Item
1 – Condensed Financial Statements
|
|
June 30,
2017
|
|
December 31,
2016
|
|
|
(Unaudited)
|
|
(Note 1)
|
ASSETS
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,115,297
|
|
|
$
|
1,039,586
|
|
Accounts receivable, net of allowance for doubtful accounts of $0 as of June 30, 2017 and $535,514 as of December 31, 2016
|
|
|
6,340,429
|
|
|
|
8,514,613
|
|
Costs and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
101,692,410
|
|
|
|
99,578,526
|
|
Prepaid expenses and other current assets
|
|
|
2,495,507
|
|
|
|
2,155,481
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
111,643,643
|
|
|
|
111,288,206
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,081,045
|
|
|
|
2,298,610
|
|
Deferred income taxes, net
|
|
|
2,797,066
|
|
|
|
3,952,598
|
|
Other assets
|
|
|
220,392
|
|
|
|
252,481
|
|
Total Assets
|
|
$
|
116,742,146
|
|
|
$
|
117,791,895
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,126,997
|
|
|
$
|
14,027,457
|
|
Accrued expenses
|
|
|
1,314,154
|
|
|
|
1,386,147
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
922,832
|
|
|
|
115,337
|
|
Current portion of long-term debt
|
|
|
1,745,492
|
|
|
|
1,341,924
|
|
Contract loss
|
|
|
489,598
|
|
|
|
1,377,171
|
|
Line of credit
|
|
|
24,238,685
|
|
|
|
22,438,685
|
|
Income tax payable
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
37,843,758
|
|
|
|
40,692,721
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
7,963,325
|
|
|
|
8,860,724
|
|
Other liabilities
|
|
|
613,204
|
|
|
|
632,744
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
46,420,287
|
|
|
|
50,186,189
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock - $.001 par value; authorized 50,000,000 shares,
|
|
|
|
|
|
|
|
|
8,832,649 and 8,739,836 shares, respectively, issued and outstanding
|
|
|
8,833
|
|
|
|
8,738
|
|
Additional paid-in capital
|
|
|
53,521,860
|
|
|
|
52,824,950
|
|
Retained earnings
|
|
|
16,795,966
|
|
|
|
14,781,018
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(4,800
|
)
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
70,321,859
|
|
|
|
67,605,706
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’
Equity
|
|
$
|
116,742,146
|
|
|
$
|
117,791,895
|
|
See
Notes to Condensed Financial Statements
CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
16,731,951
|
|
|
$
|
22,280,964
|
|
|
$
|
36,764,652
|
|
|
$
|
34,950,997
|
|
Cost of sales
|
|
|
13,048,203
|
|
|
|
17,246,963
|
|
|
|
28,543,390
|
|
|
|
41,556,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
3,683,748
|
|
|
|
5,034,001
|
|
|
|
8,221,262
|
|
|
|
(6,605,103
|
)
|
Selling, general and administrative expenses
|
|
|
2,002,198
|
|
|
|
1,868,787
|
|
|
|
4,166,076
|
|
|
|
4,589,170
|
|
Income (loss) from operations
|
|
|
1,681,550
|
|
|
|
3,165,214
|
|
|
|
4,055,186
|
|
|
|
(11,194,273
|
)
|
Interest expense
|
|
|
465,903
|
|
|
|
323,634
|
|
|
|
856,238
|
|
|
|
599,367
|
|
Income (loss) before provision for (benefit from) income taxes
|
|
|
1,215,647
|
|
|
|
2,841,580
|
|
|
|
3,198,948
|
|
|
|
(11,793,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
450,000
|
|
|
|
1,051,000
|
|
|
|
1,184,000
|
|
|
|
(4,364,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
765,647
|
|
|
|
1,790,580
|
|
|
|
2,014,948
|
|
|
|
(7,429,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) net of tax - Change in unrealized gain (loss) interest rate swap
|
|
|
(1,000
|
)
|
|
|
(73,936
|
)
|
|
|
4,200
|
|
|
|
(70,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
764,647
|
|
|
$
|
1,716,644
|
|
|
$
|
2,019,148
|
|
|
$
|
(7,500,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share – basic
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share – diluted
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,832,478
|
|
|
|
8,610,453
|
|
|
|
8,806,942
|
|
|
|
8,603,495
|
|
Diluted
|
|
|
8,865,055
|
|
|
|
8,637,393
|
|
|
|
8,840,309
|
|
|
|
8,603,495
|
|
See
Notes to Condensed Financial Statements
CONDENSED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
|
|
Common
Stock
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
|
8,583,511
|
|
|
$
|
8,584
|
|
|
$
|
52,137,384
|
|
|
$
|
18,389,594
|
|
|
$
|
(3,453
|
)
|
|
$
|
70,532,109
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,429,640
|
)
|
|
|
—
|
|
|
|
(7,429,640
|
)
|
Loss
on settlement of interest rate swap and reclassification into earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,453
|
|
|
|
3,453
|
|
Change in unrealized
loss from interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(73,936
|
)
|
|
|
(73,936
|
)
|
Stock-based
compensation expense
|
|
|
26,942
|
|
|
|
25
|
|
|
|
415,025
|
|
|
|
—
|
|
|
|
—
|
|
|
|
415,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2016
|
|
|
8,610,453
|
|
|
$
|
8,609
|
|
|
$
|
52,552,409
|
|
|
$
|
10,959,954
|
|
|
($
|
73,936
|
)
|
|
$
|
63,447,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
8,739,836
|
|
|
$
|
8,738
|
|
|
$
|
52,824,950
|
|
|
$
|
14,781,018
|
|
|
($
|
9,000
|
)
|
|
$
|
67,605,706
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,014,948
|
|
|
|
—
|
|
|
|
2,014,948
|
|
Change in unrealized loss
from interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,200
|
|
|
|
4,200
|
|
Stock-based
compensation expense
|
|
|
92,813
|
|
|
|
95
|
|
|
|
696,910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
697,005
|
|
Balance at June 30,
2017
|
|
|
8,832,649
|
