Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2017)
  • 10-Q (Aug 9, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Nov 9, 2016)
  • 10-Q (Aug 8, 2016)
  • 10-Q (May 10, 2016)

 
8-K

 
Other

CPI Aerostructures 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

 

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 ended June 30, 2017

 

OR

  

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to __________

 

Commission File Number: 1-11398

 

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)    

 

  91 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 ☒   No ☐

 

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:

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
(Do not check if a smaller reporting company) Emerging growth company ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

As of August 2, 2017 the number of shares of common stock, par value $.001 per share, outstanding was 8,846,818.

 

 

 

 

 

 

INDEX

  

Part I - Financial Information    
Item 1 – Condensed Financial Statements    
     
Condensed Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016   3
     
Condensed Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2017 (Unaudited) and 2016 (Unaudited)   4
     
Condensed Statements of Shareholders’ Equity for the Six Months ended June 30, 2017 (Unaudited) and 2016 (Unaudited)   5
     
Condensed Statements of Cash Flows for the Six Months ended June 30, 2017 (Unaudited) and 2016 (Unaudited)   6
     
Notes to Condensed Financial Statements (Unaudited)   7
     
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
     
Item 3 – Quantitative and Qualitative Disclosures About Market Risk   24
     
Item 4 – Controls and Procedures   24
     
Part II -  Other Information    
     
Item 1 – Legal Proceedings   25
     
Item 1A – Risk Factors   25
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   25
     
Item 3 – Defaults Upon Senior Securities     25
     
Item 4 – Mine Safety Disclosures   25
     
Item 5 – Other Information   25
     
Item 6 – Exhibits   25
     
Signatures   26
     
Exhibits   27

 

 

 

 

Part I - Financial Information

 

Item 1 – Condensed Financial Statements

 

CONDENSED BALANCE SHEETS

 

   June 30,
2017
  December 31,
2016
   (Unaudited)  (Note 1)
ASSETS      
Current Assets:          
Cash  $1,115,297   $1,039,586 
Accounts receivable, net of allowance for doubtful accounts of $0 as of June 30, 2017 and $535,514 as of December 31, 2016    6,340,429    8,514,613 
Costs and estimated earnings in excess of billings on uncompleted contracts   101,692,410    99,578,526 
Prepaid expenses and other current assets   2,495,507    2,155,481 
           
Total current assets   111,643,643    111,288,206 
           
Property and equipment, net   2,081,045    2,298,610 
Deferred income taxes, net   2,797,066    3,952,598 
Other assets   220,392    252,481 
Total Assets  $116,742,146   $117,791,895 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $9,126,997   $14,027,457 
Accrued expenses   1,314,154    1,386,147 
Billings in excess of costs and estimated earnings on uncompleted contracts   922,832    115,337 
Current portion of long-term debt  

1,745,492

    

1,341,924

 
Contract loss   489,598    1,377,171 
Line of credit   24,238,685    22,438,685 
Income tax payable   6,000    6,000 
           
Total current liabilities   37,843,758    40,692,721 
           
Long-term debt, net of current portion   7,963,325    8,860,724 
Other liabilities   613,204    632,744 
           
Total Liabilities   46,420,287    50,186,189 
           
Shareholders’ Equity:          
Common stock - $.001 par value; authorized 50,000,000 shares,          
8,832,649 and 8,739,836 shares, respectively, issued and outstanding   8,833    8,738 
Additional paid-in capital   53,521,860    52,824,950 
Retained earnings   16,795,966    14,781,018 
           
Accumulated other comprehensive loss   (4,800)   (9,000)
           
Total Shareholders’ Equity   70,321,859    67,605,706 
           
Total Liabilities and Shareholders’ Equity  $116,742,146   $117,791,895 

  

See Notes to Condensed Financial Statements

  

3 

 

  

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)

             
   For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
   2017  2016  2017  2016
   (Unaudited)  (Unaudited)
       
Revenue  $16,731,951   $22,280,964   $36,764,652   $34,950,997 
Cost of sales   13,048,203    17,246,963    28,543,390    41,556,100 
                     
Gross profit (loss)   3,683,748    5,034,001    8,221,262    (6,605,103)
Selling, general and administrative expenses   2,002,198    1,868,787    4,166,076    4,589,170 
Income (loss) from operations   1,681,550    3,165,214    4,055,186    (11,194,273)
Interest expense   465,903    323,634    856,238    599,367 
Income (loss) before provision for (benefit from) income taxes   1,215,647    2,841,580    3,198,948    (11,793,640)
                     
Provision for (benefit from) income taxes   450,000    1,051,000    1,184,000    (4,364,000)
                     
Net income (loss)   765,647    1,790,580    2,014,948    (7,429,640)
                     

