CVU

CPI Aerostructures, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2010. CPI Aerostructures, Inc. is engaged in the contract production of structural aircraft parts, primarily for the U.S. Air Force and other military branches, acting as both a prime contractor and a subcontractor for defense and commercial aerospace primes. The company utilizes the percentage-of-completion (POC) method for revenue recognition.

Key Financial Metrics

Cash Flow (Nine Months 2010): Net cash used in operating activities was $(2,366,243), primarily due to an increase in costs and estimated earnings in excess of billings on uncompleted contracts. Net cash provided by financing activities was $937,445, driven by proceeds from a stock offering of $3,531,870 and the repayment of a $2,200,000 line of credit.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 30.9% for the quarter and 17.7% for the nine-month period compared to 2009. This was driven by a 107.9% increase in government subcontract revenue (notably work for Boeing on the A-10 and Northrop Grumman on the E-2D), offsetting a 17.6% decline in prime government contracts and a 43.8% decline in commercial contracts.
• Profitability: Net income increased 51.3% for the quarter and 48.2% for the nine-month period. Gross margins improved to 26.0% for the nine months (vs. 24.0% in 2009) as long-term programs matured and startup costs were overcome.
• Liquidity: Cash on hand decreased from $2.22 million to $651,220. However, working capital increased by 18.4% to $46.3 million. The company fully repaid its $2.2 million line of credit using proceeds from a registered direct stock offering.
• Contract Awards: New contract awards totaled approximately $57.3 million for the nine months ended September 30, 2010, a significant increase from $15.0 million in the same period in 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margins to remain in the 24%-26% range for the remainder of 2010. The company has approximately $384 million in formalized bids outstanding as of November 5, 2010.
• Capital Resources: The company maintains a $4.0 million revolving credit facility (Sovereign Revolving Facility) with no outstanding balance as of September 30, 2010. A $3.0 million term loan remains outstanding, hedged with an interest rate swap to fix the rate at 5.8%.
• Risks and Contingencies:
  • Estimation Risk: The POC method relies on estimates of costs to complete. Revisions in the nine months ended September 30, 2010, resulted in a $2.4 million decrease to total estimated contract profits.
  • Cash Flow Timing: Significant disparity exists between reported earnings and cash receipts due to upfront costs and billing terms. The company may need to borrow funds to fund work in process or pay taxes before cash is received.
  • Customer Concentration: 23% of revenue for the nine months ended September 30, 2010, was directly from the U.S. government. The three largest commercial customers accounted for 65% of commercial revenue.

Investor Verification Checklist

• Verify the accuracy of cost-to-complete estimates for uncompleted contracts, given the $2.4 million downward revision in estimated profits during the period.
• Monitor the timing of billings versus costs incurred to assess potential future cash flow shortfalls despite reported profitability.
• Review the status of the $384 million in outstanding bids to gauge future revenue visibility.
• Confirm the sustainability of the 26% gross margin as new programs ramp up and older ones mature.
• Assess the impact of the reduction in commercial contract revenue (down 43.8%) on long-term diversification.