|
|
$
|
8,833
|
|
|
$
|
53,521,860
|
|
|
$
|
16,795,966
|
|
|
($
|
4,800
|
)
|
|
$
|
70,321,859
|
|
See
Notes to Condensed Financial Statements
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
For
the Six Months Ended June 30,
|
|
|
2017
|
|
|
2016
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
2,014,948
|
|
$
|
(7,429,640
|
)
|
Adjustments
to reconcile net income (loss) to net cash used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
302,032
|
|
|
388,311
|
|
Debt issue
costs
|
|
|
42,786
|
|
|
—
|
|
Deferred
rent
|
|
|
(15,340
|
)
|
|
3,432
|
|
Loss on
disposal of fixed asset
|
|
|
21,010
|
|
|
—
|
|
Stock-based
compensation
|
|
|
697,005
|
|
|
415,050
|
|
Bad debt
expense
|
|
|
—
|
|
|
395,749
|
|
Deferred
income taxes
|
|
|
1,155,532
|
|
|
(4,364,000
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
2,174,184
|
|
|
(2,441,150
|
)
|
(Increase)
decrease in costs and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(2,113,884
|
)
|
|
8,632,365
|
|
Increase
in prepaid expenses and other assets
|
|
|
(340,026
|
)
|
|
(293,549
|
)
|
Decrease
in accounts payable and accrued expenses
|
|
|
(4,972,453
|
)
|
|
(5,653,060
|
)
|
Increase
in billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
807,495
|
|
|
202,739
|
|
Increase
(decrease) in accrued losses on uncompleted contracts
|
|
|
(887,573
|
)
|
|
2,990,337
|
|
Decrease
in income taxes payable
|
|
|
—
|
|
|
(173,673
|
)
|
|
|
|
|
|
|
|
|
Net cash
used in operating activities
|
|
|
(1,114,284
|
)
|
|
(7,327,089
|
)
|
|
|
|
|
|
|
|
|
Cash flows
used in investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(147,957
|
)
|
|
(93,753
|
)
|
Proceeds
from sale of fixed asset
|
|
|
42,480
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net cash
used in investing activities
|
|
|
(105,477
|
)
|
|
(93,753
|
)
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(504,528
|
)
|
|
(1,352,204
|
)
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
10,000,000
|
|
Proceeds
from line of credit
|
|
|
3,000,000
|
|
|
28,238,685
|
|
Payments
on line of credit
|
|
|
(1,200,000
|
)
|
|
(29,500,000
|
)
|
Debt issue
costs paid
|
|
|
—
|
|
|
(153,856
|
)
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
|
1,295,472
|
|
|
7,232,625
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash
|
|
|
75,711
|
|
|
(188,217
|
)
|
Cash at
beginning of period
|
|
|
1,039,586
|
|
|
1,002,023
|
|
|
|
|
|
|
|
|
|
Cash at
end of period
|
|
$
|
1,115,297
|
|
$
|
813,806
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital lease
|
|
|
—
|
|
$
|
232,575
|
|
|
|
|
|
|
|
|
|
Cash paid
during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
795,151
|
|
$
|
411,883
|
|
Income
taxes
|
|
$
|
28,468
|
|
$
|
201,932
|
|
See
Notes to Condensed Financial Statements
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM
FINANCIAL STATEMENTS
The
condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of June 30, 2017 and for the three and
six months ended June 30, 2017 and 2016 have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not
misleading. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented
have been reflected. Such adjustments are of a normal, recurring nature.
The condensed balance sheet at December 31, 2016 has been
derived from the audited financial statements at that date, but does not include all of the information and notes required by
accounting principles generally accepted in the United States for complete financial statements. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016. The results of operations for interim periods are not necessarily indicative
of the operating results to be expected for the full year or any other interim period.
The
Company maintains its cash in two financial institutions. The balances are insured by the Federal Deposit Insurance Corporation.
From time to time, the Company’s balances may exceed these limits. As of June 30, 2017, the Company had $1,147,448 of uninsured
balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.
The
Company predominantly recognizes revenue from 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 tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates
all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting;
however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the
Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall
in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process
or to pay taxes until the reported earnings materialize as actual cash receipts.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
When
changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect
in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision
for the entire loss on the contract is recorded in the period in which the loss is determined.
During
the three months ended March 31, 2016 the Company had information that the United States Air Force (“USAF”) was intending
to increase the number of ship sets on order for the A-10. An increase in the number of ship sets on order would improve the Company’s
estimated gross margin on the overall program.
In
April 2016, the Company became aware that the USAF had reevaluated its position and, as such, had deferred any decision
regarding increasing the orders on the A-10 program. These changes in position by the USAF were supported by communications
from Boeing, the Company’s customer.
