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Thursday, March 29, 2007

CPI Aerostructures (CVU) Q4 results

CVU (combined links) issued their Q4 results today.
Revenue decreased 8% from the prior year (the year was really bad, 2006 stunk).
Gross margins increased to 16% from 12% (normal is around 30%).
Net income was positive, but pretty much zero.

They've been waiting for a very long time for the gigantic C-5A TOP contract to start ramping up. The giant cargo jets are in the Middle East and haven't been back for the repairs/upgrade.
We are participating with a major international prime manufacturer in the proposal process to provide new wings for over 200 A-10 Warthogs, and are looking at several other subcontracting possibilities as well.
It's good that they're working at getting into other business while waiting for the C5As.
With the expected return of our historical gross margins coupled with overhead reductions taken in mid-year 2006, we look forward to a healthier profit picture for 2007. Based upon the level of new and pending orders, we are reaffirming our prior 2007 guidance. We anticipate 2007 revenue to be approximately $25 million, with a resulting net income of approximately $2.0 million.

Conference Call

3rd best year for new orders. $30 million (up 80%). Open orders for up to $300 million (which is what everyone is waiting for). Larger average contracts ($231K vs $94K in 2005).
Fixed the production problems in 2006.
Q4 revenues were way up from Q2 and Q3 (like 30-40% or so).
Diversifying. $5 million in two orders from new customer, Sikorsky Aircraft. Total subcontracting more than tripled to $7 million. They expect more subcontracting to major prime contractors in the future: diversification.

They're bidding on the A-10 Warthog contract for new wings on over 200 planes. Total contract with a major prime contractor is over $500 million. CPI is providing some "critical" subassemblies. In 1995 CPI was awarded a $3.5 million contract to re-outfit all the A-10 planes (was needed after the Gulf War). CPI is very familiar with the design and issues with it. Six CPI employees are from Fairchild Repblic, the manufacturer, and they participated in the wing work in the past.

C-5 TOP program: CPI is trying to figure out when this is going to happen. Lockheed won a $25 million contract for other work to improve performance on the planes. This might indicate that the DoD is moving ahead finally, since it's a 3-pronged approach: avionics, engines, and structural parts [if I understand correctly, they already did the avionics a while back].

In subcontracting, CPI has established a solid relationship with Lockheed Martin. Also a supplier to Northrup Grumman and Sikorsky.

CPI is planning on some road shows with institutional investors.

Questions and Answers

Is the C-5 TOP work ever going to happen? How much has been done? What's the chance of it never coming in? What are the factors?

It's difficult to know and CPI can't really say, but the fact that the other two items are being done indicates that the CPI structural work should follow along [I would agree]. If you're going to upgrade the avionics and the engines, "the structure has to come along with it."

About $14.7 million has been released to CPI so far (i.e. almost none). It's been 3 years so far and there are 4 years left on the contract. Consider the lack of airlift mobility as a sign that this work is needed.

Where is CPI in terms of timing on the A-10?

RFPs (request for proposals) were submitted in January. The government has come back and asked for clarification from all the different competitors. They expect answers in early April. Right now it's tracking for an award in the middle of May. So far things have been happening fast and it seems like they want to get this done.

Each year they'll determine how many they want to fund for A-10 work. It's not an IDIQ contract (indefinite delivery, indefinite quantity).

Do government disbursements seem to be accelerating?

They're in the same place that they've been for the past 2 to 2.5 years. Lots of RFPs, no awards. Until things wind down in Iraq, the "bread and butter" awards is going to remain slow.

Any other subcontracting opportunities besides the companies listed above?

Always looking for others.... Can't mention names. Because CPI has established very good relations with these companies and because they've tripled the revenues on subcontracting so far, there's plenty of room to grow just with these 4 customers.

Have the 6 A-10 employees been signed on to long term contracts?

No. But they're long term employees....

Is the A-10 RFP for the production or just the prototype?

"Nah-nah-nah! The RFP is for the entire program start to finish, starting with re-engineering work, actually starting with the conversion of the orginal drawings into new formats. Then the building of prototypes. Then the production" of 200 wings or sets of wings, I know it's 200 planes.

The Air Force has made the decision to move ahead on the 200 planes before the prototype is built. This is their plan.

Any idea how many other bidders there are for the A-10?

Could be anywhere from 4 to 6. All of the competitors are worthy at the moment. Nobody has been eliminated as being technically incapable or anything like that.

Breakdown of military vs commercial on the $7 million subcontracting work?

Pretty much all of it was military. About $500K was commercial.

