Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR5.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR8.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR4.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR1.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR9.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR7.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR3.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR6.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR2.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR19.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR20.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR23.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR22.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR16.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR24.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR26.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR11.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR10.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR14.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR18.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR17.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR27.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR13.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR25.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR21.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR12.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR15.htm
XML - IDEA: XBRL DOCUMENT - CPI AEROSTRUCTURES INCR28.htm
EX-32 - CEERTIFICATION - CPI AEROSTRUCTURES INCex_32.htm
EX-31.1 - CERTIFICATION - CPI AEROSTRUCTURES INCex31_1.htm
EX-31.2 - CERTIFICATION - CPI AEROSTRUCTURES INCex31_2.htm

 
 

 
.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q/A
(Amendment #1)


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period
Commission File Number 1-11398
ended September 30, 2012
 

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

New York
11-2520310
(State or other jurisdiction
(IRS Employer Identification Number)
of incorporation or organization)
 


91 Heartland Blvd., Edgewood, NY
11717
(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.  Yes x 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). Yes x 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  No x

As of November 7, 2012, the number of shares of common stock, par value $.001 per share, outstanding was 8,353,469.

 
 

 
CPI AEROSTRUCTURES, INC.


INDEX
 

EXPLANATORY NOTE: This Form 10-Q/A corrects and supersedes the Form 10-Q which was erroneously filed earlier today at approximately 10:39am Eastern Time (“Prior Form 10-Q”). The financial results reported in this Form 10-Q/A reflect provision for income taxes for the three months ended September 30, 2012 of $1,230,000 instead of $1,068,000 as reported in the Prior Form 10-Q
 
 
Part I - Financial Information
Item 1 – Condensed Financial Statements
 
   
Condensed Balance Sheets as of September 30, 2012 (Unaudited) and
3
December 31, 2011
 
   
Condensed Statements of Income and Comprehensive Income for the Three and Nine Months ended September 30, 2012 (Unaudited) and 2011 (Unaudited)
4
   
   
Condensed Statement of Shareholders’ Equity for the Nine Months
5
ended September 30, 2012 (Unaudited) and 2011 (Unaudited)
   
Condensed Statements of Cash Flows for the Nine Months ended September 30, 2012
6
(Unaudited) and 2011 (Unaudited)
 
   
Notes to Condensed Financial Statements (Unaudited)
7
   
Item 2 – Management’s Discussion and Analysis of Financial Condition
13
and Results of Operations
 
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
19
   
Item 4 – Controls and Procedures
19
   
Part II -  Other Information
 
   
Item 1 – Legal Proceedings
21
   
Item 1A – Risk Factors
21
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
21
   
Item 3 – Defaults Upon Senior Securities
21
   
Item 4 – Mine Safety Disclosures
21
   
Item 5 – Other Information
21
   
Item 6 – Exhibits
21
   
Signatures
22
   
Exhibits
22

 
 
2
 
CPI AEROSTRUCTURES, INC.

Part I - Financial Information

Item 1 – Financial Statements
CONDENSED BALANCE SHEETS
 
September 30,
December 31,
 
2012
2011
 
(Unaudited)
(Note 1)

ASSETS
   
Current Assets:
   
Cash
$1,072,107
$878,200
Accounts receivable, net
8,858,740
4,285,570
Costs and estimated earnings in excess of billings on uncompleted
   
  Contracts
96,208,681
79,010,362
Deferred income taxes
257,000
257,000
Prepaid expenses and other current assets
397,637
662,326
     
Total current assets
106,794,165
85,093,458
     
Plant and equipment, net
2,956,666
2,629,569
Deferred income taxes
1,159,000
1,105,000
Other assets
108,080
112,080
Total Assets
$111,017,911
$88,940,107
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
   
Current Liabilities:
   
Accounts payable
$8,897,673
$11,998,244
Accrued expenses
405,728
994,398
Current portion of long-term debt
1,724,265
887,380
Line of credit
16,600,000
16,100,000
Income tax payable
1,723,292
2,802,000
Deferred income taxes
125,000
125,000
Total current liabilities
29,475,958
32,907,022
     
