form10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period |
Commission File Number 1-11398 |
|
ended June 30, 2009 |
|
CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)
|
New York |
|
11-2520310 |
|
(State or other jurisdiction |
|
(IRS Employer Identification Number) |
|
of incorporation or organization) |
|
|
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60 Heartland Blvd., Edgewood, NY |
11717 |
|
(Address of principal executive offices) |
(zip code) |
(631) 586-5200
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes £ No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o |
Accelerated filer o |
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Non-accelerated filer o |
Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
As of August 13, 2009, the number of shares of common stock, par value $.001 per share, outstanding was 5,995,465.
CPI AEROSTRUCTURES, INC .
Part I - Financial Information
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Item 1 – Condensed Financial Statements |
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| |
|
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Condensed Balance Sheets as of June 30, 2009 (Unaudited) and |
3 |
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December 31, 2008 |
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| |
|
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Condensed Income Statements for the Three and Six Months ended |
4 |
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June 30, 2009 (Unaudited) and 2008 (Unaudited) |
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| |
|
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Condensed Statements of Cash Flows for the Six Months ended June 30, 2009 |
5 |
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(Unaudited) and 2008 (Unaudited) |
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| |
|
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Notes to Condensed Financial Statements (Unaudited) |
6 |
| |
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Item 2 – Management’s Discussion and Analysis of Financial Condition |
15 |
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and Results of Operations |
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| |
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk |
21 |
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Item 4T – Controls and Procedures |
21 |
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Part II - Other Information |
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Item 4 – Submission of Matters to a Vote of Security Holders |
22 |
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Item 6 – Exhibits |
22 |
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Signatures |
23 |
| |
|
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Exhibits |
23 |
CPI AEROSTRUCTURES, INC.
Part I - Financial Information
Item 1 – Financial Statements
| |
June 30, |
December 31 |
| |
2009 |
2008 |
| |
(Unaudited) |
(Note 1) |
|
ASSETS |
|
|
|
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Current Assets: |
|
|
|
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Cash |
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$ |
454,282 |
|
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$ |
424,082 |
|
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Accounts receivable, net |
|
|
4,076,424 |
|
|
|
2,975,012 |
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
44,532,763 |
|
|
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37,922,608 |
|
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Prepaid expenses and other current assets |
|
|
264,308 |
|
|
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559,657 |
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| |
|
|
|
|
|
|
|
|
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Total current assets |
|
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49,327,777 |
|
|
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41,881,359 |
|
| |
|
|
|
|
|
|
|
|
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Plant and equipment, net |
|
|
987,686 |
|
|
|
1,002,974 |
|
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Deferred income taxes |
|
|
470,000 |
|
|
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345,500 |
|
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Other assets |
|
|
119,265 |
|
|
|
179,265 |
|
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Total Assets |
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$ |
50,904,728 |
|
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$ |
43,409,098 |
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| |
|
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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|
|
|
|
|
|
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Accounts payable |
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$ |
6,649,979 |
|
|
$ |
3,303,426 |
|
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Accrued expenses |
|
|
174,202 |
|
|
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1,081,278 |
|
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Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
879,508 |
|
|
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57,592 |
|
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Current portion of long-term debt |
|
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636,524 |
|
|
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620,668 |
|
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Line of credit |
|
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2,400,000 |
|
|
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300,000 |
|
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Income tax payable |
|
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1,402,000 |
|
|
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907,000 |
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Deferred income taxes |
|
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476,000 |
|
|
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476,000 |
|
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Total current liabilities |
|
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12,618,213 |
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|
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6,745,964 |
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| |
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Long-term debt, net of current portion |
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2,118,440 |
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2,401,206 |
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Other liabilities |
|
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252,758 |
|
|
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278,778 |
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| |
|
|
|
|
|
|
|
|
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Total Liabilities |
|
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14,989,411 |
|
|
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9,425,948 |
|
| |
|
|
|
|
|
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Shareholders’ Equity: |
|
|
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|
|
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Common stock - $.001 par value; authorized 50,000,000 shares, |
|
|
|
|
|
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|
|
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issued 6,058,999 and 6,046,273 shares, respectively, and |
|
|
|
|
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|
|
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outstanding 5,995,465 and 5,982,739 shares, respectively |
|
|
6,059 |
|
|
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6,046 |
|
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Additional paid-in capital |
|
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27,116,916 |
|
|
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26,660,606 |
|
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Retained earnings |
|
|
9,391,431 |
|
|
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7,942,021 |
|
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Accumulated other comprehensive loss |
|
|
(58,083 |
) |
|
|
(84,517 |
) |
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Treasury stock, 63,534 shares (at cost) |
|
|
(541,006 |
) |
|
|
(541,006 |
) |
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Total Shareholders’ Equity |
|
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35,915,317 |
|
|
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33,983,150 |
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Total Liabilities and Shareholders’ Equity |
|
$ |
50,904,728 |
|
|
$ |
43,409,098 |
|
See Notes to Condensed Financial Statements
CPI AEROSTRUCTURES, INC.
