Q3 2020 CPI Aerostructures Inc Earnings Call
Good morning, and welcome to the third quarter 2020, CP Aerostructures earnings Conference call.
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Thank you, Jason and good morning, everyone and welcome to Cpis Aerostructures third quarter 2020 earnings conference call with.
With me on the call. This morning are Doug Mccrosson, President and Chief Executive Officer, and Tom Powers, acting Chief Financial Officer you.
The earnings press release was issued for the market opened on December 31st.
And for todays call management will refer to Apocalypse examples and during their prepared remarks, which has been filed with the FCC and will be posted partly because it gives us a really some parts of the companys website at www Dot C. I feel dot com.
At the conclusion on their prepared remarks and itself will hold true and <unk> session.
As a reminder, this conference call will contain forward looking statements that are based on current expectations with me on that.
And that are subject to risks and uncertainties.
For it can be no assurance that such risks uncertainties will not affect the accuracy of the forward looking statements or the actual results will not differ materially from the results anticipated and forward looking statements including.
[laughter] associated with the restatement of the company's prior period consolidated financial statements and the material weaknesses and the company internal controls and.
Included substantial cost and diversion of mass its attention and resources, which will be required to we need to wait for material weaknesses and.
And the adverse developments and existing legal proceedings to coordinate misuse and abuse all could see though.
Yeah effect of economic conditions, and the industries and markets, where the company operations, including financial market conditions.
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That makes us, including its impact on global supply for North and distribution quick ability us the outbreak continues.
National conditions of the Companys customer and supplier.
No calorie and aerospace markets.
The level of U.S. government defense sensing, including for changes in the for Sunday due to budgetary constraints that.
And the cuts, resulting from sequestration, Alex and so fun to double that was policy to cope with vaccine for.
For change and political conditions on certain checks on on certain funding of program.
Ability of the government and other and the company and other customers to permanent contacts anytime.
Dr and rights for commercial and military aircraft program competitor pricing for class a startup cost for new programs technology and product development and I'm sorry.
And do [noise] Kartik.
Product performance and cost, resulting from changes to and compliance with applicable regulatory requirements level of instead, and that's impactful for race us.
Additional information concerning these and other risks can be found and the company's filings with the Securities and Exchange Commission.
The risks us on assumptions on certain please refer to GAAP could cause actual results.
Ralph comes to differ materially from those expressed and any forward looking statements.
And those are costs and not to place undue reliance on such forward looking statements each of which speak only as of the good day.
The company has no obligation to update and forward looking statements to reflect events or circumstances. After the date hereof.
With that I would now like turn the call over to Doug Mccrosson, President and Chief Executive Officer, Good morning, Doug.
Thank you Jody and good morning, everyone, a very happy new year to you all.
Thank you for joining us on short notice after a holiday week.
As we start the new year hope that you your family and friends are doing well.
Why don't we held the earnings call to report on a second quarter results. This past November we were hopeful that we would be able to report third quarter results before yearend.
Very happy that we've met that goal.
More importantly, with the filing of our form 10-Q for the third quarter on December 31st. We are now current was actually she reporting requirements and have regained compliance with the New York stock exchange is timely filing criteria.
With the restatement of financial reports for periods for prior periods now behind US as of August 25. This is the third quarterly results reported for fiscal 2020 cents for released our first quarter results on September Thirtyth.
And with results that demonstrate a strengthening fundamentals and 2020 based on our record funded defense backlog and success of our strategy to win long term defense contracts aligned with current and future us military priorities.
Our third quarter results, which we are reviewing on todays call bolster our outlook for a strong finish to 2020 and our continuing optimism for 2021.
I'll start with a recap on recent highlights then Tom will provide you with a detailed review of our financial results for the third quarter.
And I will opt for some concluding remarks before opening the lines for questions.
Turning to slide for.
Our third quarter results demonstrates the benefits we have expected from ramping up production of new and defense programs and from continued effective execution on funded defense backlog.
Compared to the second quarter revenue surged, 30% to $25.6 million and revenue from defense programs and increased 38 for shop.
Gross profit rose, 62.1% and gross margin expanded 330 basis points to 16.4%.
Net income improved $1.4 million $2.8 million.
Since the end of September we have one or have been selected for three awards totaling approximately $20 million.
Yes, we have not yet received customer approval to announce these awards, we can't share details about these programs for other than to say that these are follow on contracts with existing customers.
Lastly, I want to touch on three significant events, which have occurred since September thirtyth each.
Each of these events just described in detail and our 10-Q filing for the third quarter.
First.
We have resumed work on the Gulfstream G 650 program.
As a reminder, and April we were asked by our customer Triumph group.