Long-term debt, net of current portion
3,581,970
889,239
Deferred income taxes
660,000
660,000
Other liabilities
575,671
457,639
     
Total Liabilities
34,293,599
34,913,900
     
Shareholders’ Equity:
   
Common stock - $.001 par value; authorized 50,000,000 shares,
   
issued 8,353,469 and 7,079,638 shares, respectively, and
   
outstanding 8,353,469 and 6,946,381 shares, respectively
8,353
7,080
Additional paid-in capital
49,525,930
35,346,273
Retained earnings
27,245,627
19,834,852
Accumulated other comprehensive loss
(55,598)
(21,772)
Treasury stock, 0 and 133,257 shares, respectively (at cost)
----
(1,140,226)
Total Shareholders’ Equity
76,724,312
54,026,207
Total Liabilities and Shareholders’ Equity
$111,017,911
$88,940,107
See Notes to Condensed Financial Statements
3

 
 

 
CPI AEROSTRUCTURES, INC.

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
For the Three Months Ended
For the Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
 
(Unaudited)
(Unaudited)

Revenue
$21,340,831
$16,607,638
$61,916,552
$50,043,470
Cost of sales
15,536,407
12,440,033
45,379,099
37,780,959
         
Gross profit
5,804,424
4,167,605
16,537,453
12,262,511
Selling, general and administrative expenses
1,615,888
1,525,386
5,290,999
5,408,273
Income from operations
4,188,536
2,642,219
11,246,454
6,854,238
Interest expense
163,099
111,177
486,679
216,331
Income before provision for
       
  income taxes
4,025,437
2,531,042
10,759,775
6,637,907
         
Provision for income taxes
1,230,000
726,000
3,349,000
1,894,000
         
Net income
2,795,437
1,805,042
7,410,775
4,743,907
         
Other comprehensive income (loss),
       
net of tax -
       
Change in unrealized gain (loss)-
       
interest rate swap
(1,490)
5,732
(33,826)
17,000
         
Comprehensive income
$2,793,947
$1,810,774
$7,376,949
$4,760,907
         
         
Income per common share – basic
$0.33
$0.26
$0.99
$0.69
         
Income per common share – diluted
$0.33
$0.25
$0.96
$0.66

Shares used in computing income per common share:
       
  Basic
8,347,086
6,915,313
7,510,581
6,853,073
  Diluted
8,476,691
7,158,715
7,684,508
7,138,081
 
       


See Notes to Condensed Financial Statements
 

 
CPI AEROSTRUCTURES, INC.


STATEMENTS OF SHAREHOLDERS’ EQUITY


 
Common
Stock
 Shares
Amount
Additional
 Paid-in
Capital
Retained
 Earnings
Treasury
 Stock
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
 Equity
               
Balance at January 1, 2011
6,911,570
$6,912
$33,272,237
$12,417,924
$(981,226)
$(45,404)
$44,670,443
Net Income
----
----
----
4,743,907
----
----
4,743,907
Change in unrealized loss from interest  rate swap
----
----
----
----
----
17,000
17,000
Common stock issued upon exercise of options
137,000
137
410,813
----
----
----
410,950
Stock compensation expense
----
----
963,913
----
----
----
963,913
Tax benefit from stock option plans
----
----
438,000
----
   
438,000
Treasury stock acquired
----
----
----
----
(159,000)
----
(159,000)
Balance at September  30, 2011
7,048,570
$7,049
$35,084,963
$17,161,831
$(1,140,226
$(28,404)
$51,085,213
               
               
Balance at January 1, 2012
7,079,638
$7,080
$35,346,273
$19,834,852
$(1,140,226)
$(21,772)
$54,026,207
Net Income
----
----
----
7,410,775
----
----
7,410,775
Change in unrealized loss from interest rate swap
----
----
----
----
----
(33,826)
(33,826)
Common stock issued in share
             
offering
1,195,750
1,195
13,322,499
     
13,323,694
Common stock issued upon exercise
           
 
of options
 
196,078
  196  
1,224,319
 
----
  ----   ----   1,224,515
Common stock issued  as bonus
15,260
15
228,275
----
----
----
228,290
Stock compensation expense
----
----
382,657
----
----
----
382,657
Tax benefit from stock option plans
----
----
162,000
----
----
----
162,000
Treasury stock retired
(133,257)
(133)
(1,140,093)
----
1,140,226
----
----
Balance at September 30, 2012
8,353,469
$8,353
$49,525,930
 
$27,245,627
$----
$(55,598)
$76,724,312
               


See Notes to Condensed Financial Statements





 
 

5
 
CPI AEROSTRUCTURES, INC.