CONDENSED INCOME STATEMENTS
| |
For the Three Months Ended
June 30, |
For the Six Months Ended
June 30, |
| |
| |
2009 |
2008 |
2009 |
2008 |
| |
(Unaudited) |
(Unaudited) |
|
Revenue |
$11,437,691 |
$9,128,406 |
$21,128,926 |
$16,919,160 |
|
Cost of sales |
8,605,436 |
7,127,318 |
16,233,775 |
13,065,473 |
| |
|
|
|
|
|
Gross profit |
2,832,255 |
2,001,088 |
4,895,151 |
3,853,687 |
|
Selling, general and administrative expenses |
1,442,766 |
1,448,276 |
2,678,741 |
2,663,911 |
|
Income before provision for |
|
|
|
|
|
income taxes |
1,389,489 |
552,812 |
2,216,410 |
1,189,776 |
| |
|
|
|
|
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Provision for income taxes |
486,000 |
183,000 |
767,000 |
400,000 |
|
Net income |
$903,489 |
$369,812 |
$1,449,410 |
$789,776 |
| |
|
|
|
|
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Income per common share – basic |
$0.15 |
$0.06 |
$0.24 |
$0.13 |
| |
|
|
|
|
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Income per common share – diluted |
$0.14 |
$0.06 |
$0.23 |
$0.13 |
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Shares used in computing income per common share: |
|
|
|
|
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Basic |
5,995,465 |
5,975,408 |
5,990,192 |
5,925,655 |
|
Diluted |
6,250,021 |
6,246,953 |
6,183,881 |
6,211,406 |
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|
|
|
|
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See Notes to Condensed Financial Statements
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
| |
|
|
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For the Six Months Ended June 30, |
2009 |
2008 |
| |
(Unaudited) |
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Cash flows from operating activities |
|
|
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Net income |
$1,449,410 |
$789,776 |
|
Adjustments to reconcile net income to net |
|
|
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Cash used in operating activities |
|
|
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Depreciation and amortization |
160,329 |
122,544 |
|
Deferred rent |
3,915 |
10,061 |
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Stock option expense |
404,783 |
459,496 |
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Tax benefit from stock option and warrant exercises |
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(278,000) |
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Deferred portion of provision for income taxes |
(124,500) |
(150,000) |
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Changes in operating assets and liabilities: |
|
|
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(Increase) decrease in accounts receivable |
(1,101,412) |
753,368 |
|
Increase in costs and estimated earnings in excess of billings on uncompleted contracts |
(6,610,155) |
(3,631,333) |
|
(Increase) decrease in prepaid expenses and other assets |
355,349 |
(140,797) |
|
Decrease in refundable income taxes |
|
528,470 |
|
Increase in accounts payable and accrued expenses |
2,491,017 |
1,255,890 |
|
Increase in billing in excess of costs on uncompleted contracts |
821,916 |
|
|
Increase (decrease) in income taxes payable |
495,000 |
(459,000) |
|
Decrease in other liabilities |
(3,501) |
|
|
Net cash used in operating activities |
(1,657,849) |
(739,525) |
|
Cash used in investing activities – purchase of plant and equipment |
(97,861) |
(162,465) |
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Cash flows from financing activities: |
|
|
|
Repayments of long-term debt |
(314,090) |
(7,198) |
|
Proceeds from line of credit |
2,100,000 |
---- |
|
Repayment of line of credit |
---- |
(500,000) |
|
Proceeds from exercise of stock options and warrants |
----- |
999,688 |
|
Tax benefit from stock option and warrant exercises |
----- |
278,000 |
|
Net cash provided by financing activities |
1,785,910 |
770,490 |
| |
|
|
|
Net (decrease) increase in cash |
30,200 |
(131,500) |
|
Cash at beginning of period |
424,082 |
338,391 |
| |
|
|
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Cash at end of period |
$454,282 |
$206,891 |
|
Supplemental disclosures of cash flow information: |
|
|
| |
|
|
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Non-Cash Investing and Financing Activities |
|
|
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Settlement of other receivables |
$60,000 |
$---- |
|
Equipment acquired under capital lease |
$47,180 |
$62,850 |
|
Accrued expenses settled in exchange for common stock |
$51,540 |
$82,547 |
| |
|
|
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Cash paid during the period for: |
|
|
|
Interest |
$104,768 |
$3,435 |
|
Income taxes |
|
$ |
400,000 |
|
|
$ |
765,000 |
|
|
|
See Notes to Condensed Financial Statements |
CPI AEROSTRUCTURES, INC.
