UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q

 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2013March 31, 2014

 OR

 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________ to __________

Commission File Number: 1-11398


CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)

New York11-2520310
(State or other jurisdiction(IRS Employer Identification Number)
of incorporation or organization) 


91 Heartland Blvd., Edgewood, NY11717
(Address of principal executive offices)(zip code)

(631) 586-5200
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer    o
Smaller reporting company o
(Do not check if a smaller reporting company) 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 5, 2013May 2, 2014 the number of shares of common stock, par value $.001 per share, outstanding was 8,391,954.8,460,785.

 
 
 


INDEX
 

Part I - Financial Information
Item 1 – Condensed Financial Statements 
  
Condensed Balance Sheets as of September 30, 2013March 31, 2014 (Unaudited) and3
December 31, 20122013 
  
Condensed Statements of Income and Comprehensive Income for the Three and Nine Months ended September 30, 2013
March 31, 2014 (Unaudited) and 20122013 (Unaudited)
4
  
  
Condensed Statements of Shareholders’ Equity for the NineThree Months5
ended September 30, 2013March 31, 2014 (Unaudited) and 20122013 (Unaudited)
  
Condensed Statements of Cash Flows for the NineThree Months ended September 30, 2013March 31, 20146
(Unaudited) and 20122013 (Unaudited) 
  
Notes to Condensed Financial Statements (Unaudited)7
  
Item 2 – Management’s Discussion and Analysis of Financial Condition14
and Results of Operations 
  
Item 3 – Quantitative and Qualitative Disclosures About Market Risk21
  
Item 4 – Controls and Procedures21
  
Part II -  Other Information 
  
Item 1 – Legal Proceedings22
  
Item 1A – Risk Factors22
  
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds22
  
Item 3 – Defaults Upon Senior Securities22
  
Item 4 – Mine Safety Disclosures22
  
Item 5 – Other Information22
  
Item 6 – Exhibits22
  
Signatures23
  
Exhibits24

 
2 
 

Part I - Financial Information

Item 1 – Financial Statements
CONDENSED BALANCE SHEETS
 
 September 30,December 31,
 20132012
 (Unaudited)(Note 1)
 March 31,December 31,
 20142013
 (Unaudited)(Note 1)

ASSETS    
Current Assets:    
Cash$840,683$2,709,803$973,525$2,166,103
Accounts receivable, net13,317,8666,774,3468,108,3594,392,254
Costs and estimated earnings in excess of billings on uncompleted    
contracts111,766,149108,909,844119,205,553112,597,136
Deferred income taxes526,000534,000417,000417,000
Prepaid expenses and other current assets645,906426,063737,867609,268
    
    
Total current assets127,096,604119,354,056129,442,304120,181,761
    
Plant and equipment, net2,990,2372,907,4762,730,8472,849,753
Deferred income taxes1,009,0001,001,0001,025,0001,133,000
Other assets108,0801,620,984108,080108,080
  
Total Assets$131,203,921$124,883,516$133,306,231$124,272,594
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Current Liabilities:    
Accounts payable$7,299,757$13,286,558$7,733,328$7,614,755
Accrued expenses
Billings in excess of costs and estimated earnings on uncompleted
244,075
 
943,356
 
contracts469,509 656,853 
Accrued expenses499,168654,868
Billings in excess of costs and estimated earnings on uncompleted contracts  179,698  276,170
Current portion of long-term debt1,041,0161,100,564993,1391,020,349
Line of credit31,450,00023,450,00028,850,00021,350,000
Income tax payable235,800106,000512,699736,536
Deferred income taxes100,000102,00089,00089,000
  
Total current liabilities40,840,15739,645,33138,857,03231,741,678
    
Long-term debt, net of current portion2,444,5703,209,8731,952,4172,198,187
Deferred income taxes852,000867,000788,000788,000
Other liabilities583,073567,113592,306593,210
    
  
Total Liabilities44,719,80044,289,31742,189,75535,321,075
    
    
Shareholders’ Equity:    
Common stock - $.001 par value; authorized 50,000,000 shares,    
issued and outstanding 8,391,954 and 8,371,439  
shares, respectively
          8,392
8,371
8,460,785 and 8,410,493 shares, respectively,  
issued and outstanding8,4618,410
Additional paid-in capital50,286,53449,780,67350,814,20650,381,348
Retained earnings36,212,63230,845,98240,311,74538,582,876
Accumulated other comprehensive loss(23,437)(40,827)(17,936)
(21,115)
    
Total Shareholders’ Equity86,484,12180,594,19991,116,47688,951,519
    
Total Liabilities and Shareholders’ Equity$131,203,921$124,883,516$133,306,231$124,272,594
    
See Notes to Condensed Financial Statements
3

 
 
 

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 For the Three Months EndedFor the Nine Months Ended
 September 30,September 30,
                                                        2013                                                       2012                                                     2013                                                2012
         (Unaudited)                           (Unaudited)

Revenue$20,664,645$21,340,831$61,702,530$61,916,552
Cost of sales16,188,51815,536,40748,549,58645,379,099
     
     
Gross profit4,476,1275,804,42413,152,94416,537,453
Selling, general and administrative expenses1,508,6561,615,8884,882,8515,290,999
     
Income from operations2,967,4714,188,5368,270,09311,246,454
Interest expense195,371163,099492,443486,679
     
Income before provision for    
  income taxes2,772,1004,025,4377,777,65010,759,775
     
Provision for income taxes861,0001,230,0002,411,000
3,349,000
     
     
Net income1,911,1002,795,4375,366,6507,410,775
     
Other comprehensive income (loss),    
net of tax    
Change in unrealized gain (loss)-    
interest rate swap---(1,490)17,390(33,826)
     
     
Comprehensive Income$1,911,100$2,793,947$5,384,040$7,376,949
     
     
     
Income per common share – basic
$0.23
$0.33
$0.64
$0.99
     
     
Income per common share – diluted$0.23$0.33$0.63$0.96
     
                  For the Three Months Ended 
                                    March 31, 
                                           2014                           2013  
  (Unaudited) 

