CPI Aerostructures, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. CPI manufactures structural aircraft parts and provides engineering, program management, supply-chain management, and maintenance services. The company reports one operating segment. WMI, acquired in December 2018, is included in 2019 results but not in the comparable 2018 reported results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $23.16 million | $20.26 million | $48.74 million | $38.45 million |
| Gross profit | $4.96 million | $4.58 million | $10.37 million | $8.63 million |
| Gross margin | 21.4% | 22.6% | 21.3% | 22.5% |
| Operating income | $2.25 million | $2.03 million | $4.86 million | $4.03 million |
| Net income | $2.71 million | $1.26 million | $4.37 million | $2.51 million |
| Diluted EPS | $0.23 | $0.14 | $0.37 | $0.28 |
Q2 revenue rose 14.3%; six-month revenue rose 26.8%. Management attributed growth chiefly to higher production rates on the Raytheon Next Generation Jammer program and, to a lesser extent, WMI revenue. Lower G650 revenue partially offset growth. Gross profit increased, but gross margin declined in both comparison periods. Six-month income before taxes rose 19.2%; reported net income also benefited from an income-tax benefit related to an IRS matter.
Cash flow, liquidity, and debt
- Six-month operating cash flow was negative $3.39 million, versus negative $3.58 million in 2018. The principal working-capital uses included a $6.92 million increase in contract assets and a $2.24 million increase in inventory.
- Cash was $0.75 million at June 30, 2019, down from $4.13 million at year-end; restricted cash was $2.00 million, held in escrow for the WMI acquisition working-capital adjustment. Working capital was $98.62 million, approximately unchanged from year-end.
- Contract assets were $120.25 million, up from $113.33 million at year-end. Management linked the increase primarily to newer programs, including the HondaJet engine inlet and Next Generation Jammer pod 2.0.
- Outstanding debt, including the revolving line and long-term debt, was approximately $31.23 million. The company had $25.74 million outstanding on its revolving facility at 5.87%. The facility is secured by company assets; the company reported compliance with financial covenants.
- On June 25, the credit agreement was amended, the maturity of the revolving and term loans extended to June 30, 2021, and Citizens Bank’s interest transferred to BNB Bank. Management said existing resources and credit availability should meet working-capital needs for at least 12 months from the filing date.
Material changes, outlook, and risks
- Government subcontract revenue increased 38.0% in Q2 and 67.1% for the six months, primarily due to Next Generation Jammer production. Commercial subcontract revenue declined 8.3% and 9.7%, respectively, mainly because of lower G650 activity.
- Total backlog was $447.57 million at June 30, down from $457.38 million at year-end; 86% was attributable to government contracts. Funded backlog was $94.05 million. Management cautioned that substantially all backlog is subject to termination or rescheduling, and government funding may be appropriated periodically.
- Remaining performance obligations were $132.7 million; management estimated recognizing approximately 33% in the remainder of 2019 and 67% in 2020. This is an estimate, not company earnings guidance.
- The IRS was examining a 2014 net-operating-loss carryback. Based on further IRS information, CPI reduced its uncertain-tax-position liability by about $1.4 million in Q2, producing a $1.039 million Q2 tax benefit and a $0.599 million benefit for the six-month period. No formal additional tax assessment had been received; appeal and tax-court options were noted.
- The WMI purchase-price working-capital adjustment remained disputed and had been referred to BDO USA for binding resolution, expected by the end of Q3 2019. The $2 million escrow remained restricted.
- Management identified cash-flow exposure from contract work performed before billing and warned that inaccurate cost estimates, contract termination, program delays, or cancellations could require later revenue adjustments, additional borrowing, or material impairment charges.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because a material weakness in review controls had allowed an invoice to be coded to the wrong contract type, overstating revenue. Remediation controls were implemented in Q1 2019 but had not been fully tested. The control assessment excluded WMI during its first year of integration.
- The filing provides no specific full-year earnings or revenue guidance. CPI stated there were no material changes to the risk factors in its 2018 Form 10-K.
Key facts for investors to verify
- Whether the new revenue-invoice controls are fully tested and the material weakness remediated.
- The final WMI working-capital adjustment and release or use of the escrow.
- Collections and billing progress against the $120.25 million contract-asset balance, and the resulting operating cash flow and borrowing needs.
- Production, margins, and contract estimates for the Next Generation Jammer and other major programs, including any revisions or loss-contract exposure.
- Resolution of the IRS review and any resulting tax liability or cash payment.
- Backlog funding, cancellations or rescheduling, and progress toward the stated performance-obligation recognition estimates.