Based
on the above facts, the Company believed that it was not probable that there would be any future orders on the A-10 beyond
the 173 currently on order. As a result of the information that management became aware of in April 2016, for the quarter
ended March 31, 2016, the Company estimated that the A-10 program would run through the conclusion of its current purchase
order with Boeing at ship set number 173. The change in estimate resulted in a reduction of revenue of approximately $8.9
million and an increase in cost of sales of approximately $4.6 million, for an aggregate charge of approximately $13.5
million.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers (Topic 606)
, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The new standard outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The fundamental principles of the guidance are that entities should recognize revenue in a manner that reflects the
timing of transfer of goods and services to customers and the amount of revenue recognized reflects the consideration that an
entity expects to receive for the goods and services provided. Entities have the option of using either a full retrospective or
modified retrospective approach, with the new standard required to be adopted
for annual reporting periods (including interim
reporting periods within those periods) beginning after December 15, 2017
. Our project implementation
team, with the assistance of a third-party consultant, has been evaluating the impact of the new guidance on our financial statements.
Based on our preliminary assessment, we believe that the new standard will have an impact primarily on the recognition of revenue
related to distinct deliverables, as defined in the standard, within a long term multi-deliverable contract. We continue to review
potential required disclosures and our method of adoption. In addition, we continue to monitor additional changes, modifications,
clarifications or interpretations being undertaken by the FASB, which may impact our current conclusions
. The Company will
adopt the new standard on its effective date.
In
February of 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).”
The updated guidance requires lessees
to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors
separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance
is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect
on its financial statements.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED
)
2.
stock-based
compensation
The
Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant.
In
January 2017, the Company granted 59,395 restricted stock units (“RSUs) to its board of directors as partial compensation
for the 2017 year. On January 1, 2016, the Company granted 53,882 RSUs to its board of directors as partial compensation for the
2016 year. RSUs vest quarterly on a straight-line basis over a one-year period. The Company’s net income (loss) for the
six months ended June 30, 2017 and 2016 includes approximately $440,000 and $415,000, respectively, of non-cash compensation expense
related to the RSU grants to the board of directors. This expense is recorded as a component of selling, general and administrative
expenses. In addition, the Company granted 5,550 shares of common stock to various employees. For the six months ended June 30,
2017, approximately $13,300 of compensation expense is included in selling, general and administrative expenses and approximately
$37,500 of compensation expense is included in cost of sales for this grant.
In
August 2016 and March 2017, the Company granted 98,645 and 73,060 shares of common stock, respectively, to various employees.
In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares
may be forfeited. In addition, if certain Company performance criterion are not achieved, portions of these shares may be forfeited.
These shares will be expensed during various periods through March 2021 based upon the service and performance thresholds. For
the six months ended June 30, 2017, approximately $197,400 of compensation expense is included in selling, general and administrative
expenses and approximately $41,600 of compensation expense is included in cost of sales for this grant. In March 2017, 12,330
of the shares granted in August of 2016 were forfeited because the Company failed to achieve certain performance criterion for
the year ended December 31, 2016. In addition, on March 9, 2017, these employees returned 4,525 common shares, valued at approximately
$33,000, to pay the employees’ withholding taxes.
A
summary of the status of the Company’s stock option plans as of June 30, 2017 and changes during the six months ended June
30, 2017 is as follows:
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term (in years)
|
|
|
Aggregate
intrinsic value
|
|
Outstanding at beginning of period
|
|
|
149,466
|
|
|
$
|
10.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and vested at end of period
|
|
|
149,466
|
|
|
$
|
10.43
|
|
|
|
1.08
|
|
|
$
|
130,500
|
|
During
the six months ended June 30, 2017 and June 30, 2016, no stock options were granted or exercised.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED
)
3. Derivative
Instruments and Fair Value
Our
use of derivative instruments has been to hedge interest rates. These derivative contracts are entered into with a financial institution.
We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.
We
record these derivative financial instruments on the condensed balance sheets at fair value. For derivative instruments that are
designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings.
Any
ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations
immediately. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the results of
operations immediately.
In
March 2012, the Company entered into interest rate swaps with the objective of reducing our exposure to cash flow volatility arising
from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of these contracts
match those of the underlying debt. The Company has designated these interest rate swap contracts as cash flow hedges. The Company
measures ineffectiveness by comparing the cumulative change in the forward contact with the cumulative change in the hedged item.
No material ineffectiveness was recognized in the quarter ended March 31, 2016. The interest rate swap contract was terminated
as of March 24, 2016. The Company paid approximately $4,000 at termination to settle the swap contract.
In
May 2016, the Company entered into a new interest rate swap with the objective of reducing its exposure to cash flow
volatility arising from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and
currency of this contract match those of the underlying debt. The Company has designated this interest rate swap contract as
a cash flow hedge. The Company measures ineffectiveness by comparing the cumulative change in the forward contact with the
cumulative change in the hedged item. As of June 30, 2017 and December 31, 2016, we had a net deferred loss associated with the
interest rate swap of approximately $6,600, which was included in other liabilities.