Shares used in computing income per common share:    
  Basic8,391,9548,347,0868,387,2407,510,581
     
  Diluted8,490,7118,476,6918,464,3507,684,508
     
     
Revenue$21,883,517$19,927,433  
Cost of sales17,392,38515,486,863  
     
     
Gross profit4,491,1324,440,570  
Selling, general and administrative expenses1,838,6601,877,922  
     
Income from operations2,652,4722,562,648  
Interest expense143,603141,372  
     
Income before provision for    
  income taxes2,508,8692,421,276  
     
Provision for income taxes780,000750,000  
     
     
Net income1,728,8691,671,276  
     
Other comprehensive income,    
net of tax    
Change in unrealized loss    
interest rate swap3,1793,711  
     
     
Comprehensive income$1,732,048$1,674,987  
     
     
     
Income per common share – basic$0.21$0.20  
     
Income per common share – diluted$0.20$0.20  

Shares used in computing income per common share:    
  Basic8,421,1428,377,654  
  Diluted8,534,8568,447,974  
     


See Notes to Condensed Financial Statements

 
4
 


CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

                                                      For the nine months ended September 30, 2013 and 2012
Common
Stock
Shares
Amount
Additional
 Paid-in
 Capital
Retained
 Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
 Equity
CommonStock SharesAmountAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Shareholders’ Equity 
         
         
Balance at January 1, 20127,079,638$7,080$35,346,273$19,834,852$(1,140,226)$(21,772)$54,026,207
Balance at January 1, 20138,371,439$8,371$49,780,673$30,845,982$(40,827)$80,594,199 
Net Income--------7,410,775--------7,410,775--------1,671,276----1,671,276 
Change in unrealized loss from interest rate swap----------------(33,826)------------3,711 
Common stock issued in share    
offering1,195,7501,19513,322,499--------13,323,694
Common stock issued upon exercise    2,6453(3)----------- 
of options196,0781961,224,319--------1,224,515
Common stock issued as bonus15,26015228,275--------228,290
Stock compensation expense----382,657--------382,657
Tax benefit of stock option exercise----162,000--------162,000
Treasury stock retired(133,257)(133)(1,140,093)----1,140,226----
    
Balance at September 30, 20128,353,469$8,353
$49,525,930
 
 
$27,245,627$----$(55,598)$76,724,312
    
Balance at January 1, 20138,371,439$8,371$49,780,673$30,845,982$----$(40,827)$80,594,199
Net Income--------5,366,650--------5,366,650
Change in unrealized gain from interest rate swap----------------17,390
Common stock issued upon exercise    
of options2,6453(3)--------
of stock options     
Tax provision for stock option exercise---(26,000)------(26,000)---(26,000)------(26,000) 
Common stock issued as bonus17,87018152,056--------152,07417,87018152,056--------152,074 
Stock compensation expense----379,808--------379,808----360,964--------360,964 
Balance at March 31, 20138,391,954$8,392$50,267,690$32,517,258$(37,116)$82,756,224 
         
Balance at September 30, 20138,391,954$8,392
$50,286,534
 
$36,212,632$----$(23,437)$86,484,121
     
     
     
Balance at January 1, 20148,410,493$8,410$50,381,348$38,582,876$(21,115)$88,951,519 
Net Income--------1,728,869----1,728,869 
Change in unrealized loss from interest rate swap------------3,179 
Common stock issued upon exercise50,29251278,049--------278,100 
of stock options     
Tax benefit of stock option exercise---52,000------52,000 
Stock compensation expense----102,809--------102,809 
Balance at March 31, 20148,460,785$8,461$50,814,206$40,311,745$(17,936)$91,116,476 
         
        
        
        
        
        
        
        
        
        
    


See Notes to Condensed Financial Statements





 
5 
 


CONDENSED STATEMENTS OF CASH FLOWS
 
     
For the Nine Months Ended September 30,
2013      
2012
  
For the Three Months Ended March 31,For the Three Months Ended March 31,              20142013
     
Cash flows from operating activities:    
Net income$5,366,650$7,410,775$1,728,869$1,671,276
Adjustments to reconcile net income to net    
cash used in operating activities:    
Depreciation and amortization518,048458,606175,043163,507
Deferred rent
Recovery of bad debt
36,414
----
58,750
(75,000)
Deferred rent4,27413,655
Stock compensation379,808382,657102,809360,964
Deferred income taxes(17,000)(54,000)108,000(16,000)
Provision for (tax benefit) from stock option plans26,000(162,000)
Tax benefit (provision) from stock option plans(52,000)26,000
Changes in operating assets and liabilities:    
Increase in accounts receivable(5,030,616)(4,498,170)(3,716,105)(2,621,277)
Increase in costs and estimated earnings in excess of billings on    
uncompleted contracts(2,856,305)(17,198,319)(6,608,417)(1,101,586)
(Increase) decrease in prepaid expenses and other assets(219,843)294,145
Increase in prepaid expenses and other assets(128,599)(179,704)
Decrease in accounts payable and accrued expenses(6,537,071)(3,460,951)(39,126)(5,486,060)
(Increase) decrease in billings in excess of costs and estimated earnings
on uncompleted contracts
 
 (187,344)
 
---
Decrease in billings in excess of costs and estimated earnings  
on uncompleted contracts(96,472)(346,826)
Increase (decrease) in income taxes payable103,800(916,708)(171,837)169,530
    
    
Net cash used in operating activities(8,417,459)(17,760,215)(8,693,561)(7,346,521)
    
    
Cash used in investing activities - purchase of plant and equipmentCash used in investing activities - purchase of plant and equipment(600,810)(709,111)Cash used in investing activities - purchase of plant and equipment(56,137)
(294,632)
     
Cash flows from financing activities:Cash flows from financing activities:   Cash flows from financing activities:   
Payments on long-term debtPayments on long-term debt(824,851)(1,046,976) Payments on long-term debt(272,980)(281,774) 
Proceeds from long-term debtProceeds from long-term debt---4,500,000 Proceeds from long-term debt------ 
Proceeds from line of credit
Payments on line of credit
10,000,000
(2,000,000)
4,500,000
(4,000,000)
 