Other comprehensive income (loss) net of tax - Change in unrealized gain (loss) interest rate swap 

   (1,000)   (73,936)   4,200    (70,483)
                     
Comprehensive income (loss)  $764,647   $1,716,644   $2,019,148   $(7,500,123)
                     
Income (loss) per common share – basic  $0.09   $0.21   $0.23   $(0.86)
                     
Income (loss) per common share – diluted  $0.09   $0.21   $0.23   $(0.86)
                     
Shares used in computing income (loss)  per common share:                    
Basic   8,832,478    8,610,453    8,806,942    8,603,495 
Diluted   8,865,055    8,637,393    8,840,309    8,603,495 

 

See Notes to Condensed Financial Statements

 

4 

 

 

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)

 

   Common
Stock
Shares
   Amount   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Total
Shareholders’
Equity
 
                         
Balance at January 1, 2016   8,583,511   $8,584   $52,137,384   $18,389,594   $(3,453)  $70,532,109 
Net loss               (7,429,640)       (7,429,640)
Loss on settlement of interest rate swap and reclassification into earnings                   3,453    3,453 
Change in unrealized loss from interest rate swap                   (73,936)   (73,936)
Stock-based compensation expense   26,942    25    415,025            415,050 
                               
Balance at June 30, 2016   8,610,453   $8,609   $52,552,409   $10,959,954   ($73,936)  $63,447,036 
                               
Balance at January 1, 2017   8,739,836   $8,738   $52,824,950   $14,781,018   ($9,000)  $67,605,706 
Net income               2,014,948        2,014,948 
Change in unrealized loss from interest rate swap                   4,200    4,200 
Stock-based compensation expense   92,813    95    696,910            697,005 
Balance at June 30, 2017   8,832,649   $8,833   $53,521,860   $16,795,966   ($4,800)  $70,321,859 

 

See Notes to Condensed Financial Statements

 

5

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

 

For the Six Months Ended June 30,     2017     2016  
Cash flows from operating activities:              
Net income (loss)   $ 2,014,948   $ (7,429,640 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:              
Depreciation and amortization     302,032     388,311  
Debt issue costs     42,786      
Deferred rent     (15,340 )   3,432  
Loss on disposal of fixed asset     21,010      
Stock-based compensation     697,005     415,050  
Bad debt expense         395,749  
Deferred income taxes     1,155,532     (4,364,000 )
Changes in operating assets and liabilities:              
(Increase) decrease in accounts receivable     2,174,184     (2,441,150 )
(Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts     (2,113,884 )   8,632,365  
Increase in prepaid expenses and other assets     (340,026 )   (293,549 )
Decrease in accounts payable and accrued expenses     (4,972,453 )   (5,653,060 )
Increase in billings in excess of costs and estimated earnings on uncompleted contracts     807,495     202,739  
Increase (decrease) in accrued losses on uncompleted contracts     (887,573 )   2,990,337  
Decrease in income taxes payable         (173,673 )
               
Net cash used in operating activities     (1,114,284 )   (7,327,089 )
               
Cash flows used in investing activities:              
Purchase of property and equipment     (147,957 )   (93,753 )
Proceeds from sale of fixed asset     42,480      
               
Net cash used in investing activities     (105,477 )   (93,753 )
               
Cash flows from financing activities:              
Payments on long-term debt     (504,528 )   (1,352,204 )
Proceeds from long-term debt         10,000,000  
Proceeds from line of credit     3,000,000     28,238,685  
Payments on line of credit     (1,200,000 )   (29,500,000 )
Debt issue costs paid         (153,856 )
               
Net cash provided by financing activities     1,295,472     7,232,625  
               
Net increase (decrease) in cash     75,711     (188,217 )
Cash at beginning of period     1,039,586     1,002,023  
               
Cash at end of period   $ 1,115,297   $ 813,806  
               
Supplemental disclosures of cash flow information:              
Noncash investing and financing activities:              
               
Equipment acquired under capital lease       $ 232,575  
               
Cash paid during the period for:              
 Interest   $ 795,151   $ 411,883  
 Income taxes   $ 28,468   $ 201,932  

 

See Notes to Condensed Financial Statements

 

6

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

1.       INTERIM FINANCIAL STATEMENTS

 

The condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected. Such adjustments are of a normal, recurring nature.

 

The condensed balance sheet at December 31, 2016 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, 2016. The results of operations for interim periods are not necessarily indicative of the operating results to be expected for the full year or any other interim period.

 

The Company maintains its cash in two financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed these limits. As of June 30, 2017, the Company had $1,147,448 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

 

The Company predominantly recognizes revenue from 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 during any reporting period. The Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

 

7

 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

 

During the three months ended March 31, 2016 the Company had information that the United States Air Force (“USAF”) was intending to increase the number of ship sets on order for the A-10. An increase in the number of ship sets on order would improve the Company’s estimated gross margin on the overall program.

