CPI Aerostructures, Inc. — Q3 2012 Form 10-Q
Business and period: CPI manufactures structural aircraft parts for U.S. government and commercial aerospace programs, as a prime contractor and subcontractor. This unaudited report covers the three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $21.34 million | $16.61 million | $61.92 million | $50.04 million |
| Gross profit | $5.80 million | $4.17 million | $16.54 million | $12.26 million |
| Gross margin | 27.2% | 25.1% | 26.7% | 24.5% |
| Operating income | $4.19 million | $2.64 million | $11.25 million | $6.85 million |
| Net income | $2.96 million | $1.81 million | $7.57 million | $4.74 million |
| Diluted earnings per share | $0.35 | $0.25 | $0.99 | $0.66 |
Q3 revenue increased 28.5%; nine-month revenue rose 23.7%. Nine-month commercial revenue grew 165.2% to $18.20 million, principally from Gulfstream G650 leading edges and preliminary HondaJet work. Government prime and subcontract revenue changed comparatively little. Nine-month SG&A declined 2.2% to $5.29 million. Interest expense increased to $486,679 from $216,331.
Cash flow and liquidity: Operating activities used $17.60 million in the first nine months, versus $11.68 million used in 2011, primarily reflecting a $17.20 million increase in costs and estimated earnings in excess of billings and cash outflows in receivables and payables. Investing activities used $709,111. Financing provided $18.50 million, including equity-offering proceeds and borrowing. Cash was $1.07 million at September 30, 2012, versus $878,200 at year-end 2011. Working capital was $77.32 million, up 48.2% from year-end.
Balance sheet and debt: Total assets were $111.02 million. Costs and estimated earnings in excess of billings were $96.21 million, up from $79.01 million at year-end; accounts receivable was $8.86 million. Total debt, including the line of credit, was $21.91 million, compared with $17.88 million at year-end. The $16.60 million revolving-credit balance was under an $18 million facility; the company reported compliance with financial covenants. Long-term debt included a $4.5 million term loan for contract-related tooling and equipment.
Changes, outlook, and notable matters
- Revenue growth and improved gross margins lifted nine-month net income 59.6% year over year. Management expected full-year gross margin to remain within 25%–27%; no specific revenue or earnings guidance was provided.
- The company raised approximately $13.3 million net through a June stock offering and July over-allotment. It used $4 million to repay revolving borrowings; shares outstanding increased to 8,353,469 from 7,079,638 at year-end.
- Costs and estimated earnings in excess of billings rose $17.2 million. Management attributed approximately $7 million of the increase to the Boeing A-10 program: milestone billing had ended, and pricing negotiations for engineering changes remained unresolved while production continued.
- From the start of the year through November 3, the company reported approximately $63.9 million in new awards, compared with $81.5 million in the comparable prior-year period. Major awards included Boeing A-10, Goodrich assemblies, and a Sikorsky Black Hawk agreement. Formalized bids outstanding were approximately $958 million as of November 4, including two Boeing 787 bids totaling about $647 million; awards and timing were uncertain.
- Management cautioned that percentage-of-completion accounting depends on cost and profit estimates, and earnings may not convert promptly into cash. Contract estimate revisions reduced expected gross profit by approximately $1 million during the first nine months, versus $2.6 million in 2011. Delays or cancellations could also make upfront program costs unrecoverable.
- Customer concentration is significant: the three largest commercial customers represented 68% of nine-month revenue; three customers represented 80% of receivables at quarter-end. The filing identifies potential defense-budget reductions and January 2013 sequestration as risks to program funding, sales, liquidity, and results. Government contracts may also be terminated or adjusted.
- The company uses interest-rate swaps to hedge debt exposure; the net swap liability was approximately $84,000 at quarter-end. Management reported disclosure controls were effective and no material change in internal control; no legal proceedings were reported.
Important facts for investors to verify
- Whether Boeing engineering-change pricing is resolved and A-10 production can be billed and collected as anticipated.
- Conversion of the large unbilled contract asset into invoices and cash, and the resulting need for additional borrowing or capital.
- Whether outstanding bids become awards, and whether new awards offset the year-over-year decline in awards to date.
- Exposure to major commercial customers and to government funding reductions, sequestration, program delays, or contract termination.
- Debt, revolving-facility availability and covenant compliance, alongside the effect of the equity issuance on per-share results.