Q1 2020 CPI Aerostructures Inc Earnings Call
Good day and welcome to the C.P.I. Aerostructures first quarter 2020 earnings conference call all.
All participants will be in listen only mode should do.
You need assistance. Please think only conference specialist by Chris Starkey, followed by zero after.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Mr., Jon Kyl scores I, let say Investor Relations Counsel. Please go ahead.
Thank you Melissa and good morning, everyone. Welcome to <unk> Aerostructures first quarter 2020 earnings call Conference call with me on the call. This morning are Doug Mccrosson, President and Chief Executive Officer, and Tom Powers, acting Chief Financial Officer.
The earnings press release was issued after the market closed yesterday afternoon for today's call a powerpoint presentation to accompany management's prepared remarks is available for download in the Investor Relations section of the company's website at Www Dot C.P. Arrow Dot com at the conclusion of their prepared remarks management will hold the culinary session.
As a result as a reminder, this conference call will retain will contain forward looking statements that are based on current expectations of management and certain assumptions that are subject to risk and uncertainties.
There can be no assurance that such risks and uncertainties will not affect the accuracy of the forward looking statements or that actual results will not differ materially from the results anticipated in the forward looking statements.
Included in these risks are risk related to the restatement of the company's prior period consolidated financial statements and the material weaknesses in the company's internal controls, including the substantial costs and.
And diversion of management attention and resources, which will be required to remediate the material weaknesses any adverse development and existing legal proceedings or the initiation of new legal proceedings, the effect of economic conditions in the industries and markets, where the company operates including financial market conditions the impact of the.
Oh that 19 pandemic, including its impact on global supply demand and distribution capabilities. That's the outbreak continues the country.
The continued the financial condition of the company these customers and suppliers the cyclicality of the aerospace market the level of U.S. government defense spending, including chefs <unk> or <unk>.
Or changes in defense spending due to budgetary constraints.
Spending cuts, resulting from sequestration the allocation of funds to government responses to cope at 19.
Or change in political conditions and uncertain funding the programs the ability of the company, but the reality of the government and the company's other customers to terminate contracts anytime production rates for commercial and military aircraft programs competitive pricing pressures start up cost for new programs technology and product.
Relevant risk and uncertainties product performance and cost, resulting from changes to and compliance with applicable regulatory requirements.
Level of indebtedness and cash flow from operations additional information concerning these and other risk factors can be found in the Companys filings with the Securities and Exchange Commission.
Because the risks assumptions and uncertainties referred to above could cause actual results or outcomes to differ materially from those expressed in any forward looking statements listeners are cautioned not to place undue reliance on any such forward looking statements each of which speaks only as of the date mate.
The company has no obligation to update any forward looking statements to reflect events or circumstances. After the date hereof with that I would like to turn the call over to Douglas Mccrosson, President and Chief Executive Officer, Good morning, Doug.
Good morning, and thank you John Good morning, everyone I hope that you your family's your friends and neighbors are all healthy and well.
Today, we are we are resuming our practice of holding quarterly earnings conference calls after unfortunately prolonged absent as you know.
As you know on February 14th we suspended quarterly earnings reporting when it was determined that we needed to restate fiscal 2018 financials as well as the first three quarters of fiscal 2019 before completing the audit and filing our form 10-K for fiscal 2019.
We are finalizing our second quarter financial report and we will we will release. These results as soon as they are complete we're hopeful that we'll be current with the guys you see reporting requirement with the filing of our third quarter results sometime in late 2020.
I'm going to devote my prepared remarks today to our first quarter performance record defense backlog, our near term priorities and other factors that give us confidence that we will deliver revenue growth and improved profitability in 2020.
Tom will provide you with a detailed review of our financial results for the first quarter and the terms of our new amended credit facility.
And then I will offer some concluding remarks before opening the line to your questions.
Starting on slide four.
I don't want is a summary of our first quarter results.
As I hope to make clear in my prepared remarks. This morning, we believe that these results are not indicative of our expected performance for fiscal year 2020.
The first quarter decline in revenue was largely a matter of timing as we had significant revenue in the first quarter of 2019 for our next generation Jammer mid band pod, we produce for Raytheon technologies.