Proceeds from exercise of stock options
Proceeds from sale of common stock
---
---
1,224,515
13,323,694
 
(Provision for) tax benefit from stock option plans(26,000)162,000 
Proceeds from line of creditProceeds from line of credit7,500,0006,500,000 
Proceeds from exercise of stock optionsProceeds from exercise of stock options278,100--- 
Tax (benefit) provision from stock option plansTax (benefit) provision from stock option plans52,000(26,000) 
       
       
Net cash provided by financing activitiesNet cash provided by financing activities7,149,14918,663,233 Net cash provided by financing activities7,557,1206,192,226 
       
       
Net increase (decrease) in cash(1,869,120)193,907 
Net decrease in cashNet decrease in cash(1,192,578)(1,448,927) 
Cash at beginning of periodCash at beginning of period2,709,803878,200 Cash at beginning of period2,166,1032,709,803 
       
   
Cash at end of periodCash at end of period$840,683$1,072,107 Cash at end of period$973,525$1,260,876 
   
Supplemental disclosures of cash flow information:Supplemental disclosures of cash flow information:   Supplemental disclosures of cash flow information:   
       
Non cash investing and financing activities:Non cash investing and financing activities:   Non cash investing and financing activities:   
       
Equipment acquired under capital lease$---$76,592 
   
Common stock issued for bonusesCommon stock issued for bonuses$152,074$228,290 Common stock issued for bonuses$---$152,074 
       
Cash paid during the period for:Cash paid during the period for:   Cash paid during the period for:   
Interest Interest$638,767$907,709  Interest$250,852$238,443 
Income taxes Income taxes$2,250,000$4,394,778  Income taxes$850,000$500,000 




 See Notes to Condensed Financial Statements

6 
6 
 


 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


1.           INTERIM FINANCIAL STATEMENTS

The condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of September 30, 2013March 31, 2014 and for the three and nine months ended September 30,March 31, 2014 and 2013 and 2012 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.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.

The condensed balance sheet at December 31, 20122013 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. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by the SEC. Such adjustments are of a normal, recurring nature. 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, 2012.2013. 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.

On January 1, 2012, the Company adopted the provisions of Accounting Standards Codification 220, “Comprehensive Income.”  The new guidance requires the Company to present Comprehensive Income either on one continuous Statement of Income and Comprehensive Income, or on a separate Statement of Comprehensive Income.  The new guidance does not change the computation of Net Income or Comprehensive Income.

 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 September 30, 2013,March 31, 2014, the Company had approximately $1,145,000$905,245 of uninsured balances.  The Company limits its credit risk by selecting financial institutions considered to be highly credit worthy.

2.STOCK-BASED COMPENSATION

The Company accounts for compensation expense associated with stock options based on the fair value of the options on the date of grant.

The Company’s net income for the three and nine months ended September 30,March 31, 2014 and 2013 includes approximately $19,000$103,000 and $380,000, respectively,$361,000 of noncashnon-cash compensation expense, related to the Company’s stock options.  The Company’s net income for the three and nine months ended September 30, 2012 includes approximately zero and $383,000, respectively, of noncash compensation expense related to the Company’s stock options.  The non-cash compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of selling, general and administrative expenses.

The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model.  The following weighted-average assumptions were used for the options granted during the three and nine months ended September 30, 2013March 31, 2014 and 2012:2013:

 
7 
 


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



20132012
  20142013
Risk-free interest rate
0.76%
 
0.9%
 
1.45%0.72%
    
Expected volatility
106%
 
102%
 
102%106%
    
Dividend yield0%
0%
 
0%0%
Expected option term5 years
5 years
 
 
5 years
5 years
 

A summary of the status of the Company’s stock option plans as of September 30, 2013March 31, 2014 and changes during the ninethree months ended September 30, 2013 areMarch 31, 2014 is as follows:

Weighted
average
 Exercise
 Price
Weighted
average
remaining
 contractual 
term (in years)
Aggregate
 Intrinsic
 Value
Weighted
 average
 Exercise
 Price
Weighted
 average
 remaining
 contractual
 term (in years)
Aggregate
 Intrinsic Value
OptionsOptions
Outstanding        
at beginning of period495,517$9.33  461,919$9.80  
Granted46,40210.64  36,29215.04  
Exercised(20,000)8.20  (65,000)7.32  
Forfeited(35,000)8.20  
        
Outstanding and vested        
at end of period
 486,919
$9.582.41$1,253,203405,994$10.322.73$1,276,112
        


Options to acquire 44,21736,292 shares of common stock were granted on January 1, 20132014 to members of our board of directors as part of their normal compensation.  On August 15, 2013,Of the 36,292 options to acquire 2,185 shares were granted to a new board member as part of his normal compensation.on January 1, 2014, 9,075 vested immediately, 9,073 vest on April 1, 2014, 9,073 vest on July 1, 2014 and 9,071 vest on October 1, 2014.

During the ninethree months ended September 30, 2013, noMarch 31, 2014, 35,000 stock options were exercised for cash.cash resulting in proceeds to the Company of $278,100.  During the same period 20,00030,000 stock options were exercised, pursuant to provisions of the stock option plan, where the Company received no cash and 17,35514,708 shares of its common stock in exchange for the 20,00030,000 shares issued in the exercise.  The 17,35514,708 shares that the Company received were valued at $164,000,$197,927, the fair market value of the shares on the dates of exercise.

The intrinsic value of all options exercised during the ninethree months ended September 30,March 31, 2014 and 2013 and 2012 was approximately $26,300$413,450 and $1,224,000,$26,300, respectively.

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.

 
8
 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


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 itsour 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 contractcontact with the cumulative change in the hedged item.  No material ineffectiveness was recognized in the quarter ended September 30, 2013.March 31, 2014.  As of September 30, 2013March 31, 2014 and December 31, 2012, the Company2013, we had a net deferred loss associated with cash flow hedges of approximately $35,500$27,000 and $61,000,$32,000, respectively, due to the interest rate swap which has been included in Other Liabilities.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties may fail to meet their contractual obligations.  Recent adverse developments in the global financial and credit markets could negatively impact the creditworthiness of our counterparties and cause one or more of our counterparties to fail to perform as expected.  To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties.  To date, all counterparties have performed in accordance with their contractual obligations.

