CPI Aerostructures Inc (CVU) 2011 Q3 法說會逐字稿

Greetings and welcome to the CPI Aerostructures Inc. third-quarter 2011 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Edward Fred, Chief Executive Officer. Thank you, Mr. Fred. You may begin.

Thank you, Jackie. Good morning and thank you all for joining us for our third-quarter 2011 conference call. If you need a copy of the press release issued this morning, please contact Lena Cati of The Equity Group at 212-836-9611 and she will fax or e-mail a copy to you. Also if you would like to listen to this call again, you can hear a replay on our website's investor relations section in about an hour at www.CPIAero.com.

Before we get started, I want to remind investors that this conference call will contain forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. Included in these risks are the government's ability to terminate their contracts with us at any time; the government's ability to reduce or modify its contracts if its requirements or budgetary constraints change; the government's right to suspend or bar us from doing business with them; as well as competition in the bidding process for both government and subcontracting contracts.

Our subcontracting customers also have the ability to terminate their contracts with us if we fail to meet the requirements of those contracts or if their customer reduces or modifies the contracts to them due to budgetary constraints.

Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Additional information concerning these and other risks can be found in our filings with the SEC.

This morning I will give you a brief overview of our first nine months results. I will then hand the call over to Vince Palazzolo, our CFO, so he can walk you through the quarter's financial statement details.

As reported earlier this morning, for the first nine months of 2011, revenue was approximately $50.043 million compared to approximately $36.526 million in the first nine months of 2010, an increase of approximately 37%. Pretax income was approximately $6.638 million compared to pretax income of approximately $5.301 million for the same period last year.

Net income for the first nine months of 2011 was approximately $4.744 million or $0.66 per diluted share compared to net income of approximately $3.495 million or $0.53 per diluted share in the first nine months of 2010.

Selling, general, and administrative expenses for the first nine months of 2011 were approximately $5.408 million or 10.85 of revenue, compared to approximately $4.052 million or 11.1% of revenue for the same period of 2010.

So with that prelude, I will now hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details. Then I will comment on the current business environment, our guidance for the current year and 2012, and then briefly wrap things up and open the call to questions. Vince?

Thank you, Ed. As reported in this morning's press release, comparing the third quarter of 2011 to the third quarter of 2010, revenue increased 28% to $16,670,638 from $12,976,084. Gross margin was 25.1% as compared to 26% last year. Pretax income increased 17% to $2,531,042 compared to $2,171,363.

Net income increased 26% to $1,805,042 million or $0.25 per diluted share compared to $1,429,363 million or $0.21 per diluted share. Selling, general, and administrative expenses were approximately $1.525 million or 9.2% of revenue compared to approximately $1.181 million or 9.1% of revenue. Ed?

Thanks, Vince. New orders through October 31 of 2011 were $81.5 million, significantly higher than the $57.7 million reported this time last year and well above our record of $61.7 million for all of last year.

This award growth was driven in part by the fact that we received the expected follow-on releases on two of our major subcontracting programs, the E-2D and the G650. The G650 releases were for $24.5 million, while the E-2D orders equaled $11.2 million. In addition, we received a $2.9 million award from Sikorsky to provide structural assemblies for spares on the Black Hawk military helicopter and won two new programs to build Inlet and Flap assemblies for HondaJet and to manufacture various assemblies for Bell Helicopter for its AH-1Z Zulu Attack Helicopter. There is also real business potential from the approximately $400 million of unawarded solicitations outstanding once these programs are funded and/or awarded.

In the past several years, our reputation has been elevated in our industry thanks to our impressive list of customers, the success we have experienced on the important programs we are working on and the exposure we have had and contacts we have made at various Aerospace & Defense institutional investment conferences. This has manifested itself in the expansion of our customer base this year as we have added two prestigious companies, Honda Aircraft and Bell Helicopter to this list.

We are now in the midst of establishing relationships with additional prime manufacturers including other helicopter and business private jet companies who have come to recognize CPI Aero as a premier supplier of aircraft structure. Among the unawarded bids outstanding are contract opportunities with these potential customers. We look forward to reporting on our progress of turning solicitations with these prospects into awards and contracts in the very near future.

We are confident that we are on track to reach our 2011 guidance, which calls for revenue of approximately $74 million with the resulting net income in the range of $7.4 million to $7.5 million. Additionally, we are reaffirming our guidance for 2012, projecting that revenue will be in the range of $95 million to $98 million with the resulting net income in the range of $12 million to $13 million.

