CPI Aerostructures Inc (CVU) 2015 Q1 法說會逐字稿

Welcome to CPI Aero's 2015 first-quarter results conference call. With us today are Douglas McCrosson, President and Chief Executive Officer, and Vincent Palazzolo, Chief Financial Officer. After management's prepared remarks there will be a Q&A session.

(Operator Instructions)

As a reminder 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 the Company at any time, the government's ability to reduce or modify its contracts if requirements or budgetary constraints change, the government's right to suspend or bar the Company from doing business with them as well as competition in the bidding process for both government and subcontracting contracts.

Subcontracting customers also have the ability to terminate their contracts with the Company if it fails to meet the requirements of those contracts or if their customer reduces or modifies its 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 filings with the SEC.

Now I will transfer the call to Douglas McCrosson, CPI Aero's President and Chief Executive Officer.

Thank you, Kevin. Good morning and thank you to all for joining us for our 2015 first-quarter results conference call. I'd like to start this call by providing a summary of our achievements for the quarter and then turn the call over to Vince who will discuss our recent financial results.

Yesterday after the close of the market we released our first-quarter 2015 financial results. Our reported revenue and earnings per share for the first quarter of 2015 were in line with our internal forecast for the period and we remain on target for the year as a whole.

Due to the timing of delivery orders associated with several recently announced major programs we expect our performance for the second half of the year to be much stronger than the first half and 2015 to be a record year in terms of revenue. We are still projecting full-year revenue of $92 million to $102 million surpassing the $89.3 million of revenue we recorded in 2012.

Before I turn the call over to Vince I want to share what I believe to be the three key takeaways as you review our first-quarter 2015 performance. First, total backlog at March 31, 2015 increased by $39.9 million to $442.6 million as compared to 2014 year-end. The gross profit margin for the first quarter of 2015 was adversely affected by the change in estimate we made in 2Q 2014 for our A-10 Wing Replacement Program. That program was contributing profitable revenue in the first quarter of 2014 and now we are booking A-10 WRP revenue at zero profit.

We believe analyzing the gross profit margin for the rest of our products is key to assess how the rest of the business is performing. I am very encouraged to see that gross profit margin for the first-quarter 2015 improved by 200 basis points when compared to the first quarter of 2014 after excluding the contributions of the A-10 WRP during both periods. Clearly we are seeing the results of our various efforts to drive direct and indirect cost out of our production process.

Third, since the beginning of the year through March 31, we received approximately $16.2 million in new contract awards which is approximately $11.5 million over new contract awards received in the same period of 2014 and our best start to a year since 2012.

With that prelude I will now hand the call over to Vince Palazzolo, our CFO, to discuss our recent financial results and expectations for 2015. Then I will comment on the current business environment, backlog in contract awards and new growth opportunities going forward. I will then open the call to questions.

Vince?

Thank you, Doug. Starting with our financial performance for first quarter of 2015, as shown on slide 6 for the first quarter of 2015 as compared to the first quarter of 2014 we reported revenue of $19.9 million as compared to $21.9 million, gross margin of 18.1% as compared to 20.5%, pretax income of $1.4 million compared to $2.5 million and net income of approximately $0.9 million or $0.11 per diluted share compared to $1.7 million or $0.20 per diluted share.

Moving to slide 7, in the first quarter of 2015 approximately 49% of total revenue, or $9.2 million was generated from commercial programs. This compared to approximately $7.3 million reported in the first quarter of 2014, up by $1.9 million which was due to increased production on our Embraer and Honda programs. As expected revenue generated from military contracts in the first quarter of 2015 decreased as compared to the same quarter of 2014 due to lower revenues from our E-2D deprogram with Northrop Grumman as work on the new E-2D multiyear award has not yet reached its peak rate.

During the quarter we continued to book revenue for the A-10 Wing Replacement Program at zero margin as compared to 18.6% gross margin for this program in the first quarter of 2014. As a result as shown on slide 8 our gross margin for the current quarter was 18.1% compared to a gross margin of 20.5% in the quarter ended March 31, 2014.

