CPI Aerostructures, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. CPI manufactures structural aircraft parts and provides engineering, program-management, supply-chain and maintenance services to commercial and defense aerospace customers. Figures below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $20.71m | $22.11m | $57.47m | $57.06m |
| Gross profit (loss) | $4.91m | $5.02m | $13.13m | $(1.58)m |
| Gross margin (approx.) | 23.7% | 22.7% | 22.9% | (2.8)% |
| Operating income (loss) | $2.87m | $3.01m | $6.92m | $(8.18)m |
| Net income (loss) | $1.70m | $1.69m | $3.71m | $(5.74)m |
| Basic earnings (loss) per share | $0.19 | $0.19 | $0.42 | $(0.67) |
- Q3 revenue decreased 6.4% year over year, primarily due to a cyclical decline in E-2D program revenue. Nine-month revenue increased 0.7%.
- Nine-month commercial subcontract revenue fell 31.1% to $21.49m, mainly reflecting lower Embraer Phenom 300 and G650 activity. Management reported military revenue was about $10m higher year over year.
- Nine-month gross profit improved by $14.71m from the prior-year loss, largely because 2016 included an approximately $13.5m A-10 program estimate charge. This comparison is therefore materially affected by that prior-period item.
- For the nine months, operating cash flow was negative $0.21m, versus negative $6.81m in 2016. Cash declined to $0.71m from $1.04m at year-end 2016. Investing cash outflow was $0.20m; financing provided $0.08m.
- At September 30, working capital was $75.78m. Current assets were $116.30m and current liabilities $40.52m. Contract costs and estimated earnings in excess of billings were $108.38m on the balance sheet; the related net contract asset was $107.96m.
- Debt totaled $32.77m, including $23.44m outstanding under the revolving facility and approximately $9.33m of long-term debt before the balance-sheet presentation of current portions and issuance costs. Revolver interest was 4.75%; the facility is secured by company assets and matures in March 2019. CPI reported compliance with its financial covenants.
Changes, outlook and risks
- Total backlog decreased to $397.89m from $416.28m at December 31, 2016; funded backlog rose to $100.58m from $94.54m. Approximately 79% of backlog was government-related. The filing notes substantially all backlog may be terminated or rescheduled, often without significant penalty; unfunded amounts depend on future appropriations or orders.
- Management said existing resources and credit availability should cover current working-capital needs for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
- Liquidity is exposed to working-capital demands: costs and estimated earnings in excess of billings increased approximately $8.8m during the nine months. Management noted the potential need to borrow or seek other funding if cash receipts lag reported earnings.
- Revenue recognition uses percentage-of-completion estimates. Management cautioned that inaccurate cost or revenue estimates, contract termination, production delays or cancellations could require later adjustments or impairment of unrecoverable upfront costs. Nine-month 2017 contract estimate revisions reduced expected total gross profit by approximately $1.68m; several unfavorable adjustments were associated with long-term programs and production gaps.
- Customer concentration is significant: four commercial customers accounted for 28%, 23%, 11% and 10% of nine-month revenue. The company also disclosed a $150,000 bad-debt expense for the period.
- The company was evaluating the effects of the new revenue-recognition standard, expected to be adopted using the modified retrospective method, and the lease standard. Management reported no material changes to previously disclosed risk factors, no material litigation, and effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- Whether the large unbilled contract asset converts to billings and cash on schedule, and how it affects borrowing needs.
- Whether program-level estimates, especially the contracts with unfavorable revisions, stabilize or lead to further charges or price concessions.
- How much of reported nine-month profit improvement reflects the absence of the 2016 A-10 charge versus ongoing program economics.
- The durability and funding status of backlog, given its decline, high unfunded portion and termination/rescheduling provisions.
- Customer concentration, revolver availability and covenant headroom; the filing does not state remaining borrowing availability clearly.