Fair Value

At September 30, 2013March 31, 2014 and December 31, 2012,2013, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments.


September 30, 2013
Carrying AmountFair ValueMarch 31, 2014
  Carrying AmountFair Value
Debt    
Short-term borrowings and long-term debt$34,935,586$34,935,586$31,795,556$31,795,556
    


December 31, 2012
Carrying AmountFair ValueDecember 31, 2013
  Carrying Amount
Fair Value
Debt    
Short-term borrowings and long-term debt$27,760,437$27,760,437$24,568,536$24,568,536
    

We estimated the fair value of debt using market quotes and calculations based on market rates.
Based on current rates offered to the company for the debt of similar terms and maturites per 10-K.

 
9 
 


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


The following table presents the fair values of those financial liabilities measured at fair value on a recurring basis as of September 30, 2013March 31, 2014 and December 31, 2012:2013:

 Fair Value Measurements September 30, 2013 
    Fair Value Measurements March 31, 2014 
DescriptionTotal
Quoted Prices
 in Active
 Markets for
 Identical assets
 (Level 1)
Significant
 Other
 Observable
 Inputs (Level 2)
Significant
 Unobservable
 Inputs (Level 3)
 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$ 35,509--$ 35,509-- $ 26,936--$ 26,936-- 
     
Total$ 35,509--$ 35,509-- $ 26,936--$ 26,936-- 
          
          
 Fair Value Measurements December 31, 2012 Fair Value Measurements December 31, 2013
    
DescriptionTotal
Quoted Prices
 in Active
 Markets for
 Identical assets
 (Level 1)
Significant
 Other
 Observable
 Inputs (Level 2)
Significant
 Unobservable
 Inputs (Level 3)
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$60,516--$60,516--$31,992--$31,992--
    
Total$60,516--$60,516--$31,992--$31,992--
        

The fair value of the Company’s interest rate swaps 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 amountamounts 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.

As of September 30, 2013March 31, 2014 and December 31, 2012, $35,5092013, $26,936 and $60,516,$31,992, respectively, was included in Other Liabilities related to the fair value of the Company’s interest rate swap, and $23,437$17,936 and $40,827,$21,115, respectively, net of tax of $12,072$9,000 and $19,689, respectively,$10,877, was included in Accumulated Other Comprehensive Loss.


 
 

 
10 
 


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:

September 30, 2013
 
U.S  March 31, 2014
GovernmentCommercialTotalU.S 
   GovernmentCommercialTotal
     
Costs incurred on uncompleted     
contracts$248,918,412$57,053,894$305,972,306$270,605,597$68,163,669$338,769,266
Estimated earnings92,166,98428,574,805120,741,78999,151,46832,278,970131,430,438
   
Sub-total341,085,39685,628,699426,714,095369,757,065100,442,639470,199,704
Less billings to date257,362,91358,054,542315,417,455281,858,40069,315,449351,173,849
   
Costs and estimated earnings     
in excess of billings on     
uncompleted contracts$83,722,483$27,574,157$111,296,640$87,898,665$31,127,190$119,025,855
   

December 31, 2012 
U.S.  December 31, 2013 
GovernmentCommercialTotalU.S.  
   GovernmentCommercialTotal
Costs incurred on uncompleted      
contracts$214,888,101$42,636,753$257,524,854$259,050,407$62,502,116$321,552,523
Estimated earnings85,320,63623,782,285109,102,92195,590,87930,694,605126,285,484
   
Sub-total300,208,73766,419,038366,627,775354,641,28693,196,721447,838,007
Less billings to date215,743,09042,631,694258,374,784272,783,12062,733,921335,517,041
   
Costs and estimated earnings   
in excress of billings on   
uncompleted contracts$84,465,647$23,787,344$108,252,991
Costs and estimated earnings in excess of billings on uncompleted contracts$81,858,166$30,462,800$112,320,966

The above amounts are included in the accompanying balance sheets under the following captions at September 30, 2013March 31, 2014 and December 31, 2012:2013:

September 30, 2013December 31, 2012
 March 31, 2014December 31, 2013
Costs and estimated earnings in excess of billings on  
uncompleted contracts$ 111,766,149$ 108,909,844$ 119,205,553$ 112,597,136
Billings in excess of costs and estimated earnings on  
uncompleted contracts
 (469,509)
 (656,853)
 (179,698)
 (276,170)
  
 
Totals$ 111,296,640$ 108,252,991$ 119,025,855$ 112,320,966
 

U.S. Government Contracts includeincludes contracts directly with the U.S. Government and Government subcontracts.

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 ninethree months ended September 30,March 31, 2014 and 2013, and 2012, 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 $3,600,000$1,477,000 and $1,000,000,$1,377,000, respectively, from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in prior years.

Although management believes it has established adequate procedures for estimating costs to complete on uncompleted open contracts, it is possible that additional significant costs could occur on contracts prior to completion.

 
11 
 


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 
5.INCOME PER COMMON SHARE

Basic income per common share is computed using the weighted average number of common shares outstanding.  Diluted income per common share for the three month periods ended March 31, 2014 and nine month period ended September 30, 2013 and 2012 is computed using the weighted-average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock.  Incremental shares of 341,402 and 245,000316,919 were used in the calculation of diluted income per common share infor the three and nine month periodsperiod ended September 30, 2013.March 31, 2014. Incremental shares of 145,517 and 241,919116,292 were not included in the diluted earnings per share calculations for the three and nine month periodsperiod ended September 30, 2013March 31, 2014 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 410,000 and 450,517245,000 were used in the calculation of diluted income per common share forin the three and nine month periodsmonths ended September 30, 2012.March 31, 2013. Incremental shares of 120,517 and 80,000239,734 were not included in the diluted earnings per share calculations for the three and nine month periodsperiod ended September 30, 2012, respectively,March 31, 2013 as their exercise price was in excess of the Company’s average stock price for the respective periodsperiod and, accordingly, these shares are not assumed to be exerciseexercised for the diluted earnings per share calculation, as they would be anti-dilutive.