Excluding the effect of the A-10 program the first-quarter 2015 gross margin on all remaining programs improved 23.1% as compared to 21.1% in the same period in 2014. This increase is primarily the result of higher gross margin on the Company's commercial programs as production rates have increased.

Slide 9 summarizes our guidance for 2015. As previously mentioned, our performance for the second half of the year is expected to be much stronger than the first half due to the timing of delivery orders associated with several recently announced major programs, most notably our E-2D outer wing panel kits program for Northrop Grumman.

Specifically for 2015 we expect record revenue in the range of $92 million to $102 million, gross margin for 2015 in the range of 19% to 21%, although lower than our historical margin as we will continue to book A-10 WRP revenue at zero profit. Net income in the range of $7.2 million to $8 million. Additionally, in 2015 we expect to receive a cash benefit of between $13 million and $15 million due to the recovery of previously paid income taxes and the use of tax loss carryforwards related to our A-10 WRP.

The following slides provide 2015 revenue breakdown by market, subcontract role and segment. Starting with revenue breakdown by market as shown on slide 10 in 2015 we expect the military/commercial split for 2015 to change as compared to the split of approximately 55/45 in 2014, with military revenue to account for approximately 61% of our total revenue, growing by 20% year over year due to our recent military contract wins.

Commercial revenue for the first three months of the year increased each quarter. We are still protecting the commercial revenue will decrease year over year as the majority of the new contract wins in 2014 were for military programs. Production for these defense programs is expected to ramp up in the coming months, supporting our expectations for a much stronger second half compared to the first half of the year.

Regarding our revenue breakdown by subcontract role as shown on slide 11 the majority of our revenue over 80% is expected to be generated from programs for which we have a Tier 1 role. 2015 Tier 2 revenue is expected to slightly decline while our revenue generated from prime and Tier 1 type contracts are expected to substantially grow in 2015 as compared to 2014.

Slide 12 shows the breakdown within our three main segments. Kitting & SCM to account for 36% of total revenue and is expected to grow by 70% compared to 2014. While just 8% of our 2015 revenue was expected to be from our aerosystems segment we project this figure to increase in 2016 as certain international pod programs should be awarded to our customers later this year. Our aerostructures business is expected to decline year over year due to decreasing revenue from certain fixed wing programs, most notably our A-10 WRP as well as purposeful business development activities aimed at increasing the revenue derived from other segments.

Moving to slide 13, we have several initiatives to further improve our financial position. These initiatives include the following: to continue to pay down debt and reduce interest expense, to continue to invest in automation which should favorably impact operating efficiencies, to continue to drive production cost down to improve cash flow from operations, to further reduce overhead and SG&A rates which currently are at historical low rates.

As shown on slide 14, our initiatives are supported by $13 million to $15 million tax refund/tax loss carryforwards related to the change in estimate on the A-10 Wing Replacement Program recorded in the second quarter of 2014. And we have a $35 million revolving credit facility which is expandable to $50 million of which $5.85 million was available at March 31, 2015.

Now I will hand the call over to Doug will comment on the backlog, contract awards, current business environment and new growth opportunities going forward. He will then open the call to questions. Doug?

Thank you, Vince. Since the beginning of the year through March 31, 2015 we've received approximately $16.2 million in new business which included approximately $7.5 million of military orders and approximately $8.7 million of commercial orders compared to a total of $4.7 million in new contract awards for both military and commercial programs in the same period of last year.

As slide 16 shows, at March 31, 2015 our total backlog increased to $442.6 million as compared to $403.7 million at December 31, 2014. Funded backlog was $120.4 million, similar to funded backlog at December 31, 2014. And unfunded backlog comprised 73% of total backlog, an increase to $322.2 million with 44% related to our long-term commercial aerospace program.

Slide 17 shows our largest contracts currently in progress including our recently won contracts which collectively have the potential to generate revenue of $438 million during the remainder of their performance periods. Of note, the three most recent defense-related program wins for work on the F-16, T-38 and the E-2, C-2 collectively added over $188 million and backlog recognizable through 2022.