Fair
Value
At
June 30, 2017 and December 31, 2016, the fair values of cash, accounts receivable and accounts payable approximated their
carrying values because of the short-term nature of these instruments.
|
|
June 30, 2017
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Debt
|
|
|
|
|
|
|
Short-term borrowings and long-term debt
|
|
$
|
33,984,940
|
|
|
$
|
33,984,940
|
|
|
|
December 31, 2016
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Debt
|
|
|
|
|
|
|
Short-term borrowings and long-term debt
|
|
$
|
32,689,467
|
|
|
$
|
32,689,467
|
|
We
estimated the fair value of debt using market quotes and calculations based on market rates.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED
)
The following table presents the fair values
of those financial liabilities measured on a recurring basis as of June 30, 2017 and December 31, 2016:
|
|
|
|
|
Fair Value Measurements June 30, 2017
|
|
Description
|
|
Total
|
|
|
Quoted Prices in Active Markets for Identical assets (Level 1)
|
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
Interest
Rate Swap, net
|
|
$
|
6,581
|
|
|
|
—
|
|
|
$
|
6,581
|
|
|
|
—
|
|
Total
|
|
$
|
6,581
|
|
|
|
—
|
|
|
$
|
6,581
|
|
|
|
—
|
|
|
|
|
|
|
Fair Value Measurements December 31, 2016
|
|
Description
|
|
Total
|
|
|
Quoted Prices in Active Markets for Identical assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
Interest Rate Swap, net
|
|
$
|
13,685
|
|
|
|
—
|
|
|
$
|
13,685
|
|
|
|
—
|
|
Total
|
|
$
|
13,685
|
|
|
|
—
|
|
|
$
|
13,685
|
|
|
|
—
|
|
The fair value of the Company’s interest
rate swap was determined by comparing the fixed rate set at the inception of the transaction to the “replacement swap rate,”
which represents the market rate for an offsetting interest rate swap with the same notional amounts and final maturity date. The
market value is then determined by calculating the present value of the interest differential between the contractual swap and
the replacement swap.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts consist of:
|
|
June 30, 2017
|
|
|
|
U.S
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
357,970,228
|
|
|
$
|
165,341,508
|
|
|
$
|
523,311,736
|
|
Estimated earnings
|
|
|
40,585,938
|
|
|
|
61,086,808
|
|
|
|
101,672,746
|
|
Sub-total
|
|
|
398,556,166
|
|
|
|
226,428,316
|
|
|
|
624,984,482
|
|
Less billings to date
|
|
|
349,494,171
|
|
|
|
174,720,733
|
|
|
|
524,214,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings
in excess of billings on uncompleted contracts
|
|
$
|
49,061,995
|
|
|
$
|
51,707,583
|
|
|
$
|
100,769,578
|
|
|
|
December 31, 2016
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
Costs
incurred on uncompleted contracts
|
|
$
|
341,003,461
|
|
|
$
|
153,898,425
|
|
|
$
|
494,901,886
|
|
Estimated earnings
|
|
|
39,638,231
|
|
|
|
58,346,518
|
|
|
|
97,984,749
|
|
Sub-total
|
|
|
380,641,692
|
|
|
|
212,244,943
|
|
|
|
592,886,635
|
|
Less billings to date
|
|
|
331,277,942
|
|
|
|
162,145,504
|
|
|
|
493,423,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
49,363,750
|
|
|
$
|
50,099,439
|
|
|
$
|
99,463,189
|
|
The above amounts are included in the accompanying condensed
balance sheets under the following captions at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Costs and estimated
earnings in excess of billings on uncompleted contracts
|
|
$
|
101,692,410
|
|
|
$
|
99,578,526
|
|
Billings in
excess of costs and estimated earnings on uncompleted contracts
|
|
|
(922,832
|
)
|
|
|
(115,337
|
)
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
100,769,578
|
|
|
$
|
99,463,189
|
|
U.S. Government Contracts
include contracts directly with the U.S. Government and Government subcontracts.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Revisions in the estimated
gross profits on contracts and contract amounts are made in the period in which the circumstances requiring the revisions occur.
During the six months ended June 30, 2017, the effect of such revisions in total estimated contract profits resulted in a decrease
to the total gross profit to be earned on the contracts of approximately $1,627,000 from that which would have been reported had
the revised estimates been used as the basis of recognition of contract profits in prior years, excluding the effect of the A-10
contract. During the six months ended June 30, 2016, the effect of such revisions was a decrease to total gross profit of approximately
$1,171,000.
Although management believes it has established
adequate procedures for estimating costs to uncompleted open contracts, it is possible that additional significant costs could
occur on contracts prior to completion.
|
5.
|
income (Loss) PER COMMON SHARE
|
Basic income (loss) per common
share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per common share for the
three and six month periods ended June 30, 2017 and 2016 is computed using the weighted-average number of common shares outstanding
adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental
shares of 63,336 were used in the calculation of diluted income per common share in the three and six months ended June 30, 2017.
Incremental shares of 114,466 were not used in the calculation of diluted income per common share in the three and six month period
ended June 30, 2017, as their exercise price was in excess of the Company’s average stock price for the 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. Incremental shares of 26,940 were used in the calculation of diluted income per common share in the three months
ended June 30, 2016. Incremental shares of 214,983 were not used in the calculation of diluted income per common share in the three
month period ended June 30, 2016, as their exercise price was in excess of the Company’s average stock price for the 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. No incremental shares were used in the calculation of diluted income per common share in the six month period
ended June 30, 2016, as the effect of incremental shares would be anti-dilutive because the Company recognized a net loss.
On December 5, 2012, the Company entered
into an Amended and Restated Credit Agreement (“Restated Agreement”) with Sovereign Bank, now called Santander Bank,
N.A. (“Santander”), as the sole arranger, administrative agent and collateral agent, and Valley National Bank. The
Restated Agreement provided for a revolving credit loan (“Revolving Facility”) commitment of $35 million and was terminated
in March 2016.
