were pressured by program estimate and pricing adjustments involving Spirit, Northrop Grumman, Boeing, and the C-5 Top Program. The Boeing adjustment reduced gross margin by approximately 200 basis points. Revisions to estimated contract profits reduced total expected gross profit by approximately $3.6 million in the first nine months of 2013, versus $1.0 million in 2012.
- Total backlog was $439.7 million at September 30, up from $391.9 million at December 31, 2012. Funded backlog increased to $102.5 million from $52.3 million; the remainder was unfunded or unreleased. Approximately 52% of total backlog was government-related.
- From the start of the fiscal year through October 31, CPI reported approximately $83.1 million in new awards, compared with $64.1 million for the comparable prior-year period.
Outlook, risks, and other notable items
- Management expected full-year gross margin to be 23%–24%. The filing does not provide clear revenue or earnings guidance.
- In October, CPI collected approximately $4.8 million from Boeing as part of a pricing-negotiation settlement; $4.5 million was used to reduce the revolving credit balance. Revolver borrowings were $26.95 million at October 31.
- Management warned that percentage-of-completion accounting depends on cost and profit estimates; revisions, contract termination, delays, or cancellations could reduce earnings, impair unrecovered upfront program costs, and strain liquidity. The company was working to improve customer payment terms and explore alternative funding.
- Customer and contract concentration is significant: three commercial customers accounted for 67% of nine-month revenue. Major commercial customers also represented substantial portions of receivables and unbilled contract assets.
- Substantially all backlog may be terminated or rescheduled without significant penalty, and unfunded backlog depends on future orders and appropriations. The company also reported approximately $1.145 million of uninsured bank deposits.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective as of September 30, 2013.
Important facts for investors to verify
- Whether the expected 23%–24% full-year gross margin remains achievable given the 21.3% nine-month margin and the disclosed program adjustments.
- How quickly unbilled contract assets convert to customer cash, and whether operating cash flow improves.
- Funding, release, cancellation, and timing assumptions underlying the $337.2 million of unfunded or unreleased backlog.
- Ongoing exposure to concentrated commercial customers and the recoverability of significant unbilled contract balances.
- The timing and final financial effects of the Boeing settlement and the associated reduction in revolver borrowings.