Stop work on our contract to produce certain fixed leading edge assemblies on the wing that you shipped 50 business jet and.
And it may try and cancel nearly all our open orders on this program.
Try and restaurants sold to G 650 wing program to Gulfstream and earlier. This month, we received NEWP I'm sorry earlier in December we received new purchase orders from Gulf stream totaling approximately $3.6 million.
Importantly, we are now working directly with Gulfstream for the first time since inception on the juice Eccs 50 program over a decade ago.
We have already put back into production and all of the products to try and put canceled in fact, we delivered about 10% on the order in December with the balance due to ship during the first three quarters of 2021.
With this restart we expect to improve overhead absorption reduce inventory and generate incremental operating cash flow over the remaining life for the contract.
Second we have exited our program with Honda aircraft company to manufacture the engine and what assemblies for their Honda jet aircraft.
His program was on the early stages of a life for program agreement.
In January 2020, the company requested a modification to the recurring shelf price and a few months later Honda denied the company's request.
We commenced discussions with Honda for the purpose of CPR for Aero exiting the program and transitioning our work back to Honda.
These discussed this discussion concluded on December 20, Threerd, when we signed an agreement that terminated the on the long term agreements and cancelled all remaining purchase orders placed well she CPI aero on.
And that has agreed to purchase approximately $600000 of inventory and.
On assumed responsibility for certain purchase orders, we got placed with suppliers.
We are responsible for any remaining termination liability to suppliers that they did not choose to continue buying from us and.
In any event. This is a very positive outcome for us, we expect and net cash to C.P.I. between now and the end of the first quarter of 2021 to be around several hundred thousand dollars, even after paying termination claims for suppliers. If there are any.
But the greater value comes from no longer having to produce product and a significant recurring losses.
The impact of this contract termination is expected to have a positive effect on our fourth quarter 2020 actually on wind a loss reserve, we took to cover potential future losses.
And third as announced this past Monday, we reached a settlement of the post closing working capital dispute with air industries and the entire $1.4 million that had been held in escrow was paid to us on December 20, eightth, adding to our liquidity position as we begin 2021.
These more recent developments combined with our solid third quarter results supports our expectation for a strong finish to 2020 and positive momentum heading into 2021.
Turning to slide five.
You can see from the line chart on the right side of this slide we ended the quarter for the total backlog of $536.9 million and.
And a backlog of multiyear contracts with our defense industry customers and $480.2 million.
For our defense backlog of $183.6 million consisted of funded orders, primarily with Northrop Grumman for each Judy outer wing panel kits with Raytheon for next generation Jammer mid band electric work.
Warfare electronic warfare pods with Boeing for 810 structural assemblies for the re wing program and direct orders for the U.S. Air Force for T 38 life extension program components.
We expect our funded defense backlog and aggregate to convert to revenue through the end of 2022 and to generate positive operating margins and cash flow on.
Book to Bill ratio for the 12 months ended September Thirtyth was a strong one point for.
I'll now turn the call over to Tom powers, our acting CFO, who will walk you through our financial results for the quarter Tom.
Thank you Doug I will start my remarks on slide seven as a reminder results for the third quarter of 29 team on the restated values as filed with the FCC. This past August.
Revenue for the third quarter of 2020 increased 12.7% and 25.6 million compared to 22.7 million for the same period last year.
Revenue from military contracts increased 6.8 million for 38%, while revenue from commercial aviation contracts and decreased 3.9 million.
We then on defense business revenue increases were primarily related to the art of the recent multi reward for the Northrop Grumman Etwo D program and work performed on the T 38 based on program. These.
These increases were offset by a decrease in revenue on the Raytheon pod program and the first and second quarters from over revenue from the Raytheon program was expected and reflects timing differences as that program transitions from one development phase for the next day.
The decline and revenue from our commercial programs reflects lower revenue from the GE 650, and embryo for business jet programs.
Gross profit more than doubled from 4.2 million compared to 1.9 million, reflecting higher revenue and a favorable program mix.
As she and I expenses were 3.1 million compared to 2.8 million a year ago.
2020 had legal and accounting expenses that were approximately $600000 higher than a year ago, primarily attributable to the restatement and the ongoing litigation, resulting from the restatement.
As a result of the increase in gross profit on net income improved 2.1 million versus last year, and proving to $800000 or seven cents per share versus a net loss of 1.3 million for 11 cents per share for the third quarter of 2019.
Turning to slide eight slightly.
Slide eight presents a few of our key balance sheet accounts at September Thirtyth 2020, compared to December 31, 2019 cash.
Cash and restricted cash stood at 5 million at September Thirtyth compared to 5.4 million at December 31, 29.
