Q4 2020 CPI Aerostructures Inc Earnings Call
Good morning, and welcome to the fourth quarter, 2020 CPI Aerostructures earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded and now I'd like to turn the conference over to MS. Jody <unk>.
Hey, Investor Relations Counsel. Please go ahead.
Thank you, Jason and good morning, everyone welcome to CPI Aerostructures fourth quarter, 2020 earnings Conference call with me on the call. This morning are guys Mccrossen, President and Chief Executive Officer, and Tom Powers, acting Chief Financial Officer, and earnings Press release, which was issued earlier this morning, and a slide presentation, which management will be.
Referred to us during our prepared remarks are available and the Investor Relations section of the company's website at Www Dot CPI Aero Dot com at the conclusion of their prepared remarks management will hold a Q&A session.
As a reminder, 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 are the actual results will not differ materially from the results anticipated in the forward.
These statements and.
Putting it included and those risks are risks related to the restatements and the company's prior period consolidated financial statements and and material weaknesses and the companys internal controls and the adverse developments and existing legal proceedings are and the initiation of new legal proceedings. The company's continued compliance with New York Stock Exchange American.
Listing bowls.
In fact, and economic conditions, and the industries and markets, where the company operates.
And the financial market conditions, the impact of Covid, 19, pandemic, including its impact on global supply demand and distribution capabilities as the outbreak continues.
And answer the condition of the company's customers and suppliers.
And the aerospace market.
A level of U S government defense spending, including changes or shifts and defense spending due to budgetary constraints spending cuts.
Adult and from sequestration and the allocation of funds government responses to COVID-19 for changing political conditions and uncertain and funding program.
And ability of the of the government and the company's other customers to terminate contracts at any time production rates for commercial and military aircraft programs competitive pricing pressures and startup costs for new programs technology and product development risks and uncertainty.
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 and the company's annual report on form 10-K for the year ended December 31, 2020, and the company's other filings with the Securities and Exchange Commission.
Because the risks assumptions and uncertainties referred to or Bob could cause actual results or outcomes to differ materially from those expressed and any forward looking statements listeners are cautioned not to place undue reliance on such forward looking statements each of which speak only as of the day 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 Cross and President and Chief Executive Officer, Good morning, Doug.
Good morning, and thank you Cody and good morning, everyone.
Thank you all for joining us this morning for our fourth quarter and 2020 year end earnings call.
Before I begin let me take a minute to recognize the effort of our accounting staff and other members of the team for our central and closing the fiscal year and endured many personal challenges with COVID-19.
Specialty during January and February.
For those of you that God deal and we're grateful for your recovery and for those that had to pick up the workload. During those trying times, we are appreciative for the extra effort.
The 10-K for the period ended December 31, 2020 was filed last night.
And we expect to remain in compliance with regulatory requirements for the SEC and NYSE.
For our call today, I will start with a review of our performance for the fourth quarter and provide my perspective on our full year results. I will then turn the call over to Tom for a detailed review of our financial results for the fourth quarter and I will offer some concluding remarks before opening the line for questions.
For those of you that had been following CPI.
No doubt familiar with the many challenges we faced in 2020.
Not only were we managing through the operational complexities associated with the COVID-19 pandemic.
Although you also attack tackle the multi period financial restatement and time consuming legal challenges related to the restatement.
And as backdrop, we kept our nose to the grindstone, we focused on executing our defended our funded defense backlog and and.
The results we are reporting today testified to our achievements and the fourth quarter and full year 2020.
Our I mean, not only our dedicated and talented workforce, but also are very engaged and active board of directors, which provided much appreciated guidance to me during the most tumultuous time I can remember during my professional career.
Back in early 2020 at the beginning of the pandemic. The board created and oversight Committee that reports to our chairman and works closely with my Executive staff and me.
While created to help us manage our way to the other side of what we thought would be a short term challenge and actuality. The oversight committee is still functioning today and offering valuable counsel and encouragement for holding my executive team and me accountable for results.
Board and I are proud of our collective response to the events of 2020.
And I am pleased to share the results with you all today.
Turning to slide four we delivered on our promise to end the year and a high note.
Driven by increased production tempo of newer defense programs and solid execution on our legacy programs total revenue in the quarter increased nearly 12% and revenue for military programs increased nearly 13%.
Gross profit nearly doubled over last year's fourth quarter, and gross margin expanded 730 basis points to 18, 2%.
The bottom line improved to a $1 $3 million net profit swing of $2 $7 million from the $1 4 million net loss, we reported last year.
And we delivered solid fourth quarter earnings of <unk> 11 per diluted share compared to a loss of 12 cents per share last year.
In addition, as we did throughout 2020, we continue to prioritize liquidity over revenue.
We saw continued improvements and our processes to shorten the cash flow cycle most of our major programs through our setting of working capital management tools developed in 2020.