6.LINE OF CREDIT

Until December 2012, the Company was party to a Credit Agreement, dated August 13, 2007, as amended, between the Company and Sovereign Bank (the “Prior Agreement”), which provided for a revolving credit facility and two term loans.  Immediately prior to entering into the Restated Agreement (identified below), a revolving credit facility in the aggregate of $18.0 million was available to the Company under the Prior Agreement.
 
On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement ("Restated Agreement") with Sovereign Bank (“Restated Agreement”) as the sole arranger, administrative agent and collateral agent and lender and Valley National Bank as lender.Bank.  The Restated Agreement increased the revolving credit facility under the Prior Agreement from $18 million to $35 million (the “Sovereign Revolving Facility”), refinanced one of the previous term loans asprovides for a revolving credit loan continuedcommitment of $35 million
As of March 31, 2014, the other term loan and then-existing revolving credit loans, and amended and restatedCompany was in compliance with all financial covenants contained in the general terms"Restated Agreement".  As of March 31, 2014, the Prior Agreement.  The revolving credit loansCompany had $28.85 million outstanding under the Restated Agreement mature on December 5, 2016.  "Restated Agreement" bearing interest at 3.25%.
The Sovereign Revolving FacilityFacilty and term loanlaon under the Restated Agreement are secured by all of the Company'sour assets.
 

As of September 30, 2013, the Company was in compliance with all of the financial covenants, as amended, contained in the Credit Agreement and $31.45 million was outstanding under the Sovereign Revolving Facility.


 
12 
 

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

7.           LONG-TERM DEBT

 
 
On October 22, 2008, the Company obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Loan”). This term loan was refinanced as part of the revolving credit loan under the Restated Agreement of December 5, 2012.
7.           LONG-TERM DEBT
 
On March 9, 2012, the Company obtained a $4.5 million term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Loan 2”)Facility ”).  The Sovereign Term Loan 2Facility  was used by the Company to purchase tooling and equipment for new programs.  The Sovereign Term Loan 2 was continued under the Restated Agreement, and is payable in monthly installments of $75,000, with a final payment of the remaining principal balance on March 9, 2017.  The Sovereign Term Loan 2Facility  bears interest at the lower of LIBOR plus 3% or Sovereign Bank’s prime rate. The Sovereign Term Loan 2 is subject to the amended and restated terms and conditions of the Restated Agreement.
 
In connection with the Sovereign Term Loan 2,Additionally, the Company and Sovereign Bank entered into a five-yearfive year interest rate swap agreement, in the notional amount of $4.5 million.  Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount at a fixed rate of 4.11% and receives an amount from Sovereign Bank representing interest on the notional amount atof a rate equal to the one-month LIBOR plus 3%.  The effect of this interest rate swap will be the Company paying a fixed interest fixed rate of 4.11% over the term of the Sovereign Term Loan 2.Facility .
 
 
The maturities of long-term debt are as follows:
 

Twelve months ending September 30, 
2014$1,041,016
Twelve months ending March 31, 
2015964,069993,139
2016952,370957,325
2017528,131920,092
201875,000
$3,485,586 
 $2,945,556
 

In addition to the Sovereign Term Loan 2,, included in long-term debt are capital leases and notes payable of $260,586,$170,557, including a current portion of $141,016.$93,139.

8.           MAJOR CUSTOMERS

During the ninethree months ended September 30, 2013March 31, 2014, the Company’s three largest commercial customers accounted for 28%, 24% and 2012, 2% and 8%, respectively,17% of revenue, was directly fromrespectively.  During the U.S. Government. In addition, during the ninethree months ended September 30,March 31, 2013, the Company’s three largest commercial customers accounted for 27%26%, 22%24% and 18% of revenue, respectively.  DuringIn addition, during the ninethree months ended September 30, 2012,March 31, 2014 and 2013, 1% of revenue was directly from the U.S. Government.

At March 31, 2014, 40%, 18%, 16% and 9% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from four largest commercial customers.  At December 31, 2013, 40%, 17%, 16% and 10% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from the Company’s threefour largest commercial customers accounted for 34%, 18% and 16% of revenue, respectively.customers.

At September 30, 2013March 31, 2014 and December 31, 2012, 0.9%2013, less than 1% of Costs and 3.2%Estimated Earnings in Excess of costs and estimated earnings in excess of billingsBillings on uncompleted contracts, respectively,Uncompleted Contracts were direct from the U.S. Government.

At September 30, 2013, 40%March 31, 2014, 36%, 18%, 16%20% and 11%12% of costs and estimated earnings in excess of billings on uncompleted contracts were from the Company's four largest commercial customers.  At December 31, 2012, 39%, 22%, 14% and 13% of costs and estimated earnings in excess of billings on uncompleted contracts were from the Company’s four largest commercial customers.
At September 30, 2013, 46%, 22% and 21% ofour accounts receivable were from the Company'sour three largest commercial customers.  At December 31, 2012, 36%2013, 28%, 30%24% and 21%20% of accounts receivable were from the Company'sour three largest commercial customers. 


 
13
 
 

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, 20122013 and Part I,  Item -  2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A - Risk Factors 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 productiona manufacturer of structural aircraft parts principally for fixed wing aircraft and helicopters in both the U.S. Air Forcecommercial and other branches ofdefense markets.  Within the U.S. armed forces,global aerostructure supply chain, we are either asa 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 or as a subcontractor to other defense prime contractors.  We also act as a subcontractor to prime aircraft manufacturers in the productionU.S. Department of commercial aircraft parts.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.
 
Marketing and New Business
 
From the beginning of the current fiscal year through OctoberMarch 31, 2013,2014, we received approximately $83.1$4.7 million of new contract awards, which included approximately $62.7$0.1 million of government subcontract awards and approximately $20.4$4.6 million of commercial subcontract awards, compared to a total of $64.1$11.5 million of new contract awards, of all types, in the same period last year. The decrease in new contract awards is predominately the result of the timing of new awards.              
 