Key differences between these values being that has recently announced the 1.4 million of restricted cash related to the W. on my working capital dispute is and I want to restrict.
Net contract assets and liabilities stood at 15.9 million compared to 11.7 million as of December 31st.
The increase reflects higher contract assets as we ramp up production on new were defense programs and a return of approximately 3.2 million and over advanced funds returned to a key customer.
Total debt was 33.9 million, including 20.7 million outstanding under our revolver.
That includes the 4.8 million P.P.P. loan we received on April time on to the Paycheck protection program provision for carriers and.
Excluding this increase and debt we have otherwise reduced debt by approximately 1.9 million over the first nine months for fiscal 2020.
As a reminder, we apply for full forgiveness on the P.P.P. long and on November 2nd Orlando notified us that our application had been approved and submitted to the U.S.P.A. for review and final approval.
Non receipt of proper approvals for loan for getting this will be included in other income and our income statement and the debt and the balance sheet will be reduced accordingly.
I'll now turn the call back to us.
Well thank you Tom.
Please turn to slide 10, and I will reiterate our priorities for 2020 and 2021.
Including a sharpened focus on liquidity, our balance sheet and margin expansion.
I have mentioned previously that we have implemented 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 and materials into our operations and enhancing capital efficiency.
Well the straight to point for the first nine months of 2020, we reduced the cash used in operations to $3.3 million and $700000 lower than the same period and 2019 on around $2 million less revenue.
This was achieved despite more than $800000 of extraordinary legal and accounting expenses as well as paying back the approximately $3 million and overpayments by a customer receipt and 2019 that Tom mentioned, a few moments ago.
Without these items cash flow from operations would have been approximately $1 million positive. During the first nine months of 2020, which would have been a swing of approximately $5 million compared to the same period a year ago.
We are closer now to realizing our goal of delivering more consistently positive operating cash flow than at any point and our recent history. We expect to use the improved cash flow and 2021 to de lever the business, even more and to improve our financial profile for 2022 and beyond.
We are paying down our term loan by $2.1 million and 2020 in accordance with the terms of our amended credit agreement.
And finally, as our third quarter results demonstrate ramping up our newer programs and our defense backlog is in fact, improving fixed cost absorption and profitability and we are increasingly confident that we will achieve our stated expectation for accelerated revenue accelerated revenue growth and margin improvement across our portfolio of products for the second.
Half of 2020 compared to the first half.
We have a lot to look forward to over the next 12 months.
We will be making first deliveries of a number of defense programs, including major assemblies for the a 10 and F 16.
We will start work on our newest reconnaissance pod the tactical synthetic aperture radar for tax SAR and we are expecting the racing on next generation pod and mid band electronic warfare pod to again be a very prominent component of our business and 2021.
We have also made strategic moves in late 2020 to eliminate and unprofitable business and to settle a longstanding dispute both of which diverted management and financial resources during 2020.
So while we did well and 2020, despite the challenges of a multi year financial restatement and a global pandemic I see and even greater 2021.
The momentum and our business. These past several months combined with our strong funded defense backlog gives us a high degree of confidence to a from our initial outlook for 2021, namely we expect higher revenue operating income and operating cash flow for 2021 compared to 2020.
Before opening the Q and day session I would like to express my heartfelt appreciation for their dedication and commitment of our workforce, who have worked tirelessly through the challenges presented by the pandemic and the extra effort involved with the financial Restatements we.
Set the bar high at the beginning of 2020 to execute flawlessly on our programs, particularly the ramp up of production of our new and defense programs and we have succeeded.
Our strong defense backlog demonstrated ability to win new contracts and ongoing business development efforts position cheap Guy arrow for attractive long term growth.
Thank you for participating in the call and operator, you can open up the line for questions now thank you.
We will now begin the question and answer session to ask a question and you May Press Star then one on your Touchtone phone and if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question is from Ken Herbert from Canaccord. Please go ahead.
Hi, Good morning, Doug and Tom.
And Mike Happy New year.
Yeah, happy new year, Doug and and Tom on a nice quarter.
Doug and wanted to see first of all if you can if you can talk about really strong revenue growth and the third quarter was there anything unusual there or anything that maybe was pulled out of the fourth quarter and how should we think about the top line and the fourth quarter.
No the hands and short answer is no. There was nothing pulled forward from the fourth quarter.
We knew from the beginning that the second half for 2020 would be.
I'm very strong compared to the first half and and we've been and we've been indicating that on on the various previous calls so I'm I I think you know a lot was Northrop Grumman Etwo D. We had we had a little bit of us Raytheon on mid band pod come back and the third quarter that was relatively door.
And on the first two.