 

In April 2016, the Company became aware that the USAF had reevaluated its position and, as such, had deferred any decision regarding increasing the orders on the A-10 program. These changes in position by the USAF were supported by communications from Boeing, the Company’s customer.

 

Based on the above facts, the Company believed that it was not probable that there would be any future orders on the A-10 beyond the 173 currently on order. As a result of the information that management became aware of in April 2016, for the quarter ended March 31, 2016, the Company estimated that the A-10 program would run through the conclusion of its current purchase order with Boeing at ship set number 173. The change in estimate resulted in a reduction of revenue of approximately $8.9 million and an increase in cost of sales of approximately $4.6 million, for an aggregate charge of approximately $13.5 million.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The fundamental principles of the guidance are that entities should recognize revenue in a manner that reflects the timing of transfer of goods and services to customers and the amount of revenue recognized reflects the consideration that an entity expects to receive for the goods and services provided. Entities have the option of using either a full retrospective or modified retrospective approach, with the new standard required to be adopted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Our project implementation team, with the assistance of a third-party consultant, has been evaluating the impact of the new guidance on our financial statements. Based on our preliminary assessment, we believe that the new standard will have an impact primarily on the recognition of revenue related to distinct deliverables, as defined in the standard, within a long term multi-deliverable contract. We continue to review potential required disclosures and our method of adoption. In addition, we continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact our current conclusions. The Company will adopt the new standard on its effective date.

 

In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect on its financial statements.

 

8

 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

2.       stock-based compensation

 

The Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant.

 

In January 2017, the Company granted 59,395 restricted stock units (“RSUs) to its board of directors as partial compensation for the 2017 year. On January 1, 2016, the Company granted 53,882 RSUs to its board of directors as partial compensation for the 2016 year. RSUs vest quarterly on a straight-line basis over a one-year period. The Company’s net income (loss) for the six months ended June 30, 2017 and 2016 includes approximately $440,000 and $415,000, respectively, of non-cash compensation expense related to the RSU grants to the board of directors. This expense is recorded as a component of selling, general and administrative expenses. In addition, the Company granted 5,550 shares of common stock to various employees. For the six months ended June 30, 2017, approximately $13,300 of compensation expense is included in selling, general and administrative expenses and approximately $37,500 of compensation expense is included in cost of sales for this grant.

 

In August 2016 and March 2017, the Company granted 98,645 and 73,060 shares of common stock, respectively, to various employees. In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criterion are not achieved, portions of these shares may be forfeited. These shares will be expensed during various periods through March 2021 based upon the service and performance thresholds. For the six months ended June 30, 2017, approximately $197,400 of compensation expense is included in selling, general and administrative expenses and approximately $41,600 of compensation expense is included in cost of sales for this grant. In March 2017, 12,330 of the shares granted in August of 2016 were forfeited because the Company failed to achieve certain performance criterion for the year ended December 31, 2016. In addition, on March 9, 2017, these employees returned 4,525 common shares, valued at approximately $33,000, to pay the employees’ withholding taxes.

 

A summary of the status of the Company’s stock option plans as of June 30, 2017 and changes during the six months ended June 30, 2017 is as follows:

 

   Options   Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term (in years)
   Aggregate
intrinsic value
 
Outstanding at beginning of period   149,466   $10.43           
                     
Outstanding and vested at end of period   149,466   $10.43    1.08   $130,500 

 

During the six months ended June 30, 2017 and June 30, 2016, no stock options were granted or exercised.

 

9

 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(UNAUDITED)

 

3.       Derivative Instruments and Fair Value

 

Our use of derivative instruments has been to hedge interest rates. These derivative contracts are entered into with a financial institution. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.

 

We record these derivative financial instruments on the condensed balance sheets at fair value. 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.

 

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.

 

In March 2012, the Company entered into interest rate swaps 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 these interest rate swap contracts as cash flow hedges. 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 March 31, 2016. The interest rate swap contract was terminated as of March 24, 2016. The Company paid approximately $4,000 at termination to settle the swap contract.

 

In May 2016, the Company entered into a new interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract 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. As of June 30, 2017 and December 31, 2016, we had a net deferred loss associated with the interest rate swap of approximately $6,600, which was included in other liabilities.

 

Fair Value

 

At June 30, 2017 and December 31, 2016, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.

 

   June 30, 2017 
   Carrying Amount   Fair Value 
Debt        
Short-term borrowings and long-term debt  $33,984,940   $33,984,940 

 

   December 31, 2016 
   Carrying Amount   Fair Value 
Debt        
Short-term borrowings and long-term debt  $32,689,467   $32,689,467 

 

We estimated the fair value of debt using market quotes and calculations based on market rates.