|
|
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) |
1. INTERIM FINANCIAL STATEMENTS
The condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments that, in the opinion of management, are necesary
for fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. Such adjustments are of a normal, recurring nature. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make
the information not misleading.
The condensed balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
|
For comparability, certain 2008 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2009. |
|
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2. STOCK-BASED COMPENSATION |
The Company accounts for compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.”
The Company’s net income for the three and six months ended June 30, 2009 includes approximately $302,000 and $405,000, respectively of non-cash compensation expense related to the Company’s stock options. The Company’s net income for the three and six months ended June 30, 2008 includes approximately $300,000
and $459,000, respectively, of non-cash compensation expense related to the Company’s stock options. The non-cash compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of selling, general and administrative expenses.
The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model. The following weighted-average assumptions were used for the options granted during the three and six month period ended June 30, 2009:
|
Risk-free interest rate |
1.65% and 1.66%, respectively |
|
Expected volatility |
97.0% and 93.2%, respectively |
|
Dividend yield |
0% |
|
Expected option term |
5 years |
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
A summary of the status of the Company’s stock option plans as of June 30, 2009 and changes during the six month period ended June 30, 2009 is as follows:
| |
Weighted |
Weighted |
|
|
average |
average remaining |
Aggregate |
|
Exercise |
contractual |
Intrinsic |
|
Fixed Options |
Options |
Price |
term (in years) |
Value |
|
Outstanding |
|
|
|
|
|
at beginning of period |
1,047,333 |
$6.42 |
|
|
|
Granted |
125,000 |
6.38 |
|
|
|
Forfeited |
(55,000) |
10.00 |
|
|
|
Outstanding and expected to vest, |
|
|
|
|
|
at end of period |
1,117,333 |
$6.24 |
3.21 |
$1,571,500 |
|
Vested |
|
|
|
|
|
at end of period |
1,047,333 |
$6.19 |
2.56 |
$1,570,250 |
| |
|
|
|
|
As of June 30, 2009, there was $307,771 of unrecognized compensation cost related to non-vested stock option awards which will be amortized through December 2010.
During the six months ended June 30, 2009, no stock options were exercised. During the six months ended June 30, 2008, 21,250 stock options were exercised for cash resulting in proceeds to the Company of $141,688.
|
3. |
DERIVATIVE INSTRUMENTS AND FAIR VALUE |
Our use of derivative instruments has been to hedge interest rates. These derivative contracts are entered into with financial institutions. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.
We account for these derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS
133 requires that all derivative instruments be recorded on the balance sheet at fair value. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the results of operations. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations immediately. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the results of operations immediately. See below for a discussion of
our use of derivative instruments, management of credit risk inherent in derivative instruments and fair value information.
Derivative Instruments
In October 2008, the Company entered into an interest rate swap with the objective of reducing our exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of these contracts match those of the underlying debt. The Company
has designated this interest rate swap contract as a cash flow hedge. The Company measures ineffectiveness by comparing the cumulative change in the forward contact with the cumulative change in the hedged item. No material ineffectiveness was recognized in the quarter ended June 30, 2009. As of June 30, 2009, we had a net deferred loss associated with cash flow hedges of approximately $88,000, due to the interest rate swap which has been included in Other Liabilities.