The engineering and manufacturing development phase of the N. GJ mid band pod program with virtually complete by the end of 2019 and there was little revenue for this program in the first quarter of this year.
<unk> has recently begun to system development in a test phase of the program and we expect that this will be a strong revenue program during the second half of 2020.
Additionally, revenue declined as our commercial programs have had lower demand even prior to the Cove in 19 pandemic that subsequent to the end of the first quarter, resulting in deferred and canceled orders for certain business jet programs.
Unfavorable product mix also negatively affected margins during the quarter created largely by the reduction in the LNG Jay mid band Pod program revenue mentioned above.
We also revised our restaurant for a factory overhead rate for 2020 that had a cumulative catch up effect on program profitability that result in a gross profit of 4% for the quarter.
We expect that margins will trough and one in the first quarter of 20 and that full year 2020 gross margin percentage will be higher than it was in 2019 as our product mix for the remainder of 2020 returns to a more favorable mix between commercial and defense programs.
Despite the reported GAAP net loss our continued focus on working capital management, resulting in an improvement in cash flow from operations of approximately $900000.
Moving to the second bullet on that page since the beginning of the year, we have announced $77.4 million a new firm orders, reflecting our consistently strong performance on high quality multi year defense programs.
On the Etwo D program with Northrop Grumman, we received $48.1 million in new firm orders for when kids and $4 million in firm orders for welded assemblies.
We have received $1.2 million follow on order from Lockheed Martin for F 16 structural assemblies for.
$14 million and new purchase orders under our a 10 re winging contract with Boeing and.
And we received $10.1 million in purchase orders from the U.S. Air Force for T 38 modification kits.
By leveraging our established and long standing relationships with the largest aerospace Oems. We ended the first quarter with a record total backlog of $556.3 million and a record $499 million in defense backlog as.
As a result of strong bookings during the quarter book to Bill for the quarter was 4.7 to one and it's 2.2 to one for the trailing 12 month period.
We ended the quarter with a funded defense backlog of $206.4 million up $69.4 million since December 30, Onest 2019.
The largest programs and is funded backlog or the two d. wing panel kits, we supply the Northrop Grumman Yeah, 10 assemblies, we build for Boeing and our next generation Jammer mid band Pod program, we perform for Raytheon.
Turning to slide five as you can see from the line chart on the right side of the slide we're reaping the rewards of subset full execution of a strategy started around three years ago to concentrate on building our backlog of long term defense programs we have.
We have seen at $165 million spike in our backlog of long term defense contracts over just the past four quarters.
As a result, 90% of our backlog as of March 31st 'cause, It's a multiyear defense contracts.
However, our commercial business has been facing headwinds from the global Cobot, 19, pandemic and from order cancellations and deferred deliveries are.
Our backlog of commercial contracts decreased $7.9 million to $57 million as of March 31st with the funded portion decreasing $6 million to $4.7 million due to reductions in order quantities on the Honda jet Gulfstream programs at.
After the end of the first quarter Triumph group canceled nearly all open orders without increasing the juice, it's 50, leading edge backlog by an additional $3.6 million and.
And May Triumph group announced it had reached an agreement in principle to sell the G 650 wing program the Gulfstream Aerospace we've.
We've begun to receive communications from Gulf stream that are expected to lead to purchase orders for June 650 when components.
However, the company is unable to predict at this time when Gulf stream will be again purchasing using 50 wind components from us if at all or how many.
Most of what remains.
Commercial backlog, our two multi year programs with Embraer.
As of March 31st our funded backlog stood at $211 million of which $206 million were for defense industry customers. The current defense backlog is scheduled to convert to revenue over an approximate 24 month period and is expected to generate in the aggregate positive operating margins.
Cash flow.
Slide six displays the broad array of high value defense platforms, we are supporting <unk>.
On one hand, we have contracts that support legacy aircraft like the a 10 F 16 and T 38.
Other hand, we are working on military programs, but technologically advanced systems like the F. 35 next generation jammer and on the other undisclosed pod and missile platforms that are aligned with defense Department priorities have C.B. I position for growth and margin expansion in 2020 and beyond.
I'll now turn the call over to Tom powers, our acting CFO, who will.
