CPI Aerostructures, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The 2019 results shown are restated. The report was signed September 30, 2020, amid previously disclosed reporting delays and restatements.
Business context and results
CPI manufactures structural aircraft parts and aerospace systems for U.S. government, defense and commercial customers. It reports one operating segment. COVID-19 was declared a pandemic during the quarter; CPI was classified as essential and remained open, while some employees worked remotely or modified hours.
| Metric | Q1 2020 | Q1 2019, restated | Change |
|---|---|---|---|
| Revenue | $16.86 million | $21.99 million | Down 23.3% |
| Gross profit / margin | $0.70 million / 4.1% | $2.48 million / 11.3% | Margin down 7.2 percentage points |
| Operating loss | $2.40 million | $0.42 million | Loss increased |
| Net loss / diluted loss per share | $2.81 million / $0.24 | $0.93 million / $0.08 | Loss increased |
| Cash used in operations | $1.43 million | $2.33 million | Use decreased |
Revenue fell mainly because the Raytheon Next Generation Jammer pod development phase was substantially complete by year-end 2019, and direct military revenue from the Pacer Classic III program was lower. A new Northrop Grumman E-2D award partly offset these declines. Commercial revenue also declined, including from Embraer and HondaJet rate reductions. Gross profit was further affected by a net $405,000 reduction from contract-estimate changes, versus a net $511,000 increase in Q1 2019. SG&A rose 6.4%, primarily on higher professional fees.
Financial position and liquidity
- At March 31, cash was $2.00 million and restricted cash was $1.38 million. Working capital was $10.99 million, down from $13.85 million at December 31, 2019.
- Total debt, including the revolving facility and long-term debt, was approximately $30.37 million. The revolving balance was $26.74 million at 6.25%; the facility was secured by company assets. Shareholders’ deficit was $10.21 million, and accumulated deficit was $81.86 million.
- Operating cash use was partly offset by working-capital movements, including increased contract liabilities; inventory rose $1.05 million and contract assets rose $0.53 million. Cash and restricted cash together declined $2.05 million during the quarter.
- Management cited negative operating cash flow and continuing operating losses, but concluded resources would be sufficient to meet obligations for at least a year and a day from the filing date, based on its assessment of risks and opportunities. The filing cautions that adverse developments across significant assumptions could make liquidity and debt resources insufficient.
Backlog, outlook and material developments
- Total backlog was $556.4 million at March 31, versus $561.9 million at year-end. Funded backlog increased to $211.1 million from $147.6 million; approximately 90% of total backlog was government-related. Backlog is subject to funding, rescheduling and termination risks. Separately, remaining performance obligations were approximately $211 million, with the company estimating 46% would be recognized in fiscal 2020 and the rest by fiscal 2022.
- Management expected COVID-19 impacts to be concentrated mainly in commercial programs, which it described as approximately 20% of its business, but could not predict the pandemic’s full effect. It identified possible supply disruptions, absenteeism, reduced commercial orders and manufacturing suspensions. Mitigations included reduced discretionary spending, a hiring freeze, deferred travel and tighter materials management.
- After quarter-end, CPI received a $4.795 million Paycheck Protection Program loan at 1% interest, potentially forgivable subject to program requirements. In August 2020, it amended its BankUnited facility: $6 million of revolving debt was converted to term debt, revolving commitment was reduced to $24 million, and maturities were extended to May 2, 2022. The amendment waived specified prior covenant violations and changed future covenant testing and thresholds. Minimum liquidity of $3 million remained required.
- After quarter-end, Triumph stopped work and cancelled nearly all open orders for CPI’s G650 leading-edge program, reducing backlog by $3.6 million. Gulfstream indicated an intention to continue purchases after a program transaction, but CPI could not predict whether, when or how much it would order.
Risks, contingencies and unusual items
- Management reported material weaknesses in financial reporting controls, including revenue-recognition controls, oversight of complex transactions and IT general controls. Disclosure controls were also concluded ineffective as of March 31, 2020. Prior-period financial statements were restated for revenue-recognition errors; remediation was ongoing.
- CPI disclosed shareholder class and derivative litigation related to prior financial reporting and an SEC Division of Enforcement investigation. The investigation was described as a fact-finding inquiry, not a conclusion of wrongdoing. Outcomes and potential financial effects were uncertain.
- A court decision was pending in CPI’s working-capital dispute with Air Industries following the WMI acquisition. CPI sought approximately $3.5 million beyond amounts already released from escrow; collection of disputed amounts was uncertain and not fully recorded as an asset.
- CPI had received NYSE American notice concerning late filings and stated it intended to seek additional time to regain compliance. It also reported that filing delays could restrict use of Form S-3 to raise capital and create delisting risk.
- Revenue and gross profit depend on estimates of costs to complete long-term contracts. Errors in those estimates, contract losses or cancellations can cause margin changes and impair cash conversion. Major-customer concentration and dependence on government funding add further exposure.
Important facts for investors to verify
- Current cash, revolver availability and covenant compliance under the amended BankUnited facility, including the next covenant tests.
- Whether the PPP loan qualified for forgiveness and how much, if any, remained repayable.
- Progress in remediating control weaknesses, maintaining timely filings and addressing NYSE American compliance status.
- Developments in the SEC inquiry, shareholder litigation and Air Industries working-capital dispute.
- Actual conversion of backlog into funded orders, revenue and cash, including the G650 program and COVID-19 effects on commercial demand.