 

10

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

The following table presents the fair values of those financial liabilities measured on a recurring basis as of June 30, 2017 and December 31, 2016:

 

       Fair Value Measurements June 30, 2017 
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  $6,581       $ 6,581      
Total  $6,581       $ 6,581      

 

       Fair Value Measurements December 31, 2016 
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  $13,685       $13,685     
Total  $13,685       $13,685     

 

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 of the interest differential between the contractual swap and the replacement swap.

 

11 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Costs and estimated earnings in excess of billings on uncompleted contracts consist of:

 

   June 30, 2017 
   U.S         
   Government   Commercial   Total 
             
Costs incurred on uncompleted contracts  $357,970,228   $165,341,508   $523,311,736 
Estimated earnings   40,585,938    61,086,808    101,672,746 
Sub-total   398,556,166    226,428,316    624,984,482 
Less billings to date   349,494,171    174,720,733    524,214,904 
                
Costs and estimated earnings in excess of billings on uncompleted contracts  $49,061,995   $51,707,583   $100,769,578 

 

   December 31, 2016 
   U.S.         
   Government   Commercial   Total 
Costs incurred on uncompleted contracts  $341,003,461   $153,898,425   $494,901,886 
Estimated earnings   39,638,231    58,346,518    97,984,749 
Sub-total   380,641,692    212,244,943    592,886,635 
Less billings to date   331,277,942    162,145,504    493,423,446 
                
Costs and estimated earnings in excess of billings on uncompleted contracts  $49,363,750   $50,099,439   $99,463,189 

 

The above amounts are included in the accompanying condensed balance sheets under the following captions at June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Costs and estimated earnings in excess of billings on uncompleted contracts  $101,692,410   $99,578,526 
Billings in excess of costs and estimated earnings on uncompleted contracts   (922,832)   (115,337)
           
Totals  $100,769,578   $99,463,189 

 

U.S. Government Contracts include contracts directly with the U.S. Government and Government subcontracts.

 

12 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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, 2017, the effect of such revisions in total estimated contract profits resulted in a decrease to the total gross profit to be earned on the contracts of approximately $1,627,000 from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in prior years, excluding the effect of the A-10 contract. During the six months ended June 30, 2016, the effect of such revisions was a decrease to total gross profit of approximately $1,171,000.

 

Although management believes it has established adequate procedures for estimating costs to uncompleted open contracts, it is possible that additional significant costs could occur on contracts prior to completion.

 

5.income (Loss) PER COMMON SHARE

 

Basic income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per common share for the three and six month periods ended June 30, 2017 and 2016 is computed using the weighted-average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental shares of 63,336 were used in the calculation of diluted income per common share in the three and six months ended June 30, 2017. Incremental shares of 114,466 were not used in the calculation of diluted income per common share in the three and six month period ended June 30, 2017, 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 26,940 were used in the calculation of diluted income per common share in the three months ended June 30, 2016. Incremental shares of 214,983 were not used in the calculation of diluted income per common share in the three month period ended June 30, 2016, 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. No incremental shares were used in the calculation of diluted income per common share in the six month period ended June 30, 2016, as the effect of incremental shares would be anti-dilutive because the Company recognized a net loss.

 

6.Line of credit

 

On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement (“Restated Agreement”) with Sovereign Bank, now called Santander Bank, N.A. (“Santander”), as the sole arranger, administrative agent and collateral agent, and Valley National Bank. The Restated Agreement provided for a revolving credit loan (“Revolving Facility”) commitment of $35 million and was terminated in March 2016.

 

On March 24, 2016, the Company entered into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral agent and Citzens Bank N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The proceeds of the BankUnited Facility were used to pay off all amounts outstanding under the Santander Term Facility and the Revolving Facility. The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the agreement.

 

On May 9, 2016, the Company entered into an amendment (the “Amendment”) to the BankUnited Facility. The Amendment changed the definition of EBITDA for the Leverage Coverage Ratio Covenant for the remainder of 2016 and changed the maximum leverage ratio from 3 to 1 to 3.5 to 1 for the quarters ending June 30, 2016 and September 30, 2016. Also, the Amendment increased the interest rate on the BankUnited Facility by 50 basis points and requires the repayment of a portion of the Term Loan if and to the extent that the Company receives any contract reimbursement payments from its current Request for Equitable Adjustment with Boeing on the A-10 program.

 

As of June 30, 2017, the Company was in compliance with all of the financial covenants contained in the BankUnited Facility, as amended.

 

As of June 30, 2017, the Company had $24.2 million outstanding under the Revolving Loan bearing interest at 4.75%.

 

The BankUnited Facility is secured by all of the Company’s assets.