These tools leaned out the manufacturing process to compress build schedules and more closely manage the flow of inventory into the factory such that materials arrived and now it's close to the point of view us as possible.
And the system that enables quick reaction to unplanned changes and supply of components and customer demand or bolt.
This was critical give anything uncertainties caused by COVID-19.
Reflecting the priority given to liquidity, we deferred more than $1 million and material costs planned for the fourth quarter into early 2021 and.
And the percentage of completion accounting rules incurring less cost means recognizing less revenue and profit. We estimate that this decision has the effect of recognizing approximately $2 million less revenue and the related profit and the fourth quarter than we would've had we incurred those costs and 2020.
You may be wondering why 2020 cash flow from operations was $1 $2 million less and in 2019, Despite our focus on working capital.
And as I have reported before 2019 benefited from and approximately $3 $2 million tailwind caused by a customer overpayment and that was fully repaid during 2020, creating a headwind to reported 2020 cash generation.
Our repayments for this customer was completed during the third quarter of 2020.
And this customer not overpaid us and 2019 reported results for that year would've been $3 6 million dollar use of operating cash and for 2020. We would have reported positive cash from operations of $1 $6 million, a swing of about $5 $2 million on essentially the same revenue.
On slide five I want to touch on a few points about our full year results.
First as you can see from the bridge chart on the left side of the slide we grew revenue for military programs by $10 $5 million, which was just slightly larger than the decline and revenue from commercial aviation programs.
As a result revenue for military programs increased to 90% of total revenue from 79% of total revenue for 2019.
Shift that points to the success of our strategy to focus on military contracts and our business development efforts.
And as mixed shift also drove a significant increase in gross profit and a 340 basis point expansion and gross profit margin year over year, especially as we exited an unprofitable business aviation program and got a boost from some military work transitioning to full production rates.
Reducing our exposure to commercial aviation programs has also helped reduce our upfront inventory investment and improved working capital management.
Second turning to the chart on the right side of the slide you can see that revenue surged in the second half of the year relative to the first half as we had expected based on the timing of ramping up production of new and military programs.
Turning to slide six.
We ended the year with a total backlog of $476 $2 million down around 15% year over year due in large part to our exit from an unprofitable life of program business aviation contracts.
This program had been a drag on cash flow and earnings for several years. So it is very positive for the company. Despite the impact of total backlog 96 per cent of which now consist of multi year contracts with our defense industry customers.
The strategic pivot toward a more defense weighted program ex is more than five years and are making and we believe we are now at an inflection point.
We have earned a nationally recognized and award winning reputation with defense Oems for our capability to manufacture highly complex sophisticated aerostructures and aerospace systems.
As a reminder, when we refer to total backlog, we mean, the total potential value of all of our programs through their respective periods of performance.
Funded backlog is the revenue yet to be recognized on firm purchase orders with customers.
During 2020 funded backlog increased $21 million for $169 $6 million of which 98 per cent for defense markets Approx.
Approximately 56 per cent of the funded backlog and is expected to be recognized as revenue during 2021.
At year end 2020 are funded and defense backlog consisted primarily of orders with Northrop Grumman for the E. <unk> outer wing panel kits program with Lockheed Martin for structural assemblies for the Black Hawk helicopter F 35, and the F 16 fee with.
And with Boeing for the eight and 10 re wing program and.
And direct orders with the U S Air Force for T 38 life extension program components.
Our book to Bill ratio for the 12 months ended December 31 was 1.2 for and this follows a very strong year in 2019, one book to Bill was 129.
For those who may be unfamiliar with the term book to Bill. This ratio compares to the value of orders received to the value of record debt.
For the value of revenue recognized during the period.
The higher the ratio the stronger the demand for your product ratio is higher than one generally indicate that revenue is expected to grow and the future and.
And our case for 2020 for every dollar of revenue we recorded we booked $1.24 of new funded orders for.
For 2020 that translates to book and new funded orders totaling more than $108 million.
Moving to slide seven and a business development team is hard at work building a pipeline of new opportunities to maintain our strong total backlog and our proposal activity remains very strong as we head into 2020 one.
Our pipeline consists of opportunities for follow on awards to current programs as well as brand new opportunities aligned with national security priorities, including electronic warfare, and intelligence surveillance and reconnaissance advanced missile technologies and large scale autonomous systems.
We have already submitted or will soon be submitting proposals for electronic warfare pods.
These are for follow on contracts for CPI Aero is the incumbent and one is for an entirely new system for which there is no incumbent.
We believe that our customers will make awards on each of these competitions within the next few months.
We're also leveraging the subsystem integration and complex Assembly experience gained from our pod manufacturing programs to bid on programs with Oems of autonomous systems.
We are currently responding to a couple of RF queues for work on unmanned systems and if successful this would represent our first order for product used on and unmanned system.