CONDENSED STATEMENTS OF CASH FLOWS
     
For the Nine Months Ended September 30,
2012
2011
Cash flows from operating activities:
   
Net income
$7,410,775
$4,743,907
Adjustments to reconcile net income to net
   
cash used in operating activities:
   
Depreciation and amortization
458,606
380,895
Deferred rent
Bad debts
58,750
(75,000)
(81,328)
----
Stock compensation
382,657
963,913
Deferred portion of provision for income taxes
(54,000)
(194,000)
Tax benefit of stock options
(162,000)
(438,000)
Changes in operating assets and liabilities:
   
Increase in accounts receivable
(4,498,170)
(3,035,261)
Increase in costs and estimated earnings in excess of billings on
   
uncompleted contracts
(17,198,319)
(18,301,674)
(Increase) decrease in prepaid expenses and other assets
294,145
(32,661)
Increase (decrease) in accounts payable and accrued expenses
(3,460,951)
2,342,450
Increase (decrease) in income taxes payable
(916,708)
1,974,000
     
Net cash used in operating activities
(17,760,215)
(11,677,759)
     
Cash used in investing activities - purchase of plant and equipment
(709,111)
(742,904)
Cash flows from financing activities:
     
Payments on long-term debt
(1,046,976)
(539,286)
 
Proceeds from long-term debt
4,500,000
----
 
Proceeds from line of credit
4,500,000
11,800,000
 
Payments on line of credit
(4,000,000)
---
 
Proceeds from exercise of stock options
1,224,515
251,950
 
Proceeds from sales of common stock
13,323,694
----
 
Tax benefit of stock options
162,000
438,000
 
       
Net cash provided by financing activities
18,663,233
11,950,664
 
       
Net increase (decrease) in cash
193,907
(469,999)
 
Cash at beginning of period
878,200
823,376
 
       
Cash at end of period
$1,072,107
$353,377
 
Supplemental disclosures of cash flow information:
     
       
Non cash investing and financing activities:
     
       
Equipment acquired under capital lease
$76,592
$575,542
 
Common stock issued for bonuses
$228,290
----
 
       
Cash paid during the period for:
     
  Interest
$907,709
$220,203
 
  Income taxes
$4,394,778
$180,000
 




 
See Notes to Condensed Financial Statements

 

 
CPI AEROSTRUCTURES, INC.


 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


1.           INTERIM FINANCIAL STATEMENTS

The condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 2011 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, 2011. 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, 2012, the Company had approximately $289,000 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 both the three and nine months ended September 30, 2012 includes approximately zero and $383,000, respectively, of non-cash compensation expense related to the Company’s stock options.  The Company’s net income for the three and nine months ended September 30, 2011 includes approximately $22,000 and $964,000, respectively, of non-cash 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 nine months ended September 30, 2012 and 2011:

 

 
CPI AEROSTRUCTURES, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



 
2012
2011
Risk-free interest rate
0.9%
 
2.1%
 
     
Expected volatility
102%
 
101%
 
     
Dividend yield
0%
0%
Expected option term
5 years
5 years
 
 

A summary of the status of the Company’s stock option plans as of September 30, 2012 and changes during the nine months ended September 30, 2012 is as follows:

 
Weighted average Exercise Price
Weighted average remaining contractual term (in years)
Aggregate Intrinsic Value
 
Options
Outstanding
       
at beginning of period
695,000
$6.68
   
Granted
40,517
11.87
   
Exercised
(205,000)
6.65
   
Outstanding and vested
       
at end of period
530,517
$9.25
2.89
$1,224,146


Options to acquire 40,517 shares of common stock were granted on January 1, 2012 to members of our board of directors as part of their normal compensation.