 

13 

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

7.       LONG-TERM DEBT

 

On March 9, 2012, the Company obtained a $4.5 million term loan from Santander to be amortized over five years (the “Santander Term Facility”). The Santander Term Facility was used to purchase tooling and equipment for new programs.

 

Additionally, the Company and Santander 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 paid an amount to Santander Bank representing interest on the notional amount at a fixed rate of 4.11% and received an amount from Santander Bank representing interest on the notional amount of a rate equal to the one-month LIBOR plus 3%. The effect of this interest rate swap was the Company paying a fixed interest rate of 4.11% over the term of the Santander Term Facility.

 

The Santander interest swap agreement was terminated and the Santander Term Facility was paid off on March 24, 2016 using the proceeds of the BankUnited Facility (See Note 6).

 

In May 2016, the Company entered into a new interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date and currency of this contract match those of the underlying debt. The Company has designated this interest rate swap contract as a cash flow hedge.

 

The Company paid approximately $254,000 of debt issuance costs in connection with the BankUnited Facility of which approximately $112,000 is included in long-term assets and $37,000 is a reduction of long-term debt.

 

The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on March 31, 2019.

 

The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:

 

Twelve months ending June 30,     
 2018   $1,745,492 
 2019    7,814,743 
 2020    136,454 
 2021    48,503 
 Thereafter    1,062 
     $9,746,254 

 

In addition to the Term Loan, included in long-term debt are capital leases and notes payable of $496,254, including a current portion of $162,159.

 

8.       MAJOR CUSTOMERS

 

During the six months ended June 30, 2017, the Company’s three largest commercial customers accounted for 32%, 24% and 11% of revenue, respectively. During the six months ended June 30, 2016, the Company’s three largest commercial customers accounted for 39%, 30% and 14% of revenue, respectively. In addition, during the six months ended June 30, 2017, 6.3% of revenue was directly from the U.S. Government.

 

At June 30, 2017, 33%, 25%, 11% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from the Company’s four largest commercial customers. At December 31, 2016, 33%, 26%, 12% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from the Company’s four largest commercial customers.

 

14 

 

 

At both June 30, 2017 and December 31, 2016, 1.% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts was directly from the U.S. Government.

 

At June 30, 2017, 21%, 19%, 17%, 15% and 11% of our accounts receivable were from our five largest commercial customers. At December 31, 2016, 35%, 24% and 17% of accounts receivable were from our three largest commercial customers.

 

15 

 

 

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, 2016 and 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 a manufacturer of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. Within the global aerostructure supply chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufactures. We also are a prime contractor to the U.S. Department of Defense, primarily the Air Force. In conjunction with our assembly operations, we provide engineering, program management, supply chain management, and Maintenance Repair & Overhaul (“MRO”) services.

 

16 

 

 

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 June 30, 2017 and December 31, 2016 was as follows:

 

Backlog
(Total)
  June 30,
2017
   December 31, 2016 
Funded  $90,545,000   $94,540,000 
Unfunded   304,280,000    321,744,000 
Total  $394,825,000   $416,284,000 

 

Approximately 80% of the total amount of our backlog at June 30, 2017 was attributable to government contracts. Our backlog attributable to government contracts at June 30, 2017 and December 31, 2016 was as follows:

 

Backlog
(Government)
  June 30,
2017
   December 31, 2016 
Funded  $88,974,000   $92,189,000 
Unfunded   225,353,000    229,543,000 
Total  $314,327,000   $321,732,000 

 

Our backlog attributable to commercial contracts at June 30, 2017 and December 31, 2016 was as follows:

 

Backlog
(Commercial)
  June 30,
2017
   December 31, 2016 
Funded  $1,571,000   $2,351,000 
Unfunded   78,927,000    92,201,000 
Total  $80,498,000   $94,552,000 

 

Our unfunded backlog is primarily comprised of the long-term contracts for the G650, E-2D, F-16, T-38, F-35, HondaJet Light Business Jet, Bell AH-1Z, Cessna Citation X+, Sikorsky S-92 and Embraer Phenom 300. These long-term contracts are expected to have yearly orders, which will be funded in the future.

 

The low level of funded backlog on commercial programs is the result of customers placing funded orders based upon expected lead time. These programs are under long-term agreements with our customers, and as such, we are protected by termination liability provisions.

 

17 

 

  

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

Critical Accounting Policies

 

Revenue Recognition

 

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

 

When adjustments are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

 

18
 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

  

Revenue

 

Revenue for the three months ended June 30, 2017 was $16,731,951 compared to $22,280,964 for the same period last year, a decrease of $5,549,013 or 24.9%. This decrease is predominantly the result of a normal cyclical decrease in revenue on the Company’s E-2D program.