We expect to complete our relocation to our new 171,000 square foot facility by the end of this year. This new location which is nearly three times the size of our current location will provide us with the needed capacity to support our expected growth in new orders, customers, programs, and of course revenue and profits over the coming years.

On a separate note, CPI Aero will continue to tell its story as often as possible and to that point, we will participate in the D. A. Davidson Aerospace & Industrial Conference in Boston on Wednesday, November 16. In addition, we have already been invited to participate in the Noble Financial Eighth Annual Equity Conference in January and the Roth Capital 24th Annual Growth Stock Conference in March.

We look forward to the coming years with great anticipation and excitement as we execute on our current contracts, develop new customers, and deliver unprecedented financial results for our Company.

This is our last conference call for the year. Vince and I want to wish all of you the very best for the holiday season and the coming year.

Now before I turn the call over for questions, I did receive a question from Paul Berger, who could not be on the call. Paul wonders how our A-10 program is faring given that at least one other company has announced that they were having delays on their program, Boeing order delays on their A-10 program.

I won't address the other companies' issues or guidance that they've received from Boeing. I can only speak for us and we have been told to continue producing at the levels that we have been producing at -- that all up -- all scheduling that we have been given previous is to be continued that there is no downturn at the moment. I can't exactly tell you why one company is told to slow down and a company like us is told to continue. The only thing I will say is that the majority of the parts we build are then sent to Korea to be integrated onto the wing assembly that Korean Air is producing for Boeing and it might just be that they don't want that to lay in that particular area.

But in answer to your question, Paul, we are right on track, right on schedule. We see no delays. We have asked our customer and they have made it quite clear that at this point, there are no delays predicted for us.

So with that said, at this point, Jackie, I would like to open the floor to questions, so if you could allow callers to place questions now, please.

(Operator Instructions). Mark Jordan, Noble Financial Group Inc.

Good morning, gentlemen. A question relative to financing. We did see that you had increased your bank line to $13 million with I guess a maturity on 11/30. Could you tell us what your plans are with regards to funding over the next 12 months? And related to that, when do you expect to see the Boeing contract turn cash flow positive?

Yes, we are actually still -- we are in the process of working with our current bank and pulling the potential of other financing solutions. We expect that we will have a resolution before -- well, we don't expect, we will have a resolution of what our funding plans are going to be with our bank before the end of the month, before the temporary line runs out. Still working through some negotiations and we will announce that as soon as we finalize the financings.

In terms of the Boeing contract which has been disclosed as a cash flow drain over the last -- over this year, we anticipate that the turnaround in that will come probably in the first half of next year. I would like to say in the first quarter, but I'm not going to commit to that, so figure sometime in the spring of next year.

Okay, related to that, is the gating issue the acceptance of the wing? And where does that stand? (multiple speakers) The first article, yes.

I am not sure what Boeing is scheduling on the acceptance of the first article is. We have worked directly with Boeing to -- since all of our parts have been accepted, work with Boeing to work out a separate payment arrangement with them to cover our portion of the program as that has been accepted already.

Thank you. One last question. Of the $399 million pipeline, what is representative of new customers versus existing?

I'm going to say that it's probably 25% new customers, 75% current customers.

Okay, thank you very much.

Alex Silverman, Special Situations Fund.

Most of my questions have been asked and answered. One question, did the four wings for the A-10 ship at this point?

Which four wings?

Boeing expected to have four wings shipped by the end of October. Are you aware whether those shipped or not?

We are not aware. We were not privy to that information.

Other than that, everything else has been asked. Thank you.

Alex Hamilton, EarlyBirdCapital.

Good morning. Two modeling questions first a macro question. Tax rate for the year, would it be unreasonable to assume I guess the same tax rate that you had this quarter?

I would model about 30% to 31% on an annualized basis.

Okay, that's fair. And accounts receivable, I noticed a little pick up. What was behind that?

Part of that is some cycle, slow cycling of the Northrop Grumman receivables on progress payments, as we are working through some three-way issues between the government, Northrop Grumman, and us. So we had some big progress payments that have been submitted that just haven't been paid yet.

I guess better you than me dealing with that, right?

Yes, it's a very exciting process.

And two sort of macro questions. Honda, what is the current run rate on that? On the [Honda]?

The risk you run it at the moment. They are delayed, as people probably read a about. We were not to have started generating income yet. That's all 2012 income for us and that will be set up in the new building and start there. So there is no run rate.

