CPI AEROSTRUCTURES, INC.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended March 31, 2005
CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)
New York 11-2520310
--------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
60 Heartland Blvd., Edgewood, NY 11717
-------------------------------- -----
(Address of principal executive offices) (zip code)
(631) 586-5200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No X
--- ---
As of May 13, 2005, the number of shares of common stock, par value $.001 per
share, outstanding was 5,418,400.
CPI AEROSTRUCTURES, INC.
INDEX
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Part I: Financial Information:
Item 1 - Condensed Financial Statements:
Balance Sheets as of March 31, 2005 (Unaudited) and 3
December 31, 2004
Statements of Income for the Three Months ended March 31, 2005 4
(Unaudited) and 2004 (Unaudited)
Statements of Cash Flows for the Three Months ended March 31, 2005 5
(Unaudited) and 2004 (Unaudited)
Notes to Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12
Item 4 - Controls and Procedures 13
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures and Certifications 15
CPI AEROSTRUCTURES, INC.
PART I: FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
CONDENSED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2005 2004
(UNAUDITED)
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ASSETS
Current Assets:
Cash $1,222,910 $1,756,350
Accounts receivable 2,647,955 1,641,002
Costs and estimated earnings in excess of
billings on uncompleted contracts 25,433,107 26,030,507
Prepaid expenses and other current assets 117,934 182,003
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TOTAL CURRENT ASSETS 29,421,906 29,609,862
Plant and equipment, net 987,327 882,758
Other assets 260,686 266,504
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TOTAL ASSETS $30,669,919 $30,759,124
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,710,986 $4,332,255
Accrued expenses 310,889 525,061
Current portion of long-term debt 83,370 83,144
Deferred income taxes 90,000 144,000
Income taxes payable 337,000 129,000
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TOTAL CURRENT LIABILITIES 4,532,245 5,213,460
Long-term debt, net of current portion 108,349 129,276
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TOTAL LIABILITIES 4,640,594 5,342,736
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Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized
50,000,000 shares, issued 5,449,415 and
5,443,415 shares, respectively, and
outstanding 5,418,400 and 5,412,400 shares,
respectively 5,449 5,443
Additional paid-in capital 22,575,991 22,541,716
Retained earnings 3,768,741 3,190,085
Treasury stock (320,856) (320,856)
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TOTAL SHAREHOLDERS' EQUITY 26,029,325 25,416,388
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,669,919 $30,759,124
================================================================================
See Notes to Condensed Financial Statements
3
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED MARCH 31, 2005 2004
(UNAUDITED)
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Revenue $6,245,102 $6,228,108
Cost of sales 4,422,985 4,302,014
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Gross profit 1,822,117 1,926,094
Selling, general and administrative expenses 885,511 838,076
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Income from operations 936,606 1,088,018
Other expense 3,950 1,206
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Income before provision for income taxes 932,656 1,086,812
Provision for income taxes 354,000 435,000
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Net income $578,656 $651,812
================================================================================
Income per common share - basic $0.11 $0.12
================================================================================
Income per common share - diluted $0.09 $0.11
================================================================================
Shares used in computing income per common share:
Basic 5,417,300 5,301,770
Diluted 6,167,995 5,800,120
See Notes to Condensed Financial Statements
4
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2005 2004
(UNAUDITED)
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Cash flows from operating activities:
Net income $578,656 $651,812
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 46,535 27,579
Deferred portion of provision for income taxes (54,000) 435,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,006,953) 34,748
(Increase) decrease in costs and estimated earnings
in excess of billings on uncompleted contracts 597,400 (1,158,906)
Decrease in prepaid expenses and other assets 69,887 66,598
Decrease in accounts payable and accrued expenses (835,441) (1,217,900)
Increase (decrease) in income taxes payable 208,000 (171,247)
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Net cash used in operating activities (395,916) (1,332,316)
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Cash used in investing activities - purchase of
plant and equipment (151,104) (47,861)
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Cash flows from financing activities:
Net repayment of long-term debt (20,701) (2,434)
Proceeds from exercise of stock options 34,281 ---
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Net cash (used in) provided by financing activities 13,580 (2,434)
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Net decrease in cash (533,440) (1,382,611)
Cash at beginning of period 1,756,350 2,794,310
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Cash at end of period $1,222,910 $1,411,699
========================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,466 $3,417
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Income taxes $215,029 $171,247
========================================================================================
See Notes to Condensed Financial Statements
5
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. INTERIM The financial statements as of March 31, 2005 and for the
FINANCIAL three months ended March 31, 2005 and 2004 are unaudited,
STATEMENTS: however, in the opinion of the management of the Company,
these financial statements reflect all adjustments (consisting
solely of normal recurring adjustments) necessary to present
fairly the financial position of the Company and the results
of operations. The results of operations for such interim
periods are not necessarily indicative of the results to be
obtained for a full year.