 

Revenue for the six months ended June 30, 2017 was $36,764,652 compared to $34,950,997 for the same period last year, an increase of $1,813,655 or 5.2%.

 

During the three months ended March 31, 2016, the Company had information that the United States Air Force (“USAF”) was intending to increase the number of ship sets on order for the A-10. An increase in the number of ship sets on order would improve the Company’s estimated gross margin on the overall program.

 

In April 2016, the Company became aware that the USAF had reevaluated its position and, as such, had deferred any decision regarding increasing the orders on the A-10 program. These changes in position by the USAF were supported by communications from Boeing, the Company’s customer.

 

Based on the above facts, the Company believed that it was not probable that there would be any future orders on the A-10 beyond the 173 currently on order. As a result of the information that management became aware of in April 2016, for the quarter ended March 31, 2016, the Company estimated that the A-10 program would run through the conclusion of its current purchase order with Boeing at ship set number 173. The change in estimate resulted in a reduction of revenue of approximately $8.9 million in the quarter ended March 31, 2016.

 

In addition to the change in estimate adjustment to revenue in the quarter ended March 31, 2016, which caused military revenue to be unusually low in that year, military revenue in 2017 increased by approximately $8.0 million.

 

Revenue from commercial subcontracts was $14,106,590 for the six months ended June 30, 2017 compared to $20,524,578 for the six months ended June 30, 2016, a decrease of $6,417,988 or 31.3%. The decrease in revenue is the result of an approximate $3.3 million decrease in revenue on our Embraer Phenom 300 program, as production rates have declined and a $1.8 million decrease in revenue on our G650 program.

 

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

 

Cost of sales

 

Cost of sales for the three months ended June 30, 2017 and 2016 was $13,048,203 and $17,246,963, respectively, a decrease of $4,198,760 or 24.3%, This decrease is the result of the comparable decline in revenue.

 

Cost of sales for the six months ended June 30, 2017 and 2016 was $28,543,390 and $41,556,100, respectively, a decrease of $13,012,710 or 31.3%. The provision for contract losses, as well as lower rate production on our E-2D, Phenom 300 and Embraer programs, all described above have resulted in lower cost of sales.

 

19
 

 

The components of the cost of sales were as follows:

 

   Three months ended   Six months ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
                 
Procurement  $8,064,051   $12,930,373   $17,904,113   $26,232,905 
Labor   1,712,025    2,035,949    3,586,568    4,330,410 
Factory overhead   3,534,619    3,806,964    7,787,706    7,988,341 
Other contract costs (credits)   (262,492)   (1,526,323)   (734,997)   3,004,444 
                     
Cost of Sales  $13,048,203   $17,246,963   $28,543,390   $41,556,100 
                     

 

Other contract costs (credit) for the six months ended June 30, 2017 was ($734,997) compared to $3,004,444, a decrease of $3,739,441. Other contract costs (credit) for the three months ended June 30, 2017 was ($262,492) compared to ($1,526,323), an decrease of $1,263,831 or 82.8%. Other contract costs relate to expenses recognized for changes in estimates and expenses predominately associated with loss contracts. Other contract costs are comprised predominantly of charges related to the change in estimate on the A-10 program in 2016. In the six months ended June 30, 2017, other contract costs are a credit, as we have incurred actual expenses on our A-10 program that had been previously recognized as part of the change in estimate charge.

 

Procurement for the six months ended June 30, 2017 was $17,904,113 compared to $26,232,905, a decrease of $8,328,792 or 31.7%. Procurement for the three months ended June 30, 2017 was $8,064,051 compared to $12,930,373, a decrease of $4,866,322 or 37.6%. This decrease is a result of a $3.4 million decrease in procurement on our E-2D program, as we are shipping parts from stock and lowering inventory on this program, as well as an approximately $4.9 million decrease in procurement on the commercial programs described above.

 

Labor costs for the six months ended June 30, 2017 was $3,586,568 compared to $4,330,410, a decrease of $743,842 or 17.2%. The decrease is the result of approximately $224,000 decrease in the commercial programs described above, as well as $519,000 decrease in military programs. Labor costs for the three months ended June 30, 2017 was $1,712,025 compared to $2,035,949, a decrease of $323,924 or 15.9%.

 

Factory overhead for the six months ended June 30, 2017 was $7,787,706 compared to $7,988,341, a decrease of $200,635 or 2.5%. Factory overhead for the three months ended June 30, 2017 was $3,534,619 compared to $3,806,964, a decrease of $272,345 or 7.2%.

 

Gross Profit (Loss)

 

Gross profit (loss) for the six months ended June 30, 2017 was a profit of $8,221,262 compared to a loss of $6,605,103 for the six months ended June 30, 2016, an increase of $14,826,365, predominately the result of the change in estimate on the A-10 program.

