CPI Aerostructures, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company manufactures structural aircraft parts and assemblies for commercial and defense markets, and provides related engineering, program-management, supply-chain and maintenance services. Financial statements are unaudited.
Financial performance
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $16.7 million | $22.3 million | $36.8 million | $35.0 million |
| Gross profit (loss) | $3.7 million | $5.0 million | $8.2 million | $(6.6) million |
| Gross margin | 22.0% | 22.6% | 22.4% | (18.9)% |
| Operating income (loss) | $1.7 million | $3.2 million | $4.1 million | $(11.2) million |
| Net income (loss) | $0.8 million | $1.8 million | $2.0 million | $(7.4) million |
| Basic earnings (loss) per share | $0.09 | $0.21 | $0.23 | $(0.86) |
- Q2 revenue fell 24.9%, primarily because of a normal cyclical decline in the E-2D program; Q2 gross profit and net income also declined.
- First-half revenue increased 5.2%. The swing from a first-half 2016 loss to 2017 profit mainly reflects the prior-year A-10 contract estimate revision, not simply a comparable improvement in underlying activity.
- First-half operating cash flow was a use of $1.1 million, versus a use of $7.3 million in 2016. Cash increased $76,000 to $1.1 million. Contract costs and estimated earnings ahead of billings increased $2.1 million.
- At June 30, cash was $1.1 million; working capital was $73.8 million. Total debt and line-of-credit borrowings were approximately $34.0 million, versus $32.7 million at year-end 2016. The $30 million revolving facility had $24.2 million drawn at 4.75%; the company reported compliance with its financial covenants. The facility is secured by company assets.
Material changes and operating developments
- The 2016 A-10 estimate change reduced revenue by about $8.9 million and increased cost of sales by about $4.6 million, an aggregate charge of approximately $13.5 million. The revision followed the USAF’s decision to defer additional A-10 orders; the company assumed the program would end at the 173 ship sets then on order.
- First-half 2017 commercial subcontract revenue declined 31.3% to $14.1 million, including decreases on the Embraer Phenom 300 and G650 programs. Management also cited lower production rates on other programs. Military revenue increased about $8.0 million year over year, partly reflecting the unusual 2016 comparison.
- First-half 2017 contract estimate revisions reduced total expected gross profit by a net $1.627 million. Notable unfavorable revisions included approximately $659,000 and $436,000 on two contracts, and $475,000 associated with a production gap and smaller-than-expected order.
- Total backlog was $394.8 million at June 30, down from $416.3 million at December 31, 2016; $90.5 million was funded. Approximately 80% of backlog was government-related. The company cautions that substantially all backlog may be terminated or rescheduled, generally without significant penalty, and unfunded amounts depend on future appropriations or orders.
Outlook, risks and other notable items
- Management said existing resources and credit-facility availability should cover current working-capital needs for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
- Percentage-of-completion accounting relies on estimates of contract costs and profitability. Estimate changes can affect revenue and earnings, and reported earnings may not convert to cash on the same schedule. The company may need borrowing or other liquidity to fund work in process or taxes.
- Concentration is significant: the three largest commercial customers represented 32%, 24% and 11% of first-half revenue, respectively. A large portion of unbilled contract assets was also concentrated among several commercial customers.
- Potential program delays or cancellations could impair unrecovered upfront costs. Management reported no material changes to the risk factors in its 2016 Form 10-K and no legal proceedings in this filing.
- The company was assessing the impact of the new revenue-recognition standard, expected to affect recognition for distinct deliverables in long-term, multi-deliverable contracts. It was also evaluating the new lease standard.
- Disclosure controls were reported effective as of June 30, 2017, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the A-10 estimate assumptions and the 2016 comparison are understood when assessing first-half 2017 profit growth.
- Progress on the contracts with unfavorable estimate revisions, including expected contract extensions, pricing, production timing and potential additional losses.
- Backlog conversion and funding, especially the large unfunded portion and customers’ termination or rescheduling rights.
- Cash conversion, working-capital demands and available borrowing capacity under the asset-secured revolving facility and its covenants.
- Customer concentration and the recoverability and timing of the approximately $101.7 million balance-sheet asset for costs and estimated earnings in excess of billings.