On March 24, 2016, the Company entered
into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral agent and Citzens Bank
N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million
(the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The proceeds of the BankUnited Facility
were used to pay off all amounts outstanding under the Santander Term Facility and the Revolving Facility. The Revolving Loan bears
interest at a rate based upon a pricing grid, as defined in the agreement.
On
May 9, 2016, the Company entered into an amendment (the “Amendment”) to the BankUnited Facility. The Amendment changed
the definition of EBITDA for the Leverage Coverage Ratio Covenant for the remainder of 2016 and changed the maximum leverage ratio
from 3 to 1 to 3.5 to 1 for the quarters ending June 30, 2016 and September 30, 2016. Also, the Amendment increased the interest
rate on the BankUnited Facility by 50 basis points and requires the repayment of a portion of the Term Loan if and to the extent
that the Company receives any contract reimbursement payments from its current Request for Equitable Adjustment with Boeing on
the A-10 program
.
As of June 30, 2017, the Company was in
compliance with all of the financial covenants contained in the BankUnited Facility, as amended.
As of June 30, 2017, the Company had $24.2
million outstanding under the Revolving Loan bearing interest at 4.75%.
The BankUnited Facility is secured by all
of the Company’s assets.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
7. LONG-TERM
DEBT
On March 9, 2012, the Company obtained
a $4.5 million term loan from Santander to be amortized over five years (the “Santander Term Facility”). The Santander
Term Facility was used to purchase tooling and equipment for new programs.
Additionally, the Company and Santander
Bank entered into a five-year interest rate swap agreement, in the notional amount of $4.5 million. Under the interest rate swap,
the Company paid an amount to Santander Bank representing interest on the notional amount at a fixed rate of 4.11% and received
an amount from Santander Bank representing interest on the notional amount of a rate equal to the one-month LIBOR plus 3%. The
effect of this interest rate swap was the Company paying a fixed interest rate of 4.11% over the term of the Santander Term Facility.
The Santander interest swap agreement
was terminated and the Santander Term Facility was paid off on March 24, 2016 using the proceeds of the BankUnited Facility
(See Note 6).
In May 2016, the Company entered into a
new interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate fluctuations
associated with certain debt. The notional amount, maturity date and currency of this contract match those of the underlying debt.
The Company has designated this interest rate swap contract as a cash flow hedge.
The Company paid approximately
$254,000 of debt issuance costs in connection with the BankUnited Facility of which approximately $112,000 is included in
long-term assets and $37,000 is a reduction of long-term debt.
The Term Loan had an initial amount of
$10 million, payable in monthly installments, as defined in the agreement, which matures on March 31, 2019.
The maturities
of long-term debt (excluding unamortized debt issuance costs) are as follows
:
Twelve months ending June 30,
|
|
|
|
|
|
2018
|
|
|
$
|
1,745,492
|
|
|
2019
|
|
|
|
7,814,743
|
|
|
2020
|
|
|
|
136,454
|
|
|
2021
|
|
|
|
48,503
|
|
|
Thereafter
|
|
|
|
1,062
|
|
|
|
|
|
$
|
9,746,254
|
|
In addition to the Term Loan, included
in long-term debt are capital leases and notes payable of $496,254, including a current portion of $162,159.
8. MAJOR
CUSTOMERS
During the six months
ended June 30, 2017, the Company’s three largest commercial customers accounted for 32%, 24% and 11% of revenue,
respectively. During the six months ended June 30, 2016, the Company’s three largest commercial customers accounted for
39%, 30% and 14% of revenue, respectively. In addition, during the six months ended June 30, 2017, 6.3% of revenue was
directly from the U.S. Government.
At June 30, 2017, 33%, 25%,
11% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from the Company’s four largest
commercial customers. At December 31, 2016, 33%, 26%, 12% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted
Contracts were from the Company’s four largest commercial customers.
At both June 30, 2017 and
December 31, 2016, 1.% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
was directly from the U.S. Government.
At June 30, 2017, 21%, 19%,
17%, 15% and 11% of our accounts receivable were from our five largest commercial customers. At December 31, 2016, 35%, 24%
and 17% of accounts receivable were from our three largest commercial customers.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read
in conjunction with the Company’s Condensed Financial Statements and notes thereto contained in this report.
Forward Looking Statements
When
used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission, the words or phrases
“will likely result,” “management expects” or “we expect,” “will continue,”
“is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to
place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements
are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The risks are included in Item 1A - Risk Factors of our Annual Report on Form
10-K for the year ended December 31, 2016 and in this Form 10-Q. We have no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Business Operations
We are a manufacturer of structural aircraft
parts for fixed wing aircraft and helicopters in both the commercial and defense markets. Within the global aerostructure supply
chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturers (“OEMs”) or a Tier 2 subcontractor
to major Tier 1 manufactures. We also are a prime contractor to the U.S. Department of Defense, primarily the Air Force. In conjunction
with our assembly operations, we provide engineering, program management, supply chain management, and Maintenance Repair &
Overhaul (“MRO”) services.