As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties may fail to meet their contractual obligations. Recent adverse developments in the global financial and credit markets could negatively impact the creditworthiness of our counterparties and cause one or more of our counterparties
to fail to perform as expected. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. To date, all counterparties have performed in accordance with their contractual obligations.
Fair Value
At June 30, 2009 and December 31, 2008, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments
| |
June 30, 2009 |
| |
Carrying Amount |
Fair Value |
|
Debt |
|
|
|
Short-term borrowings and long term debt |
$5,154,964 |
$5,154,964 |
| |
December 31, 2008 |
| |
Carrying Amount |
Fair Value |
|
Debt |
|
|
|
Short-term borrowings and long-term debt |
$3,321,874 |
$3,321,874 |
We estimated the fair value of debt using market quotes and calculations based on market rates.
In September 2006, the Financial Accounting Standards Board (”FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosures
about fair value measurements. The Company adopted the provisions of SFAS 157 effective January 1, 2008.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the fair values of those financial assets and liabilities measured on a recurring basis as of June 30, 2009:
| |
|
Fair Value Measurements |
|
Description |
Total |
Quoted Prices in Active Markets for Identical assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|
Interest Rate Swap, net |
$ 88,003 |
-- |
$ 88,003 |
-- |
|
Total |
$ 88,003 |
-- |
$ 88,003 |
-- |
The fair value of the Company’s interest rate swap was determined by comparing the fixed rate set at the inception of the transaction to the “replacement swap rate,” which represents the market rate for an offsetting interest rate swap with the same notional amounts and final maturity date. The market value
is then determined by calculating the present value interest differential between the contractual swap and the replacement swap.
As of June 30, 2009 and December 31, 2008, $88,003 and $128,056, respectively, was included in Other Liabilities related to the fair value of the Company’s interest rate swap, and $58,083 and $84,517, respectively, net of tax of $29,921 and $43,539, respectively, was included in Accumulated Other Comprehensive Loss.
The change in unrealized loss from the Company’s interest rate swap of $19,106 and $23,374 is included in other comprehensive income for the three and six months ended June 30, 2009, respectively. Other comprehensive income was $922,595 and $1,472,784 for the three and six months ended June 30, 2009, respectively.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts consist of:
| |
June 30, 2009 |
| |
U.S |
|
|
| |
Government |
Commercial |
Total |
| |
|
|
|
|
Costs incurred on uncompleted |
|
|
|
|
contracts |
$77,178,171 |
$26,950,471 |
$104,128,642 |
|
Estimated earnings |
43,753,520 |
12,688,150 |
56,441,670 |
|
Sub-total |
120,931,691 |
39,638,621 |
160,570,312 |
|
Less billings to date |
91,493,518 |
25,423,539 |
116,917,057 |
|
Costs and estimated earnings |
|
|
|
|
in excess of billings on |
|
|
|
|
uncompleted contracts |
$29,438,173 |
$14,215,082 |
$43,653,255 |
| |
December 31, 2008 |
|
| |
U.S |
|
|
| |
Government |
Commercial |
Total |
|
Costs incurred on uncompleted |
|
|
|
|
contracts |
$66,604,669 |
$21,555,809 |
$88,160,478 |
|
Estimated earnings |
42,788,296 |
9,595,396 |
52,383,692 |
|
Sub-total |
109,392,965 |
31,151,205 |
140,544,170 |
|
Less billings to date |
78,849,843 |
23,829,311 |
102,679,154 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
$30,543,122 |
$7,321,894 |
$37,865,016 |
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The above amounts are included in the accompanying balance sheets under the following captions at June 30, 2009 and December 31, 2008:
| |
2009 |
2008 |
|
Costs and estimated earnings in excess of billings on |
|
|
|
uncompleted contracts |
$ 44,532,763 |
$ 37,922,608 |
|
Billings in excess of costs and estimated earnings on |
|
|
|
uncompleted contracts |
(879,508) |
(57,592) |
| |
|
|
|
Totals |
$ 43,653,255 |
$ 37,865,016 |
| |
|
|
Revisions in the estimated gross profits on contracts and contract amounts are made in the period in which the circumstances requiring the revisions occur. During the six months ended June 30, 2009, the effect of such revisions in total estimated contract profits resulted in a decrease to the total gross profit earned on certain contracts
of approximately $3,150,000, from that which would have been reported had the revised estimate been used as the basis of recognition of contract profits in prior years.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
|
5. |
INCOME PER COMMON SHARE |
