CPI Aerostructures, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise noted. The company manufactures structural aircraft parts for government and commercial customers.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $19.93 million | $19.72 million | +1.0% |
| Gross profit / margin | $4.44 million / 22.3% | $4.96 million / 25.2% | Gross profit down $0.52 million |
| Operating income | $2.56 million | $2.86 million | Down $0.30 million |
| Net income | $1.67 million | $1.92 million | Down 12.9% |
| Basic / diluted EPS | $0.20 / $0.20 | $0.28 / $0.27 | Lower year over year |
| Operating cash flow | $(7.35) million | $(5.85) million | Greater cash use |
SG&A decreased 10.8% to $1.88 million, partly due to lower accrued officer bonuses and accounting and legal fees. The effective tax rate was approximately 31%, versus 29%.
Balance sheet and liquidity
- At March 31, 2013, cash was $1.26 million, down from $2.71 million at year-end 2012. Working capital was $82.97 million, up 4.1% from December 31.
- Debt, including the line of credit, was $33.98 million, compared with $27.76 million at year-end. The revolving facility had a $35 million commitment and $29.95 million drawn; the company reported compliance with its financial covenants.
- Cash-flow pressure reflected increases in receivables and costs and estimated earnings ahead of billings, alongside a $5.49 million decrease in accounts payable and accrued expenses. The company said it may need borrowing or other liquidity to fund work in process.
- Costs and estimated earnings in excess of billings were approximately $110.0 million on the balance sheet. The Boeing A-10 program accounted for about $1.6 million of the quarterly increase in this asset.
Material changes, outlook, and risks
- Government prime-contract revenue fell 87.7% to $0.23 million as the company shifted away from prime government work. Government subcontract revenue rose 14% to $14.11 million; commercial revenue rose 2.5% to $5.58 million.
- Management attributed the lower gross margin to contract estimate and pricing adjustments involving Spirit and Boeing. The Spirit adjustment accompanied price reductions in exchange for increased program value and an extension through 2019. Boeing engineering changes remained subject to pricing negotiations, while production continued.
- Despite the first-quarter margin of 22.3%, management said it still expected full-year gross margin of 25%–27%. New contract awards from the start of the year through March were approximately $11.5 million, versus $31.7 million in the comparable prior-year period.
- Total backlog was $420.3 million at March 31, up from $391.9 million at year-end; $81.9 million was funded. About 53% was government backlog. The filing cautions that substantially all backlog may be terminated or rescheduled without significant penalty, and unfunded backlog depends on future customer orders and funding.
- Customer concentration is material: the three largest commercial customers generated 68% of Q1 revenue. The company also cites potential cash-flow shortfalls under percentage-of-completion accounting, possible unrecoverable upfront program costs if programs are delayed or cancelled, contract cost-estimation uncertainty, and customer payment timing.
- The company used a $4.5 million interest-rate swap to fix the related term-loan rate at 4.11%; no material hedge ineffectiveness was recognized. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Boeing change-order pricing is resolved and when related costs and earnings can be billed and collected.
- Whether cash conversion improves, particularly collections, unbilled contract assets, and accounts-payable movements, and how much revolving-credit availability remains.
- Whether management achieves its 25%–27% full-year gross-margin outlook after the Q1 contract adjustments.
- How funded orders develop against the large, predominantly unfunded backlog and the dependence on major commercial customers.
- The filing reports $110.0 million of costs and estimated earnings in excess of billings on the balance sheet, while the contract note presents a net amount of $109.7 million after excess billings; investors may wish to reconcile the presentation.