The Company has elected to apply Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, and related interpretations in accounting for its
stock options issued to employees (intrinsic value) and has
adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation. Had the Company elected to
recognize compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS No.
123, the Company's net income and income per common share
would have been as follows:
Three months ended March 31, 2005 2004
--------------------------------------------------------------
Net income - as reported $578,656 $651,812
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects 135,409 89,621
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Net income - pro forma $443,247 $562,191
==============================================================
Basic income per share - as reported $0.11 $0.12
==============================================================
BASIC INCOME PER SHARE - PRO FORMA $0.08 $0.11
==============================================================
Diluted income per share - as reported $0.09 $0.11
==============================================================
DILUTED INCOME PER SHARE - PRO FORMA $0.07 $0.10
==============================================================
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123(R) (revised 2004), "Share-Based Payment",
which amends FASB Statement No. 123 and will be effective for
the Company beginning after December 31, 2005. The new
standard will require us to expense employee stock options and
other share-based payments. Therefore, beginning in the first
quarter of 2006, the Company will not be permitted to apply
APB 25 as described above.
6
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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2. COSTS AND Costs and estimated earnings in excess of billings on
ESTIMATED uncompleted contracts consist of:
EARNINGS IN
EXCESS OF
BILLINGS ON March 31, 2005
UNCOMPLETED --------------------------------------------------------------
CONTRACTS:
U.S.
Government Commercial Total
--------------------------------------------------------------
Costs incurred on
uncompleted contracts $34,176,943 $13,373,694 $47,550,637
Estimated earnings 21,195,404 6,672,592 27,867,996
--------------------------------------------------------------
55,372,347 20,046,286 75,418,633
Less billings to date 32,005,544 17,979,982 49,985,526
--------------------------------------------------------------
COSTS AND ESTIMATED
EARNINGS IN EXCESS OF
BILLINGS ON
UNCOMPLETED CONTRACTS $23,366,803 $2,066,304 $25,433,107
==============================================================
December 31, 2004
--------------------------------------------------------------
U.S.
Government Commercial Total
--------------------------------------------------------------
Costs incurred on
uncompleted contracts $32,764,584 $13,373,694 $46,138,278
Estimated earnings 20,351,259 6,187,927 26,539,186
--------------------------------------------------------------
53,115,843 19,561,621 72,677,464
Less billings to date 28,746,944 17,900,013 46,646,957
--------------------------------------------------------------
COSTS AND ESTIMATED
EARNINGS IN EXCESS OF
BILLINGS ON
UNCOMPLETED CONTRACTS $24,368,899 $1,661,608 $26,030,507
==============================================================
7
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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3. INCOME PER Basic income per common share is computed using the weighted
COMMON SHARE: average number of shares outstanding. Diluted income per
common share is computed using the weighted-average number of
shares outstanding adjusted for the incremental shares
attributed to outstanding options and warrants to purchase
common stock. Incremental shares of 750,695 and 498,350 were
used in the calculation of diluted income per common share in
the three month periods ended March 31, 2005 and 2004,
respectively. Incremental shares of 80,000 and 15,000 were not
included in the diluted earnings per share calculations at
March 31, 2005 and 2004, respectively, as their exercise price
was in excess of the Company's stock price at the end of each
respective period and, accordingly, these shares are not
assumed to be exercised for the diluted earnings per share
calculation, as they would be anti-dilutive.
4. CREDIT In September 2003, the Company entered into a three year, $5.0
FACILITY: million revolving credit facility with JP Morgan Chase Bank,
secured by the assets of the Company. The facility specifies
interest rates that range between the Prime Rate and 225 basis
points over LIBOR, depending on certain terms and conditions.
As of March 31, 2005, the Company had not borrowed any funds
pursuant to this facility.
8
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the Company's
Condensed Financial Statements and footnotes thereto contained in this report.
FORWARD LOOKING STATEMENTS
The statements discussed in this Report include forward looking statements that
involve risks and uncertainties, including the timely delivery and acceptance of
the Company's products and the other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
BUSINESS OPERATIONS
Our operations consist of the design and production of structural aircraft
parts principally for the United States Air Force and other branches of the U.S.
armed forces. We also provide aircraft parts to the commercial sector of the
aircraft industry, but we believe that significantly weaker business prospects
exist in this sector.
