Business context and reporting period
CPI Aerostructures, Inc. manufactures structural aircraft parts for U.S. defense customers and commercial aerospace companies, primarily as a subcontractor. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $20.85 million, up 19.7% | $40.58 million, up 21.4% |
| Gross profit / margin | $5.77 million / 27.7% (prior: 24.4%) | $10.73 million / 26.5% (prior: 24.2%) |
| Operating income | $4.20 million (prior: $2.16 million) | $7.06 million (prior: $4.21 million) |
| Net income | $2.70 million; diluted EPS $0.36 | $4.62 million; diluted EPS $0.63 |
Six-month operating cash flow was negative $11.33 million, compared with negative $7.19 million in 2011. Capital expenditures were $0.67 million. Cash increased to $3.60 million from $0.88 million at year-end, primarily supported by financing proceeds. Working capital was $72.41 million, up 38.8% from December 31, 2011.
At June 30, total short- and long-term borrowings were $20.35 million, including $14.60 million outstanding under an $18 million revolving facility and $5.75 million of long-term debt, including current maturities. The company reported compliance with its credit covenants. Its assets secure the credit facilities.
Material changes and notable items
- Six-month commercial revenue rose 185.2% to $11.72 million, driven mainly by Gulfstream G650 production and preliminary HondaJet work. Government subcontract revenue declined 3.6%, as higher E-2D revenue was more than offset by lower Boeing A-10 revenue.
- Gross margins improved; management attributed lower SG&A partly to changes in director stock-option grants. Six-month income tax expense was $2.12 million, or 31.5% of pretax income, versus 28% in 2011; the company accrued penalties and interest for underpayment of taxes.
- Costs and estimated earnings in excess of billings rose $9.7 million to $88.72 million. The A-10 contract accounted for about $4.6 million of the increase, amid vendor performance issues, missed milestone billings, pending price negotiations for engineering changes, and production awaiting a Boeing configuration change.
- In June, the company sold 1.0 million shares at $12 each, receiving approximately $11.1 million net; $3 million repaid its revolving credit facility. On July 3, underwriters exercised an option for another 195,750 shares, generating approximately $2.2 million net; $1 million was used to repay the facility.
Outlook, risks and contingencies
Management expected full-year gross margin to remain within 25%–27%; the filing gives no full-year revenue or earnings guidance. From the start of 2012 through August 3, the company reported approximately $44.6 million of new awards, versus $58.6 million in the comparable prior-year period. It also reported approximately $980 million in formalized bids outstanding as of August 4, including two bids totaling about $647 million for Boeing 787 work; award outcomes and timing were uncertain.
Management cautioned that percentage-of-completion accounting depends on cost and profit estimates, and that reported earnings may not convert to cash promptly. Delays or cancellations could leave upfront tooling and production costs unrecoverable and lead to material impairment charges. Customer concentration is significant: three commercial customers represented 38%, 19% and 15% of six-month revenue. The company also cited interest-rate and counterparty risks, while using swaps to hedge interest-rate exposure. Contract-estimate revisions reduced expected gross profit by approximately $528,000 in the first half, versus $1.8 million in 2011. No material change to previously reported risk factors or legal proceedings was reported.
Important facts for investors to verify
- Whether Boeing vendor, engineering-change, configuration and milestone-billing issues are resolved, and how they affect collections and contract margins.
- Whether the $88.72 million contract asset balance converts to billings and cash on expected schedules; contract completion estimates remain subject to change.
- Actual awards and timing from the substantial bid pipeline, including the Boeing 787 proposals, and the performance of newer commercial programs.
- Cash needs, revolving-facility usage and covenant compliance as production and upfront program costs evolve.
- Customer concentration, tax penalties and interest, and any future impairments or revisions to estimated contract profitability.