CPI Aero(CVU) - 2019 Q1 - Quarterly Report

Part I - Financial Information This part provides CPI Aerostructures, Inc.'s unaudited consolidated financial statements and detailed notes for the period Item 1 – Consolidated Financial Statements This section presents the unaudited consolidated financial statements and comprehensive notes for CPI Aerostructures, Inc Consolidated Balance Sheets This section presents the unaudited consolidated balance sheets as of March 31, 2019, and December 31, 2018 Consolidated Balance Sheet Highlights (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 (Unaudited) | December 31, 2018 (Note 1) | | :-------------------------- | :------------------------- | :------------------------- | | Total Current Assets | $142,681,526 | $140,204,589 | | Total Assets | $151,858,590 | $143,713,674 | | Total Current Liabilities | $45,042,116 | $41,854,413 | | Total Liabilities | $56,510,230 | $50,290,328 | | Total Shareholders' Equity | $95,348,360 | $93,423,346 | - Cash decreased significantly from $4,128,142 at December 31, 2018, to $617,161 at March 31, 2019. Restricted cash remained at $2,000,000[6] - Contract assets increased from $113,333,491 to $120,749,918, indicating more unbilled revenue from ongoing contracts[6] Consolidated Statements of Income and Comprehensive Income This section presents unaudited consolidated statements of income and comprehensive income for Q1 2019 and 2018 Consolidated Statements of Income and Comprehensive Income (Three Months Ended March 31, 2019 vs. 2018) | Metric | 2019 (Unaudited) | 2018 (Unaudited) | | :----------------------------------- | :--------------- | :--------------- | | Revenue | $25,583,531 | $18,191,623 | | Cost of revenue | $20,167,721 | $14,141,755 | | Gross profit | $5,415,810 | $4,049,868 | | Income from operations | $2,609,367 | $2,000,028 | | Net income | $1,658,598 | $1,256,765 | | Comprehensive income | $1,658,598 | $1,250,965 | | Income per common share – basic | $0.14 | $0.14 | | Income per common share – diluted | $0.14 | $0.14 | - Revenue increased by 40.6% year-over-year, from $18,191,623 in Q1 2018 to $25,583,531 in Q1 2019[9] - Net income increased by 32.0% year-over-year, from $1,256,765 in Q1 2018 to $1,658,598 in Q1 2019, while basic and diluted EPS remained flat at $0.14 due to an increase in outstanding shares[9] Consolidated Statements of Shareholders' Equity This section presents unaudited consolidated statements of shareholders' equity for Q1 2019 and 2018 Shareholders' Equity Changes (Three Months Ended March 31, 2019 vs. 2018) | Metric | March 31, 2019 | March 31, 2018 | | :----------------------------------- | :------------- | :------------- | | Balance at January 1 | $93,423,346 | $74,313,333 | | Net income | $1,658,598 | $1,256,765 | | Costs related to stock offering | $(64,371) | — | | Stock-based compensation expense | $330,787 | $303,940 | | Balance at March 31 | $95,348,360 | $75,914,151 | - Total Shareholders' Equity increased from $93,423,346 at January 1, 2019, to $95,348,360 at March 31, 2019, primarily driven by net income and stock-based compensation expense, partially offset by stock offering costs[12] Consolidated Statements of Cash Flows This section presents unaudited consolidated statements of cash flows for Q1 2019 and 2018 Consolidated Statements of Cash Flows (Three Months Ended March 31, 2019 vs. 2018) | Cash Flow Activity | 2019 (Unaudited) | 2018 (Unaudited) | | :--------------------------------- | :--------------- | :--------------- | | Net cash used in operating activities | $(2,332,878) | $(2,573,325) | | Net cash used in investing activities | $(210,695) | $(156,006) | | Net cash (used in) provided by financing activities | $(967,408) | $1,581,694 | | Net decrease in cash and restricted cash | $(3,510,981) | $(1,147,637) | | Cash and restricted cash at beginning of period | $6,128,142 | $1,430,877 | | Cash and restricted cash at end of period | $2,617,161 | $283,240 | - Net cash used in operating activities decreased slightly from $(2,573,325) in Q1 2018 to $(2,332,878) in Q1 2019[14] - Financing activities shifted from providing $1,581,694 in Q1 2018 to using $(967,408) in Q1 2019, primarily due to payments on long-term debt and line of credit, and stock offering costs[14] Notes to Consolidated Financial Statements This section provides detailed notes on accounting policies, business combinations, revenue, leases, inventory, and other financial items 1. Interim Financial Statements This note details the Company's structure, single reportable segment, and adoption of ASC 606 and ASC 842 - The Company consists of CPI Aerostructures, Inc., Welding Metallury, Inc. (WMI, acquired Dec 20, 2018), and Compac Development Corporation[17] - The Company operates as a single