We compete with other prime contractors to win contracts through a process
of competitive bidding. After winning a contract, the length of the contract
varies but is typically between one and two years for U. S. Government contracts
(although recent large government contracts have been for periods of up to 10
years, as is the case with the T-38 Propulsion Modification Program) and up to
10 years for commercial contracts. Except in cases where contract terms permit
us to bill on a progress basis, we must incur upfront costs in producing
assemblies and bill our customers upon delivery. Because of the upfront costs
incurred, the timing of our billings and the nature of the
percentage-of-completion method of accounting described below, there can be a
significant disparity between the period in which (a) costs are expended, (b)
revenue and earnings are recorded and (c) cash is received.
REVENUE RECOGNITION
We recognize revenue from our contracts over the contractual period under
the percentage-of-completion (POC) method of accounting. Under the POC method of
accounting, sales and gross profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under
the terms of the contract until a later date are recorded as an asset captioned
"Costs and estimated earnings in excess of billings on uncompleted contracts."
Contracts where billings to date have exceeded recognized revenues are recorded
as a liability captioned "Billings in excess of costs and estimated earnings on
uncompleted contracts." Changes to the original estimates may be required during
the life of the contract. Estimates are reviewed monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period the change becomes known. The use of the POC method
of accounting involves considerable use of estimates in determining revenues,
costs and profits and in assigning the amounts to accounting periods. As a
result, there can be a significant disparity between earnings (both for
accounting and taxes) as reported and actual cash received by us during any
reporting period. We continually evaluate all of the issues related to the
assumptions, risks and uncertainties inherent with the application of the POC
method of accounting; however, we cannot assure you that our estimates will be
accurate. If our estimates are not accurate or a contract is terminated, we will
be forced to adjust revenue in later periods. Furthermore, even if our estimates
are accurate, we may have a shortfall in our cash flow and we may need to borrow
money to pay taxes until the reported earnings materialize to actual cash
receipts.
9
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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RESULTS OF OPERATIONS
REVENUE
Our revenue for the three months ended March 31, 2005 was $6,245,102
compared to $6,228,108 for the same period last year, representing an increase
of $16,994 or .3%. We generate revenue primarily from government contracts and
to a lesser extent from one commercial contract. Revenue from government
contracts for the three months ended March 31, 2005 was $5,760,435 compared to
$6,228,108 for the same period last year, a decrease of $467,673 or 7.5%. This
decrease was due to the significant slowdown in government procurement. Although
we are not actively pursuing commercial contract work, during late 2004 and
early 2005, we received a release on our one remaining commercial contract,
which accounted for revenue of $484,667 for the quarter ended March 31, 2005
compared to $0 for the quarter ended March 31, 2004.
GROSS PROFIT
Gross profit for the three months ended March 31, 2005 decreased by
$103,977 or 5.4 %, compared with the same period last year. As a percentage of
revenue, gross profit for the three months ended March 31, 2005 was 29% compared
to 31% for the same period last year. The decrease in gross profit percentage
was due to approximately $112,000 of extra costs that we had to incur to rework
a first article that was rejected by the government. This rejection was the
result of non-conforming component parts purchased from a vendor. We no longer
do business with this vendor and, therefore, we do not anticipate that this
situation will recur in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the three months ended
March 31, 2005 were $885,511 compared to $838,076 for the three months ended
March 31, 2004, an increase of $47,435, or 5.6%. The increase was due to
increased costs of rent, utilities, maintenance and equipment related to our
new, larger office facility.
INCOME FROM OPERATIONS
Income from operations for the three months ended March 31, 2005 was
$936,606, a 14% decrease from $1,088,018 reported in the same period last year.
The decrease was primarily due to the decrease in gross profit described above.
PROVISION FOR INCOME TAXES
We recorded a provision for income taxes of $354,000 for the three months
ended March 31, 2005. For the same period last year, we recorded a provision for
income taxes of $435,000.
NET INCOME
As a result, basic net income for the three months ended March 31, 2005 was
$578,656, or $0.11 per share, compared to $651,812, or $0.12 per share, for the
same period last year. Diluted income per share for the three months ended March
31, 2005 was $0.09, calculated utilizing 6,167,995 diluted average shares
outstanding for the period, compared to diluted income per share of $0.11,
calculated utilizing 5,800,120 diluted average shares outstanding for the same
period last year.
10
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL
At March 31, 2005, we had working capital of $24,889,661 compared to
$24,396,402 at December 31, 2004, an increase of $493,259. This increase is
primarily attributable to decreases in accounts payable and accrued expenses of
$835,441, which resulted from the Company using current cash from net income to
pay down liabilities. These decreases were offset by an increase in income taxes
payable. This increase resulted from utilizing our remaining net operating loss
carryforward for federal income tax purposes during 2004. Therefore, during
2005, we are required to make quarterly estimated federal income tax payments.