And then just sort of being a student of aerospace defense, the fact that you have the Bell business, how does it work now trying to -- as you said, you are trying to get other helicopter manufacturers and business chip manufacturers. How does it work leveraging yourself into potentially the commercial side of Bell and on the Cessna side?

It certainly helps. It helps a lot. It has opened the doors. I'll be candid and say we talk to Cessna now. We are taking a look at various programs Cessna is working on to see what we can do there. And probably like any other program we work on or any other customer we work on, we will try once or twice and not get anything and then something will click.

But it's huge to be able to leverage those kinds of things. Bell is going to be -- prove to be a very, very valuable customer to us, not just because of their military helicopters, but as you said, their civilian arena and then also Cessna. So a lot of leverage.

Okay. Thank you.

Brian Post, ROTH Capital Partners.

Most of my questions have been answered. You touched on just a general government spending environment a little bit when you commented on Boeing. Do you have any other color on any sort of change or perceived change in bidding or award activity from the government as of the last quarter or two?

Since we have had so limit amount, such a limited amount of government bidding quite honestly, we are not seeing many changes. The only thing we see, and this is philosophical, this isn't factual, so please understand that as I answer the question.

It's just my opinion that we happen to be in the right arena in this environment where people are looking to cut defense budgets, to cut defense spending, etc., in that we are on legacy programs for the most part or programs that have absolutely no replacements on the horizon for them and therefore must be dealt with. E2 has no other competitor, if you will.

You can't land an AWACS plane on an aircraft carrier, so we need to as an absolute requirement to protect the fleet. The A-10, there is no other plane in our entire inventory that serves the same purpose and performs the same mission as an A-10. So unless you are going to rewing the A-10, you're going to get have to go out and build a brand-new aircraft. That's not about to happen in this environment.

You see all the time every other day, you read about how the F-35 looks like it's going to get cut back, cut out, sliced and diced, and this and that. We are not on the F-35 at this point in time. Would I take parts on it? Sure, but our future growth is not hinged on programs like that.

So I think we are positioned as well as we can be given this military and governmental spending environment. It doesn't mean we can't get hurt just like everybody else can get hurt, but I think our risk is a whole lot lower based on the programs we are on.

Okay, and building on some other questions that have been asked, the Northrop Grumman receivable, do you expect that to be resolved by the end of the quarter? Is that a carry forward issue?

It should be resolved before the end of the year.

Okay, and then one last one on Honda, you said that there has been a delay. Your fiscal '12 guidance, does that include any HondaJet revenue? Is it subject to delay?

Yes, it does, but that is not -- in other words when I said subject to a delay, not to us. Honda itself has said they have had issues with their engining and they are probably not looking now to get certification till 2013. However, we will still be building the tooling required and building the low-level production units required to go ahead and do what we are supposed to do. So we see no impact on our 2012 revenue at all.

Thank you.

Marco Rodriguez, Stonegate Securities.

Good morning, guys. Thank you for taking my questions. A few quick questions here. On the SG&A line, a decent tick down. Is the delta from a sequential basis mainly the stock option expense from Q2?

Yes, that's all. Almost all of the difference.

Okay, got it. Then just some housekeeping items here real quick. What was cash flow from operations or usage and D&A and CapEx in the quarter?

Depreciation and amortization in the quarter was $170,000 and cash flow from operations in the quarter was negative $4.5 million.

And CapEx?

CapEx in the quarter was $500,000.

Understand the CapEx -- giant numbers in CapEx relates to going to the new building. It's not new computer systems. It's not stuff for this -- it is the capital improvements being made to ready the building for our occupation.

Got it, and then just two other kind of higher-level questions in regard to the bids outstanding that $400 million level, thereabouts, can you provide an update on what Sikorsky represents of that?

It is at about $125 million like it has been.

Okay, and are you seeing any further movement in regards to the [whole] Gold Supplier status -- maybe some acceleration there in terms of orders or potential orders?

Well, we have had the status now for a year. We have been a Supplier Gold for a year. As a matter of fact, we were just told we will be recertified again. And just for people to understand how important that is or how difficult that is, it has been brought to our attention that 30% of the people who were made supplier of did not get it back again the second year. We will.

So that's pretty outstanding and I'm very proud of my people for making sure we continue that.

As far as what impact it has now, we believe we are in line to win some major programs from Sikorsky, wherein being Supplier Gold certainly helped us in the competitive process. Sikorsky is in the midst of still negotiating Multiyear VIII with the United States government and that has been the cause of the delay in them awarding contracts down to their supplier level.