For subcontracting, are the gross margins better or worse than the contracting work?

The nice thing about the subcontracting is that the margins are better. CPI can do the work cheaper than the primes due to lower overhead, unions, etc. The margins are around 30% and maybe a bit higher?

When will overall margins reach normal levels?

Mid-year CPI should be at around that level. Not in Q2, but probably in Q3.

On the $300 million unawarded contracts, how much is where CPI is prime vs sub?

Around $250 to $270 million is prime.

How much of that is with the C-5 TOP contract?

Can't figure it out on the fly during the call, but inquiries are welcome.

Lots of awards near the end of last year, isn't it normally about 6 to 9 months before they hit?

Normally, yes.

$18 million to $20 million of the $30 million will probably be realized in 2007. Some was realized in 2006.

So there's not much additional business needed to get to the guidance level (which results in an expected $2 million in net profit for 2007).

What's the pitch for the road show?

Not really a pitch, just that CPI is getting past two down years, things are looking up, just want to get in front of investors and let them know who CPI is.

What sort of work has CPI done on the A-10 and what work have the competitors done?

All new leading edges [wings?] on the entire fleet of A-10s. That alone probably gave CPI more [wing?] experience on the A-10 than anyone else in the country.

CPI could end up being a subcontractor to someone else who wins the contract.

The 6 A-10 employees are from Fairchild and worked specifically on the wings and the wing program. "We have engineers who actually helped design them. We have mechanics who actually helped build them. And we have operational guys who helped make sure it was built right and on time. So we bring that to the table...." [excellent!]

CPI has seen the design flaws now (of course no one knew what they were 30 or 40 years ago when the planes were built).

"That's what we bring to the table that nobody else has."

[I'm thinking the odds are better than one-in-four or one-in-six.]

When are the road shows?

Starting out in April and going every month for 3 or 4 months.

They believe they've explained to people why things were not going well in the past 2 years. [I agree.]

If one of these big contracts goes through, it'll transform the company. Yes it will. How many more of these company transforming possibilities are out there?

That's internal information that can't be stated to the public. Whether it's 10 or zero.

But it sounds like the logjam is still in place.

"That's correct from our experience and the experience of our competitors."

David Cohen from Midwood Capital [big shareholder]:
With the 2007 targets, what's been identified as the tax rate and tax liability?

Very low due to the NOLs. Down in the 35ish rate. They have a state tax carry-forward.

What was SG&A for the year?

$3.6 million. It was normal for Q4 vs the other quarters other than usual stock option expenses and so forth.

What about the vendor issue and the wording in the press release?

Very minor, fraction of a percent of gross margins. The issues are gone. [I missed some of this]

Next guy:
CPI is a subcontractor in the A-10 bid, how much will CPI influence the decision vs the capabilities or lack by the prime?

100% correct. However, CPI is a contractor to a major prime and CPI was specifically named by the prime in the proposal. CPI evaluated the prime before joining up with them. So CPI believes in these guys.

Also there are subcontracting possibilities with other primes who might win the contract.

How much of the TOPs is in the projection for 2007?

None. And none of the $300 million is in there.

Some things have been added, some dropped out of the 300.

Nothing significant has been lost recently (except for the thing more than a year ago that CPI was sort of glad to lose).

In the CPI TOP program, what if they drop the C-5A vs C-5B/C?

The contract didn't call for anything over quantity 47. If they ordered everything in the contract, it would only be 47. So it's not a big issue(?) I take this to mean that the contract was not assuming all the planes. There are 60 C-5As, 49 C-5Bs, and 2 C-5Cs? I'm not sure if this excludes the one that crashed recently (all survived, if I recall correctly). Wikipedia has more details.


Yeah, I'll keep holding the stock.

UPDATE April 2, 2007:
CVU issued a press release saying that some SG&A was reclassified as cost of revenues. Gross margins changed from 16% to 14% for 2006 and from 10% to 9.2% for 2005. Net income wouldn't be affected.

Hey Bruch take a look at WNC thats Wabash National, possible competitor for CFRI
I checked their website and the latest 10-K for Wabash and I don't see anything close to competition for CFRI. Yes, they deal with composites in trailers, but I don't see anything resembling marine quality intermodal container flooring (which has all sorts of unique requirements).

The only intermodal thing I see in their innovations is the RoadRailer, which is pretty neat, but unrelated.

The DuraPlate used in dry vans uses composites for sidewall material rather than flooring. They use oak for flooring.
good stuff just thought I'd run it by you.
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