Thursday, March 30, 2006
C P I Aerostructures (CVU) Q4 results
Revenue was down 28% to $6.5 million.
Gross margin was down to 12% (vs 36%) due to rework costs for a rejected work item in Q1, higher overhead related to the [untimely] move in early 2005, and so forth.
Small net loss
Things are slow right now in the military aircraft business since the aircraft are in the Middle East. CVU has a 13% success rate on bids awarded, which is above the industry average of 5%, but business overall is way down.
They project $25 million in revenue for 2006 and $2 million in net income, the same as 2005. The real point of owning this stock is for the big orders that have already been awarded. These will happen, but not right now.
The balance sheet remains strong, I'm not worried about the business getting into serious trouble.
Conference Call Notes
[I was not very dilligent at keeping up and taking notes here]
Why everyone feels the need to read the results verbatim is beyond me. It makes no sense.
Positive outlook for the future due to increasing relevant expenditures by the government. CVU makes money on aircraft modifications and repair. The quadrennial review was positive for CVU (including the C-5A).
They're trying to get subcontracts from larger players (in other areas) to get some business. This is working somewhat so far. Any single award could have a large positive impact on results. 2006 could be big, but who knows.
$350 million in bids outstanding.
Line of credit outstanding, but expires later in 2006.
CEO is not disappointed in the results.
1) Gross margin decline. Large amount of indirect labor in Q4 on 2 projects. ISO certification. Lots of indirect hours from QA. Defense Management certification stuff to increase ratings... "next level". The effort was necessary anyway. A slowdown is a good time to do this [agreed].
2) Rate of awards decline, supply chain issues. Partners OK? Competitors? Vendors are OK. No subcontracting concentration. Competition is all surviving, but affected. Everyone did very well during the boom times and can survive now.
3) Building sales force for subcontracting, any employee turnover? No. And don't plan to add any employees.
4) SOX? Don't need to comply until year ending Dec 2007.
5) Gross margin question again. The guy doesn't understand how that stuff works. They had to pay people lots of overtime to do the compliance stuff.
6) What sort of backlog exists? $18 million. Something related to the (otherwise huge) TOPS contract Q4 06 to the end of 2007 (if I heard correctly). This part is small potatoes.
7) Probability of success on subcontractor work? Subcontractors have more flexibility in awarding to people they like to work with, can look deeper into the overall production than the US Gov. The US Gov can be fooled by low bids more. Going into a prime or subcontractor, those guys are better at identifying stupidity. More qualitative, which is right into CVU's strength. Anecdote about CVU being one of two left standing after an original 14 bidders. They rattled off a number of contracts and companies that sounded pretty good.
8) When will gross margins get back to normal? Still expect low margins in Q1 and maybe even into Q2 a bit. Also things should get more visibile in Q2. At that time they'll re-assess if needed (to cut back).
9) Expect two possible "projected very strongly" awards for Q2. Can't disclose dollar figure, but we're talking well above $2 million... significant.
10) Big award in 2004 but still nothing yet... why? How much longer can it go on? 100 line item contract with max value of $215 million, not guaranteed. Ongoing war is different than expected. The transport aircraft are being used all the time, without off-time. Quadrennial review stated that airlift mobility was a prime concern (good for CVU and the contract). The US fleet of airlift aircraft need maintenance and to be increased. Immediately afterward, they got a $5 million award (unrelated). More releases are hard to predict. Sooner or later the airplanes need the work and it's a clear 4-year priority. [that's good stuff]
11) Dollar range for a really huge contract? How long till that shows up? $2-$5 million would be "large". They talked more about it, but I missed it.
12) Warner Robins and others are fairly busy. Why not CVU? They're not as busy as they were. The other upgrades of the C-5A (avionics, etc.) are higher priority than what CVU has been awarded. There are other contracts coming out, it shows commitment to the aircraft is still there: they won't upgrade the engine and allow the structure to rot away. Problem is, they can't afford to take planes out for all the work needed, with a war going on.
13) Any retired aircraft being used for spare parts? Only retired 14 out of 126(?), not a lot of spare parts to use. Only so much cannibalism is possible (a wingtip or something else), but the planes are getting old. Before the war, they would have done the order. Now things are more immediate, urgent.
14) missed this one (inventory-ing parts). Government is not good at ordering in advance. RFPs and RFQs are going out, but just sitting there, no award or rejection.
15) $25 million projection, what's included (C-5 TOPS)? Yes (see above): Q4 until the end of 07.
16) How did they come up with the projection? How much is subcontract? Difficult to answer. They know the backlog. Based on RFPs, expected win rate, historical win rate. They know what should be coming later in the year. Doesn't include any significant major awards. They have huge potential $350 million bids outstanding (up $100 million from last quarter). If the logjam breaks, then revenues go way up [which is what I'm waiting on]. Things started to pick up, but then slowed down. They're not projecting any of that stuff for 2006.
If something positive doesn't happen in the near future, they need to start looking at reducing the overhead and cutting back. [my sense is that they'll stall for time if nothing pans out sson, as I believe they can go on for a while without serious consequences]
17) Can you take on low margin business in the meantime? No, you'd have to go after such extremely low margin stuff that it would be unprofitable. [in my opinion, they're doing exactly the right stuff]
18) Any more coverage of the business from the investment community? Nothing formalized. They'll be talking to people in various areas (Boston, SF, Florida) that have been with the company for a while.
19) Silliness. Management answered it very well. Funny stuff.
Thanks for pointing that out. The problem with Boyd's argument is that the C-5A's are apparently getting upgrades on avionics and other things. He might be right, I don't know. I'll have to dig into it.
I don't know if I'd call it "questioning my own thesis" -- the stock could quadruple over the next couple of years, and definitely isn't a zero. I think that's pretty attractive.
But it's not a sure thing, which opens up the question, "How much of something that's attractive but not a sure thing do you want to own?" If I knew for sure that there'd be 40-50 C5-As flying in 2020, I'd be averaging down with glee.
One thing I've been meaning to do but haven't is to troll some of the military discussion groups looking for background info & other dirt. Bruce, have you been able to dig anything up?
No I haven't done that. The problem is that these decisions can go against what the grunts or armchair generals might view as expected. I agree that it's not a sure thing. I hoped that it would play out by now, but it's not that surprising that it hasn't.