Who will walk you through our financial results for the quarter.
Well the amended credit facility with bank United Huh.
Thank you Doug.
I'll start my remarks on slide eight as a reminder results for the first quarter of 2019, all the restated values as found on form 10, Qs filed with the SEC.
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Revenue for the first quarter of 2020 was 16.9 million compared to 22 million for the same period last year as Doug mentioned, the lower revenue was primarily attributable to the Raytheon next generation jammer.
Yeah, Dan Palmer, wherein we had essentially completed phase one development by the end of 2019.
We have recently transitioned to a new development phase on this program.
In addition revenue for our commercial programs declined 1.2 million, reflecting continued weak demand for business Jets.
Gross profit was zero point $7 million compared to 2.5 million, reflecting in part an unfavorable product mix as a result of lower revenue on the Raytheon pop program.
We also revised and increased our factory overhead rate forecast for 2020 on what contracts to account for the lower absorption of fixed costs, largely resulting from the next generation jammer mid band pod production gap and the anticipated impact of the pandemic on certain commercial programs.
Revision, resulting in a one time cumulative catch up on program profitability I'm old gross profit down to 4% for the quarter.
We expect full year 2020 gross margin percentage will be higher than it was in 2019 as our product mix for the remainder of 2020 returns to a more favorable mix between commercial and defense programs.
<unk> expenses increased 6% to 3.1 million compared to 2.9 million and included approximately $578000 in nonrecurring accounting and legal expenses related to the restatement and.
And the ongoing litigation, resulting from.
Combination of lower gross profit and high rest DNA expenses, resulting in a net loss of 2.8 million or 24 cents per share.
Slide nine presents our balance sheet highlights.
Cash and restricted cash stood at 3.4 million as of March 30 Onest.
That contract assets and liabilities were 11.1 million compared to 11.7 million as of December 31, 2019.
Vast majority of contract assets at March 31, 2020 consist of physical inventory that will be used for the fulfillment of firm orders to customers.
Total debt was 30.4 million, including 26.7 million outstanding under the ball.
Also as disclosed in an 8-K filing and in our earnings release for the fourth quarter on August 24th we finalized an amendment to our credit facility with bank United on.
Under this agreement the maturity of the credit facility has been extended to May 2nd Twentytwenty two six.
6 million of the outstanding balance on the revolver, that's been converted to an attitude the terminal as a.
As a result, the outstanding principal on the term loan has increased to approximately $8 million and availability under the revolver has been permanently reduced to 24.
And as a reminder, in April we received a $4.8 million alone under the Paycheck protection program provision of because there we expect the P.P. loan to be converted into a grant before the end of the year.
I'll now turn the call back.
Thank you Tom.
Turning to slide 11.
Our defence backlog consist a multiyear programs many of which have life remaining through at least 2025.
A few noteworthy programs that we have either one recently or it had extended recently by customers include the.
Include the following.
He to de advanced Hawkeye.
Second five year contract for Northrop Grumman and the potential for additional growth as the U.S. Navy plans an expansion of the program of record.
And anticipates additional foreign military sales order.
Next generation Jammer mid band Pod program, it's that significant upside as the program moves through system development and demonstration and into low rate initial production and then full rate production.
We estimate this program has the potential to generate an additional $150 million in revenue for CP I arrow over a roughly 10 year production period.
A 10 re wing program with Boeing program.
The program is just spooling up and a significant portion of the backlog is already funded.
The 38 Pacer classic three trim program, where the prime contractor to the U.S. Air Force in support of extending the life of the T 38 trainer airframe.
The program is valued at more than $65 million with orders being placed multiple times per year.
And finally, the F 16 rider Island drags shoot canister assembly significant growth potential with Lockheed recently announcing a 5 billion dollar deal for 90 aircraft for Thailand, Taiwan and Morocco.
And they've negotiated pricing with U.S. Air force for additional countries considering the F 16.
Turning to slide 12.
And Aerosystems in Aerostructures, we have attractive near term program opportunities that should allow us to end the year with an increased book of business, particularly for those programs, where we're already the incumbent and to sustain momentum in our defense business.
Turning to slide 13.