operating and reportable segment[17] - Effective January 1, 2019, the Company adopted ASC 842 (Leases), recognizing approximately $5.3 million in ROU assets and $5.8 million in lease liabilities on its consolidated balance sheet[29] 2. Business Combinations This note details the WMI acquisition, its provisional accounting, and the ongoing working capital adjustment dispute - The WMI acquisition was completed on December 20, 2018, for a purchase price of $7.9 million, subject to a post-closing working capital adjustment[33] - $2 million of the purchase price was placed in escrow, shown as restricted cash[33] Provisional Fair Values of WMI Assets Acquired and Liabilities Assumed | Item | Provisional Fair Values | | :------------------------ | :---------------------- | | Other current assets | $1,049,000 | | Accounts receivable | $1,522,000 | | Inventory | $7,969,000 | | Property and equipment, net | $586,000 | | Current liabilities | $(5,174,000) | | Total | $5,952,000 | 3. Revenue Recognition This note outlines revenue recognition policies, contract types, and remaining performance obligations for future periods - Revenue from long-term contracts is recognized over time using the cost-to-cost input method[41] - For Q1 2019, 88% of revenue was from long-term contracts (over time) and 12% from MRO contracts (point in time)[50] Revenue by Long-Term Contract Type (Three Months Ended March 31, 2019 vs. 2018) | Contract Type | March 2019 | March 2018 | | :------------------------ | :------------ | :------------ | | Government subcontracts | $16,675,292 | $8,137,726 | | Commercial contracts | $6,653,157 | $7,476,095 | | Prime government contracts | $2,255,082 | $2,577,802 | | Total | $25,583,531 | $18,191,623 | - Remaining performance obligations as of March 31, 2019, were $99.3 million, with 78% expected in 2019 and 22% in 2020[48] 4. Leases This note details the Company's operating leases, ROU assets, lease liabilities, and related expenses under ASC 842 ROU Assets and Operating Lease Liabilities (March 31, 2019) | Item | Amount | | :---------------------------------- | :---------- | | ROU Assets | $4,927,810 | | Current operating lease liabilities | $1,593,243 | | Long-term operating lease liabilities | $3,837,678 | | Total ROU liabilities | $5,430,921 | - Operating lease expense for the three months ended March 31, 2019, was $438,328[56] - The weighted average remaining lease term for operating leases is 3.4 years[57] 5. Inventory This note details the composition and changes in inventory, including raw materials, work-in-progress, and finished goods Inventory Components (March 31, 2019 vs. December 31, 2018) | Component | March 31, 2019 | December 31, 2018 | | :--------------- | :------------- | :---------------- | | Raw materials | $2,867,039 | $3,379,986 | | Work in progress | $5,940,866 | $4,495,980 | | Finished goods | $2,283,090 | $1,836,031 | | Total | $11,090,995 | $9,711,997 | 6. Stock-Based Compensation This note details stock-based compensation expense, RSU grants, and stock option exercises for the period - Stock-based compensation expense for Q1 2019 was approximately $330,787, compared to $303,940 in Q1 2018[12][14] - In January 2019, 75,353 restricted stock units (RSUs) were granted to the board of directors, resulting in approximately $250,000 of non-cash compensation expense in Q1 2019[62] - 35,000 stock options were exercised in Q1 2019, with the company receiving no cash and exchanging 34,478 shares of common stock[68] 7. Fair Value This note discusses the fair value measurements for financial instruments, including short-term assets, liabilities, and debt - Fair values of short-term financial instruments (cash, accounts receivable, accounts payable, accrued expenses) approximated their carrying values[69] Fair Value of Debt (March 31, 2019 vs. December 31, 2018) | Debt Category | March 31, 2019 Carrying Amount | March 31, 2019 Fair Value | December 31, 2018 Carrying Amount | December 31, 2018 Fair Value | | :--------------------------------- | :----------------------------- | :------------------------ | :-------------------------------- | :--------------------------- | | Short-term borrowings and long-term debt | $29,846,667 | $29,846,667 | $30,349,903 | $30,349,903 | 8. Contract Assets and Contract Liabilities This note details the changes in contract assets and liabilities, driven by new programs and contract profit revisions Net Contract Assets (Liabilities) by Customer Type (March 31, 2019 vs. December 31, 2018) | Category | March 31, 2019 Total | December 31, 2018 Total | | :---------------------- | :------------------- | :---------------------- | | Contract assets | $120,749,918 | $113,333,491 | | Contract liabilities | $(3,496,449) | $(3,805,106) | | Net contract