Item 2 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Backlog
We produce custom assemblies pursuant to
long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and purchase orders,
excluding the portion previously included in operating revenues on the basis of percentage of completion accounting, and including
estimates of future contract price escalation. Substantially all of our backlog is subject to termination at will and rescheduling,
without significant penalty. Funds are often appropriated for programs or contracts on a yearly or quarterly basis, even though
the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include
the full value of our contracts. Our total backlog as of June 30, 2017 and December 31, 2016 was as follows:
Backlog
(Total)
|
|
June 30,
2017
|
|
|
December 31, 2016
|
|
Funded
|
|
$
|
90,545,000
|
|
|
$
|
94,540,000
|
|
Unfunded
|
|
|
304,280,000
|
|
|
|
321,744,000
|
|
Total
|
|
$
|
394,825,000
|
|
|
$
|
416,284,000
|
|
Approximately 80% of
the total amount of our backlog at June 30, 2017 was attributable to government contracts. Our backlog attributable to government
contracts at June 30, 2017 and December 31, 2016 was as follows:
Backlog
(Government)
|
|
June 30,
2017
|
|
|
December 31, 2016
|
|
Funded
|
|
$
|
88,974,000
|
|
|
$
|
92,189,000
|
|
Unfunded
|
|
|
225,353,000
|
|
|
|
229,543,000
|
|
Total
|
|
$
|
314,327,000
|
|
|
$
|
321,732,000
|
|
Our backlog attributable
to commercial contracts at June 30, 2017 and December 31, 2016 was as follows:
Backlog
(Commercial)
|
|
June 30,
2017
|
|
|
December 31, 2016
|
|
Funded
|
|
$
|
1,571,000
|
|
|
$
|
2,351,000
|
|
Unfunded
|
|
|
78,927,000
|
|
|
|
92,201,000
|
|
Total
|
|
$
|
80,498,000
|
|
|
$
|
94,552,000
|
|
Our unfunded backlog
is primarily comprised of the long-term contracts for the G650, E-2D, F-16, T-38, F-35, HondaJet Light Business Jet, Bell AH-1Z,
Cessna Citation X+, Sikorsky S-92 and Embraer Phenom 300. These long-term contracts are expected to have yearly orders, which will
be funded in the future.
The low level of funded
backlog on commercial programs is the result of customers placing funded orders based upon expected lead time. These programs are
under long-term agreements with our customers, and as such, we are protected by termination liability provisions.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
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 tax purposes) 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, or seek access to other forms of liquidity, to fund our work in process or to
pay taxes until the reported earnings materialize as actual cash receipts.
When
adjustments are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date
effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned,
a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results
of Operations
Revenue
Revenue
for the three months ended June 30, 2017 was $16,731,951 compared to $22,280,964 for the same period last year, a decrease of
$5,549,013 or 24.9%. This decrease is predominantly the result of a normal cyclical decrease in revenue on the Company’s
E-2D program.
Revenue
for the six months ended June 30, 2017 was $36,764,652 compared to $34,950,997 for the same period last year, an increase of $1,813,655
or 5.2%.
During
the three months ended March 31, 2016, the Company had information that the United States Air Force (“USAF”) was intending
to increase the number of ship sets on order for the A-10. An increase in the number of ship sets on order would improve the Company’s
estimated gross margin on the overall program.
In
April 2016, the Company became aware that the USAF had reevaluated its position and, as such, had deferred any decision
regarding increasing the orders on the A-10 program. These changes in position by the USAF were supported by communications
from Boeing, the Company’s customer.
Based
on the above facts, the Company believed that it was not probable that there would be any future orders on the A-10 beyond
the 173 currently on order. As a result of the information that management became aware of in April 2016, for the quarter
ended March 31, 2016, the Company estimated that the A-10 program would run through the conclusion of its current purchase
order with Boeing at ship set number 173. The change in estimate resulted in a reduction of revenue of approximately $8.9
million in the quarter ended March 31, 2016.
In
addition to the change in estimate adjustment to revenue in the quarter ended March 31, 2016, which caused military revenue to
be unusually low in that year, military revenue in 2017 increased by approximately $8.0 million.
Revenue
from commercial subcontracts was $14,106,590 for the six months ended June 30, 2017 compared to $20,524,578 for the six months
ended June 30, 2016, a decrease of $6,417,988 or 31.3%. The decrease in revenue is the result of an approximate $3.3 million
decrease in revenue on our Embraer Phenom 300 program, as production rates have declined and a $1.8 million decrease in revenue
on our G650 program.
Inflation
historically has not had a material effect on our operations.
Cost
of sales
Cost
of sales for the three months ended June 30, 2017 and 2016 was $13,048,203 and $17,246,963, respectively, a decrease of $4,198,760
or 24.3%, This decrease is the result of the comparable decline in revenue.
Cost
of sales for the six months ended June 30, 2017 and 2016 was $28,543,390 and $41,556,100, respectively, a decrease of $13,012,710
or 31.3%. The provision for contract losses, as well as lower rate production on our E-2D, Phenom 300 and Embraer programs, all
described above have resulted in lower cost of sales.
The components
of the cost of sales were as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procurement
|
|
$
|
8,064,051
|
|
|
$
|
12,930,373
|
|
|
$
|
17,904,113
|
|
|
$
|
26,232,905
|
|
Labor
|
|
|
1,712,025
|
|
|
|
2,035,949
|
|
|
|
3,586,568
|
|
|
|
4,330,410
|
|
Factory overhead
|
|
|
3,534,619
|
|
|
|
3,806,964
|
|
|
|
7,787,706
|
|
|
|
7,988,341
|
|
Other
contract costs (credits)
|
|
|
(262,492
|
)
|
|
|
(1,526,323
|
)
|
|
|
(734,997
|
)
|
|
|
3,004,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
$
|
13,048,203
|
|
|
$
|
17,246,963
|
|
|
$
|
28,543,390
|
|
|
$
|
41,556,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contract costs (credit) for
the six months ended June 30, 2017 was ($734,997) compared to $3,004,444, a decrease of $3,739,441. Other contract costs (credit)
for the three months ended June 30, 2017 was ($262,492) compared to ($1,526,323), an decrease of $1,263,831 or 82.8%. Other contract
costs relate to expenses recognized for changes in estimates and expenses predominately associated with loss contracts. Other
contract costs are comprised predominantly of charges related to the change in estimate on the A-10 program in 2016. In the six
months ended June 30, 2017, other contract costs are a credit, as we have incurred actual expenses on our A-10 program that had
been previously recognized as part of the change in estimate charge.
