CVU

CPI Aerostructures, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010. CPI Aerostructures, Inc. is engaged in the contract production of structural aircraft parts, primarily for the U.S. Air Force and other branches of the U.S. armed forces, acting as both a prime contractor and a subcontractor for defense and commercial aerospace primes. The company utilizes the percentage-of-completion (POC) method for revenue recognition.

Key Financial Metrics (Six Months Ended June 30, 2010)

Cash Flow: Net cash used in operating activities was $(2,468,852), primarily due to an increase in costs and estimated earnings in excess of billings on uncompleted contracts and payments for income taxes. Net cash provided by financing activities was $1,109,803, driven by a $3.5 million stock offering and repayment of the line of credit.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 11.5% year-over-year. This was driven by a 108.6% increase in government subcontract revenue (notably work for Boeing on the A-10 and Northrop Grumman on the E-2D), offsetting a 48.1% decline in commercial contract revenue (Gulfstream G650 program) and a 9.4% decline in prime government contracts.
• Profitability: Gross margin improved from 23.2% to 25.9% as long-term subcontract programs matured and startup costs were overcome. Net income increased 42.5%.
• Debt Reduction: The company repaid its entire $2.2 million line of credit balance using proceeds from a registered direct stock offering. Total debt decreased significantly from $4.6 million to $2.2 million.
• Contract Awards: New contract awards totaled approximately $31.1 million for the six months ended June 30, 2010, a substantial increase from $4.9 million in the same period in 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margin percentages to remain in the range of 24% to 26% for the remainder of 2010.
• Liquidity: While working capital increased to nearly $45 million, cash flow from operations was negative due to the timing of billings under the POC method. The company notes that significant upfront costs are often incurred before billing, creating a disparity between reported earnings and cash receipts.
• Contract Revisions: During the six months ended June 30, 2010, revisions to estimated gross profits on contracts resulted in a decrease to total gross profit of approximately $2.0 million compared to prior estimates.
• Customer Concentration: 24% of revenue was directly from the U.S. government. The three largest commercial customers accounted for 62% of total revenue (29%, 20%, and 13% respectively).
• Derivatives: The company maintains an interest rate swap to hedge a $3.0 million term loan, fixing the effective interest rate at 5.8%.

Investor Verification Checklist

• Contract Profitability Revisions: Verify the impact of the $2.0 million reduction in estimated gross profits on future earnings and the stability of current contract margins.
• Cash Flow Timing: Assess the sustainability of operations given the negative operating cash flow despite positive net income, specifically regarding the "costs in excess of billings" asset ($49 million).
• Customer Concentration: Evaluate the risk associated with the top three commercial customers representing over 60% of revenue and the reliance on government subcontracting.
• Debt Covenants: Confirm continued compliance with financial covenants under the Sovereign Term Facility and Revolving Credit Agreement, particularly as the company has no outstanding balance on the revolving line.
• Stock Offering Proceeds: Monitor the utilization of the $3.5 million net proceeds from the April 2010 stock offering, which were used to pay down debt and fund working capital.