Basic income per common share is computed using the weighted average number of shares outstanding. Diluted income per common share for the three and six month periods ended June 30, 2009 and 2008 is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options
and warrants to purchase common stock. Incremental shares of 254,556 and 193,689 were used in the calculation of diluted income per common share in the three and six month periods ended June 30, 2009, respectively. Incremental shares of 345,000 and 802,333 were not included in the diluted earnings per share calculations for the three and six month periods ended June 30, 2009, respectively, as their exercise price was in excess of the Company’s average stock price for the respective period and,
accordingly, these shares are not assumed to be exercised for the diluted earnings per share calculation, as they would be anti-dilutive. Incremental shares of 271,545 and 285,751 were used in the calculation of diluted income per common share in the three month and six month periods ended June 30, 2008, respectively. Incremental shares of 400,000 and 315,000 were not included in the diluted earnings per share calculations for the three month and six month periods ended June 30, 2008, respectively,
as their exercise price was in excess of the Company’s average stock price for the period and, accordingly, these shares are not assumed to be exercised for the diluted earnings per share calculation, as they would be anti-dilutive.
In August 2007, the Company entered into a two-year, $2,500,000 revolving credit facility with Sovereign Bank (the “Sovereign Revolving Facility”), secured by all of the Company’s assets. The Sovereign Revolving Facility specifies an interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank’s
prime rate. The effective rate as of June 30, 2009 was 3.25%. The Sovereign Facility contains financial covenants related to interest coverage, net income and capital expenditures, as defined in the credit agreement.
As of June 30, 2009, the Company was in compliance with all of the financial covenants contained in the credit agreement. As of June 30, 2009, the Company had $2,400,000 outstanding under the Sovereign Revolving Facility.
7. LONG-TERM DEBT
On October 22, 2008, the Company obtained a $3,000,000 term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Facility”). Prior to entering into the term loan, the Company had borrowed $2,500,000 under the Sovereign Revolving Facility to fund the initial tooling costs related to a long-term contract
award. The Company used the proceeds from the Sovereign Term Facility to repay the borrowings under the Sovereign Revolving Facility and to pay for additional tooling related to the long-term contract. The Sovereign Term Facility bears interest at LIBOR (0.32% at June 30, 2009) plus 2.5% and is secured by all of the assets of the Company.
Concurrent with entering into the Sovereign Term Facility, Sovereign Bank amended the terms of the Sovereign Revolving Facility extending the term until August 2010 and amending the covenants, as defined, commencing in the fourth quarter of 2008.
The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility.
Additionally, the Company and Sovereign Bank entered into a five year interest rate swap agreement, in the notional amount of $3,000,000. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount at 5.8% and receives an amount from Sovereign representing interest on the notional
amount at a rate equal to the one-month LIBOR. The effect of this interest rate swap will be the Company paying a fixed interest rate of 5.8% over the term of the Sovereign Term Facility.
CPI AEROSTRUCTURES, INC .
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The maturities of the Sovereign Term Facility are as follows:
|
Six months ending December 31, |
|
|
2009 |
$300,000 |
|
Year ending December 31, |
|
|
2010 |
600,000 |
|
2011 |
600,000 |
|
2012 |
600,000 |
|
2013 |
550,000 |
| |
$2,650,000 |
Also included in long-term debt are capital leases of $68,440 at June 30, 2009, net of a current portion of $36,524.
8. MAJOR CUSTOMER
During the six months ended June 30, 2009 and 2008, 29% and 47%, respectively, of revenue was directly to the U.S. government. In addition, during the six months ended June 30, 2009, the Company’s three largest commercial customers accounted for 31%, 17% and 13% of revenue, respectively. During
the six months ended June 30, 2008, the Company’s two largest commercial customers accounted for 25% and 15% of revenue, respectively.
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9. |
RECENT ACCOUNTING PRONOUNCEMENTS |
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). This statement requires enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on an entity’s financial
position, financial performance and cash flows. The Company adopted SFAS 161 on January 1, 2009.