 

Gross profit for the three months ended June 30, 2017 was $3,683,748 compared to $5,034,001 for the three months ended June 30, 2016, a decrease of $1,350,253 predominately the result of lower volume, as described above.

 

20 

 

 

Favorable/Unfavorable Adjustments to Gross Profit (Loss)

 

During the six months ended June 30, 2017 and 2016, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in decreases in total gross profit as follows:

 

     Six months ended 
     
     June 30,
2017
   June 30,
2016
 
         
         
Favorable adjustments  $212,000   $187,805 
Unfavorable adjustments   (1,839,000)   (1,359,092)
Net adjustments  $(1,627,000)  $(1,171,287)
           

 

During the six months ended June 30, 2017, we had two contracts which had an approximately $659,000 and $436,000 of unfavorable adjustments caused by changing estimates on a long-term program, that we are working with the customer to agree to contract extensions and expect to have to decrease our selling price. Additionally, we had one contract that had a gap in production, as well as a smaller than expected order quantity. The gap in production and low quantity has resulted in an unfavorable adjustment of approximately $475,000. There were no other material changes favorable or unfavorable during the six months ended June 30, 2017.

 

During the six months ended June 30, 2016 we had one contract which had an approximately $270,000 unfavorable adjustment caused by excess labor and procurement costs due to difficulty in the manufacturing process. In addition, we had an approximate $159,000 unfavorable adjustment on one contract that was canceled by the government. Also, we had four contracts that each had between $139,000 and $188,000 (cumulatively $654,000) of unfavorable adjustments caused by excess labor costs incurred.

 

In addition to the above mentioned unfavorable adjustments, in 2016 we had the unfavorable adjustment of approximately, $12.2 million related to the A-10 program described previously.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2017 were $2,002,198 compared to $1,868,787 for the three months ended June 30, 2016, an increase of $133,411, or 7.1%. This change was predominately the result of a decrease of approximately $86,000 in bank fees offset by an increase of $76,000 in marketing, an increase of $75,000 in accrued bonuses and an increase of $73,000 in salaries.

 

Selling, general and administrative expenses for the six months ended June 30, 2017 were $4,166,076 compared to $4,589,170 for the six months ended June 30, 2016, a decrease of $423,094 or 9.2%. This decrease was predominately the result of an approximately $395,000 decrease in loss on unrealized receivables, an approximately $300,000 decrease in professional fees because of the extended audit CPI had in 2016, offset by an increase in salaries of $173,000 and an increase in accrued bonuses of $150,000.

 

Income (Loss) Before Provision for (Benefit from) Income Taxes

 

Income before provision for income taxes for the three months ended June 30, 2017 was $1,215,647 compared to $2,841,580 for the same period last year, a decrease of $1,625,933. Income before provision for income taxes for the six months ended June 30, 2017 was $3,198,948 compared to loss before benefit from income taxes of $11,793,640 for the same period last year, an increase of $14,992,588, predominately the result of the change in estimate on the A-10 program.

 

Provision for (Benefit from) Income Taxes

 

Provision for income taxes was $450,000 and $1,184,000 for the three and six months ended June 30, 2017, compared to provision for income taxes of $1,051,000 for the three months ended June 30, 2016 and benefit from income taxes of $4,364,000 for the six months ended June 30, 2016. The effective tax rate at June 30, 2017 was 37%. The benefit from income taxes recognized in the six months ending March 31, 2016, resulted in the booking of a deferred tax asset. At December 31, 2016, the Company had net operating loss carryforwards of approximately $14.6 million which will expire in 2031. Our historical tax rates have been below the federal statutory rate because of the effect of permanent differences between book and tax deductions, predominately the R&D tax credit and the domestic production activity deduction.

 

21 

 

 

Net Income (Loss)

 

Net income for the three months ended June 30, 2017 was $765,647 or $0.09 per basic share, compared to $1,790,580 or $0.21 per basic share, for the same period last year. Net income for the six months ended June 30, 2017 was $2,014,948 or $0.23 per basic share, compared to a loss of $7,429,640 or $0.86 per basic share for the same period last year. Diluted income per share was $0.09 for the three months ended June 30, 2017 calculated utilizing 8,865,055 weighted average shares outstanding. Diluted income per share for the six months ended June 30, 2017 was $0.23, calculated utilizing 8,840,309 average shares outstanding as adjusted for the dilutive effect of outstanding stock options and RSUs. Diluted income per share for the three months ended June 30, 2016 was $0.21, calculated utilizing 8,637,393 average shares outstanding as adjusted for the dilutive effect of outstanding stock options and RSUs. Basic and diluted income per share for the six months ended June 30, 2016 were the same as effects of outstanding options would be anti-dilutive.

