CPI Aerostructures, Inc. — Q1 2015 Form 10-Q
Business and period: The company manufactures structural aircraft parts and assemblies for commercial and defense markets, and provides related engineering, program-management, supply-chain and maintenance services. This unaudited report covers the three months ended March 31, 2015, compared with the same 2014 quarter. Revenue is recognized primarily using percentage-of-completion accounting.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $19.88 million | $21.88 million | Down 9.2% |
| Gross profit / margin | $3.60 million / 18.1% | $4.49 million / 20.5% | Margin down 2.4 percentage points |
| Operating income | $1.58 million | $2.65 million | Down 40.3% |
| Interest expense | $0.21 million | $0.14 million | Increased |
| Net income | $0.93 million | $1.73 million | Down 46.3% |
| Diluted EPS | $0.11 | $0.20 | Down $0.09 |
| Operating cash flow | $(4.42) million | $(8.69) million | Cash use narrowed |
| Capital expenditures | $0.11 million | $0.06 million | Increased |
SG&A rose 9.8% to $2.02 million, largely because of higher director restricted-stock-unit compensation. The effective tax rate was 32%, versus 31% a year earlier.
Liquidity and debt
- Cash was $0.84 million at March 31, down from $1.50 million at year-end. Working capital was $62.40 million, up 2.5% from December 31, 2014.
- Current liabilities were $41.21 million and current assets $103.62 million. Cash used in operations reflected investment in receivables and contract work not yet billed; costs and estimated earnings in excess of billings increased by about $4.0 million.
- Outstanding revolving-credit borrowings were $29.15 million under a $35 million facility, bearing interest at 3.25% at quarter-end and maturing December 5, 2016. The company reported compliance with amended financial covenants. The facility and term loan are secured by company assets.
- Long-term debt, including current maturities, was approximately $2.10 million; total short-term borrowings and long-term debt were $31.25 million, versus $27.41 million at December 31. A swap fixes the term loan’s interest rate at 4.11%.
Changes, outlook and risks
- Government-subcontract revenue fell to $10.54 million from $14.19 million, primarily because the E-2D program had not yet reached peak production on its new multi-year award. Commercial-subcontract revenue rose 27.3% to $9.22 million, driven by Embraer and Honda programs.
- The A-10 program continued to generate no gross margin in Q1 2015 following a loss estimate recognized in Q2 2014. Excluding A-10, gross margin improved to 23.1% from 21.1%, attributed to higher margins on certain commercial programs as production increased. Management said Q1 2015 contract-estimate revisions were immaterial.
- New awards from the start of the year through March 31 totaled approximately $16.2 million, versus $4.7 million in the comparable prior-year period. Total backlog was $442.64 million, up from $403.65 million at year-end; about 68% was attributable to government contracts. Of total backlog, $120.35 million was funded and $322.28 million unfunded. Most backlog may be terminated or rescheduled, and unfunded awards depend on future orders or appropriations.
- No specific earnings or revenue guidance was provided. Management noted efforts to improve customer payment terms and obtain progress payments or alternative funding. It cautioned that percentage-of-completion estimates may change and that delayed or canceled programs could cause material impairment of unrecoverable upfront costs. Reported earnings may not convert to cash promptly, potentially requiring additional borrowing or capital.
- Commercial customer concentration is significant: the three largest commercial customers represented 21%, 19% and 15% of Q1 revenue. The four largest commercial customers accounted for 72% of costs and estimated earnings in excess of billings at quarter-end. Management reported no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of March 31.
Important facts for investors to verify
- Progress toward peak production and revenue contribution from the E-2D award, and the timing and funding of unfunded backlog.
- A-10 contract economics and whether future changes to contract estimates could materially affect reported results.
- Conversion of unbilled contract assets into customer billings and cash, given low cash and substantial quarterly operating cash outflow.
- Availability under the revolving facility, covenant headroom, and the effect of rising borrowings and customer concentration on liquidity.
- The balance-sheet line for costs and estimated earnings in excess of billings is reported as $82.92 million, while the contract note presents a net total of $82.79 million after billings in excess of costs; reconcile the presentation in the full filing.