Procurement for the six months ended
June 30, 2017 was $17,904,113 compared to $26,232,905, a decrease of $8,328,792 or 31.7%. Procurement for the three months ended
June 30, 2017 was $8,064,051 compared to $12,930,373, a decrease of $4,866,322 or 37.6%. This decrease is a result of a $3.4 million
decrease in procurement on our E-2D program, as we are shipping parts from stock and lowering inventory on this program, as well
as an approximately $4.9 million decrease in procurement on the commercial programs described above.
Labor costs for the six months ended
June 30, 2017 was $3,586,568 compared to $4,330,410, a decrease of $743,842 or 17.2%. The decrease is the result of approximately
$224,000 decrease in the commercial programs described above, as well as $519,000 decrease in military programs. Labor costs for
the three months ended June 30, 2017 was $1,712,025 compared to $2,035,949, a decrease of $323,924 or 15.9%.
Factory overhead for the six months
ended June 30, 2017 was $7,787,706 compared to $7,988,341, a decrease of $200,635 or 2.5%. Factory overhead for the three months
ended June 30, 2017 was $3,534,619 compared to $3,806,964, a decrease of $272,345 or 7.2%.
Gross
Profit (Loss)
Gross profit
(loss) for the six months ended June 30, 2017 was a profit of $8,221,262 compared to a loss of $6,605,103 for the six months ended
June 30, 2016, an increase of $14,826,365, predominately the result of the change in estimate on the A-10 program.
Gross profit
for the three months ended June 30, 2017 was $3,683,748 compared to $5,034,001 for the three months ended June 30, 2016, a decrease
of $1,350,253 predominately the result of lower volume, as described above.
Favorable/Unfavorable
Adjustments to Gross Profit (Loss)
During the
six months ended June 30, 2017 and 2016, circumstances required that we make changes in estimates to various contracts. Such changes
in estimates resulted in decreases in total gross profit as follows:
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable adjustments
|
|
$
|
212,000
|
|
|
$
|
187,805
|
|
Unfavorable adjustments
|
|
|
(1,839,000
|
)
|
|
|
(1,359,092
|
)
|
Net adjustments
|
|
$
|
(1,627,000
|
)
|
|
$
|
(1,171,287
|
)
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2017, we had two contracts which had an approximately $659,000 and $436,000 of unfavorable
adjustments caused by changing estimates on a long-term program, that we are working with the customer to agree to contract
extensions and expect to have to decrease our selling price. Additionally, we had one contract that had a gap in production,
as well as a smaller than expected order quantity. The gap in production and low quantity has resulted in an unfavorable
adjustment of approximately $475,000. There were no other material changes favorable or unfavorable during the six months
ended June 30, 2017.
During the
six months ended June 30, 2016 we had one contract which had an approximately $270,000 unfavorable adjustment caused by excess
labor and procurement costs due to difficulty in the manufacturing process. In addition, we had an approximate $159,000 unfavorable
adjustment on one contract that was canceled by the government. Also, we had four contracts that each had between $139,000 and
$188,000 (cumulatively $654,000) of unfavorable adjustments caused by excess labor costs incurred.
In addition
to the above mentioned unfavorable adjustments, in 2016 we had the unfavorable adjustment of approximately, $12.2 million related
to the A-10 program described previously.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the three months ended June 30, 2017 were $2,002,198 compared to $1,868,787 for the
three months ended June 30, 2016, an increase of $133,411, or 7.1%. This change was predominately the result of a decrease of
approximately $86,000 in bank fees offset by an increase of $76,000 in marketing, an increase of $75,000 in accrued bonuses
and an increase of $73,000 in salaries.
Selling,
general and administrative expenses for the six months ended June 30, 2017 were $4,166,076 compared to $4,589,170 for the six
months ended June 30, 2016, a decrease of $423,094 or 9.2%. This decrease was predominately the result of an approximately
$395,000 decrease in loss on unrealized receivables, an approximately $300,000 decrease in professional fees because of the
extended audit CPI had in 2016, offset by an increase in salaries of $173,000 and an increase in accrued bonuses of
$150,000.
Income (Loss)
Before Provision for (Benefit from) Income Taxes
Income before
provision for income taxes for the three months ended June 30, 2017 was $1,215,647 compared to $2,841,580 for the same period
last year, a decrease of $1,625,933. Income before provision for income taxes for the six months ended June 30, 2017 was $3,198,948
compared to loss before benefit from income taxes of $11,793,640 for the same period last year, an increase of $14,992,588, predominately
the result of the change in estimate on the A-10 program.