Slide 18 provides an update of a few of our programs currently in progress and the three recent wins I just mentioned. Starting with our multiyear contract for E-2D, C-2A outer wing panel kits this contract added more than $63 million in new funded backlog. We will begin to recognize revenue from the multiyear order for the second quarter of 2014, I'm sorry, in the second quarter of 2015 and significant revenue is expected to occur in both the third and fourth quarter of this year as we receive purchased detail parts from our suppliers.

Our Phenom 300 engine inlet assembly program with Embraer continues to perform well and we have successfully ramped the full rate production of more than 10 shipsets per month. This is up sharply from the two shipsets per month rate of early 2014.

HondaJet, one of the newest and most technologically advanced light jets on the market, is another important program for CPI. In late March Honda Aircraft received FAA provisional-type certification for its business jet and it is expecting to receive its final type certification in the next few months.

Honda has publicly stated that it has booked orders for more than 100 aircraft and that they expect to deliver at least this many aircraft during the first 24 months following the final type certification. We look forward to ramping to full rate production over the coming months.

We have a potential $53.5 million contract with the Defense Logistics Agency to provide structural wing components and logistical support for global F-16 aircraft maintenance repair and overhaul operations. We will not use percentage of completion revenue recognition on this program and will record revenue when we deliver product to the customer.

Due to supplier leadtimes and a delayed start resulting from an unsuccessful protest of this contract by a competitor, we now expect that 2015 will be spent acquiring inventory and obtaining the approvals needed to begin product deliveries in the first quarter of 2016. While some product sales may in fact start this year we do not project this program to have meaningful revenue this year.

Our newest long-term program was awarded in February this year and is a $49 million contract to provide structural modification kits for the T-38 Pacer Classic II program. This contract is part of a larger Air Force effort to enhance operational capability while improving flight safety, reliability and maintainability of the T-38 trainer. Along with the contract we received a firm delivery order that added $5.6 million to funded backlog.

In addition to these contracts we were recently awarded two follow-on awards. The first one is a $1.21 million contract by Northrop Grumman to manufacture pod structural housings for their airborne laser mine detection system called ALMDS. The contract includes options which if exercised would bring the cumulative value to $6.75 million.

Deliveries for this contract are scheduled to commence in early 2016 and the period of performance including option periods is through 2021. CPI Aero has participated on the ALMDS program since 2005 and since this time we have delivered a total of 18 ALMDS pod structural housings.

The second award is a $3 million purchase order from Cessna Aircraft Company to supply wing spar assemblies on their flagship aircraft, the new Citation X+. This purchase order is a follow-on to the long-term agreement announced in October 2012 and brings the total value of firm orders to approximately $12.2 million and extends production backlog through late 2016.

Moving to slide 19 this slide summarizes our bid pipeline and breakdown by segment and position within the supply chain. We have submitted several proposals for high-value programs for both the commercial and defense aerospace markets. These opportunities span across all segments of our business at both the Tier 1 and Tier 2 level.

Over the years we have successfully competed for a number of opportunities in both commercial and defense markets. The commercial defense mix within the bid pipeline changes as a function of the timing of proposal submittals and awards. At the present time most of our submitted bids, around 63% by value, happen to be for military aircraft structure and aero systems including the F-35 fighter and pod-based electronic systems.

We have submitted or will soon be submitting several high-value proposals for regional and large commercial airliner assembly programs. For example, on slide 20 you will note that we have bids for structural assemblies on aircrafts such as the Boeing 787 Dreamliner, the Embraer E2 regional jet and the Bombardier C-series airliner. These proposals are for both Tier 1 and Tier 2 applications.

While timing of the review and evaluation of proposals by the potential customer and final decisions remain out of our control I would like to emphasize that our guidance for 2015 does not include revenue from a potential win, a large commercial airliner.