 
14 
 

Item 2 – Management’s- 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 September 30, 2013March 31, 2014 and December 31, 20122013 was as follows:
 

Backlog
(Total)
 September 30, 2013December 31, 2012 
March 31,
2014
 
December 31,
2013
 
  
Funded $102,538,000$52,318,000 $96,192,000 $110,431,000 
Unfunded/Unreleased 337,166,000339,563,000
  
Unfunded 314,130,000 321,011,000 
Total $439,704,000$391,881,000 $410,322,000 $431,442,000 
       
Approximately 52%57% of the total amount of our backlog at September 30, 2013March 31, 2014 was attributable to government contracts.  Our backlog attributable to government contracts at September 30, 2013March 31, 2014 and December 31, 20122013 was as follows:

Backlog
(Government)
 September 30, 2013December 31, 2012
    
Funded $73,601,000$43,215,000
Unfunded 178,015,000190,109,000
    
Total $251,616,000$233,324,000
    

 Backlog
(Government)
March 31,
2014
December 31,
2013
 Funded $69,178,000 $82,803,000
 Unfunded 165,016,000 165,574,000
 Total $234,194,000 $248,377,000

Our backlog attributable to commercial contracts at September 30, 2013March 31, 2014 and December 31, 20122013 was as follows:

Backlog
(Commercial)
 September 30, 2013December 31, 2012
March 31,
2014
December 31,
2013
  
Funded $28,937,000$9,103,000 $27,014,000 $27,628,000
Unfunded/Unreleased 159,151,000149,454,000
  
Unfunded 149,114,000 155,437,000
Total $188,088,000$158,557,000 $176,128,000 $183,065,000
  

Our unfunded backlog is primarily comprised of the long-term contracts that we received from Boeing, Spirit and Northrop GrummanNGC during 2008, Honda and Bell during 2011 and Cessna, Sikorsky and Embraer during 2012.  These long-term contracts are expected to have yearly orders which will be funded in the future.

 

 
 

 


 
15 
 


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 revenuecost 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.
 
 

 


 
16 
 

Item 2Item2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
 
Revenue
 
Revenue for the three months ended September 30, 2013March 31, 2014 was $20,664,645$21,883,517 compared to $21,340,831$19,927,433 for the same period last year, representing a decreasean increase of $676,186$1,956,084 or 3.2%.  For the nine months ended September 30, 2013, revenue was $61,702,530 compared to $61,916,552 for the same period last year, representing a decrease of $214,022 or 0.3%10%.
 
We predominately generate revenue from subcontracts with OEM’s and Tier 1 manufacturers. Revenue generated from government contractssubcontracts for which we act as a prime contractorthe three months ended March 31, 2014 was $14,189,609 compared to $14,109,556 for the three months ended March 31, 2013 an increase of $80,053 or as a subcontractor as well as.6%.
Revenue generated from commercial contracts. subcontracts was $7,245,918 for the three months ended March 31, 2014 compared to $5,583,424 for the three months ended March 31, 2013, an increase of $1,662,494 or 30%.  The increase in revenue generated from commercial subcontracts was the result of increases in production from our contracts with Cessna (approximately $1.8 million) and Embraer (approximately $600,000) partially offset by an approximate $400,000 decrease in revenue from Sikorsky.  The Cessna and Embraer programs have both entered the production stage so this increase was anticipated.
Revenue generated from prime government contracts for the ninethree months ended September 30, 2013March 31, 2014 was $1,022,968$447,989 compared to $5,218,254$234,453 for the ninethree months ended September 30, 2012, a decrease of $4,195,286 or 80%. This decrease was anticipated, as we move away from focusing on government prime work.
Revenue generated from government subcontracts for the nine months ended September 30,March 31, 2013, was $41,469,900 compared to $38,499,624 for the nine months ended September 30, 2012 an increase of $2,970,276$213,536 or 7.7%91%.  This increase is primarily the result of increased production on the A-10 program of approximately $6.9 million and an increase in production on our program with UTC Aerospace of approximately $3.0 million, offset by a decrease in production on the E-2D program of approximately $7.5 million.
Revenue generated from commercial contracts was $19,209,662 for the nine months ended September 30, 2013 compared to $18,198,674 for the nine months ended September 30, 2012, an increase of $1,010,988 or 5.6%.  This increase is primarily the result of increased production rates on the G650 program.
 
Inflation historically has not had a material effect on our operations.
 
Gross Profit
 
Gross profit for the three months ended September 30, 2013March 31, 2014 was $4,476,127$4,491,132 compared to $5,804,424$4,440,570 for the three months ended September 30, 2012, a decreaseMarch 31, 2013, an increase of $1,328,297.$50,562. As a percentage of revenue, gross profit for the three months ended September 30, 2013March 31, 2014 was 21.7%20.5% compared to 27.2% for the same period last year. Gross profit for the nine months ended September 30, 2013 was $13,152,944 compared to $16,537,453 for the nine months ended September 30, 2012, a decrease of $3,384,509.  As a percentage of revenue, gross profit for the nine months ended September 30, 2013 was 21.3% compared to 26.7%22.3% for the same period last year.
 
TheThis gross margin percentage is lower in 2013 than in 2012  because of adjustments towas within our long term programs with Spirit, Northrop Grumman and Boeing as well as the C-5 Top Program.  The adjustment for our Spirit program was the result of price reductions given as part of an agreement to increase the program value and to extend the life of the program until 2019. The adjustment for Northrop Grumman is the result of price reductions that were necessary at completion of a government pricing analysis. The adjustment for our Boeing program was part of the negotiations for program changes described in the liquidity section.  The Boeing adjustment approximates a 200 basis point decrease in our gross margin percentage. The adjustment for the C-5 Top Program was the result of excess time and work required on C-5 wing tip panels
We now expect our gross margin for the full year to fall to be in theexpected range of 23%-24%20%-21%.
 


