CPI Aerostructures, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. CPI manufactures structural aircraft parts and provides related engineering, assembly, and maintenance services, primarily as a supplier to commercial and defense aerospace customers. Financial statements are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $21.88 million | $19.93 million | +10% |
| Gross profit / margin | $4.49 million / 20.5% | $4.44 million / 22.3% | Margin down 1.8 percentage points |
| Operating income | $2.65 million | $2.56 million | +3.5% |
| Net income | $1.73 million | $1.67 million | +3.4% |
| Diluted earnings per share | $0.20 | $0.20 | Unchanged |
| Cash used in operating activities | $8.69 million | $7.35 million | Use increased |
Commercial subcontract revenue rose 30% to $7.25 million, driven mainly by higher production on Cessna and Embraer programs; government subcontract revenue was broadly flat at $14.19 million. Management said the 20.5% gross margin was within its expected 20%–21% range. SG&A declined 2% to $1.84 million, partly reflecting a change in the timing of board-option expense.
Liquidity, debt, and cash flow
- Cash was $0.97 million at March 31, down from $2.17 million at year-end. Working capital was $90.59 million, up 2.4% from December 31, 2013.
- Operating cash use was driven principally by increases of $6.61 million in costs and estimated earnings exceeding billings and $3.72 million in accounts receivable. Financing provided $7.56 million, including $7.50 million of additional revolving-credit borrowings.
- Outstanding line-of-credit borrowings were $28.85 million under a $35 million facility, bearing interest at 3.25%; the facility matures December 5, 2016 and is secured by company assets. CPI reported compliance with all financial covenants.
- Total short- and long-term debt was $31.80 million, compared with $24.57 million at December 31, 2013. Long-term debt, including the current portion, was $2.95 million.
- Costs and estimated earnings in excess of billings were $119.21 million on the balance sheet; the contract note reports a net contract asset of $119.03 million after offsetting billings in excess. The increase in the net balance during the quarter was approximately $6.6 million.
Changes, outlook, and risks
- New awards through March 31 were approximately $4.7 million, versus $11.5 million in the comparable 2013 period. Management attributed the decline primarily to award timing.
- Total backlog fell to $410.32 million from $431.44 million at December 31; funded backlog declined to $96.19 million from $110.43 million. Approximately 57% of total backlog was government-related. Substantially all backlog may be terminated or rescheduled without significant penalty, and unfunded backlog depends on future orders and funding.
- January and February shipping delays on the Boeing A-10 program contributed approximately $2.2 million to the increase in unbilled contract assets. Shipping returned to normal levels in March; management expected billings on the program to rise in subsequent quarters.
- The proposed fiscal 2015 federal budget would eliminate the A-10. CPI warned that cancellation of its Boeing A-10 enhanced-wing structural-kit program could materially affect its balance sheet, results, and cash flow. Government appropriations, program priorities, and government termination rights are additional risks.
- Percentage-of-completion accounting relies on estimates of costs and profits; revisions to estimated contract profits reduced expected total contract gross profit by approximately $1.48 million in Q1 2014, versus $1.38 million in Q1 2013. Additional costs or delays could lead to further revisions or impairment of unrecovered upfront program costs.
- No formal full-year financial guidance was provided. Management noted that cash collection can lag reported earnings and said it is pursuing improved customer payment terms and alternative funding sources. The company also reported no material change in risk factors other than the government-contract risks described in the filing.
Important facts for investors to verify
- Whether A-10 funding and the Boeing program continue, and how any decision affects backlog, contract assets, and cash flow.
- Whether March’s normalization of A-10 shipments results in the expected subsequent billings and collection of contract assets.
- How backlog converts to funded orders and revenue, given lower funded backlog and the timing-related decline in new awards.
- Whether gross margins remain within management’s stated 20%–21% range and contract cost estimates remain achievable.
- Availability under the revolving facility, covenant compliance, and liquidity needs if working-capital investment remains elevated.
- Customer concentration: three largest commercial customers represented 69% of Q1 revenue; the filing also reports high customer concentration in receivables and unbilled contract assets.