Q2 2020 CPI Aerostructures Inc Earnings Call
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Good day and welcome to the Q2 2020, CPR Aerostructures earnings Conference call.
All participants will be in listen only mode.
So do you.
It's a good place teleconference specialist quicker dark key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to you. This is Jody burfening.
H.A. Investor Relations counsel please.
Need that.
Thank you Sarah and good morning, everyone welcome to see CPI Aero structures second quarter 2020 earnings conference call.
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 market close.
Yesterday evening <unk> today's call Powerpoint presentation to accompany management's prepared remarks is available for download in the Investor Relations section of the company's website Www <unk> Aero Dot com.
At the conclusion of the their prepared remarks management will hold it she when they session as a reminder.
During this conference call will contain forward looking statements that are based on current expectations of management and certain assumptions that are subject to risks 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.
Statements.
Including included them in with our risks associated with the restatement of the company's prior query its consolidated financial statements and the material weaknesses in the company's internal controls, including the substantial cost and diversion of management attention and resources, which will be required to remediate the material.
The weaknesses any adverse developments in existing legal proceedings or the initiation of new legal proceedings.
Back to the economic conditions in the industries and markets, where the company operates including financial market conditions, the impact of COVID-19 pandemic, including its impact on global supply demand and distribution.
Mission capabilities at the outbreak as the outfit continues.
Financial condition of the company customers and suppliers the cyclicality of the aerospace market a level of U.S. government defense spending including shifts or changes in defense spending due to budgetary constraints spend.
Spending cuts, resulting from sequestration.
The allocation of funds to government responses to COVID-19 or change in critical condition and uncertain funding the programs.
The ability of the government and the Companys other customers to terminate contracts anytime production rates for commercial and military aircraft programs competitive pricing pressures start.
Startup cost for new programs technology, and product development risks 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 risks can be found in the Companys filings with the securities.
Exchange Commission expenses.
It's 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 such forward looking statements each of which speaks only as of the day.
They made the company has no obligation to update any forward looking statements to reflect events or circumstances. After the date hereof.
With that I would now like to turn the call over to Doug Mccrosson, President and Chief Executive Officer, Good morning, Doug.
Good morning, and thank you Jody and good morning, everyone Hope that you your family's your friends.
Neighbors are all helping him well.
Today, we are reporting our second quarter 2020 result, as we continue to catch up on a reporting.
This years since completing the restatement of fiscal 2018 financials as well as the first three quarters of fiscal 2019, and the filing of our form 10-K for fiscal 2019.
We remain hopeful that we will be current with the FCC reporting requirements with the filing of our third quarter results sometime in late December.
[laughter] reporting first quarter results only five weeks ago.
Minimum so that business are still strong our liquidity has improved our outlook for a strong finish to 2020 is unchanged.
In our optimism heading into 2020 remains high.
Since only a short time has passed since our last call. We are going to keep our comments brief. This morning focused on second quarter results backlog figures and our outlook for 2020 and 2021.
I'll start with a recap of recent highlights then Tom will provide you with a detailed.
Review of our financial results for the second quarter and the status of our Paycheck protection program alone.
And then I will offer some concluding remarks before opening the line to questions.
Turning to slide four.
We posted solid results for the second quarter as we continue to execute on programs in are funded defense backlog.
Revenue was flat compared to the second quarter of 2019 with increases from our defense business offset by ongoing weakness in our commercial aviation business.
Gross profit margin rebounded from the first quarter as expected.
Quarterly gross margin percentage increased nearly 900 basis points from the first quarter and by nearly 200 basis.
Tailed lines from the year ago period.
We continue to expect that the first quarter margin will prove to be the low point of 2020 and that full year 2020 gross margin percentage will be higher than it was in 2019.
Our net loss for the quarter narrowed relative to last year's second quarter. Despite the addition of nonrecurring professional fees related to the re state.
Payment and we generated operating cash flow for the quarter.
Reflecting an intense focus on improving working capital management, we improved cash flow from operations relative to last year by approximately $1.7 million for the quarter.
While absorbing $800000 of nonrecurring cash outflows for professional.
Fees.
The first half of 2020, our cash flow from operations has improved by approximately two and a half million dollars versus last year.