In June 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events
and whether the date corresponds with the release of their financial statements. SFAS 165 is effective for all interim and annual periods ending after June 15, 2009. We adopted SFAS 165 upon its issuance and it had no material impact on our financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”). The FASB
Accounting Standards Codification (the “Codification”) will become the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”). The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Codification is not intended to change or alter existing U.S. GAAP.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMNTS (UNAUDITED)
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date and through August 14, 2009, the financial statements issuance date, for appropriate accounting and disclosures.
On July 7, 2009, the Company and Sovereign Bank amended the terms of the Sovereign Revolving Facility, increasing the existing revolving credit facility under the Credit Agreement from an aggregate of $2,500,000 to an aggregate of $3,500,000 and extending the term of the revolving credit facility from August 2010 to August 2011. In addition,
the interest rate of borrowings under the revolving credit facility was amended to (i) the greater of 4.0% or 3.5% in excess of the LIBOR rate or (ii) the greater of 4.0% or 0.75% in excess of Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement. The Credit Agreement was further amended to increase the commitment fee from 0.25% to 0.50% per annum on the average daily unused portion of the revolving credit commitment commencing September 30,
2009, and to permit the Company’s sale of a certain single customer accounts receivable.
CPI AEROSTRUCTURES, INC.
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, 2008 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.
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 for other defense prime contractors. Our strategy for growth has focused on government and military sales as a prime contractor and increasingly
as a subcontractor for leading aerospace prime contractors.
Due to our success as a subcontractor to defense prime contractors and growth in the commercial sector, we are also pursuing opportunities to increase our commercial subcontracting business.
Marketing and New Business
During the six months ended June 30, 2009, we received approximately $4.9 million of new contract awards, which included approximately $2.7 million of government prime contract awards, approximately $2.1 million of government subcontract awards and approximately $0.1 million of commercial subcontract awards, compared to a total of $17.0
million of new contract awards, of all types, in the same period last year, a 71% decrease. This decrease is the result of weak national economic conditions, which are affecting buying decisions throughout the military and commercial markets.
We still have approximately $390 million in formalized bids outstanding as of June 30, 2009 and continue to make bids on contracts on a weekly basis. As mentioned previously, we have increased our marketing efforts for both government and commercial subcontracting opportunities. While we cannot predict the probability of obtaining or the
timing of awards, some of these outstanding proposals are significant in amount.
CPI AEROSTRUCTURES, INC.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The lengths of our contracts vary but are typically between nine months and two years for U.S. government contracts (although our T-38 contract and our C-5 TOP contract are for periods of ten years and seven years, respectively), and up to ten years for commercial contracts. Except in cases where contract terms permit us to bill
on a progress basis, we must incur upfront costs in producing assemblies and bill our customers upon delivery. Because of the upfront costs incurred, the timing of our billings and the nature of the percentage-of-completion method of accounting described below, there can be a significant disparity between the periods in which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash is received.
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 to fund our work in process or to pay taxes until the reported earnings materialize as actual cash receipts.
We account for compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.”
CPI AEROSTRUCTURES, INC.
Item2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenue
Revenue for the three months ended June 30, 2009 was $11,437,691 compared to $9,128,406 for the same period last year, representing an increase of $2,309,285 or 25%. For the six months ended June 30, 2009 revenue was $21,128,926 compared to $16,919,160 for the same period last year, representing an increase of $4,209,766 or 25%. The
increase in revenue is primarily the result of work performed for Spirit Aerosystems on the Gulfstream G650 executive jet.
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 six months ended June 30, 2009 was $6,112,432 compared to $7,960,790 for the six months ended June 30, 2008, a decrease of $1,848,358 or
23%. Revenue generated from government subcontracts for the six months ended June 30, 2009 was $6,520,811 compared to $6,779,302 for the six months ended June 30, 2008, a decrease of $258,491 or 4%. Revenue generated from commercial contracts was $8,495,683 for the six months ended June 30, 2009 compared to $2,179,068 for the six months ended June 30, 2008, an increase of $6,316,615 or 290%.