I wanted to spend some time on today's call discussing our outlook for 2020 and our priorities over the next several quarters.
First the pandemic is galvanized our focus on liquidity cash preservation and the efficient use of capital like me.
Like many companies, we have experienced supply chain disruptions higher than normal employee absenteeism and suspensions of manufacturing at some customer facilities.
On New York wasn't locked down during the spring our classification as an essential business sustained our defense business, but could not pushing us from slowdowns in our commercial business as demand for business Jets has all but evaporated and the disparity in profitability between our defense and commercial programs has widened.
In response to these challenging circumstances toward the end of the first quarter, we took immediate action curtailing discretionary spending implementing a hiring freeze and reducing staff.
After the first quarter ended we were quick to act on new government programs aimed at improving liquidity a business is impacted by the krona virus. We qualified for and received a 4.8 million dollar Paycheck protection program under the cares Act, which enabled us to retain our workforce preventing further job cuts at CP VI.
We have also taken the opportunity to look at our operations attacking waste and reengineering several processes to enhance capital efficiency.
For instance, we are focused on compressing the cash cycle for each program by shortening build time and more closely managing the flow of materials into our operations. He.
Keep in mind that the cash cycle of our defense programs is better than our commercial business and therefore, continuing to increase the mix of defense business will inherently help improve cash conversion.
We believe the cash saved from these working capital improvement in issue.
Careful control of inventory levels and continued cost management will largely offset the cash we expect to pay the nonrecurring professional expenses and 2020.
Second through these various liquidity enhancement measures, we intend to strengthen our balance sheet. Our goal is to apply the increased operating cash generation to paying down approximately $2 million at that in 2020.
Third margin expansion is a key priority for us as our new defense programs start to hit our assembly for over the latter part of 2020, we expect the increased direct labor hours will improve overhead absorption.
Convert to higher profit margins across our portfolio of products.
Hi revenue and the improved payment posture, we should have with key supply chain partners could also want to have helped improve our buying leverage and over time lead to improved bill of material costs.
Approximately 65% of our direct cost for materials, we purchase from suppliers. So even a small improvement can lead to big improvements in cash in margin and.
By putting behind US this year, its professional fees and certain covert 19 related cost, which combined we estimate will amount to approximately one and a half million dollars well have a more typical SGN a cost structure, starting in 2021 and be positioned to realize operating leverage on rising revenue.
These three near term priorities will set the table for what we believe will be a much improved 2021 way, we we project higher revenue improved profitability and cash flow compared to 2020.
The goal is to use the increased cash flow to accelerate debt repayment to further de leverage the company and provide a solid foundation for 2022 and beyond.
On slide 14, using 2018 revenue as a baseline we are providing our growth outlook for the three year period 2018 to 2021 in each of our business areas.
In Aerostructures, we started at $35.1 million in revenue in fiscal 18.
On the strength of new contracts with Lockheed for F 16 assemblies and Boeing for the a 10, we believe this business will grow in the range of 12% to 14% through 2021.
The bulk of our commercial revenue or in this aerostructures business area and as such this growth rate projection has no contribution from potential future orders by Gulfstream, but you said 50, leading edges and.
And it does include the impact of Cobot 19 to our other business jet programs.
Aerosystems remains our fastest growing area driven by our electronic warfare pods and electronic systems programs. This is.
This is a great niche for us when that we believe can generate growth across the programs indicated at a three year compound annual growth rate in the range of 22% to 26%.
This is largely driven off of expected increased production of the various electronic warfare and intelligence reconnaissance and surveillance pods, we built for Raytheon and Northrop Grumman.
As well as increased orders for certain Blackhawk systems from Sikorsky.
And our kitting and supply chain management area at the bottom we started a revenue base of $17.7 million for fiscal 18.
We believe that the funded orders we received for the Etwo D program and the T 38 program among others should produce a compound annual growth rate in the range of 8% to 10%.
Before opening the call to questions I'd like to say in closing that we are now reaping the rewards of our efforts to foster a durable relationships with the Premier Aerospace and defense Oems and win long term contracts.
Thanks to our high quality backlog and record funded defense backlog, we are well positioned with a stable business near term.
And because we have earned a reputation as an exceptional and reliable supply chain partner.
