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CVU > SEC Filings for CVU > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for CPI AEROSTRUCTURES INC


10-May-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's Condensed Financial Statements and notes thereto contained in this report.

Forward Looking Statements

When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission, the words or phrases "will likely result," "management expects" or "we expect," "will continue," "is anticipated," "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2012 and Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Business Operations

We are engaged in the contract production of structural aircraft parts principally for the U.S. Air Force and other branches of the U.S. armed forces, either as a prime contractor or as a subcontractor to other defense prime contractors. We also act as a subcontractor to prime aircraft manufacturers in the production of commercial aircraft parts.

Marketing and New Business

From the beginning of the current fiscal year through March 31, 2013, we received approximately $11.5 million of new contract awards, which included approximately $4.5 million of government subcontract awards and approximately $7.0 million of commercial subcontract awards, compared to a total of $31.7 million of new contract awards, of all types, in the same period last year.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Backlog

We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and purchase orders, excluding the portion previously included in operating revenues on the basis of percentage of completion accounting, and including estimates of future contract price escalation. Substantially all of our backlog is subject to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our contracts. Our total backlog as of March 31, 2013 and December 31, 2012 was as follows:

Backlog  March 31, 2013 December 31, 2012
(Total)
 Funded   $81,899,000      $52,318,000
Unfunded  338,414,000      339,563,000
 Totals   $420,313,000    $391,881,000

Approximately 53% of the total amount of our backlog at March 31, 2013 was attributable to government contracts. Our backlog attributable to government contracts at March 31, 2013 and December 31, 2012 was as follows:

  Backlog    March 31, 2013 December 31, 2012
(Government)
   Funded     $41,171,000      $43,215,000
  Unfunded    178,474,000      190,109,000
   Totals     $219,645,000    $233,324,000

Our backlog attributable to commercial contracts at March 31, 2013 and December 31, 2012 was as follows:

  Backlog    March 31, 2013 December 31, 2012
(Commercial)
   Funded     $40,728,000      $9,103,000
  Unfunded    159,940,000      149,454,000
   Totals     $200,668,000    $158,557,000

Our unfunded backlog is primarily comprised of the long-term contracts that we received from Boeing, Spirit and NGC during 2008, Honda and Bell during 2011 and Cessna, Sikorsky and Embraer during 2012. These long-term contracts are expected to have yearly orders which will be funded in the future.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Revenue Recognition

We recognize revenue from our contracts over the contractual period under the percentage-of-completion ("POC") method of accounting. Under the POC method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned "Costs and estimated earnings in excess of billings on uncompleted contracts." Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned "Billings in excess of costs and estimated earnings on uncompleted contracts." Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received by us during any reporting period. We continually evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, we cannot assure you that our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and we may need to borrow money, or seek access to other forms of liquidity, to fund our work in process or to pay taxes until the reported earnings materialize as actual cash receipts.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Revenue

Revenue for the three months ended March 31, 2013 was $19,927,433 compared to $19,721,095 for the same period last year, representing an increase of $206,338, or 1%.

We generate revenue from government contracts for which we act as a prime contractor or as a subcontractor as well as from commercial contracts. Revenue generated from prime government contracts for the three months ended March 31, 2013 was $234,453 compared to $1,899,397 for the three months ended March 31, 2012, a decrease of $1,664,944, or 87.7%. This decrease was anticipated as we move away from focusing on government prime work.

Revenue generated from government subcontracts for the three months ended March 31, 2013 was $14,109,556 compared to $12,376,798 for the three months ended March 31, 2012, an increase of $1,732,758, or 14%.

Revenue generated from commercial contracts was $5,583,424 for the three months ended March 31, 2013 compared to $5,444,900 for the three months ended March 31, 2012, an increase of $138,524, or 2.5%.

Inflation historically has not had a material effect on our operations.

Gross Profit

Gross profit for the three months ended March 31, 2013 was $4,440,570 compared to $4,964,386 for the three months ended March 31, 2012, a decrease of $523,816. As a percentage of revenue, gross profit for the three months ended March 31, 2013 was 22.3% compared to 25.2% for the same period last year.

The gross margin percentage was below our anticipated percentage because of adjustments to our long term programs with Spirit and Boeing. The adjustment for our Spirit program was the result of price reductions given as part of an agreement to increase the program value and to extend the life of the program until 2019. The adjustment for our Boeing program was part of the negotiations for program changes described in the liquidity section.