During the nine months ended September 30, 2012, 170,000 stock options were exercised for cash resulting in proceeds to the Company of $1,121,700.  During the same period an additional 10,000 options were exercised, pursuant to provisions of the stock option plan, where the Company received no cash and 4,589 shares of its common stock in exchange for the 10,000 shares issued in the exercise.  The 4,589 shares that the Company received were valued at $69,095, the fair market value of the shares on the date of exercise.  Lastly, an additional 25,000 options were exercised, pursuant to provisions of the stock option plan, for a combination of cash and common shares.  The Company received $102,815 in cash and 4,333 shares in exchange for the 25,000 shares issued in this exercise.  The 4,333 shares that the Company received were valued at $69,930, the fair market value of the shares on the date of exercise.

The intrinsic value of all options exercised during the nine months ended September 30, 2012 and 2011 was approximately $1,224,000 and $1,514,000, 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.

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.

 

 
CPI AEROSTRUCTURES, INC.
 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 October 2008 and March 2012, the Company entered into interest rate swaps with the objective of reducing our exposure to cash flow volatility arising from interest rate fluctuations associated with certain debt.  The notional amount, maturity date, and currency of these contracts match those of the underlying debt.  The Company has designated these interest rate swap contracts as cash flow hedges.  The Company measures ineffectiveness by comparing the cumulative change in the forward contact with the cumulative change in the hedged item.  No material ineffectiveness was recognized in the quarter ended September 30, 2012.  As of September 30, 2012 and December 31, 2011, we had a net deferred loss associated with cash flow hedges of approximately $84,000 and $33,000, 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, 2012 and December 31, 2011, 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, 2012
 
Carrying Amount
Fair Value
Debt
   
Short-term borrowings and long-term debt
$21,906,235
$21,906,235


 
December 31, 2011
 
Carrying Amount
Fair Value
Debt
   
Short-term borrowings and long-term debt
$17,876,619
$17,876,619

We estimated the fair value of debt using market quotes and calculations based on market rates.

 
10 

 
CPI AEROSTRUCTURES, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


The following table presents the fair values of those financial liabilities measured on a recurring basis as of September 30, 2012 and December 31, 2011:

   
Fair Value Measurements September 30, 2012
 
Description
Total
Quoted Prices in Active Markets for Identical assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
 
Interest Rate Swap, net
$ 84,239
--
$ 84,239
--
 
Total
$ 84,239
--
$ 84,239
--
 
           
   
Fair Value Measurements December 31, 2011
Description
Total
Quoted Prices in Active Markets for Identical assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Interest Rate Swap, net
$32,988
--
$32,988
--
Total
$32,988
--
$32,988
--

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 amounts and final maturity date.  The market value is then determined by calculating the present value of the interest differential between the contractual swap and the replacement swap.

As of September 30, 2012 and December 31, 2011, $84,239 and $32,988, respectively, was included in Other Liabilities related to the fair value of the Company’s interest rate swap, and $55,598 and $21,772, respectively, net of tax of $28,641 and $11,216, was included in Accumulated Other Comprehensive Loss.


 
 

 
11 

 
CPI AEROSTRUCTURES, INC.


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, 2012
 
U.S
   
 
Government
Commercial
Total
       
Costs incurred on uncompleted
     
contracts
$204,275,188
$37,127,946
$241,403,134
Estimated earnings
78,181,599
20,813,841
98,995,440
Sub-total
282,456,787
57,941,787
340,398,574
Less billings to date
205,883,663
38,306,230
244,189,893
Costs and estimated earnings
     
in excess of billings on
     
uncompleted contracts
$76,573,124
$19,635,557
$96,208,681

 
December 31, 2011
 
 
U.S.
   
 
Government
Commercial
Total
Costs incurred on uncompleted
     
contracts
$162,233,699
$24,713,310
$186,947,009
Estimated earnings
72,883,505
15,029,802
87,913,307
Sub-total
235,117,204
39,743,112
274,860,316
Less billings to date
171,694,325
24,155,629
195,849,954
Costs and estimated earnings in excess of billings on uncompleted contracts
$63,422,879
$15,587,483
$79,010,362

U.S. Government Contracts includes 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 nine months ended September 30, 2012 and 2011, the effect of such revisions in total estimated contract profits resulted in a decrease to the total gross profit to be earned on the contracts of approximately $1,000,000 and $2,600,000, 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.