And and.
And also as we as we mentioned in the US in prior calls our focus really has been and a working capital management and you know with percentage of completion accounting as you align your incoming materials more closely.
And two when you actually needed on the factory floor and you compress that that that build cycle youre actually taking revenue that would have been booked and poor and putting it closer to the actual point of sale, which is what we've been doing and so I think you saw a lot of that and the and the first quarter and the second quarter as well.
And now that everything is a lie and you're seeing the true ramp up our us primarily our defense programs.
Okay very helpful. As we I think you alluded to.
Oh, it's really get your defense backlog, where you've had some really nice growth fund.
Funded defense backlog of 184 million and I think you said on the call that you expect most of that to convert to revenue is just not all by the end of 22 can you just talk about the sort of the revenue cadence and 21 and and maybe even 22 or.
Is the quarterly rate right now a good quarterly run rate to assume a into 21.
Well as you know, we don't we haven't given guidance and for 2020, and we and we probably won't for 2021.
I can tell you that the.
The level of activity, which is generally aligned with with revenue that we'll post.
Is a increased and the fourth quarter over the third quarter and going into the into the first quarter of 2021, we expect that that kind of continue.
You know I haven't I haven't measured and the full impact of a the defense backlog and winter flow is out over 2021, we'll we'll do that and in the <unk> and the coming days and weeks as you as we you know where we're just about to start our fourth quarter to close so I can tell you that is.
It's.
The business going into 2021 and is as strong as it's ever been and my almost 17 years here. So I'm feeling very good about 2021.
Okay, that's great and if I could just one final question I think you commented that excluding the sort of a onetime charges. This year you would have been positive 1 million and and cash from operations through the first nine months I'm I just wanted to make sure I got that correctly to clarify that and then second I know us.
So you're not giving guidance, but I think you're expecting cash generation to improve and 21 over 20 I'm. Just wondering if you could provide any color around magnitude or expectations around that and then maybe just a couple of the moving pieces.
Okay. So let me let me start with your for your first point.
So back in 2019, we.
We had advanced payments, we were getting from a significant customer.
And as as it turns out when ultimately the negotiation was completed and and with it was on and not to exceed contract. The on our true cost really were lower than what they had actually paid us and so over.
The first nine months of 2020, we in fact, we're we're building this customer and they were they were not paying us the cash for it because we will pay and get back.
You know roughly $3.2 million.
So that alone would have almost turned us into.
You know a us a break even on a cash flow basis had we collected that $3.2 million. Instead of you know basically paying it back to the customer.
So you did hear that right and then the other the other cash component.
Is the extraneous, you know above and beyond legal and accounting associated with the restatement and you know and legal legal costs associated with the restatement. So you did get that correct.
Going forward into 2021.
We don't have that we don't have as much headwind as we did in certainly in the first nine months of 2020 and.
And so I I think that you will see a much improved company from a cash flow perspective, and full year 2021, and not ready to say what that will be.
Whit.
We're expecting to be less negative.
At the end of the fourth quarter I don't know that will be a breakeven company and the fourth quarter from a cash flow perspective.
But certainly that would be the goal and 2021.
Perfect. Thanks, a lot Doug happy new year nice quarter. Thank you.
Again, if you have a question. Please press Star then one.
The next question is from art Winston from pilot Advisors. Please go ahead.
A happy healthy new year.
Doug Hi Art on my question is really on the a 10 day can you give us any sense about what we anticipate and terms on revenue and shipments and cash flow and operating profit and we can't give numbers you know.
What's the deal and on the 810 going forward in 2021.
Good day, so Ah. Thank you art and good good to hear from you and happy new year or so the a 10 program has a significant backlog I don't have that number handy, but us and they close to $18 million to $20 million range and that and that is funded.
Which is roughly half of what the program.
Mike might become the on operate the expectation is that it is a.
For the normal profit here, which which is you know when to say that the 20% range or so so we expect the eight tend to be profitable in 2021.
And and it will be a of all of the programs that are growing because we did have some small amount of revenue and ER and the fourth quarter of.
<unk> of 2020 for eight and we expected to grow by around $4 million for $5 million and and 2021, so would it be a pretty sizeable component of our 21 sales and and more so in 20 or 22.
Okay. Thanks, Doug Thanks, good job. Thank you for IR. Thank you.
Again, if you have questions. Please press Star then one.
There are no more questions and the queue. This concludes our question and answer session I would like to turn the conference back over to Doug Mccrosson for any closing remarks.
Okay. Thank you, Jason and again, thank you all for participating on today's call and Tom and I will be speaking to you again, when we report the fourth quarter and full year 20, Twond and results later this year. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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