We still expect our gross margin for the full year to fall within our expected range of 25%-27%.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2013 were $1,877,922 compared to $2,104,881 for the three months ended March 31, 2012, a decrease of $226,959, or 10.8%. This decrease is the result of a $100,000 decrease in accrued officers' bonus, as computed pursuant to the officers' employment agreements and an approximate $100,000 decrease in accounting and legal fees.

Income Before Provision for Income Taxes

Income before provision for income taxes for the three months ended March 31, 2013 was $2,421,276 compared to $2,710,320 for the same period last year, a decrease of $289,044. This decrease is the result of the lower gross margin percentage during 2013 as compared to 2012.

Provision for Income Taxes

Provision for income taxes was $750,000 for the three months ended March 31, 2013, or 31%, of pre-tax income, compared to $791,000, or 29%, of pre-tax income for the three months ended March 31, 2012.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Net Income

Net income for the three months ended March 31, 2013 was $1,671,276, or $0.20 per basic share, compared to net income of $1,919,320, or $0.28 per basic share for the same period last year. Diluted income per share for the three months ended March 31, 2013 was $0.20, calculated utilizing 8,447,974 average shares outstanding. Diluted income per share for the three months ended March 31, 2012 was $0.27, calculated utilizing 7,228,061 average shares outstanding.

Liquidity and Capital Resources

General

At March 31, 2013, we had working capital of $82,973,236 compared to $79,708,725 at December 31, 2012, an increase of $3,264,511, or 4.1%.

Cash Flow

A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Contracts that permit us to bill on a progress basis must be classified as "on time" for us to apply for progress payments. Costs for which we are not able to bill on a progress basis are components of "Costs and estimated earnings in excess of billings on uncompleted contracts" on our condensed balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.

Because the POC method of accounting requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money, or to raise additional capital, until the reported earnings materialize into actual cash receipts.

At March 31, 2013, we had a cash balance of $1,260,876 compared to $2,709,803 at December 31, 2012.

Our costs and estimated earnings in excess of billings increased by approximately $1.1 million during the three months ended March 31, 2013. The Boeing A-10 contract accounted for approximately $1.6 million of this increase. Although this contract does provide for milestone billings, the program has reached the end of the milestone billing phase and as such we are no longer able to invoice this program on a progress basis. Additionally, Boeing has made engineering changes to parts under contract with us. We have not yet completed pricing negotiations related to these changes. We are contractually obligated to continue production on these parts, however, we are not able to invoice for the expected full value until price negotiations are completed.

Because of our high growth rate, in order to perform on new programs, such as the recently announced Goodrich and Embraer programs, we may be required to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could be required to bear impairment charges, which may be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.

We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative funding sources.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Credit Facilities

Line of Credit

In August 2007, we entered into a revolving credit facility with Sovereign Bank (the "Sovereign Revolving Facility"), secured by all of our assets.

On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement with Sovereign Bank as the sole arranger, administrative agent and collateral agent and Valley National Bank. The Restated Agreement provides for a revolving credit loan commitment of $35 million, which replaces the Sovereign Revolving Facility, and a term loan of $3.9 million. The term of the Restated Agreement is through December 2016. The Restated Agreement increases the availability under, and amends and restates the Credit Agreement, dated as of August 13, 2007, as subsequently amended, between the Company and Sovereign Bank (the "Prior Agreement"), which provided for a revolving credit loan commitment and two term loans. One of the term loans under the Prior Agreement was refinanced as a revolving credit loan under the Restated Agreement. The other term loan and the revolving credit loans under the Prior Agreement continued as a term loan and revolving credit loan under the Restated Agreement.

As of March 31, 2013, we were in compliance with all of the financial covenants contained in the Credit Agreement, as amended, and $29.95 million was outstanding under the Sovereign Revolving Facility.

Term Loan

On October 22, 2008, we obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Facility"). This term loan was refinanced as part of the revolving credit loan under the Restated Agreement of December 5, 2012.

On March 9, 2012, the Company obtained a $4.5 million term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Facility 2"). The Sovereign Term Facility 2 was be used by the Company to purchase tooling and equipment for new programs. The Sovereign Term Facility 2 bears interest at the lower of LIBOR plus 3% or Sovereign Bank's prime rate.

The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility 2.

Additionally, the Company and Sovereign Bank entered into a five-year interest rate swap agreement, in the notional amount of $4.5 million. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount at a rate of 4.11% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR plus 3%. The effect of this interest rate swap will be the Company paying a fixed interest rate of 4.11% over the term of the Sovereign Term Facility 2.

Contractual Obligations

For information concerning our contractual obligations, see "Contractual Obligations" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2012.


CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


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