 
12 

 
CPI AEROSTRUCTURES, INC.


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 and nine month periods ended September 30, 2012 and 2011 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 410,000 and 450,517 were used in the calculation of diluted income per common share for the three and nine month periods ended September 30, 2012. Incremental shares of 120,517 and 80,000 were not included in the diluted earnings per share calculations for the three and nine month periods ended September 30, 2012, respectively, 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 643,333 were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2011. Incremental shares of 80,000 were not included in the diluted earnings per share calculations for the three and nine month periods ended September 30, 2011 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 exercise for the diluted earnings per share calculation, as they would be anti-dilutive.

6.
LINE OF CREDIT

 
In August 2007, we entered into a revolving credit facility with Sovereign Bank (the “Sovereign Revolving Facility”), secured by all of our assets.
 
 
On May 26, 2010, the Company and Sovereign Bank entered into a third amendment to the Sovereign Revolving Facility increasing the existing revolving credit facility under the Credit Agreement (the “Credit Agreement”) from an aggregate of $3.5 million to an aggregate of $4.0 million and extending the term of the revolving credit facility from August 2011 to August 2013.  In addition, the interest rate on borrowings under the revolving credit facility was decreased to (i) the greater of 3.75% or 3.25% in excess of the LIBOR Rate or (ii) the greater of 3.75% or 0.50% in excess of Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement.
 
 
On May 10, 2011, the Company entered into a fifth amendment to its credit agreement with Sovereign Bank, increasing the existing revolving credit facility from an aggregate of $4.0 million to an aggregate of $10.0 million and extending the term from August 2013 to August 2014.  In addition, the interest rate of borrowings under the revolving credit facility will no longer be subject to a minimum rate of 3.75%.
 
 
On September 1, 2011, the Company entered into a sixth amendment to its credit agreement with Sovereign Bank, providing for a $3.0 million increase until November 30, 2011 of the existing revolving credit facility under the Credit Agreement, from an aggregate of $10.0 million to an aggregate of $13.0 million.
 

 
13 

 
CPI AEROSTRUCTURES, INC.

 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 
On November 29, 2011, the Company entered into a seventh amendment to its credit agreement with Sovereign Bank, which increased the revolving credit facility under the Credit Agreement from an aggregate of $13.0 million to an aggregate of $18.0 million and extended the term of earlier terminating revolving credit loans to August 2014.  The Amendment also provides for a reduction in the interest rate of borrowings under the revolving credit facility to 2.75% in excess of the LIBOR rate or Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement, a reduction in the commitment fee to a rate of 0.4% per annum on the average daily unused portion of the revolving credit commitment, commencing December 31, 2011 and the addition of a covenant to the Credit Agreement requiring that the Company maintain a ratio of Unsubordinated Liabilities to Capital Base, as such terms are defined in the Credit Agreement.
 
 
As of September 30, 2012, the Company was in compliance with all of the financial covenants, as amended, contained in the Credit Agreement and $16.6 million was outstanding under the Sovereign Revolving Facility.
 
 

 
 
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 Facility”). The Sovereign Term Facility bears interest at LIBOR (0.23% at September 30, 2012) plus 2.5% and is secured by all of the assets of the Company.
 
 
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 million. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount at a rate of 5.8% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR.  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.
 
 
On March 9, 2012, the Company entered into an eighth amendment to its credit agreement with Sovereign Bank, which Amendment provides for an additional term loan from Sovereign in the principal amount of $4.5 million to be amortized over five years (the “Sovereign Term Facility 2”).  The Sovereign Term Facility 2 shall be used by the Company to purchase tooling and equipment in connection with certain contracts.  The Sovereign Term Facility 2 is subject to the same acceleration provision as the Revolving Credit Loans and the Sovereign Term Facility, which provision allows Sovereign, at its option, to declare all Loans and other outstanding amounts under the Credit Agreement as due and payable upon the occurrence of any Event of Default.  The Amendment also requires a prepayment of the Sovereign Term Facility 2 upon the Company’s receipt of a termination or cancellation payment in connection with the Designated Contracts in an amount equal to the lesser of 50% of such payment or the outstanding principal balance of the Sovereign Term Facility 2.
 