Liquidity, which we are defining as unrestricted cash on hand, plus revolver availability has also increased significantly from approximately $1 million as of June thirtyth to.
Some $19 million to $7 million as of June Thirtyth 2020.
The strategic steps, we took earlier this year to prioritize cash flow are starting to show in our financial performance as.
As a result of these steps plus the receipt of the Paycheck protection program loans during the second quarter, which enabled us to sustain our work.
Yes throughout the COVID-19 pandemic.
We are in a stronger position as we have been in years to execute on our growing backlog greeting and welcome news for our workforce, our customers and ultimately for our shareholders.
On the first quarter call, we highlighted $77.4 million in new firm orders since.
Since then we have announced 1.4.
$4 million in orders from Turkish Aerospace industries for our work on the Turkish utility helicopter program.
As a reminder, since the beginning of the year. We have also received $52.1 million in firm orders from Northrop Grumman for work on the two D. advanced Hawkeye both for the US Navy version as well as for the international variant.
For.
$400 million in new purchase orders from Boeing in support of the 810 Thunderbolt two aircraft re winging effort.
$10.1 million in purchase orders from the US Air Force for T 38 modification kits and $1.2 million follow on order from Lockheed Martin F 16 structural assemblies.
We ended the second.
In quarter with a total backlog of $546.4 million.
And a $491.1 million defense backlog.
The first quarter book to Bill ratio was unusually high so the second quarter rate ratio of <unk> 0.9 was still higher than we expected and our trailing 12 month book to Bill ratio.
Virtual as at June Thirtyth 2020 is a very robust 2.13.
We ended the quarter with a funded defense backlog of $205.6 million up $68.8 million or 50% since December 30, Onest of 2019. This.
This supports the stable business, which.
So in the near term and growth over the longer term.
As a reminder, the largest programs in this funded backlog or the two D. wing panel kits, we supplied a northrop Grumman the tennis and we build for Boeing and our next generation Jammer pod program, we perform for Raytheon.
Turning to slide five as you can.
Air from the line chart on the right side of the slide our backlog of multiyear defense contracts is stable offerings CPI Aero multiple attractive long term growth opportunities as we continued to deliver consistently strong performance on the military programs we support.
In addition, we believe that the defense spending for the foreseeable future, we will not be impacted.
In some other recent resin presidential election.
Our defence backlog contains a broad array of high value defense platforms from legacy aircraft like the a 10 at 16 and T 38 to technologically advanced weapon systems like the F 35, the next generation jammer and other undisclosed pod and missile platforms.
As such we believe we are well positioned relative to DMD spending priorities, regardless of which parties in the majority come January.
The commercial portion of our backlog continues to reduce due.
Due to headwinds from the global COVID-19 pandemic.
And from order cancellations and deferred deliveries.
As of June Thirtyth.
Funded backlog stood at $209.0 million of which $205.6 million consisted of orders from our defense industry customers.
The current defense backlog is scheduled to convert to revenue through the end of 2022 and is expected to generate in the aggregate positive operating margins and cash flow.
Our near term as we ramp up production on newer defense programs, we expect to accelerate revenue and margin improvement for the second half of 2020 compared to the first half of the year.
I'll now turn the call over to Tom powers, our acting CFO, who will walk you through our financial results for the quarter as well as on the status of the Paycheck protection program loan.
Tom Thank.
Thank you Doug.
Morning, everyone I'll start my remarks on slide seven as a reminder results for the second quarter of 2019, our restated values as found on form 10, Qs filed with the SEC on August 27.
Revenue for the second quarter of 2020 was $19.7 million compared to 20.1 million.
The same period last year.
Overall revenue from military contracts increased $2.6 million, while revenue from commercial aviation contracts decreased 3 million.
Within our defense business the revenue increases related primarily to our previously announced multiyear award from the Northrop Grumman core role on the two D program and.
In dollars are performed on the T 38, Pacer program, which were offset by decreases in our commercial programs and the Raytheon pod program.
As in the first quarter, the lower revenue from the Raytheon program was expected and reflects timing differences as it transitions from one development phase to the next.
A decline in revenue from our commercial program.
So next lower revenue from the GE 650 program and the Embraer program.
Gross profit was $2.6 million compared to $2.2 million, reflecting favorable product mix.
