CPI Aerostructures, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company manufactures structural aircraft parts for U.S. military and commercial aerospace programs.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $21.11 million | $20.85 million | $41.04 million | $40.58 million |
| Gross profit | $4.24 million | $5.77 million | $8.68 million | $10.73 million |
| Gross margin | 20.1% | 27.7% | 21.1% | 26.5% |
| Operating income | $2.74 million | $4.20 million | $5.30 million | $7.06 million |
| Net income | $1.78 million | $2.70 million | $3.46 million | $4.62 million |
| Basic / diluted EPS | $0.21 / $0.21 | $0.37 / $0.36 | $0.41 / $0.41 | $0.65 / $0.63 |
- Six-month operating cash flow was negative $7.63 million, compared with negative $11.33 million in 2012. Capital expenditures were $0.55 million. Cash declined $2.26 million to $0.45 million.
- At June 30, working capital was $84.43 million, up 5.9% from year-end 2012. Costs and estimated earnings ahead of billings were $111.30 million on the balance sheet; net contract assets after excess billings were $110.88 million.
- Total short- and long-term debt was $33.70 million, versus $27.76 million at December 31, 2012. The $35 million revolving facility had $29.95 million outstanding; the company reported covenant compliance. Long-term debt maturities total $3.75 million.
Changes versus the prior comparable period
- Revenue increased 1.2% for Q2 and 1.1% for the first half, while six-month net income declined 25.1%; gross margin fell 5.4 percentage points.
- Six-month government prime-contract revenue fell 92% to $0.29 million as the company shifted away from prime government work. Government subcontract revenue rose 9.2% to $27.62 million, and commercial revenue rose 12% to $13.13 million.
- New awards through June 30 were approximately $13.2 million, versus $44.6 million in the same period of 2012.
- Total backlog rose to $411.87 million from $391.88 million at year-end. Funded backlog was $74.85 million; approximately 53% of total backlog was government-related. Government backlog declined to $217.58 million, while commercial backlog increased to $194.29 million.
Outlook, management commentary, and risks
- Management expected full-year gross margin of 23%–24%, citing contract adjustments and price reductions. The filing attributes lower margins to adjustments involving Spirit, Northrop Grumman and Boeing, and additional work on C-5 wing-tip panels. Six-month revisions to estimated contract profits reduced total expected gross profit by approximately $2.80 million, versus $0.53 million in the first half of 2012.
- Boeing negotiations on the A-10 program increased expected lifetime revenue by approximately $1.5 million and permitted progress billing for qualifying inventory through June. The negotiation nevertheless reduced the quarter’s gross margin by about 200 basis points. Management expected the billing arrangement to improve third-quarter cash flow.
- Management warned that percentage-of-completion accounting relies on estimates and that contract cost overruns, delays, cancellations, or inaccurate estimates could require later adjustments, impair up-front program costs, and pressure liquidity. It was pursuing improved customer payment terms and alternative funding sources.
- Substantially all backlog is subject to termination or rescheduling, and unfunded backlog depends on future orders and funding. Customer concentration is significant: the three largest commercial customers represented 68% of first-half revenue; four customers represented 86% of contract assets at June 30.
- The company used a $4.5 million interest-rate swap to fix the related loan rate at 4.11%. Management reported no material market-risk exposure and no material change to the risk factors in its 2012 Form 10-K. No legal proceedings were reported; disclosure controls were deemed effective.
Investor verification points
- Track cash conversion, contract assets, progress billings, and whether the Boeing arrangement produced the expected third-quarter cash benefit.
- Verify whether management achieved its 23%–24% full-year gross-margin outlook and whether the cited contract adjustments or cost estimates changed.
- Monitor revolver utilization, covenant compliance, and liquidity needs as new programs require upfront spending.
- Assess the funding, cancellation, and customer-concentration risks embedded in the large, mostly unfunded backlog.