 
Pursuant to the terms of the ISDA 2002 Master Agreement and Schedule between Sovereign and the Company, dated October 22, 2008, the Company also 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 representing interest on the notional amount at a fixed 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 rate plus 300 basis points.  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 Facility 2.
 
 
 
The maturities of long-term debt are as follows:
 

Twelve months ending September 30,
 
2013
1,724,265
2014
1,141,277
2015
964,114
2016
950,015
2017
526,564
 
$5,306,235
   

In addition to the Sovereign Term Facilities, included in long-term debt are capital leases and notes payable of $481,236, including a current portion of $224,265.

8.           MAJOR CUSTOMERS

During the nine months ended September 30, 2012 and 2011, 8% and 10%, respectively, of revenue was directly from the U.S. Government. In addition, during the nine months ended September 30, 2012, the Company’s three largest commercial customers accounted for 34%, 18% and 16% of revenue, respectively.  During the nine months ended September 30, 2011, the Company’s three largest commercial customers accounted for 31%, 30% and 13% of revenue, respectively.

At September 30, 2012 and December 31, 2011, 4.5% and 7.5% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, respectively, were direct from the U.S. Government.

At September 30, 2012, 42%, 22%, 15% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from four largest commercial customers.  At December 31, 2011, 40%, 21%, 15% 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, 2012, 33%, 29% and 22% of our accounts receivable were from our three largest commercial customers.  At December 31, 2011, 36%, 34% and 12% of accounts receivable were from our three largest commercial customers. 

9.           EQUITY

On June 13, 2012, the Company sold 1,000,000 shares of common stock at a sales price of $12 per share, upon the closing of an underwritten stock offering.  Roth Capital Partner, LLC acted as representative of the several underwriters (the “Underwriters”).  The gross proceeds of the offering were $12 million and net proceeds, after deducting the Underwriters’ fees and estimated offering expenses were approximately $11.1 million.  The Company used $3 million of the net proceeds to repay a portion of the Sovereign Revolving Facility.

On July 3, 2012, the Underwriters exercised their over-allotment option whereby the Company sold an additional 195,750 common shares at a price of $12 per share.  The Company’s net proceeds were approximately $2.2 million after deducting Underwriters’ fees and estimated offering expenses.  The Company used $1 million of the net proceeds to repay a portion of the Sovereign Revolving Facility.

 
14 

 


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, 2011 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 to other defense prime contractors.  CPI Aero also acts as a subcontractor to prime aircraft manufacturers in the production of commercial aircraft parts.  Our strategy for growth has been focused primarily as a subcontractor for defense prime contractors.  Due to our success as a subcontractor to defense prime contractors we have pursued opportunities to increase our commercial subcontracting business.
 


 
Marketing and New Business
 
 
From the beginning of the current fiscal year through November 7, 2012, we received approximately $68.9 million of new contract awards, which included approximately $0.4 million of government prime contract awards, approximately $63.0 million of government subcontract awards and approximately $5.5 million of commercial subcontract awards, compared to a total of $81.5 million of new contract awards, of all types, in the same period last year.
 
 
Included in new contract awards are:
 


 
·  
A $12.7 million purchase order from Boeing for assemblies on the A-10 aircraft.
 
 
·  
A $10.7 million order from Goodrich Corporation for the supply of structural aerospace assemblies.  In addition, we will have, for the first time in our history, design authority for design modifications to the structure it is manufacturing.
 
 
·  
A $18.8 million long term agreement with Sikorsky to manufacture gunner window assemblies for the BLACK HAWK helicopter.
 


 
We have approximately $958 million in formalized bids outstanding as of November 5, 2012 and continue to make bids on contracts on a weekly basis. Unawarded solicitations include two bids totaling approximately $647 million to an international aerospace company for work on the Boeing 787. While we cannot predict the probability of obtaining or the timing of awards, some of these outstanding proposals are significant in amount.
 


