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CVU > SEC Filings for CVU > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for CPI AEROSTRUCTURES INC

Form 10-Q for CPI AEROSTRUCTURES INC


8-Nov-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 October 31, 2013, we received approximately $83.1 million of new contract awards, which included approximately $62.7 million of government subcontract awards and approximately $20.4 million of commercial subcontract awards, compared to a total of $64.1 million of new contract awards, of all types, in the same period last year.


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 September 30, 2013 and December 31, 2012 was as follows:

      Backlog         September 30, 2013 December 31, 2012
      (Total)

      Funded             $102,538,000       $52,318,000
Unfunded/Unreleased      337,166,000        339,563,000

       Total             $439,704,000      $391,881,000

Approximately 52% of the total amount of our backlog at September 30, 2013 was attributable to government contracts. Our backlog attributable to government contracts at September 30, 2013 and December 31, 2012 was as follows:

  Backlog      September 30, 2013 December 31, 2012
(Government)

   Funded         $73,601,000        $43,215,000
  Unfunded        178,015,000        190,109,000

   Total          $251,616,000      $233,324,000

Our backlog attributable to commercial contracts at September 30, 2013 and December 31, 2012 was as follows:

      Backlog         September 30, 2013 December 31, 2012
   (Commercial)

      Funded             $28,937,000        $9,103,000
Unfunded/Unreleased      159,151,000        149,454,000

       Total             $188,088,000      $158,557,000

Our unfunded backlog is primarily comprised of the long-term contracts that we received from Boeing, Spirit and Northrop Grumman 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.


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 revenue 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.


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


Results of Operations

Revenue

Revenue for the three months ended September 30, 2013 was $20,664,645 compared to $21,340,831 for the same period last year, representing a decrease of $676,186 or 3.2%. For the nine months ended September 30, 2013, revenue was $61,702,530 compared to $61,916,552 for the same period last year, representing a decrease of $214,022 or 0.3%.

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 nine months ended September 30, 2013 was $1,022,968 compared to $5,218,254 for the nine months ended September 30, 2012, a decrease of $4,195,286 or 80%. This decrease was anticipated, as we move away from focusing on government prime work.

Revenue generated from government subcontracts for the nine months ended September 30, 2013 was $41,469,900 compared to $38,499,624 for the nine months ended September 30, 2012 an increase of $2,970,276 or 7.7%. This increase is primarily the result of increased production on the A-10 program of approximately $6.9 million and an increase in production on our program with UTC Aerospace of approximately $3.0 million, offset by a decrease in production on the E-2D program of approximately $7.5 million.

Revenue generated from commercial contracts was $19,209,662 for the nine months ended September 30, 2013 compared to $18,198,674 for the nine months ended September 30, 2012, an increase of $1,010,988 or 5.6%. This increase is primarily the result of increased production rates on the G650 program.

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

Gross Profit

Gross profit for the three months ended September 30, 2013 was $4,476,127 compared to $5,804,424 for the three months ended September 30, 2012, a decrease of $1,328,297. As a percentage of revenue, gross profit for the three months ended September 30, 2013 was 21.7% compared to 27.2% for the same period last year. Gross profit for the nine months ended September 30, 2013 was $13,152,944 compared to $16,537,453 for the nine months ended September 30, 2012, a decrease of $3,384,509. As a percentage of revenue, gross profit for the nine months ended September 30, 2013 was 21.3% compared to 26.7% for the same period last year.

The gross margin percentage is lower in 2013 than in 2012 because of adjustments to our long term programs with Spirit, Northrop Grumman and Boeing as well as the C-5 Top Program. 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 Northrop Grumman is the result of price reductions that were necessary at completion of a government pricing analysis. The adjustment for our Boeing program was part of the negotiations for program changes described in the liquidity section. The Boeing adjustment approximates a 200 basis point decrease in our gross margin percentage. The adjustment for the C-5 Top Program was the result of excess time and work required on C-5 wing tip panels

We now expect our gross margin for the full year to fall to be in the range of 23%-24%.


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 September 30, 2013 were $1,508,656 compared to $1,615,888 for the three months ended September 30, 2012, a decrease of $107,232, or 6.6%.

For the nine months ended September 30, 2013, selling, general and administrative expenses were $4,882,851, compared to $5,290,999 for the same period last year, a decrease of $408,148 or 7.7%. This decrease is predominately the result of a lower accrual for officers' bonus of $375,000 and lower professional fees of approximately $189,000, offset by increased salaries of $237,000, the result of increased headcount.

