CPI Aerostructures, Inc. — Q3 2022 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2022. CPI Aero manufactures structural aircraft parts and aerosystems and provides related engineering, supply-chain, and other services. Most revenue comes from long-term U.S. government, military, and commercial contractor programs.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $20.2 million | $23.9 million | $59.3 million | $77.0 million |
| Gross profit / margin | $5.3 million / 26.4% | $3.7 million / 15.3% | $12.4 million / 21.0% | $12.2 million / 15.8% |
| Operating income | $2.6 million | $0.9 million | $3.8 million | $3.3 million |
| Net income | $1.9 million | $5.4 million | $2.3 million | $7.3 million |
| Diluted EPS | $0.15 | $0.44 | $0.19 | $0.60 |
Revenue declined 15.5% in Q3 and 23.1% for the nine months. Management attributed the declines mainly to lower activity on Northrop Grumman E-2D and Raytheon NGJ programs. Gross margins improved, which management attributed to favorable program mix and operating efficiencies. Nine-month net income included a $771,834 severance charge; excluding it, management reported net income of $3.1 million and EPS of $0.25.
Prior-year comparisons include $4.795 million of other income from forgiveness of the PPP loan in Q3 2021. Interest expense increased to $1.5 million for the first nine months of 2022 from $0.8 million a year earlier, reflecting higher borrowing costs.
Cash, debt, and liquidity
- Cash was $4.6 million at September 30, down from $6.3 million at year-end 2021. Nine-month operating cash flow was positive $0.8 million, compared with negative $1.3 million in 2021; debt repayments used $2.5 million of cash.
- Working capital was $13.6 million, versus $12.2 million at December 31, 2021. Current assets included $24.2 million of contract assets, representing revenue recognized ahead of customer billings.
- The company had $21.0 million outstanding on its revolving facility, with no remaining availability, and approximately $2.7 million of term and other debt. The facility is secured by company assets; its stated interest rate was 12.25% at September 30.
- On November 10, 2022, after quarter-end, the lender extended facility maturity to November 30, 2023 and reduced the rate to Prime plus 3.5%, effective November 1. Term-loan principal payments remain substantial, including $250,000 installments due December 31, 2022 and March 31, 2023, plus monthly payments.
- Management cited the company’s deficit, prior operating losses and negative operating cash flows as going-concern risk factors. It believes liquidity is sufficient through a year and a day from filing, relying on the amended credit facility, customer advances/progress payments, cost controls, and funded backlog.
Backlog, outlook, and notable matters
- Total backlog was approximately $500.9 million, nearly unchanged from $501.7 million at year-end 2021; $118.1 million was funded. About 98% of backlog was government-related. The filing says substantially all backlog may be terminated or rescheduled, and funding may be appropriated periodically.
- Of approximately $118 million in remaining performance obligations, the company expected to recognize about 21% in fiscal 2022 and the balance by 2030. No broader revenue or earnings guidance is provided.
- Contract-estimate revisions increased nine-month gross profit by a net $2.1 million, comprising $4.7 million of favorable and $2.6 million of unfavorable adjustments. Results depend on estimates of costs and progress toward completion.
- A proposed $3.6 million class-action settlement remained subject to final court approval. The company recorded a $3.6 million liability and matching insurance receivable; it reported that the insurer would cover the settlement after the company’s $750,000 retention. Related derivative actions also had a proposed settlement pending court approval.
- Disclosure controls and procedures were deemed ineffective due to previously identified material weaknesses in internal control over financial reporting. Management said remediation efforts were continuing.
- The NYSE American resumed trading in the shares on October 5, 2022 after the company became current with filings. Separately, the company remained subject to an exchange compliance plan, with a March 17, 2023 deadline to regain continued-listing compliance.
Most important facts for investors to verify
- Whether the company generates enough cash from operations and customer payments to meet near-term obligations, given low cash, no revolver availability, and debt maturities and repayments.
- Compliance with amended lender covenants and continued access to the BankUnited facility; the filing describes repeated waivers and amendments.
- Whether backlog converts into funded orders and revenue, considering program timing, customer concentration, and termination/rescheduling provisions.
- Final court approval and insurance payment of the class-action settlement, and the outcome and potential costs of the derivative actions.
- Progress in remediating material weaknesses and meeting NYSE American continued-listing requirements.