Finally, we are leveraging our experience and advanced missile structure to determine how CPI Aero can play a role within the emerging military and commercial space market.
While market conditions currently favorite defense opportunities, we believe that our capabilities will be and strong demand by commercial aviation customers as the commercial market recovers and we will be ready to capitalize when that time comes.
And now I'll turn the call over to Tom powers, our acting CFO, who will walk you through our financial results for the quarter Tom. Thank.
Thank you Doug.
Please turn to slide nine.
Starting with the quarterly results on the left side of the slide revenue for the fourth quarter of 2020 increased 11, 9% to $25 4 million compared to $22 7 million for last year's fourth quarter.
Revenue for military contracts increased by 12, 9% to $23 4 million, while revenue from commercial aviation contracts was essentially flat from last year at just under $2 million.
Gross profit nearly doubled to $4 6 million compared to $2 5 million due to higher revenue and a more favorable program mix gross profit margin expanded 730 basis points to 18, 2%.
On the strength of the gross profit gains net income for the fourth quarter was approximately $1 3 million for 11 per share compared to a net loss of $1 4 million for 12 cents per share for the fourth quarter of 2019. This is an improvement of $2 7 million or <unk> 23 per share.
Finally cash flow from operations for the fourth quarter was $1 7 million compared to $3 7 million for the fourth quarter last year recall that 2019 benefited from a roughly $3 2 million tailwind due to a customer overpayment that became a headwind for cash during 2020 as we repaid for customer.
Mobile payment was fully paid back during 2020.
On the right side of this slide we present the financial highlights for the full year of 2020 compared to ordered and figures for 2019.
Doug mentioned earlier revenue for the year was essentially flat with gains in revenue for military contracts nearly offset by lower commercial aviation revenue for.
Gross profit increased 35% to approximately $12 million and the gross profit margin expanded 340 basis points, reflecting more favorable mix of military programs and our exit from unprofitable commercial programs, partially offset by lower volume on a Raytheon pod program.
The net loss was narrowed to $1 3 million or 11 cents per share compared to a net loss of $4 5 million for 38 cents per share for 2019.
Turning to slide 10, we present, a few of our key balance sheet accounts at December 31, 2020 compared to December 31, and 2019.
Cash stood at $6 million compared to $5 4 million at December 31, and 2019.
For 2019 balance sheet had $1 4 million and restricted cash which was the amount held in escrow related to our 2018 acquisition of welding metallurgy and.
In December 2020, we entered into a settlement agreement with the seller and welding metallurgy, which resulted in the release to CPI Aero and of the $1 4 million held in escrow.
Cash was was received on December 28 for 2020.
Net contract assets and liabilities stood at $18 1 million compared to $11 7 million at December 31, and 2019.
The increase reflects working capital growth to support our expected revenue growth and 2021 and the repayment of the customer overpayment during 2020.
Total debt stood at $28 $7 million, excluding the $4 8 million along and we've received under the Paycheck protection program provision of the cares Act.
During the year, we reduced our debt by $2 3 million.
As of December 31, and 2020, and we were in compliance with all the covenants contained in our amended Bankunited credit facility.
And I'll turn the call back to Doug.
Thank you Tom.
Please now turn to slide 12.
For a review of our 2021 priorities and outlook.
And 2021, and we intend to maintain our focus on operational excellence as we execute on and our funded backlog and.
<unk>, we expect about 95 per cent of revenue for 2021 will come from deliveries against the funded backlog we had at the end of 2020.
With 20 defense programs, each contributing more than $1 million and revenue.
For context, and 2019, just 13 military programs contributed more than $1 million and revenue.
Several programs are expected to drive revenue growth and 2021.
Some are growing because of ramping production rates such as for example, the next generation Jammer mid band pod, we produced for Raytheon as we start production of the system development and test articles phase of the program.
This project has the potential to be our largest growth program and we are on plan to Sue and delivered the first of 16 S. DTA pods, we expect to deliver in 2020 one.
We also plan to reach first delivery milestones on several programs. During 2021, we announced recently that we shipped our first assembly of F 16, rudder Island and drag chute canister assemblies for Lockheed.
Later this year our plan is to deliver the first mainland and gear pod assemblies to Boeing against purchase orders totaling more than $20 million to support their 810 re wing program.
Other programs that will contribute to revenue or new starts in 2020 one for.
For example, we expect to be commencing work this year on the undisclosed radar a pod, we announced in March as well as to begin work on a second as yet unannounced radar pods.
In addition, the contract we announced in January with Raytheon missile company, it's likewise expected to generate meaningful incremental revenue and 2021.
We also intend to maintain our focus on improving liquidity by continuing to compress and manufacturing cycles, and converting contract assets and inventory into cash.
For 2021, we are especially focused on improving inventory turns for welded products and our repair and overhaul product lines and.