Income Before Provision for Income Taxes

Income before provision for income taxes for the three months ended September 30, 2013 was $2,772,100 compared to $4,025,437 for the same period last year, a decrease of $1,253,337. This decrease is the result of the lower gross margin percentage during 2013 as compared to 2012. For the nine months ended September 30, 2013, income before provision for income taxes was $7,777,650 compared to $10,759,775 for the same period last year, a decrease of $2,982,125.

Provision for Income Taxes

Provision for income taxes was $861,000 for the three months ended September 30, 2013, or 31% of pre-tax income, compared to $1,230,000 or 31% of pre-tax income, for the three months ended September 30, 2012. Provision for income taxes was $2,411,000 for the nine months ended September 30, 2013, or 31% of pre-tax income, compared to $3,349,000 or 31% of pre-tax income, for the nine months ended September 30, 2012.


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


Net Income

Net income for the three months ended September 30, 2013 was $1,911,100, or $0.23 per basic share, compared to net income of $2,795,437, or $0.33 per basic share, for the same period last year. Net income for the nine months ended September 30, 2013 was $5,366,650 or $0.64 per basic share, compared to $7,410,775, or $0.99 per basic share, for the same period last year. Diluted income per share for the three months ended September 30, 2013 was $0.23, calculated utilizing 8,490,711 average shares outstanding. Diluted income per share for the nine months ended September 30, 2013 was $0.63, calculated utilizing 8,464,350 average shares outstanding.

Liquidity and Capital Resources

General

At September 30, 2013, we had working capital of $86,256,447 compared to $79,708,725 at December 31, 2012, an increase of $6,547,722, or 8.2%.

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 September 30, 2013, we had a cash balance of $840,683 compared to $2,709,803 at December 31, 2012.

Our costs and estimated earnings in excess of billings increased by approximately $2.9 million during the nine months ended September 30, 2013. The Boeing A-10 contract accounted for an approximately $1.8 million increase. In the three months ended September 30, 2013, however the costs and estimated earnings in excess of billings related to the A-10 program decreased by approximately $1.2 million, as a result of our negotiated ability to bill Boeing on a progress basis.

Because of our high growth rate, in order to perform on new programs, such as the recently announced UTS Aerospace 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.


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


Credit Facilities

Line of Credit

Until December 2012, the Company was party to a Credit Agreement, dated August 13, 2007, as amended, between the Company and Sovereign Bank (the "Prior Agreement"), which provided for a revolving credit facility and two term loans. Immediately prior to entering into the Restated Agreement (identified below), a revolving credit facility in the aggregate of $18.0 million was available to the Company under the Prior Agreement.

On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement with Sovereign Bank ("Restated Agreement") as the sole arranger, administrative agent, collateral agent and lender and Valley National Bank as lender. The Restated Agreement increased the revolving credit facility under the Prior Agreement from $18 million to $35 million (the "Sovereign Revolving Facility"), refinanced one of the previous term loans as a revolving credit loan, continued the other term loan and then-existing revolving credit loans, and amended and restated the general terms of the Prior Agreement. The revolving credit loans under the Restated Agreement mature on December 5, 2016. The Sovereign Revolving Facility and term loan under the Restated Agreement are secured by all of our assets.

As of September 30, 2013, the Company was in compliance with all of the financial covenants, as amended, contained in the Credit Agreement and $31.45 million was outstanding under the Sovereign Revolving Facility. In October 2013, we collected an approximate $4.8 million from Boeing as a portion of the settlement of our pricing negotiations, $4.5 million of which was used to pay down our line of credit. At October 31, 2013, we had $26.95 million outstanding under the Sovereign Revolving Facility.

Term Loan

On October 22, 2008, the Company obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Loan"). 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 Loan 2"). The Sovereign Term Loan 2 was used by the Company to purchase tooling and equipment for new programs. The Sovereign Term Loan 2 was continued under the Restated Agreement, and is payable in monthly installments of $75,000, with a final payment of the remaining principal balance on March 9, 2017. The Sovereign Term Loan 2 bears interest at the lower of LIBOR plus 3% or Sovereign Bank's prime rate. The Sovereign Term Loan 2 is subject to the amended and restated terms and conditions of the Restated Agreement.

In connection with the Sovereign Term Loan 2, 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 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 Loan 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.


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