Moving to slide 21, our strategy is clear: one, focus on gaining marketshare at the Tier 1 level, particularly within high mix lower volume markets such as defense business aviation and regional airliners; two, invest in new manufacturing technologies that increase capacity and lower unit cost to improve margins on current products and to better position CPI Aero as a Tier 1 or Tier 2 manufacturer within higher volume markets such as the large commercial airliner market; three, develop new sales channels and service offerings for our aftermarket and MRO services business to provide a better balance between long cycle in short cycle sales.

With regard to item 2 above, the automated mini riveter we acquired late last year is operational about two months ahead of plan. We are expecting to see a considerable labor savings compared to a fully manual riveting process. In its first actual use, a riveting operation that took 3.5 hours was reduced to a little more than one hour.

Likewise, our new 3D printer is already producing tooling details at significantly last cost than machined tool details and with greatly reduced leadtime. We are on pace to pay back the investment in around 12 or 13 months.

As important as the cost savings these investments have shown our customers that CPI Aero is serious about continuous improvement, lean manufacturing and increasing our capacity. We are now able to credibly complete for larger and more complex programs especially large-scale high production rate applications like commercial airliners from both domestic and international customers.

Our efforts in this area were recently recognized by Frost & Sullivan's manufacturing leadership Council as we were named the winner of the 2015 Manufacturing Leadership Award. The Manufacturing Leadership Awards recognize world-class manufacturing companies that distinguish themselves by embracing breakthrough innovation. CPI Aero was selected as the winner in the engineering and production technology leadership category for improving and streamlining the manufacturing process for improved productivity. We are very proud to be part of a very selective list of winners in this category including companies such as General Motors, DKN Aerospace and Lockheed Martin.

In the coming quarters we plan to use a portion of the $13 million to $15 million in cash benefit we expect to receive from the recovery of previously paid income taxes and the use of tax loss carryforwards related to our A-10 WRP to further invest in advanced technologies, program risksharing to help capture new long-term commercial contracts, our infrastructure and in skills training.

Moving to slide 22, our efforts have well positioned CPI Aero for even greater success in the future. Our belief is supported by our large and diversified backlog of over $440 million, our growing bid pipeline, new opportunities for both the defense and commercial markets, the ability to perform in larger and more complex programs due to investments in advanced technologies and best growth opportunities arising from developments in both commercial aerospace and the military defense sector.

Before opening the lines for questions I would like to mention that we will be presenting at three conferences in the following week: the B. Riley Conference on May 14 in Los Angeles, the Benchmark 101 Conference on May 28 in Milwaukee and the Drexel Hamilton A&D Conference on June 11 in New York City. I'm sure we will see some of you there.

This concludes our prepared remarks. At this point I'd like to open the floor to questions. Kevin, please allow to place questions.

(Operator Instructions) Mark Jordan, Noble Financial.

Yes, good morning gentlemen. A question relative to your guidance, the bottom end of the range at $92 million, if you exclude A-10 revenue, what percent of that $92 million is currently funded backlog?

It's a little over 95% of that.

And when do expect the balance of that to be nailed down? Is that something -- is that business you have to find or is that just existing relationships that haven't been funded yet?

The latter, Mark.

Okay. A question relative to the A-10, how do you see that playing out this year in terms of funded backlog that you have currently and when is the decision point if another option or more work gets committed?

Our backlog does not contain any more releases on A-10. The current political situation is rapidly changing. If people are aware, maybe some of you follow it for other reasons, the budget process down in Washington, right now the only thing that we know for sure is that the House Armed Services Committee has put funding in to keep the A-10 in the fleet to provide maintenance and upgrade funding for that program and we believe that to also include a new release of wings beyond the current orders that we have now with Boeing.

How that plays out over the coming months during this budget process is anybody's guess. We are internally functioning under the scenario that we been operating under frankly for over a year now which is that we will continue to produce A-10 assemblies, ship to our customer, probably now for the balance of the year although there has been -- it's roughly the same number of aircraft that we will be delivering.