assets | $117,253,469 | $109,528,385 | - The increase in net contract assets was primarily due to new programs like HondaJet engine inlet ($1.0 million increase) and Raytheon Next Generation Jammer pod 2.0 ($4.6 million increase), and increases in T-38 Pacer Classic ($0.8 million) and F-35 Lock Assembly ($0.7 million)[73] - Revisions in estimated contract profits resulted in a $391,000 increase to total gross profit in Q1 2019, compared to a $320,000 decrease in Q1 2018[75] 9. Income Per Common Share This note explains the calculation of basic and diluted income per common share, including weighted average shares outstanding - Basic and diluted income per common share were both $0.14 for the three months ended March 31, 2019 and 2018[9] - Diluted EPS for Q1 2019 was calculated using 11,792,818 weighted average shares outstanding, including 56,513 incremental shares[77] 10. Debt This note details the Company's credit facilities, outstanding debt, interest rates, and long-term debt maturity schedule - The Company has a $30 million Revolving Loan and a $10 million Term Loan with BankUnited, N.A., both maturing on June 30, 2020[80] - As of March 31, 2019, $23.7 million was outstanding under the Revolving Loan, bearing interest at 6.25%[82] Maturities of Long-Term Debt (Excluding Unamortized Debt Issuance Costs) as of March 31, 2019 | Twelve months ending March 31, | Amount | | :----------------------------- | :---------- | | 2020 | $2,506,099 | | 2021 | $3,131,789 | | 2022 | $204,065 | | 2023 | $179,055 | | Thereafter | $86,974 | | Total | $6,107,982 | 11. Major Customers This note identifies the concentration of revenue and contract assets among the Company's major commercial and government customers - In Q1 2019, the four largest commercial customers accounted for 25%, 13%, 13%, and 12% of revenue[88] - Direct U.S. government revenue was 9% in Q1 2019, compared to 14% in Q1 2018[88] - At March 31, 2019, 37%, 13%, 13%, and 12% of contract assets were from the Company's four largest commercial customers[89] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition, operational results, liquidity, and capital resources for Q1 2019 Forward Looking Statements This section provides a disclaimer regarding forward-looking statements and associated risks and uncertainties - This section serves as a disclaimer regarding forward-looking statements, cautioning readers about inherent risks and uncertainties that could cause actual results to differ materially from projections[93] Business Operations The Company manufactures structural aircraft parts for commercial and defense markets, serving as a Tier 1, Tier 2, and prime contractor - The Company manufactures structural aircraft parts for fixed-wing aircraft and helicopters in both commercial and defense markets[94] - It operates as a Tier 1 supplier to aircraft OEMs, a Tier 2 subcontractor to major Tier 1 manufacturers, and a prime contractor to the U.S. Department of Defense[94] - Services include engineering, program management, supply chain management, and Maintenance Repair & Overhaul (MRO)[94] Backlog This section analyzes the Company's total backlog, including funded and unfunded portions, across government and commercial contracts Total Backlog (March 31, 2019 vs. December 31, 2018) | Category | March 31, 2019 | December 31, 2018 | | :------- | :------------- | :---------------- | | Funded | $85,669,000 | $94,474,000 | | Unfunded | $367,206,000 | $362,906,000 | | Total | $452,875,000 | $457,380,000 | - Approximately 84% of the total backlog at March 31, 2019, was attributable to government contracts[97] Commercial Backlog (March 31, 2019 vs. December 31, 2018) | Category | March 31, 2019 | December 31, 2018 | | :------- | :------------- | :---------------- | | Funded | $7,157,000 | $13,662,000 | | Unfunded | $61,740,000 | $57,324,000 | | Total | $68,897,000 | $70,986,000 | Critical Accounting Policies This section outlines critical accounting policies, specifically revenue recognition under ASC 606 and leases under ASC 842 Revenue Recognition This subsection details the Company's revenue recognition policy under ASC 606, emphasizing estimates for long-term contracts - The Company adopted ASC 606 (Revenue from Contracts with Customers) effective January 1, 2018, using the modified retrospective method[101] - Revenue and gross profit are recognized over the contract period based on the relationship between actual costs incurred and total estimated costs[101] - ASC 606 involves considerable use of estimates, which can lead to disparities between reported earnings and actual cash receipts[101] Leases This subsection details the Company's lease accounting policy under ASC 842, including ROU asset and liability recognition - The Company adopted