Pr
ovision
for (Benefit from) Income Taxes
Provision for
income taxes was $450,000 and $1,184,000 for the three and six months ended June 30, 2017, compared to provision for income taxes
of $1,051,000 for the three months ended June 30, 2016 and benefit from income taxes of $4,364,000 for the six months ended June
30, 2016. The effective tax rate at June 30, 2017 was 37%. The benefit from income taxes recognized in the six months ending March
31, 2016, resulted in the booking of a deferred tax asset. At December 31, 2016, the Company had net operating loss carryforwards
of approximately $14.6 million which will expire in 2031. Our historical tax rates have been below the federal statutory rate
because of the effect of permanent differences between book and tax deductions, predominately the R&D tax credit and the domestic
production activity deduction.
Net Income
(Loss)
Net income
for the three months ended June 30, 2017 was $765,647 or $0.09 per basic share, compared to $1,790,580 or $0.21 per basic share,
for the same period last year. Net income for the six months ended June 30, 2017 was $2,014,948 or $0.23 per basic share, compared
to a loss of $7,429,640 or $0.86 per basic share for the same period last year. Diluted income per share was $0.09 for the three
months ended June 30, 2017 calculated utilizing 8,865,055 weighted average shares outstanding. Diluted income per share for the
six months ended June 30, 2017 was $0.23, calculated utilizing 8,840,309 average shares outstanding as adjusted for the dilutive
effect of outstanding stock options and RSUs. Diluted income per share for the three months ended June 30, 2016 was $0.21, calculated
utilizing 8,637,393 average shares outstanding as adjusted for the dilutive effect of outstanding stock options and RSUs. Basic
and diluted income per share for the six months ended June 30, 2016 were the same as effects of outstanding options would be anti-dilutive.
Liquidity
and Capital Resources
General
At June
30, 2017, we had working capital of $73,799,885 compared to $70,595,485 at December 31, 2016, an increase of $3,204,400 or
4.5%.
Cash
Flow
A large portion
of our cash flow is used to pay for materials and processing costs associated with contracts that are in process and which do
not provide for progress payments. Costs for which we are not able to bill on a progress basis are components of “Costs
and estimated earnings in excess of billings on uncompleted contracts” on our condensed balance sheets 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 revenue, costs and profits and in assigning the amounts to
accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and
actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash
flow and may need to borrow money, or to raise additional capital, until the reported earnings materialize into actual cash receipts.
At June 30,
2017, we had a cash balance of $1,115,297 compared to $1,039,586 at December 31, 2016.
Our costs
and estimated earnings in excess of billings increased by $2,113,884 million during the six months ended June 30,
2017.
Several of
our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case
of significant program delays and/or program cancellations, we could be required to bear impairment charges which may be material,
for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.
We continue
to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring
alternative funding sources.
We believe
that our existing resources, together with the availability under our credit facility, will be sufficient to meet our current
working capital needs for at least 12 months from the date of the filing of this Quarterly report on Form 10-Q.
Item 2 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Credit Facilities
Credit
Agreement and Term Loan
On March 24,
2016, the Company entered into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral
agent and Citzens Bank, N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit
loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The proceeds
of the BankUnited Facility were used to pay off all amounts outstanding under the Santander Term Loan and the Revolving Facility.
The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the agreement.
As of
March 31, 2016, the Company was not in compliance with the net profit, Debt Service Coverage, and Leverage Coverage Ratio
financial covenants contained in the BankUnited Facility, which non-compliance was waived (the “Wavier”) by the
banks. On May 9, 2016 the Company entered into an amendment (the “Amendment”) to the BankUnited Facility which,
among other things, provided for the Waiver. In addition, the Amendment changes the definition of EBITDA for the Leverage
Coverage Ratio Covenant for the remainder of 2016 and changes the maximum leverage ratio from 3 to 1 to 3.5 to 1 for the
quarters ending June 30, 2016 and September 30, 2016. Also, the Amendment increased the interest rate on the BankUnited
Facility by 50 basis points and requires the repayment of a portion of the Term Loan if and to the extent that the Company
receives any contract reimbursement payments from its current REA with Boeing on the A-10 program. The Company was in
compliance with all of the financial covenants contained in the bank agreement as of June 30, 2017.
As of June
30, 2017, the Company had $24.2 million outstanding under the Revolving Loan bearing interest at 4.75%.
The BankUnited
Revolving Facility is secured by all of our assets.
The Term
Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on March
31, 2019. The maturities of the Term Loan are included in the maturities of long-term debt.
On March
9, 2012, the Company obtained a $4.5 million term loan from Santander to be amortized over five years (the “Santander Term
Facility”). Santander Term Facility was used to purchase tooling and equipment for new programs.
Additionally,
the Company and Santander Bank entered into a five-year interest rate swap agreement, in the notional amount of $4.5 million.
Under the interest rate swap, the Company paid an amount to Santander Bank representing interest on the notional amount at a fixed
rate of 4.11% and received an amount from Santander Bank representing interest on the notional amount of a rate equal to the one-month
LIBOR plus 3%. The effect of this interest rate swap was the Company paying a fixed interest rate of 4.11% over the term of the
Santander Term Facility.
The Santander
interest swap agreement was terminated and the Santander Term Facility paid off on March 24, 2016 using the proceeds of the BankUnited
Facility.
In May 2016,
the Company entered into a new interest rate swap with the objective of reducing its exposure to cash flow volatility arising
from interest rate fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract
match those of the underlying debt. The Company has designated this interest rate swap contract as a cash flow hedge.
Contractual
Obligations
For information
concerning our contractual obligations, see “
Contractual Obligations
” under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year
ended December 31, 2016.