 
17 
 

Item 2Item2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2013March 31, 2014 were $1,508,656$1,838,660 compared to $1,615,888$1,877,922 for the three months ended September 30, 2012,March 31, 2013, a decrease of $107,232,$39,262, or 6.6%.

For the nine months ended September 30, 2013, selling, general and administrative expenses were $4,882,851, compared to $5,290,999 for the same period last year, a decrease of $408,148 or 7.7%2%. This decrease is predominately the result of a lower accrual for officers’ bonus$252,000 decrease in Board of $375,000 and lower professionalDirectors fees, of approximately $189,000,partially offset by increasedan increases in employee insurance and benefits of $58,000, education reimbursement of $49,000, computer expenses of $44,000 and salaries of $237,000,$30,000.  The decrease in Board fees was the result of increased headcount.us changing the vesting period of the stock options granted to board members, which results in the expense being recorded throughout the year, rather than on the grant date.  The increases in salaries, employee insurance and benefits and education expense is the result of higher employment levels in 2014 as compared to 2013.  The increase in computer expenses was the result of improvements to the company’s current computer systems.

Income Before Provision for Income Taxes
 
Income before provision for income taxes for the three months ended September 30, 2013March 31, 2014 was $2,772,100$2,508,869 compared to $4,025,437$2,421,276 for the same period last year, a decreasean increase of $1,253,337.  This decrease is the result of the lower gross margin percentage during 2013 as compared to 2012.  For the nine months ended September 30, 2013, income before provision for income taxes was $7,777,650 compared to $10,759,775 for the same period last year, a decrease of $2,982,125.$87,593.
 
Provision for Income Taxes
 
Provision for income taxes was $861,000$780,000 for the three months ended September 30, 2013, or 31% of pre-tax income,March 31, 2014 compared to $1,230,000 or 31% of pre-tax income,$750,000 for the three months ended September 30, 2012.  Provision for income taxesMarch 31, 2013.  The effective tax rate was $2,411,000 for the nine months ended September 30, 2013, or 31% of pre-tax income, compared to $3,349,000 or 31% of pre-tax income, for the nine months ended September 30, 2012.in both periods.



 
18 
 

Item 2Item2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Net Income
 
Net income for the three months ended September 30, 2013March 31, 2014 was $1,911,100,$1,728,869, or $0.23$0.21 per basic share, compared to net income of $2,795,437,$1,671,276, or $0.33 per basic share, for the same period last year.  Net income for the nine months ended September 30, 2013 was $5,366,650 or $0.64 per basic share, compared to $7,410,775, or $0.99$0.20 per basic share, for the same period last year.  Diluted income per share for the three months ended September 30, 2013March 31, 2014 was $0.23,$0.20, calculated utilizing 8,490,7118,534,856 average shares outstanding.  Diluted income per share for the ninethree months ended September 30,March 31, 2013 was $0.63,$0.20, calculated utilizing 8,464,3508,447,974 average shares outstanding.
 
Liquidity and Capital Resources
 
General
 
At September 30, 2013,March 31, 2014, we had working capital of $86,256,447$90,585,272 compared to $79,708,725$88,440,083 at December 31, 2012,2013, an increase of $6,547,722,$2,145,189, or 8.2%2.43%.
 
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, or to raise additional capital, until the reported earnings materialize into actual cash receipts.
 
At September 30, 2013,March 31, 2014, we had a cash balance of $840,683$973,525 compared to $2,709,803$2,166,103 at December 31, 2012.2013.
 
Our costs and estimated earnings in excess of billings increased by approximately $2.9$6.6 million during the ninethree months ended September 30, 2013.March 31, 2014.  The Boeing A-10 contract accounted for an approximately $1.8$2.2 million of this increase.  In the three months ended September 30, 2013, however the costsThe increase is attributable to some shipping delays that we experienced in January and estimated earningsFebruary on this program.  Shipping resumed normal levels in excess ofMarch, therefore we expect billings related to the A-10rise on this program decreased by approximately $1.2 million, as a resultin subsequent quarters.
Several of our negotiated ability to bill Boeing on a progress basis.
Because of our high growth rate, in order to perform on new programs such as the recently announced UTS Aerospace and Embraer programs, we may be requiredrequire 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.
 


19 
 
19 
 

Item 2Item2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Credit Facilities
 
Line of Credit
 
Until December 2012, the Company was party to a Credit Agreement, dated August 13, 2007, as amended, between the Company and Sovereign Bank (the “Prior Agreement”), which provided for a revolving credit facility and two term loans.  Immediately prior to entering into the Restated Agreement (identified below), a revolving credit facility in the aggregate of $18.0 million was available to the Company under the Prior Agreement.
On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement with Sovereign Bank (“Restated Agreement”) as the sole arranger, administrative agent, collateral agent and lender and Valley National Bank as lender.  The Restated Agreement increased theprovides for a revolving credit facility under the Prior Agreement from $18 million toof $35 million (the “Sovereign Revolving Facility”), refinanced one of the previous term loans as a revolving credit loan, continued the other term loan and then-existing revolving credit loans, and amended and restated the general terms of the Prior Agreement.  Themillion.The revolving credit loans under the Restated Agreement mature on December 5, 2016.  The Sovereign Revolving Facility and term loan under the Restated Agreement are secured by all of our assets.
 
As of September 30, 2013,March 31, 2014, the Company was in compliance with all of the financial covenants, as amended, contained in the Credit Agreement and $31.45$28.85 million was outstanding under the Sovereign Revolving Facility.  In October 2013, we collected an approximate $4.8 million from Boeing as a portion of the settlement of our pricing negotiations, $4.5 million of which was used to pay down our line of credit.  At October 31, 2013, we had $26.95 million outstanding under the Sovereign Revolving Facility.
 
Term Loan
On October 22, 2008, the Company obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Loan”). This term loan was refinanced as part of the revolving credit loan under the Restated Agreement of December 5, 2012.
 