Gross Profit
Gross profit for the three months ended June 30, 2009 was $2,832,255 compared to $2,001,088 for the three months ended June 30, 2008, an increase of $831,167. As a percentage of revenue, gross profit for the three months ended June 30, 2009 was 24.8% compared to 21.9% for the same period last year. Gross profit for the six months ended June
30, 2009 was $4,895,151 compared to $3,853,687 for the six months ended June 30, 2008, an increase of $1,041,464. As a percentage of revenue, gross profit for the six months ended June 30, 2009 was 23.2% compared to 22.8% for the same period last year. Gross profit percentage was within our expected range of 23%-25%.
We expect gross margin percentage to continue to be in the range of 23%-25% in the second half of 2009.
CPI AEROSTRUCTURES, INC.
Item2 – 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 June 30, 2009 were $1,442,766 compared to $1,448,276 for the three months ended June 30, 2008, a decrease of $5,510, or 0.38%. For the six months ended June 30, 2009, selling, general and administrative expenses were $2,678,741 compared to $2,663,911 for
the same period last year, an increase of $14,830, or 0.56%. The increase is primarily due a $373,000 increase in salaries, the result of changing the classification of certain employees from factory overhead in 2008 to selling, general and administrative expenses in 2009, and an $84,000 increase in interest expense partially offset by a $123,000 decrease in public relation fees, a $102,000 decrease in accounting and legal fees, and a $170,000 decrease in accrued bonus.
Income Before Provision for Income Taxes
Income before provision for income taxes for the three months ended June 30, 2009 was $1,389,489 compared to $552,812 for the same period last year, an increase of $836,677. For the six months ended June 30, 2009, income before provision for income taxes was $2,216,410 compared to $1,189,776 for the same period last year, an
increase of $1,026,634.
Provision for Income Taxes
Provision for income taxes was $767,000 for the six months ended June 30, 2009, or 35% of pre-tax income. For the three months ended June 30, 2009, the provision for income taxes was $486,000, or 35% of pre-tax income. Provision for income taxes was $400,000 for the six months ended June 30, 2008, or 34% of pre-tax
income. For the three months ended June 30, 2008, the provision for income taxes was $183,000, or 33% of pre-tax income.
CPI AEROSTRUCTURES, INC.
Item2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Net income for the three months ended June 30, 2009 was $903,489, or $0.15 per basic share, compared to net income of $369,812, or $0.06 per basic share, for the same period last year. For the six months ended June 30, 2009, net income was $1,449,410, or $0.24 per basic share, compared to net income of $789,776, or $0.13 per
basic share, for the same period last year. Diluted income per share for the three months ended June 30, 2009 was $0.14, calculated utilizing 6,250,021 average shares outstanding. Diluted income per share for the six months ended June 30, 2009 was $0.23, calculated utilizing 6,183,881 average shares outstanding. Diluted income per share for the three months ended June 30, 2008 was $0.06, calculated utilizing 6,246,953 average shares outstanding. Diluted income per share for the
six months ended June 30, 2008 was $0.13, calculated utilizing 6,211,406 average shares outstanding.
Liquidity and Capital Resources
General
At June 30, 2009, we had working capital of $36,709,564 compared to $35,135,395 at December 31, 2008, an increase of $1,574,169, or 4.5%.
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 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 until the reported earnings materialize into actual cash receipts.
At June 30, 2009, we had a cash balance of $454,282 compared to $424,082 at December 31, 2008. Our costs and estimated earnings in excess of billings increased by approximately $6,610,155 during the six months ended June 30, 2009. The increase in costs and estimated earnings in excess of billings on uncompleted contracts
and accounts payable was primarily due to higher levels of procurement and production related to work on new contract awards and advances made to expedite delivery of tooling required for our new long-term contracts with Spirit and Northrop-Grumman.
CPI AEROSTRUCTURES, INC.
Item2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Credit Facilities
Line of Credit
In August 2008, we entered into a two-year, $2,500,000 revolving credit facility with Sovereign Bank (the “Sovereign Revolving Facility”), secured by all of our assets. The Sovereign Revolving Facility specifies an interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank’s prime rate. The effective
rate as of June 30, 2009 was 2.82%. The Sovereign Revolving Facility contains financial covenants related to interest coverage, net income and capital expenditures, as defined in the credit agreement. As of June 30, 2009, we were in compliance with all of the financial covenants contained in the credit agreement. As of June 30, 2009, we had $2,400,000 outstanding under the Sovereign Revolving Facility.
