CPI Aerostructures, Inc. — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; unaudited. CPI manufactures structural aircraft parts and provides related engineering, program management, supply-chain, and maintenance services for commercial and defense markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $12.67 million | $19.88 million; down 36.3% |
| Gross profit (loss) / margin | $(11.64) million / (91.9%) | $3.60 million / 18.1% |
| Operating income (loss) | $(14.36) million | $1.58 million |
| Net income (loss) / diluted EPS | $(9.22) million / $(1.07) | $0.93 million / $0.11 |
| Operating cash flow | $(5.73) million | $(4.42) million |
Interest expense was $0.28 million. The $5.42 million income-tax benefit largely reflected a deferred tax asset; deferred income taxes on the balance sheet rose to $7.31 million from $1.89 million at year-end.
At March 31, cash was $0.82 million, working capital was $62.01 million, and total debt, including the revolver, was approximately $31.23 million. The $20.74 million revolving balance bore 3.50% interest. Current and long-term debt were $0.64 million and $9.81 million, respectively; the new term loan matures March 31, 2019. Accounts receivable included a $0.47 million doubtful-account allowance. Costs and estimated earnings exceeding billings were $92.88 million.
Material changes and unusual items
- A revised estimate for the Boeing A-10 program reduced Q1 revenue by approximately $8.9 million and increased cost of sales by approximately $4.6 million, an aggregate charge of about $13.5 million. Management concluded that further A-10 orders beyond the current order through ship set 173 were not probable after the USAF deferred a decision on additional orders.
- Cost of sales rose 49.4% to $24.31 million, including $4.53 million of other contract costs, predominantly A-10-related. SG&A rose 34.7% to $2.72 million, including a $0.40 million reserve for disputed receivables and higher accounting and legal fees.
- Management’s non-GAAP results excluding the A-10 program showed revenue of $19.49 million, gross profit of $3.65 million, and net income of $0.41 million, or $0.05 per diluted share. These adjusted figures are not substitutes for GAAP results.
- Backlog was $407.42 million, up from $387.32 million at December 31, 2015; $103.98 million was funded. About 74% of total backlog was government-related. Substantially all backlog may be terminated or rescheduled, and unfunded backlog depends on future appropriations and orders.
- Commercial subcontract revenue increased 14.7% to $10.58 million, led by Embraer and Honda production. New awards were $14.1 million versus $16.2 million a year earlier.
Liquidity, outlook, and risks
The company entered a new BankUnited credit facility on March 24, 2016, comprising a $30 million revolver and a $10 million term loan, replacing its prior facilities. At quarter-end it was out of compliance with net profit, debt-service-coverage, and leverage covenants. A May 9 amendment waived the noncompliance, revised covenant terms for 2016, increased the facility rate by 50 basis points, and requires some term-loan repayment if Boeing A-10 equitable-adjustment reimbursements are received. The revolver is secured by all company assets.
Management gave no specific earnings or revenue guidance. It noted that percentage-of-completion accounting relies on contract cost and revenue estimates, which can cause reported earnings to differ from cash receipts; work-in-process funding needs may require additional borrowing or capital. Program delays or cancellations may also result in unrecoverable upfront costs. Customer concentration is significant: the three largest commercial customers represented 33%, 28%, and 12% of Q1 revenue.
Disclosure controls were deemed ineffective as of March 31, 2016 because a material weakness remained in review controls over revenue recognition for a customer request for equitable adjustment (REA). Management described remediation steps but had not completed the process. No material changes to previously disclosed risk factors or legal proceedings were reported.
Investor verification points
- Track A-10 orders, the Boeing REA and any reimbursement, and whether further contract-estimate adjustments are required.
- Review covenant compliance, the waiver and amended terms, borrowing availability, and liquidity given low cash and negative operating cash flow.
- Assess realization and collectability of contract assets, disputed receivables, and concentrated customer balances.
- Monitor remediation of the revenue-recognition control weakness and the reliability of percentage-of-completion estimates.
- Distinguish funded from unfunded backlog and verify customer orders, appropriations, and program schedules that support expected conversion to revenue.