Add
CVU to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CVU > SEC Filings for CVU > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-2009
Quarterly Report
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, 2008, as supplemented in this Form 10-Q and Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations included 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 engaged in the contract production of structural aircraft parts principally for the U.S. Air Force and other branches of the U.S. armed forces, either as a prime contractor or as a subcontractor for other defense prime contractors. Our strategy for growth has focused on government and military sales as a prime contractor and increasingly as a subcontractor for leading aerospace prime contractors.
Due to our success as a subcontractor to defense prime contractors and growth in the commercial sector, we are also pursuing opportunities to increase our commercial subcontracting business.
Marketing and New Business
During the nine months ended September 30, 2009, we received approximately $15.0 million of new contract awards, which included approximately $10.3 million of government prime contract awards, approximately $4.5 million of government subcontract awards and approximately $0.2 million of commercial subcontract awards, compared to a total of $49.0 million of new contract awards, of all types, in the same period last year, a 70% decrease. This decrease is the result of weak national economic conditions, which are affecting buying decisions throughout the military and commercial markets.
We still have approximately $393 million in formalized bids outstanding as of September 30, 2009 and continue to make bids on contracts on a weekly basis. As mentioned previously, we have increased our marketing efforts for both government and commercial subcontracting opportunities. While we cannot predict the probability of obtaining or the timing of awards, some of these outstanding proposals are significant in amount.
The lengths of our contracts vary but are typically between nine months and two years for U.S. government contracts (although our T-38 contract and our C-5 TOP contract are for periods of ten years and seven years, respectively), and up to ten years for commercial contracts. Except in cases where contract terms permit us to bill on a progress basis, we must incur upfront costs, such as for tooling, 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 periods in which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash is received.
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 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 fund our work in process or to pay taxes until the reported earnings materialize as actual cash receipts.
Stock-Based Compensation
We account for compensation expense associated with stock options based on the fair value of the options on the date of issue.
Results of Operations
Revenue
Revenue for the three months ended September 30, 2009 was $9,916,357 compared to $9,434,095 for the same period last year, representing an increase of $482,262 or 5.1%. For the nine months ended September 30, 2009 revenue was $31,045,283 compared to $26,353,255 for the same period last year, representing an increase of $4,692,028 or 17.8%. The increase in revenue is primarily the result of work performed for Spirit Aerosystems on the Gulfstream G650 executive jet.
We generate revenue from government contracts for which we act as a prime contractor or as a subcontractor as well as from commercial contracts. Revenue generated from prime government contracts for the nine months ended September 30, 2009 was $9,973,342 compared to $13,438,102 for the nine months ended September 30, 2008, a decrease of $3,464,760 or 26%. Revenue generated from government subcontracts for the nine months ended September 30, 2009 was $10,851,080 compared to $8,764,412 for the nine months ended September 30, 2008, an increase of $2,086,668 or 24%. Revenue generated from commercial contracts was $10,220,861 for the nine months ended September 30, 2009 compared to $4,150,741 for the nine months ended September 30, 2008, an increase of $6,070,120 or 146%.
Gross Profit
Gross profit for the three months ended September 30, 2009 was $2,559,796 compared to $2,158,193 for the three months ended September 30, 2008, an increase of $401,602. As a percentage of revenue, gross profit for the three months ended September 30, 2009 was 26%, compared to 23% for the same period last year. The increased gross margin percentage was a result of a favorable product mix, as well as favorable add on work on certain of our long-term programs which have increased gross margin in the near term.
Because of this favorable near term product mix, we expect gross margin percentage to remain constant for the remainder of 2009.
Gross profit for the nine months ended September 30, 2009 was $7,454,947 compared to $6,011,879 for the nine months ended September 30, 2008, an increase of $1,443,068. As a percentage of revenue, gross profit for the nine months ended September 30, 2009 was 24% compared to 23% for the same period last year. Gross profit percentage was within our expected range of 23%-25%.
Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended September 30, 2009 were $1,201,134 compared to $806,071 for the three months ended September 30, 2008, an increase of $395,063, or 49%. For the nine months ended September 30, 2009, selling, general and administrative expenses were $3,879,876 compared to $3,469,981 for the same period last year, an increase of $409,895, or 12%. The increase is primarily due to a $607,000 increase in salaries, the result of changing the classification of certain employees from factory overhead in 2008 to selling, general and administrative expenses in 2009, and an $168,000 increase in interest expense partially offset by a $194,000 decrease in consulting fees, a $115,000 decrease in public relation fees, and a $120,000 decrease in accrued bonus.
Income Before Provision for Income Taxes
Income before provision for income taxes for the three months ended September 30, 2009 was $1,358,662 compared to $1,352,122 for the same period last year, an increase of $6,540. For the nine months ended September 30, 2009, income before provision for income taxes was $3,575,071 compared to $2,541,898 for the same period last year, an increase of $1,033,173, predominantly the result of the increase in gross profit described previously.
