CPI Aerostructures, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. CPI produces structural aircraft parts for U.S. defense customers and commercial aerospace manufacturers. Interim results are unaudited.
Financial performance
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $19.72 million | $16.01 million; up 23% |
| Gross profit / margin | $4.96 million / 25.2% | $3.85 million / 24.0% |
| Operating income | $2.86 million | $2.05 million |
| Net income | $1.92 million | $1.37 million |
| EPS, basic / diluted | $0.28 / $0.27 | $0.20 / $0.19 |
| Operating cash flow | $(5.85) million | $(3.17) million |
| Capital expenditures | $0.51 million | $0.21 million |
| Cash | $0.53 million | $0.88 million at Dec. 31, 2011 |
| Working capital | $58.05 million | $52.19 million at Dec. 31, 2011 |
| Debt, including line of credit | $23.65 million | $17.88 million at Dec. 31, 2011 |
Commercial revenue rose 190.5% to $5.44 million, largely from increased production of Gulfstream G650 leading edges. Government prime-contract revenue increased 41.6% to $1.90 million, while government subcontract revenue declined 3.3% to $12.38 million. SG&A rose 16.9% to $2.10 million, primarily due to public-company fees and higher accounting and legal costs. Interest expense increased to $149,000 from $38,000. The effective tax rate was 29%, versus 32%.
Liquidity, debt, and contract assets
Operating cash use reflected working-capital needs: accounts receivable increased $3.92 million and costs and estimated earnings in excess of billings increased $3.57 million. That contract asset totaled $82.58 million at March 31, 2012, up from $79.01 million at year-end. Financing provided $6.01 million, including a new $4.5 million five-year term loan for tooling and equipment and $1.5 million of additional revolving borrowings. The $18 million revolver had $17.6 million outstanding; the company reported compliance with its financial covenants. Total debt includes $545,786 of capital leases and notes payable. The debt facilities are secured by company assets.
Outlook, risks, and notable items
- Management expects full-year gross margin of 25%–27%; Q1’s 25.2% was within that range. The filing provides no specific revenue or earnings forecast.
- From the start of the fiscal year through May 4, 2012, new awards totaled approximately $32.2 million, compared with $46.8 million in the comparable prior-year period. Awards included a $12.7 million Boeing A-10 order and a $10.7 million Goodrich order. Formalized bids outstanding totaled approximately $952 million, including two bids totaling about $647 million for Boeing 787 work; award timing and likelihood are uncertain.
- Management said A-10 vendor performance constraints, pending government approval of Boeing’s complete wing submission, and a configuration change delayed milestones, shipments, or invoicing. The A-10 contract accounted for approximately $2.3 million of the Q1 increase in contract assets.
- Management cautioned that percentage-of-completion accounting relies on cost and profit estimates, and that spending, reported earnings, billings, and cash receipts may occur at different times. Delayed or cancelled programs could leave upfront costs unrecoverable and materially affect liquidity.
- Customer concentration is significant: the three largest commercial customers generated 38%, 20%, and 15% of Q1 revenue. Four commercial customers represented 41%, 20%, 16%, and 12% of contract assets at quarter-end.
- Estimated total contract gross profit was reduced by approximately $600,000 in Q1 due to estimate revisions, compared with a $1.2 million reduction in Q1 2011. Management noted that additional costs on open contracts remain possible.
- The company entered a $4.5 million interest-rate swap associated with its new term loan. It reported a $71,288 swap liability at quarter-end. On April 30, 2012, it filed a shelf registration statement that, once effective, could permit future offerings of up to $20 million in securities.
Important facts for investors to verify
- Whether the A-10 program’s vendor, approval, and configuration issues are resolved and permit milestone billing and shipments.
- Whether contract-asset growth converts into billings and cash, and whether operating cash use remains elevated.
- Whether the company maintains compliance with credit covenants and has adequate liquidity given the nearly fully drawn revolver and increased debt.
- Whether large commercial customers and major outstanding bids translate into sustained production, awards, and the stated margin outlook.
- The status and potential dilution or financing implications of the $20 million shelf registration statement.