On July 7, 2009, the Company and Sovereign Bank amended the terms of the Sovereign Revolving Facility, increasing the existing revolving credit facility under the Credit Agreement from an aggregate of $2,500,000 to an aggregate of $3,500,000 and extending the term of the revolving credit facility from August 2010 to August 2011. In addition,
the interest rate of borrowings under the revolving credit facility was amended to (i) the greater of 4.0% or 3.5% in excess of the LIBOR Rate or (ii) the greater of 4.0% or 0.75% in excess of Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement. The Credit Agreement was further amended to increase the commitment fee from 0.25% to 0.50% per annum on the average daily unused portion of the revolving credit commitment commencing September 30,
2009, and to permit the Company’s sale of certain accounts receivable.
Term Loan
On October 22, 2008, we obtained a $3,000,000 term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Facility”). Prior to entering into the term loan we had borrowed $2,500,000 under the Sovereign Revolving Facility to fund the initial tooling costs related to the previously mentioned long-term
contract with Spirit. We used the proceeds from the Sovereign Term Facility to repay the borrowings under the Sovereign Revolving Facility and to pay for additional tooling related to the Spirit contract. The Sovereign Term Facility bears interest at LIBOR plus 2.5% and is secured by all of our assets.
Concurrent with entering into the Sovereign Term Facility, Sovereign Bank amended the terms of the Sovereign Revolving Facility extending the term until August 2011 and amending the covenants, as defined, commencing in the fourth quarter of 2009.
The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility.
Additionally, the Company and Sovereign Bank entered into a five year interest rate swap agreement, in the notional amount of $3,000,000. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount of 5.8% and receives an amount from Sovereign representing interest on
the notional amount at a rate equal to the one-month LIBOR plus 2.5%. The effect of this interest rate swap will be the Company paying a fixed interest rate of 5.8% over the term of the Sovereign Term Facility.
CPI AEROSTRUCTURES, INC.
Item 3 – Quantitive and Qualitative Disclosure About Market Risk
Not Applicable
Item 4T – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management has established disclosure controls and procedures designed to ensure that information it is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods
specified in the Securities and Exchange Commission rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information the Company is required to disclose in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure.
Based on an evaluation of the Company’s disclosure controls and procedures as of June 30, 2009 made by management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective as of June 30, 2009.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended June 30, 2009 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
CPI AEROSTRUCTURES, INC.
Part II: Other Information
Item 1 – Legal Proceedings
None.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on June 11, 2009. At the meeting, the directors nominated for election, Walter Paulick and Eric Rosenfeld, were reelected for three-year terms expiring in 2012, Mr. Paulick was reelected with 5,394,547 shares voted in favor of his election and 334,440 shares for which authority was withheld. Mr.
Rosenfeld was reelected with 4,629,680 shares voted in favor of his election and 1,099,307 shares for which authority was withheld. The term of office of Edward J. Fred will expire at the Annual Meeting of Shareholders to be held in 2010. The terms of office of Kenneth McSweeney and Harvey Bazaar will expire at the Annual Meeting of Shareholders to be held in 2011.
Additionally, we approved the adoption of the CPI Aerostructures, Inc. Performance Equity Plan 2009. The plan reserves 500,000 shares of our common stock for issuance in accordance with the plan’s terms. At the meeting 3,293,123 shares voted in favor of approving the plan, 766,651 shares voted against approving
the plan, 105,057 abstained and 1,546,156 shares represented broker non-votes.
Item 5 – Other Information
None.
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Exhibit 31.1 |
Section 302 Certification by Chief Executive Officer |
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Exhibit 31.2 |
Section 302 Certification by Chief Financial Officer |
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Exhibit 32 |
Section 906 Certification by Chief Executive Officer and Chief Financial Officer |
CPI AEROSTRUCTURES, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CPI AEROSTRUCTURES, INC. |
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Dated: August 14, 2009 |
By: /s/ Edward J Fred |
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Edward J. Fred |
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Chief Executive Officer and President |
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Dated August 14, 2009 |
By: /s/ Vincent Palazzolo |
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Vincent Palazzolo |
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Chief Financial Officer |