In contrast to the bulk of our business that consists of long lived complex programs. These product lines are typically quick turn sales and we generally do not receive customer contract financing on the material we purchase.
We believe that we have ample opportunity to try and inventory into cash by streamlining and production process and increasing production output from these work cells.
Finally as discussed on earnings calls last year, the steps, we're taking to optimize our working capital requirements have the added benefit of generally leading to higher profit margins as products are manufactured more efficiently.
We expect a reduction in overhead rates and 2021 as new contracts begin production and existing programs ramp to higher rates, causing an increase and the direct labor base.
And remember in 2020, we spent nearly $1 million and advisory fees and added audit fees directly related to the restatement of prior reported results that are not expected to recur again, providing further operating leverage and is expected to benefit the bottom line.
Based on the momentum when we realized and the second half for 2020, and our confidence and our ability to deliver against our funded backlog and our goal is to deliver higher revenue improved profitability and cash flow in 2020, one compared to 2020.
With cash flow generation governing our day to day operation decision, making and we'd have.
Our sights set on improving our financial profile in 'twenty, and 'twenty, one and setting the stage for and even more improvement and 2022.
And closing 2020 was a real gut check you.
And you like that test your ability to overcome obstacles and requires that you zero in on what is really important for your business.
I've always been amazed that the talent.
<unk> and dedication of our employees once the pandemic began and I knew that this group and step up and step up they did.
And especially thank the men and women that were essential to keeping the production line is going.
Designated by our government as essential workers. They came to the factory every day enacted heroically and unselfishly, so that our customers could keep producing and the aircrafts do we need to defend our nation.
We all owe them a respect and our thanks.
Despite numerous challenges we delivered significant improvements and our financial performance for the fourth quarter and full year 2020 compared to the same periods last year.
During the second half of 2020, we began to see the fruits of our defense centric business development strategy that we initiated in 2015, and we expect to sustain momentum and <unk> and.
And 2021.
We have worked hard to establish a reputation as a best in class supplier of complex assemblies and systems to defense contractors, earning their trust and sole suppliers in many cases and expanding our book of business with them.
Our strategy is clear our priorities are defined.
All of us a lofty, but achievable and we are increasingly optimistic about the future.
Jason and you can open the line for questions now thank you.
We will now begin the question and answer session.
And I ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from Ken Herbert from Canaccord. Please go ahead.
Hey, good morning, Doug and Tom really nice fourth quarter and ended the year.
Thank you thank you and good morning.
Hey.
Doug I just wanted to see if we could get a little more specific on the gross margin assumptions and 21, I know youre, not giving a lot of detail and the guidance, but over 'twenty because of other unusual items and everything going on and you had a really nice sort of improvement and gross margins across the quarters.
This 18 point to us.
The appropriate launching point to us we think about 'twenty, one or how should we think about the cadence of gross margins through the year and and how maybe maybe where they where they start out and where they could and.
Okay.
And so.
I wouldn't say debt between the third and fourth quarter of 2020.
That is from from a top line perspective kind of what a typical quarter might look like in 2020 one.
On the margin side I would have to say that we have a lot of new start programs.
And a few of them in my prepared remarks.
That might we might be lower than that 18%, maybe not appreciably lower but somewhere between where we ended now and and 18% for 2020 one.
Okay. Okay.
Great wide range, there, but I appreciate that.
And can you talk a little bit about so you're just credit and little more detail and sort of the top line and how it shakes out.
For the year is there anything noticeable in terms of the cadence of the top line I mean with some of these new program starts and the timing of the backlog, we see perhaps an acceleration and the growth and the second half or how do we how should we think about the framework for the top line.
The way it appears now is that we don't we.
We don't necessarily see a similar pattern like last year, where we knew going into 2020 that the beginning half of the year was what's going to be a much less active than in the second half of the year, where were we started 21 pretty strong and and I and I would say that it kind of stay.
But this for the rest of the year I don't think we're going to going to have a lot of I'll.
And I'll say a back ended the year this year.
And that's the way, it's looking now anyway.
Okay, and then the guidance for for and improvement and cash from operations and.
And in 'twenty, one is that does that and looking at the revised 20 estimate when we back out the customer refund or what's the starting point for that comment on the cash flow.
Well the comment was really related to the GAAP results, we just reported.
I would also envision it being stronger than the.
I'll say the modified result, I just presented.
Okay, perfect and just one final question can you quantify the backlog impact from the business jet program exit.
And the quarter it was roughly.
And third age of $40 million I don't have the exact number but it was a significant number.
Got it I'll pass it back here and thanks, Doug.
Thank you Ken.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Doug Mccrossen CEO for any closing remarks.
Okay. Thank you all for participating in today's call and Tom and I look forward to speaking to you again, when we reported results for the first quarter of 'twenty. One. Thank you have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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