ASC 842 (Leases) on January 1, 2019, using the optional transition method, without restating comparative financial information[104] - Upon adoption, the Company recognized approximately $5.3 million in ROU assets and $5.8 million in lease liabilities[106] - The Company elected practical expedients, including not recognizing ROU assets or lease liabilities for short-term leases and not separating lease and non-lease components for certain assets[105] Results of Operations This section analyzes the Company's Q1 2019 operational results, including revenue, cost of sales, gross profit, expenses, and net income Revenue This subsection details the drivers of revenue growth, including the WMI acquisition and key program contributions - Total revenue for Q1 2019 increased by $7,391,908 (40.6%) to $25,583,531, compared to $18,191,623 in Q1 2018[108] - Key drivers for revenue increase include $2.1 million from the WMI acquisition, $4.3 million from the Next Generation Jammer pod program, and increases from E-2D, F-35 Lock, and HondaJet programs (each approximately $0.7 million)[108] - Government subcontracts revenue increased by 104.9% to $16,675,292, while commercial subcontracts revenue decreased by 11% to $6,653,157, mainly due to lower G650 program revenue[109][111] Cost of Sales This subsection analyzes the increase in cost of sales, driven by procurement, labor, and factory overhead - Cost of sales increased by $6,025,966 (42.6%) to $20,167,721 in Q1 2019, commensurate with the increase in revenue[113] Cost of Sales Components (Three Months Ended March 31, 2019 vs. 2018) | Component | March 31, 2019 | March 31, 2018 | | :----------------------------- | :------------- | :------------- | | Procurement | $13,195,363 | $8,645,609 | | Labor | $1,979,759 | $1,657,719 | | Factory overhead | $5,016,553 | $3,941,364 | | Other contract costs (credit), net | $(23,954) | $(102,937) | | Total Cost of Sales | $20,167,721 | $14,141,755 | - Procurement costs increased by $4,549,754 (52.6%), largely due to the Raytheon Next Generation Jammer pod program ($2.8 million) and WMI acquisition ($0.8 million)[117] Gross Profit This subsection details the increase in gross profit, primarily attributable to higher sales volume - Gross profit increased by $1,365,942 (33.7%) to $5,415,810 in Q1 2019, primarily due to higher sales volume[120] Favorable/Unfavorable Adjustments to Gross Profit (Loss) This subsection analyzes the net adjustments to gross profit, including favorable and unfavorable contract revisions Net Adjustments to Gross Profit (Three Months Ended March 31, 2019 vs. 2018) | Adjustment Type | March 31, 2019 | March 31, 2018 | | :------------------------ | :------------- | :------------- | | Favorable adjustments | $680,000 | $175,000 | | Unfavorable adjustments | $(289,000) | $(495,000) | | Net adjustments | $391,000 | $(320,000) | - Net adjustments to gross profit were favorable by $391,000 in Q1 2019, primarily due to a $330,000 favorable adjustment on one contract's completion[121] - In Q1 2018, net adjustments were unfavorable by $320,000, including a $241,000 unfavorable adjustment on a long-term program and a $128,000 unfavorable adjustment due to excess overhead and material costs[123] Selling, General and Administrative Expenses This subsection details the increase in SG&A expenses, driven by WMI-related costs and professional fees - SG&A expenses increased by $756,603 (36.9%) to $2,806,443 in Q1 2019, mainly due to additional costs related to WMI and approximately $110,000 in professional fees for the WMI audit and reporting[124] Income Before Provision for Income Taxes This subsection details the increase in income before taxes, primarily due to higher government subcontractor revenue - Income before provision for income taxes increased by $545,833 (35%) to $2,098,598 in Q1 2019, primarily due to higher government subcontractor revenue[125] Provision for Income Taxes This subsection details the provision for income taxes and the effective tax rate for Q1 2019 and 2018 - Provision for income taxes increased to $440,000 in Q1 2019 from $296,000 in Q1 2018[126] - The effective tax rate was 21% in Q1 2019, up from 19% in Q1 2018[126] Net Income This subsection details the increase in net income and the stable basic and diluted EPS for Q1 2019 - Net income for Q1 2019 was $1,658,599, an increase from $1,256,765 in Q1 2018[127] - Basic and diluted income per share remained $0.14 for both periods, despite the increase in net income, due to a higher weighted average number of shares outstanding[127] Liquidity and Capital Resources This section analyzes the Company's liquidity, working capital, cash flow, and capital resources, including credit facilities General This subsection provides an overview