We're spreading it out if you will so that our assumptions are all valid, the assumptions we made back in 2014 remain valid today. If the Congress ultimately does fund the wings that are currently in the House version of the budget then I would expect Boeing would receive an order later this year and then we would receive an order some time after that.

The economics are going to be different on any subsequent order because we're no longer under the terms of our long-term agreement we negotiated back in 2007, 2008. In a way I'm neutral on it, I'm going to wait and see, but there's a potential upside if the Congress fully funds the A-10 including new wings.

So just to reiterate that, if there was an additional lot authorized, that would not -- that would be economically be positive event for you versus a neutral to negative?

That is correct. It would be positive for us.

Okay, final question for me. I noticed in the 8-K filed yesterday that there was an amendment to the bank lines. Could you summarize the changes that were implemented with that amendment?

The change basically related to one specific financial covenant, the leverage ratio covenant. We increased the maximum leverage ratio from 2.75 to 1 to 3.25 to 1 for the first quarter of 2015 and then having a sliding scale for the remainder of the year.

Mostly that's related it was necessary because we were not really comparing apples to apples. We were comparing income in the first quarter of 2015 with zero margin, zero margin A-10 revenue compared to last year's positive margin A-10. So it kind of threw the ratio out of whack and we just fixed up the amount so for the remainder of this year that will level itself out until all of the periods become comparable again.

Okay, thank you very much.

(Operator Instructions) Mike Crawford, B. Riley & Company.

Good morning. So it's nice you're expecting this near-term acceleration in Tier 2 opportunities for large commercial platforms.

What do you mean by that? And how many of these bids have already been submitted would you say?

What we've seen, I'm going to say starting in late last year into early this year, is we've seen increased opportunities for the large commercial airliners, primarily on 787 and the Embraer E-2 and there's a couple of factors that go into that.

I think we're getting those Tier 2, in one case I'm sorry it's a Tier 1 application, but we're getting these opportunities now for a combination of past performance with these customers. And in both cases they're existing customers and we're getting our investments in the technologies are convincing them that we could actually perform this if we're successful at the rates they would be expecting. We have submitted some smaller ones and then we have two large ones that we're putting in that have to go in in the May, June time frame.

Okay, thank you. Then, for Embraer today I think you're doing like 12 shipsets per month, intending to ramp to 14. Would that make that just about the highest volume program you've worked on so far?

That is -- the Embraer right now is our highest delivery rate program by quite a large measure actually. And we expect that rate to continue at least through the first quarter of 2016, possibly longer. That rate doesn't go on forever of course, but that is what the rate is currently.

So has that been one of the stumbling blocks, just being able to demonstrate the ability to produce at a high rate? If you take 737 where it's 30 or 35 shipsets a month --

Yes, I mean there is that, Mike and it is -- it's both the rate and our ability to meet delivery schedules as we increased the ramp and we were very successful on our Embraer program in doing both while maintaining the quality. I think this past actually about two weeks ago Embraer had a supplier summit down in Brazil where they bring in their top suppliers and we were asked to actually be one of the keynote, the voice of the supplier for that conference because of our success on the ramp up and the increase in our production rate.

So we have a very happy customer with Embraer. And I think we were able to demonstrate to the larger audience during that presentation that we're making the right investments to be I'll say all call it a credible Tier 1 supplier for these large applications.

Great, thank you. Then last question is you're nicely two for two on these logistics supply chain management bids. Are there others that you have submitted or will be submitting that are similar?

Yes, the one that we're looking at now it is during the RFI stage which is pre-RFQ is an F-16 service life extension program that's been publicly announced by the Air Force. And we believe pretty strongly that we'll be able to offer a very competitive bid piggybacking if you will on our recent win that supports the wing production line out at Hill Air Force Base.

Great. Thanks very much.

(Operator Instructions) If there are no further questions at this time I'd like to turn the floor back over to management for any further or closing comments.

All right, thank you. Thank you all for participating in this call.

We look forward to speaking to you again in early August when we announce our 2015 second-quarter results. Thank you.

Thank you. That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.