 

Liquidity and Capital Resources

 

General

 

At June 30, 2017, we had working capital of $73,799,885 compared to $70,595,485 at December 31, 2016, an increase of $3,204,400 or 4.5%.

 

Cash Flow

 

A large portion of our cash flow is used to pay for materials and processing costs associated with contracts that are in process and which do not provide 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 June 30, 2017, we had a cash balance of $1,115,297 compared to $1,039,586 at December 31, 2016.

 

Our costs and estimated earnings in excess of billings increased by $2,113,884 million during the six months ended June 30, 2017.

 

Several of our programs require us 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.

 

We believe that our existing resources, together with the availability under our credit facility, will be sufficient to meet our current working capital needs for at least 12 months from the date of the filing of this Quarterly report on Form 10-Q.

 

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Credit Facilities

 

Credit Agreement and Term Loan

 

On March 24, 2016, the Company entered into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral agent and Citzens Bank, N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The proceeds of the BankUnited Facility were used to pay off all amounts outstanding under the Santander Term Loan and the Revolving Facility. The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the agreement.

 

As of March 31, 2016, the Company was not in compliance with the net profit, Debt Service Coverage, and Leverage Coverage Ratio financial covenants contained in the BankUnited Facility, which non-compliance was waived (the “Wavier”) by the banks. On May 9, 2016 the Company entered into an amendment (the “Amendment”) to the BankUnited Facility which, among other things, provided for the Waiver. In addition, the Amendment changes the definition of EBITDA for the Leverage Coverage Ratio Covenant for the remainder of 2016 and changes the maximum leverage ratio from 3 to 1 to 3.5 to 1 for the quarters ending June 30, 2016 and September 30, 2016. Also, the Amendment increased the interest rate on the BankUnited Facility by 50 basis points and requires the repayment of a portion of the Term Loan if and to the extent that the Company receives any contract reimbursement payments from its current REA with Boeing on the A-10 program. The Company was in compliance with all of the financial covenants contained in the bank agreement as of June 30, 2017.

 

As of June 30, 2017, the Company had $24.2 million outstanding under the Revolving Loan bearing interest at 4.75%.

 

The BankUnited Revolving Facility is secured by all of our assets.

 

The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on March 31, 2019. The maturities of the Term Loan are included in the maturities of long-term debt.

 

On March 9, 2012, the Company obtained a $4.5 million term loan from Santander to be amortized over five years (the “Santander Term Facility”). Santander Term Facility was used to purchase tooling and equipment for new programs.

 

Additionally, the Company and Santander 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 paid an amount to Santander Bank representing interest on the notional amount at a fixed rate of 4.11% and received an amount from Santander Bank representing interest on the notional amount of a rate equal to the one-month LIBOR plus 3%. The effect of this interest rate swap was the Company paying a fixed interest rate of 4.11% over the term of the Santander Term Facility.

 

The Santander interest swap agreement was terminated and the Santander Term Facility paid off on March 24, 2016 using the proceeds of the BankUnited Facility.

 

In May 2016, the Company entered into a new interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt. The Company has designated this interest rate swap contract as a cash flow hedge.

 

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, 2016.

 

23 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.

 

Item 4 – 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, 2017 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, 2017.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2017 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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Part II: Other Information

 

Item 1 – Legal Proceedings

 

None.

 

Item 1A – Risk Factors

 

Material risks related to our business, financial condition and results of operations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 8, 2017. There have been no material changes to such risk factors. The risk factors disclosed in our Annual Report should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

There have been no sales of unregistered equity securities for the six months ended June 30, 2017.

 

Item 3 – Defaults Upon Senior Securities

 

None.

 

Item 4 – Mine Safety Disclosures

 

Not applicable.

 

Item 5 – Other Information

 

None.

 

Item 6 – Exhibits

 

  Exhibit 31.1 Section 302 Certification by Chief Executive Officer and President
  Exhibit 31.2 Section 302 Certification by Chief Financial Officer (Principal Accounting Officer)
  Exhibit 32 Section 906 Certification by Chief Executive Officer and Chief Financial Officer
  Exhibit 101 The following financial information from CPI Aerostructures, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheet, (ii) the Condensed Statements of Operations and Comprehensive Income (Loss), (iii) the Condensed Statement of Shareholder’s Equity, (iv) the Condensed Statements of Cash Flows, and (v) the Notes to the Condensed Financial Statements

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CPI AEROSTRUCTURES, INC.
     
Dated: August 9, 2017 By:   /s/ Douglas J. McCrosson  
    Douglas J. McCrosson
    Chief Executive Officer and President
     
Dated: August 9, 2017 By:  /s/ Vincent Palazzolo  
    Vincent Palazzolo
    Chief Financial Officer (Principal Accounting Officer)

 

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