Provision for Income Taxes
Provision for income taxes was $1,216,000 for the nine months ended September 30, 2009, or 34% of pre-tax income. For the three months ended September 30, 2009, the provision for income taxes was $414,000, or 30% of pre-tax income. Provision for income taxes was $860,000 for the nine months ended September 30, 2008, or 34% of pre-tax income. For the three months ended September 30, 2008, the provision for income taxes was $460,000, or 34% of pre-tax income.
Net Income
Net income for the three months ended September 30, 2009 was $944,662, or $0.16 per basic share, compared to net income of $892,122, or $0.15 per basic share, for the same period last year. For the nine months ended September 30, 2009, net income was $2,359,071, or $0.39 per basic share, compared to net income of $1,681,898, or $0.28 per basic share, for the same period last year. Diluted income per share for the three months ended September 30, 2009 was $0.15, calculated utilizing 6,224,962 average shares outstanding. Diluted income per share for the nine months ended September 30, 2009 was $0.38, calculated utilizing 6,192,595 average shares outstanding. Diluted income per share for the three months ended September 30, 2008 was $0.14, calculated utilizing 6,252,685 average shares outstanding. Diluted income per share for the nine months ended September 30, 2008 was $0.27, calculated utilizing 6,217,010 average shares outstanding.
Liquidity and Capital Resources
General
At September 30, 2009, we had working capital of $37,618,135 compared to $35,135,395 at December 31, 2008, an increase of $2,482,740, or 7%.
Cash Flow
A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Contracts that permit us to bill on a progress basis must be classified as "on time" for us to apply 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 until the reported earnings materialize into actual cash receipts.
At September 30, 2009, we had a cash balance of $684,418 compared to $424,082 at December 31, 2008. Our costs and estimated earnings in excess of billings, net of billings in excess of costs and estimated earnings, increased by approximately $5,373,000 during the nine months ended September 30, 2009. The increase in costs and estimated earnings in excess of billings on uncompleted contracts and accounts payable was primarily due to higher levels of procurement and production related to work on new contract awards and advances made to expedite delivery of tooling required for our new long-term contracts with Spirit and Northrop-Grumman. In order to perform on new programs we may be required to expend up-front costs, which may not have been negotiated into our selling price. 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.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Credit Facilities
Line of Credit
In August 2007, we entered into a two-year, $2,500,000 revolving credit facility with Sovereign Bank (the "Sovereign Revolving Facility"), secured by all of our assets. The Sovereign Revolving Facility specifies an interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank's prime rate. The Sovereign Revolving Facility contains financial covenants related to interest coverage, net income and capital expenditures, as defined in the credit agreement. As of September 30, 2009, we were in compliance with all of the financial covenants contained in the credit agreement.
On July 7, 2009, the Company and Sovereign Bank amended the terms of the Sovereign Revolving Facility, increasing the existing revolving credit facility under the Credit Agreement from an aggregate of $2,500,000 to an aggregate of $3,500,000 and extending the term of the revolving credit facility from August 2010 to August 2011. In addition, the interest rate of borrowings under the revolving credit facility was amended to (i) the greater of 4.0% or 3.5% in excess of the LIBOR Rate or (ii) the greater of 4.0% or 0.75% in excess of Sovereign Bank's prime rate, as elected by the Company in accordance with the Credit Agreement. The effective rate as of September 30, 2009 was 4.00%. The Credit Agreement was further amended to increase the commitment fee from 0.25% to 0.50% per annum on the average daily unused portion of the revolving credit commitment commencing September 30, 2009, and to permit the Company's sale of certain accounts receivable. As of September 30, 2009, we had $3,000,000 outstanding under the Sovereign Revolving Facility.
Term Loan
On October 22, 2008, we obtained a $3,000,000 term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Facility"). Prior to entering into the term loan we had borrowed $2,500,000 under the Sovereign Revolving Facility to fund the initial tooling costs related to the previously mentioned long-term contract with Spirit. We used the proceeds from the Sovereign Term Facility to repay the borrowings under the Sovereign Revolving Facility and to pay for additional tooling related to the Spirit contract. The Sovereign Term Facility bears interest at LIBOR plus 2.5% and is secured by all of our assets.
Concurrent with entering into the Sovereign Term Facility, Sovereign Bank amended the terms of the Sovereign Revolving Facility extending the term until August 2011 and amending the covenants, as defined, commencing in the fourth quarter of 2009.
The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility.
Additionally, the Company and Sovereign Bank entered into a five year interest rate swap agreement, in the notional amount of $3,000,000. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount of 5.8% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR plus 2.5%. The effect of this interest rate swap will be the Company paying a fixed interest rate of 5.8% over the term of the Sovereign Term Facility.
|
|