of the Company's working capital position - Working capital decreased by $710,766 (0.7%) to $97,639,410 at March 31, 2019, from $98,350,176 at December 31, 2018[128] Cash Flow This subsection details changes in cash and restricted cash balances and the impact of contract assets - Cash balance decreased from $4,128,142 at December 31, 2018, to $617,161 at March 31, 2019[132] - Restricted cash remained at $2,000,000, held in escrow for the WMI acquisition[132] - Contract assets increased by approximately $7.4 million in Q1 2019, representing unbilled costs and earnings on uncompleted contracts[133][129] - The Company believes existing resources, credit facility availability, and BankUnited's commitment to extend the credit facility will be sufficient for working capital needs for at least 12 months[134] Credit Facilities This subsection details the Company's credit facilities, outstanding balances, and covenant compliance - The BankUnited Facility includes a $30 million revolving credit loan and a $10 million term loan, both maturing on June 30, 2020[135] - As of March 31, 2019, $23.7 million was outstanding under the Revolving Loan at 6.25% interest[137] - The Company was in compliance with all financial covenants of the BankUnited Facility as of March 31, 2019[139] Contractual Obligations This subsection references contractual obligations to the Company's prior annual report - Information on contractual obligations is referenced to the Company's Annual Report on Form 10-K for the year ended December 31, 2018[141] Item 3 – Quantitative and Qualitative Disclosures About Market Risk This section states that quantitative and qualitative disclosures about market risk are not applicable to the Company - The Company states that this item is not applicable[143] Item 4 – Controls and Procedures This section addresses the effectiveness of disclosure controls and procedures, including identified material weaknesses and corrective actions - Disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2019[145] - A material weakness was identified: review control procedures failed to timely identify the miscoding of an invoice and resulting overstatement of revenue[146] - Corrective actions and new control procedures were implemented in Q1 2019, but full testing is not yet concluded[146] - The evaluation excluded WMI (acquired December 20, 2018), which represented approximately 8% of total assets and revenue for Q1 2019[147] Evaluation of Disclosure Controls and Procedures This subsection details the evaluation of disclosure controls and procedures, concluding their ineffectiveness due to a material weakness - Management concluded that disclosure controls and procedures were not effective as of March 31, 2019, due to a material weakness[145] - The material weakness involved the failure of review control procedures to timely identify the miscoding of an invoice and resulting overstatement of revenue[146] Changes in Internal Control Over Financial Reporting This subsection reports on changes in internal control over financial reporting, noting corrective actions for a material weakness - No material changes in internal control over financial reporting occurred during Q1 2019, other than the corrective actions taken to address the identified material weakness[148] Part II - Other Information This part contains other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1 – Legal Proceedings This section reports no legal proceedings for the current period - There are no legal proceedings to report[150] Item 1A – Risk Factors This section reports no material changes to previously disclosed risk factors - No material changes to risk factors were reported since the Annual Report on Form 10-K for December 31, 2018[151] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds for the period - There were no unregistered sales of equity securities for the three months ended March 31, 2019[152] Item 3 – Defaults Upon Senior Securities This section reports no defaults upon senior securities for the period - There were no defaults upon senior securities[153] Item 4 – Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - The Company states that this item is not applicable[154] Item 5 – Other Information This section reports no other information for the current period - There is no other information to report[155] Item 6 – Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL financial data - Exhibits include Section 302 Certifications by the CEO and CFO, Section 906 Certification by the CEO and CFO, and XBRL financial information[156] Signatures This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer - The report was signed by Douglas J. McCrosson (CEO and President) and Vincent Palazzolo (CFO) on May 10, 2019[160]