We are highly confident in what we will receive once that logjam breaks. Obviously it's in the best interests of the government and Sikorsky to get their negotiation done as soon as possible. So we just have to kind of sit on the sidelines and watch and just wait it out and then again, we anticipate receiving some very nice awards thereafter. And Supplier Gold was certainly part of the reason for us getting them.

Okay, great. Thanks a lot, guys.

(Operator Instructions). John Kohler, Oppenheimer & Co.

Good morning, gentlemen. A question. I was wondering what the total amount expensed in the income statement was for the move and what were the total costs incurred in the quarter was?

The cost incurred for the move in the September quarter is nominal, $100,000 or less. Probably less than $100,000. The costs associated with the move in the fourth quarter, I'm going to say is probably about $300,000 to $400,000.

But what we have incurred so far on the new building or at least through September 30 was mostly capital expenditures like getting our airlines installed at the new building and the wiring related to our production space and the buildout of our quality area and things like that all capital expenditures, not expense -- not period expenses.

Okay, great. And you are pretty comfortable with -- I assume there was pre-building or getting some product in line just in case. You are all caught up on that?

Yes.

Any buildup would be evident in the Q3?

Where we needed to, we built up what I will call a bubble of product so that we could take the couple of weeks it takes the move tools, etc. And I think as I've mentioned on a couple of other occasions also in some of our contracts, Spirit in particular, there was an actual callout for a two-week stop in production so that all the tools could be recalibrated, make sure they stayed at their quality standards, if you will.

And so what we've done already, quite candidly, is when we hit that timeframe, that spot, we actually stopped building, picked those tools up, moved them across the street, dropped them there the same day, and now the recalibration is being done in the building itself, so we don't have to do it a second time.

So again, the timing of it has worked out very well. We see no production issues whatsoever. We have had help quite frankly from all of our customers in establishing the quality requirements to make sure we can deliver product from that building.

Sikorsky actually spent two days here last week with our continuous improvement lean manufacturing people, helping us lay out their section in the most efficient way possible. So this has been seen as a very, very positive thing by our customers especially and they have been terrific in lending a hand to help us make it even more efficient.

Great, thanks a lot.

Mark Jordan, Noble Financial.

I'm sorry, I had my mute button on. I apologize. Do you have a funded backlog number as of the end of the third quarter? I believe it was 64.8 at the end of the second.

I do have that number. I don't have it available with me right here. Give me a call off-line. I can get you that one.

Okay, thank you.

Michael Potter, Monarch Capital Group.

Great quarter. Just want to -- obviously our backlog is quite large and we have been holding this level for some time. Do you anticipate that we are going to see a big I guess schedule of releases between now and the end of the year?

I want to say to you yes. I can't promise you that's true. From what we believe, yes, we think we are going to see one or two of the Sikorsky things free up. There are some other potential things in there that we are very hopeful we are going to win that should occur prior to the end of the year. So yes, we are anticipating that.

That said, we don't control it so I can't give you my word it's going to happen that way, but we certainly are anticipating that.

But it looks like we can go into next year with over $100 million of awards for 2011?

I think that's a reasonable assumption, Mike. Absolutely.

Okay, just a follow-up from I guess the question that I think I asked the last call. Our conversations with Spirit and the G650, I know it's scheduled to get initial certification before the end of the year. Any further discussions with Spirit about them offloading more work to us especially as they continue to ramp up production of the 787?

Every single month on a monthly call with them we address that issue. I think -- and again, this is an opinion and a feeling, not anything they've said to us. I think they want to know the 787 is completely on track. That thing has had stops and starts now for three years. And so I think everybody is a little uncomfortable about offloading too much work only to find out, oh heck, we just give away XY and Z and 787 has another problem.

I don't think anybody believes there's a problem anymore. I think everybody is of the opinion that the issues Boeing had are gone, but there is that hesitancy yet to give out new work.

Again, we do ask for it every month. We continue to pursue it. We visit there every single month and as soon as they are ready to give something out, we will be there with our hands out to take it.

All right. Thanks, guys. Great job.

Thank you. At this time, there are no further questions. I would like to hand the floor back over to management.

Thank you, Jackie. Well, I would like to thank you all for participating in this call and look forward to speaking to you again in mid-March 2012 for our fourth-quarter and year-end earnings call. Thank you.