On March 9, 2012, the Company obtained a $4.5 million term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Loan 2”)Facility ”).  The Sovereign Term Loan 2Facility  was be used by the Company to purchase tooling and equipment for new programs.  The Sovereign Term Loan 2  was continued under the Restated Agreement, and is payable in monthly installments of $75,000, with a final payment of the remaining principal balance on March 9, 2017.  The Sovereign Term Loan 2Facility  bears interest at the lower of LIBOR plus 3% or Sovereign Bank’s prime rate.  The Sovereign Term Loan 2  is subject to the amended and restated terms and conditions of the Restated Agreement.
 
In connection with the Sovereign Term Loan, 2, the Company and Sovereign 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 pays an amount to Sovereign Bank representing interest on the notional amount at a rate of 4.11% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR plus 3%.  The effect of this interest rate swap will be the Company paying a fixed interest rate of 4.11% over the term of the Sovereign Term Loan 2.Loan.
 
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, 2012.2013.
 


20 
20 
 

Item 3 – Quantitative and Qualitative Disclosure About Market Risk

Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management has established disclosure controls and procedures designed to ensure that information it is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms.  Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information the Company is required to disclose in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure.
 
Based on an evaluation of the Company’s disclosure controls and procedures as of September 30, 2013March 31, 2014 made by management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective as of September 30, 2013.March 31, 2014.
 
Changes in Internal Control Over Financial Reporting
 
No change in our internal control over financial reporting occurred during the quarter ended September 30, 2013March 31, 2014 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
 
 

 

21 
21 
 

Part II:  Other Information

Item 1 – Legal Proceedings

None.

Item 1A – Risk Factors

Material risks related to our business, financial condition and results of operations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012,2013, as filed with the SEC on March 13, 2013.  There11, 2014.  Except as set forth below, there have been no material changes to such risk factors.  The risk factors disclosed in our Annual Report should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition.

We face risks relating to government contracts.

The funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For many programs, Congress appropriates funds on a fiscal year basis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced in budgets approved by Congress or be included in the scope of separate supplemental appropriations.  In the event that appropriations for any of our programs becomes unavailable, or is reduced or delayed, our contract or subcontract under such program may be terminated or adjusted by the U.S. Government, which could have a material adverse effect on our future sales under such program, and on our financial position, results of operations and cash flows.

We also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature of war-related activity on existing, follow-on or replacement programs. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results of operations and cash flows.

In addition, the U.S. Government generally has the ability to terminate contracts, in whole or in part, without prior notice, for convenience or for default based on performance. In the event of termination for the U.S. Government’s convenience, contractors are generally protected by provisions covering reimbursement for costs incurred on the contracts and profit on those costs but not the anticipated profit that would have been earned had the contract been completed. Termination by the U.S. Government of a contract for convenience could also result in the cancellation of future work on that program. Termination by the U.S. Government of a contract due to our default could require us to pay for re-procurement costs in excess of the original contract price, net of the value of work accepted from the original contract. Termination of a contract due to our default may expose us to liability and could have a material adverse effect on our ability to compete for contracts.

In March 2014, the President released his proposed budget for fiscal year 2015.  The proposed budget, as released, would eliminate the A-10 aircraft from military service.  Although the 2015 budget proposal is preliminary, and as yet the fate of the A-10 still uncertain, the cancellation of our program to supply Boeing with structural kits for enhanced wings for  the A-10 would have a material effect on our balance sheet, results of operations and cash flow.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

There have been no repurchases or unregistered sales of ourunregistered equity securities for the three months ended September 30, 2013.   March 31, 2014.  The following table sets forth information for the three months ended March 31, 2014 with respect to repurchases of our outstanding common stock:
Issuer Purchases of Equity Securities
Period
Total number
 of shares
 purchased (1)
Average
 price paid
 per share
 
Total number of shares
 (or units) purchased as
 part of publicly
 announced plans or
 programs
Maximum number (or
 approximate dollar value) of
 shares (or units) that may yet
 be purchased under the plans
 or programs
January 1, 2014 – January 31, 2014------——
February 1, 2014 – February 29, 2014————
March 1, 2014 – March 31, 201414,708$13.46——
Total14,708$13.46——

(1)  Represents shares that were delivered to the Company pursuant to provisions of stock option agreements and the applicable Company equity incentive plan under which such grants were made, which permit payment of the exercise price of options in shares of common stock delivered to the Company.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures
Discosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits
  

 
22 

Exhibit 10.1Letter agreement,Seperation Agreement, dated October 31, 2013,March 5, 2014, between the RegistrantCompany and Edward J. Fred (1)
Exhibit 10.2Letter agreement,Consulting Agreement, dated October 31, 2013,March 5, 2014, between the Registrantcompany and Douglas McCrosson (1)Edward J. Fred
Exhibit 10.3Letter agreement,Amended and Restated Employment Agreement, dated October 31, 2013,March 5, 2014, between the RegistrantCompany and Vincent Palazzolo (1)Douglas McCrosson
Exhibit 31.1Section 302 Certification by Chief Executive Officer and President
Exhibit 31.2Section 302 Certification by Chief Financial Officer (Principal Accounting Officer)
Exhibit 32Section 906 Certification by Chief Executive Officer and Chief Financial Officer
Exhibit 101101.INSThe following financial information from CPI Aerostructures, Inc Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Income and Comprehensive Income, (iii) the Condensed Statements of Shareholders' Equity, (iv) the Condensed Statements of Cash Flows, and (v) the Notes to the Condensed Financial StatementsXBRL Instance Document
Exhibit 101.SCHXBRL Taxonomy Extension Schema
Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PREXBRL Taxonomy Presentation Linkbase Document

(1)  Filed as an exhibit to the Company’s Current Report on Form 8-K dated November 1, 2013 and incorporated herein by reference


 
                      



 
2322 
 



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



  CPI AEROSTRUCTURES, INC.
   
   
   
Dated: November 8, 2013May 9, 2014By./s/ EdwardDouglas J. FredMcCrosson
  EdwardDouglas J. FredMcCrosson
  Chief Executive Officer and President
   
   
   
Dated: November 8, 2013May 9, 2014By./s/ Vincent Palazzolo
  Vincent Palazzolo
  Chief Financial Officer (Principal Accounting Officer)





 
2423