As DNA expenses were 2.8 million compared to 2.5 million and included approximately $514000 in nonres.
And wearing accounting and legal expenses related to the restatement and the ongoing litigation, resulting from the restatement.
Despite the increase in professional fees the increase in gross profit resulted in a narrowing of the net loss to point $6 million or five cents, a share compared to <unk> point $9 million or seven cents per share for the second quarter of 2019.
Turning to slide eight slide eight presents balance sheet highlights cash unrestricted cash stood at eight point.
Excuse me 8.1 million as of June Thirtyth compared to 5.4 million at December 31, 2019.
That contract assets and liabilities with $10.6 million compared to $11.7 million.
As of December 30 Onest.
The decrease reflects higher contract liabilities due to increased contract financing received from customers.
Total debt was $34.5 million, including 26.7 million outstanding under our revolver and the $4.8 million alone we receive on April 10th.
Under the Paycheck protection program for vision of the Capex.
The outstanding balance under our revolver is unchanged as of June Thirtyth compared to March 31, and December 31 2019.
With respect to the PPP loan we applied for full forgiveness of the loan on October 16th than our lender has submitted our application to the FDA.
Who will review and final approval.
Upon receipt of proper approvals the loan forgiveness will be included in other income in our income statement and the debt in the balance sheet will be reduced accordingly.
I'll now turn the call back to Doug.
Okay. Thank you Tom.
Turning now to slide 10.
This is a slide we included in our first quarter presentation and.
And as you can see three of the four near term opportunities that we were bidding on as the incumbent supplier have now been decided in our favor.
More details will be provided once we receive permission from the customer.
None of these new contracts are in the reported backlog as of June Thirtyth.
Collectively we estimate that these will add more than $20 million to our total backlog.
Customer decisions on most of the other opportunities on this slide are expected within the next 90 days.
In slide 11.
On the first quarter call I shared with you our priorities for 2020 and 2021.
Including a sharpened focus on liquidity, our balance sheet and margin expansion.
We are continuing to implement working capital improvement initiatives that are designed to compress the cash flow cycle for each program by shortening build time and more closely managing the flow of materials and operations.
We are also continuing to examine our offer.
Operations to enhance capital efficiency by reengineering key manufacturing and production control processes.
Already these initiatives along with careful inventory management are allowing us to meet if not slightly exceed our internal operating cash flow plan objectives for the first half of 2020.
Using these new tools also.
Able to us to generate operating cash flow of approximately $2.6 million for the second quarter, which we applied to the repayment of approximately point $6 million of long term debt.
We are committed to paying down debt through disciplined adherence to liquidity enhancement measures.
With respect to margin expansion, we still expect.
In the auction ramp up of our new defense programs over the latter part of 2020 will improve profit margins across our portfolio of products.
Longer term, we continue to see opportunities to lower our bill of material costs.
Collectively these operational priorities positioned CPI aero for higher revenue improved profitability.
Pretty and cash flow for 2021 compared to 2020.
Our goal, which we are now close to two.
Now than at any point in our recent history is to have more consistently positive operating cash flow we.
We expect to use any increased cash flow to delever the balance sheet, even more in 2021.
I will give us a solid foundation for 2022 and beyond.
On slide 12, I want to give you a quick recap of our growth outlook for the three year period 2018.
2021 in each of our business areas using restated 2018 as a baseline.
And Aerostructures, which accounted for.
26% of total backlog at June Thirtyth, new contracts with Lockheed for F 16, assemblies and with Boeing for the a 10 placed us on a path to grow this business in the range of 12% to 14% through 2021.
As a reminder, the bulk of our commercial revenue are in this aerostructures business area.
Aero systems, 44% of total backlog remains our fastest growing area driven by our electronic warfare pods and electronic systems programs. Once that we believe can generate growth across all the programs indicated at a three year compound annual growth rate in the range of 22% to 26%.
This is largely driven off.
So it's.
Expected increased production of the various electronic warfare and intelligence reconnaissance surveillance pods were built for Raytheon and Northrop Grumman.
As well as increased orders for certain Blackhawk systems from Sikorsky.
Hitting in supply chain management, which is 30% of total backlog led by key players.