Net cash used in operating activities for the three months ended March 31,
2005 was $395,916 compared to net cash used in operating activities of
$1,332,316 for the same period last year. The decrease in cash was the result of
a build-up in accounts receivable and a pay down of accounts payable. This
decrease in cash was not as large as the prior year because of a decrease in
costs and estimated earnings in excess of billings on uncompleted contracts in
the three months ended March 31, 2005 compared to an increase in the same period
last year. This decrease reflects the overall slowdown in government procurement
which has resulted in reduced manufacturing activity.
CASH FLOW
A large portion of our cash is used in paying for materials and processing
costs associated with contracts that are in process and which do not provide for
progress payments. These costs are components of "Costs and estimated earnings
in excess of billings on uncompleted contracts" on our balance sheet and
represent the aggregate costs and related earnings for uncompleted contracts for
which the customer has not yet been billed. These costs and earnings are
recovered upon shipment of products and presentation of billings in accordance
with contract terms.
Because the POC method of accounting requires us to use estimates in
determining revenues, costs and profits and in assigning the amounts to
accounting periods, there can be a significant disparity between earnings (both
for accounting and taxes) as reported and actual cash received by us during any
reporting period. Accordingly, it is possible that we may have a shortfall in
our cash flow and may need to borrow money until the reported earnings
materialize to actual cash receipts.
11
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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JP Morgan Chase Credit Facility
In September 2003, we entered into a three year, $5.0 million revolving
credit facility with JPMorgan Chase Bank, secured by our assets. The facility
specifies interest rates that range between the Prime Rate and 225 basis points
over LIBOR, depending on certain terms and conditions. As of March 31, 2005, we
had not borrowed any funds pursuant to this facility.
We believe that our existing resources, together with the availability
under our credit facility, will be sufficient to meet our working capital needs
for at least the next 12 months.
CONTRACTUAL OBLIGATIONS
The table below summarizes information about our contractual obligations as
of March 31, 2005 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
--------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD ($)
--------------------------------------------------------------------------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
--------------------------------------------------------------------------------------------------------------------------------
Short-Term Debt -0- -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations 191,719 83,370 108,349 -0- -0-
--------------------------------------------------------------------------------------------------------------------------------
Operating Leases 4,205,205 377,813 789,968 838,077 2,199,347
--------------------------------------------------------------------------------------------------------------------------------
Employment Agreement Compensation * 1,899,505 850,702 1,048,803 -0- -0-
--------------------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations 6,296,429 1,311,885 1,947,120 838,077 2,199,347
--------------------------------------------------------------------------------------------------------------------------------
* The employment agreements provide for bonus payments that are excluded from
these amounts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
12
CPI AEROSTRUCTURES, INC.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our disclosure controls and
procedures was made as of March 31, 2005 under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer. Based on that evaluation, they concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. During
the most recently completed fiscal quarter, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
13
CPI AEROSTRUCTURES, INC.
PART II: OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------------------------------
Consideration Received and
Description of If Option, Warrant
Underwriting or Exemption or Convertible
Other Discounts to from Security, Terms of
Market Price Afforded Registration Exercise or
Date of Sale Title of Security Number Sold To Purchasers Claimed Conversion
--------------------------------------------------------------------------------------------------------------------------
1/13/05 Common Stock 5,000 Common stock issued upon 4(2) N/A
exercise of options;
$31,750 cash consideration
received by the Company
--------------------------------------------------------------------------------------------------------------------------
2/03/05 Common Stock 1,000 Common stock issued upon 4(2) N/A
exercise of options;
$2,530 cash consideration
received by the Company
--------------------------------------------------------------------------------------------------------------------------
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 31.1 Section 302 Certification by Chief Executive Officer
Exhibit 31.2 Section 302 Certification by Chief Financial Officer
Exhibit 32 Section 906 Certification by Chief Executive Officer and
Chief Financial Officer
b) Reports on Form 8-K
During the three months ended March 31, 2005, we filed the following
Current Reports on Form 8-K:
1. Form 8-K dated February 7, 2005, and filed with the SEC on February
10, 2005, which Form 8-K reported events under Items 1.01 and 9.01.
2. Form 8-K dated March 29, 2005, and filed with the SEC on March 29,
2005, which Form 8-K reported events under Items 2.02 and 9.01.
14
CPI AEROSTRUCTURES, INC.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CPI AEROSTRUCTURES, INC.
Dated: May 13, 2005 By /s/ Edward J. Fred
-------------------------------
Edward J. Fred
Chief Executive Officer, President,
and Secretary
Dated: May 13, 2005 By: /s/ Vincent Palazzolo
-------------------------------
Vincent Palazzolo
Chief Financial Officer
15