We plan to leverage these relationships to bid on and win New awards, giving us attractive long term growth opportunity.
In fact, our business defense, our defense business is that the starting block.
What could be decades long programs fine.
Finally, I want to recognize the dedication of our employees who have risen to the occasion. These past several months to continue their work in service of our country's national security there.
They have done an outstanding job under difficult circumstances, they had my heartfelt. Thanks.
Let's say you can open the line for questions. Please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Joe Your question. Please press Star then Keith.
The first question today comes from Ken Herbert of Canaccord Genuity. Please go ahead.
Hi, Thanks, Good morning, Doug and Tom.
Morning.
Hey, Doug I just wanted to first ask around gross margins can you provide a little bit just maybe more specific on on the season the quarter, Oh, sorry, if I missed it and and to get job you see a better gross margin this year than in 2019 implies a pretty nice ramp over the second third and fourth.
Orders can you just talk about the sequential improvement we should expect as we go through the rest of the year on the gross margin.
Well I don't want to specify by quarter, but I can tell you that the cumulative effect of the the change in in our EA season for the quarter was roughly around a million dollars.
And so.
We don't have that headwind in the second third and fourth quarters and so when you I would prefer to leave it as as we publicly stated which our gross margin at the end of the year will be higher than 19 without without going into how we think that will ramp up over the period, but we would have.
In fact, our fourth quarter to be the highest gross profit margin quarter of the year.
Okay. That's helpful and I appreciate the detail on the slides I know, obviously, you haven't been able to say much but as you look at sort of your revised outlook for 2021 is just apply these growth rates I get to revenues next year sort of.
You know well over 100 million, maybe 100 and 510 somewhere in that range, depending upon the growth rates can you just talk through I know you've outlined a lot of these just maybe just talk to your confidence in those 2021 numbers with the backlog and a couple of the key moving pieces as we think about the step up obviously from.
18 to 20 to 21.
The.
I can say is a very high confidence in the in the growth rate.
And the derivation that you picked is is in line with our own internal thinking at the moment.
And I would say that the vast majority of that is already in the funded backlog.
So you know things that could derail that you know obviously a program execution you know we have to execute on the backlog and deliberate when when the customer wants it.
But that's just an ordinary risk and the risk of you know always the risk of an order cancellation here and there, but I I I can tell you that there's not a lot of white space you know in the end.
And the forecast for.
No for 2021 revenue.
Okay.
And then just finally can you just walk through I mean, obviously a lot has happened over the last several months can you just walk through.
Maybe some of the changes you put in place just regarding on the financing control side as we think about coming out of the restatement.
And and what you can say a little give investors confidence you're moving forward that that obviously all those issues are behind us and and you feel very good about what's in place now moving forward.
Well as we stated you know this was a along and and.
Complex issue that we had to address after we announced that we discovered the hour. So one of the first things that the board directed we do and we did do was higher a big four.
Advisory firm with expertise in this.
This particular area to.
To help Tom and the team developed very detailed.
And complete process.
Processes on how to recognize revenue for various types of contracts that we get.
That has already been done and we are you and we use those to developed in 2018 and 19 restatement as well as of course, the first quarter. We still have work to do on the remediation side lot of training, we still have to get comfortable that the internal controls are tested so we have to.
I have time during the year to do those tests, but we're highly confident and I and I know our board is highly confident that the steps that we have in place now are the right ones and and will document the remediation effort in future quarterly reports.
Okay, and just finally it sounds like you expect the second quarter result, so maybe in the next couple of weeks is there anything else specifically you can see on timing.
Yeah, it might be a little longer than the next few weeks I'm honestly Uh huh.
I'd, rather not we have until.
October 15th was our our our deadline to get some of the <unk>.
You know kind of get current I don't expect that we'll we'll achieve that so you can probably look towards maybe the end of October early November ish for the second quarter and near to the end of the year for the third quarter.
Great. Thanks, Doug Thanks, Tom Good luck I'll pass it back there.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Doug Mccrosson CEO for any closing remarks.
Thank you Melissa and thank you all for participating in todays call, Tom and I look forward to speaking to you again soon when we report on the second quarter results. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.