Forms such as the two D. T 38, and have 16 will produce a compound annual growth rate in the range of 8% to 10%.
In summary, our second quarter results demonstrate continued solid execution of our funded defense backlog and the business stability our high quality.
Lastly, backlog affords us.
I'd like to take the opportunity to recognize the hard work and talent of our workforce during would've been unprecedented times.
While some work from the office and others work from home each group had to endure extremely challenging circumstances and their results exceeded my expectations.
There is no final group of aerospace.
Officials in the industry and the head my respect and my Thanks, and Im sure they have yours.
The results also support our expectation that ramping production of newer programs in our defense backlog will fuel a stronger half of the year and position us to end 2020 with higher revenue and operating income in 2019.
Our preliminary outlook.
For 2021 is for growth in revenue operating income and operating cash flow compared to 2020.
We expect to share more insights into 2021, when we announced our third quarter results sometime in late December.
Sorry, you can open the line for questions now thank you.
Thank you we will now begin the question.
Question and answer session.
You ask a question you May press Star then one on you touched on.
If you are using a speakerphone please pick up your handset before pressing Nicky.
So with Janney. Your question. Please press Star then Tim.
At this time, we will pause momentarily to assemble our wall.
Our first question comes from Cantor Herbert with Canaccord. Please go ahead.
Yes, hi, good morning, good morning, Karen.
Doug just wanted to see if you can provide any more detail on the your expectation for the pace of gross margin improvement into the second half.
For the year I know you indicated you expect it to be.
Better for the full year than last year, but you put up a very nice sort of sequential improvement from the first to the second quarter. How do we think about the improvement into the third and fourth quarters.
Well again, we're still doing all of the estimates in preparing the third quarter results.
But.
My sense is that the third quarter gross margin percentage will be higher than the second quarter.
And now we will end the year.
The second half of the year, we'll obviously be much higher in gross margin percentage than the first half.
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How much higher that.
And it wasn't in the second quarter will depend on our program estimates that are ongoing right now but.
Based on what I'm seeing now I would say they are sequentially higher again in the third quarter compared to the second quarter.
Okay and do you expect sort of do you have a positive earnings quarter of this year or does that.
That's why it gets more into 2021.
Ah, Yes, we do have positive earnings quarters this year.
Okay.
And I think you just called out the.
Paul the next Gen jammer or slightly down in the quarter.
Order I think if I remember well you're transitioning on that program can you maybe just level set us on on revenues. This year and if there was anything unusual in the quarter on that program and how we should think about it moving forward.
Yes. So we are now in full swing on what is called the S.D.T. a phase of that program.
System development and test phase.
There was a lot of activity in the third quarter on that job continues.
Pretty much through 2021.
The run rate on an annual basis is.
At least equal to if not greater than the previous phase.
So we would expect that to be a once again one of our key contributors of revenue going forward.
Okay, and just finally on the defense side in general really good growth in the backlog are you seeing any sort of increased pricing pressure or can you talk about dynamics from your customers from a pricing.
Point, and if there's been any more sort of risk or pressure, there and how the backlog reflects any of that.
Well the backlog would be priced at whatever at most.
Mostly fixed price contracts. So that those are not going to it's Tom remind me all fixed price contracts. So there's no.
There's no way for I'll say customers to put pressure on those selling prices that we've negotiated already.
At least on the defense side and no I'm not really seeing any of that I mean, the defense industry its always been.
You know there's always probably.
The sensitivity for everything right, there's only so much budget dollars and the government wants to get a good price for the value you know good value for work for what they're getting and we think we of course deliver that and in some cases when we go to bid.
Bid on a a new system, maybe we've we've had a efficiencies the last time, we run it and we.
And we could lower priced without without giving margin.
In some cases, we show that and you know our margin wasn't you know at our normal standard and we were able to get more price you know better pricing. The next time, we bid on the job. So it's kind of all over the board I wouldn't say that there's pricing.
Price pressure to to the extent that the commercial aviation business is known to have pricing pressure.
Great. Thank you very much I'll pass it back there.
Thank you Ken.
This concludes our question and answer session I would like to turn the conference back up into that process for any.
Closing remarks.
Okay. Thank you everyone for participating in today's call and Tom and I look forward to speaking to you in late December when we report on the third quarter results. Thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.