 
 
15
 


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

 

 


 
While historically our direct U.S. Government work has typically ranged from six months to two years, our major subcontract awards for the E-2D, A-10 and G650 average a 7 year life.  Except in cases where contract terms permit us to bill on a progress basis, we must incur upfront costs in producing assemblies, amortize the costs 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 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 

 

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


 
Results of Operations
 
 
Revenue
 


 
Revenue for the three months ended September 30, 2012 was $21,340,831 compared to $16,607,638 for the same period last year, representing an increase of $4,733,193 or 28.5%.  For the nine months ended September 30, 2012, revenue was $61,916,552 compared to $50,043,470 for the same period last year, representing an increase of $11,873,082 or 23.7%.
 
 
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, 2012 was $5,218,254 compared to $4,999,825 for the nine months ended September 30, 2011, an increase of $218,429 or 4.4%. This increase was predominately the result of increased revenue on the C-5 TOP contract in 2012.
 
 
Revenue generated from government subcontracts for the nine months ended September 30, 2012 was $38,499,624 compared to $38,180,940 for the nine months ended September 30, 2011, an increase of $318,684 or 0.8%.
 
 
Revenue generated from commercial contracts was $18,198,674 for the nine months ended September 30, 2012 compared to $6,862,705 for the nine months ended September 30, 2011, an increase of $11,335,969 or 165.2%.  The majority of the increase in revenue from commercial customers was related to increases in production of leading edges for the Gulfstream G650 ($11.3 million) and preliminary work for Honda ($2.7 million) on the production of flaps and inlets for the HondaJet Advanced Light Jet.
 
 
Inflation historically has not had a material effect on our operations.
 


 

 
 
Gross Profit
 
 
Gross profit for the three months ended September 30, 2012 was $5,804,424 compared to $4,167,605 for the three months ended September 30, 2011, an increase of $1,636,819. As a percentage of revenue, gross profit for the three months ended September 30, 2012 was 27.2% compared to 25.1% for the same period last year. Gross profit for the nine months ended September 30, 2012 was $16,537,453 compared to $12,262,511 for the nine months ended September 30, 2011, an increase of $4,274,942. As a percentage of revenue, gross profit for the nine months ended September 30, 2012 was 26.7% compared to 24.5% for the same period last year. Our gross margin percentage for the nine months ended September 30, 2012 was in line with our expected gross margin percentage of 25%-27%.
 
 
We expect our gross margin for the full year to fall within our expected range of 25%-27%.
 


 
17 

 

Item2 – 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, 2012 were $1,615,888 compared to $1,525,386 for the three months ended September 30, 2011, an increase of $90,502, or 5.9%.

For the nine months ended September 30, 2012, selling, general and administrative expenses were $5,290,999, not materially different from the $5,408,273 for the same period last year, a decrease of $117,274 or 2.2%.

The decreases are in line with the Company’s expectations for the periods, as we changed our non-employee director compensation plan, which in 2012 limits the expense related to stock option grants.



 
Income Before Provision for Income Taxes
 


 
Income before provision for income taxes for the three months ended September 30, 2012 was $4,025,437 compared to $2,531,042 for the same period last year, an increase of $1,494,395.  For the nine months ended September 30, 2012, income before provision for income taxes was $10,759,775 compared to $6,637,907 for the same period last year, an increase of $4,121,868.
 
 
Provision for Income Taxes
 
 
Provision for income taxes was $1,230,000 for the three months ended September 30, 2012, or 31% of pre-tax income, compared to $726,000 or 29% of pre-tax income for the three months ended September 30, 2011.  Provision for income taxes was $3,349,000 for the nine months ended September 30, 2012, or 31% of pre-tax income compared to $1,894,000 or 29% or pre-tax income for the nine months ended September 30, 2011.  The provision for income taxes as a percentage of pre-tax income was below the statutory rate of 34% because in 2011 the Company began taking a deduction for domestic production activity which results in approximately a 2%-3% tax savings.  In addition, the exercise of non-qualified stock options results in a tax savings of an additional 2%-3%.
 
 

 


 
18 

 

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


 
Net Income
 


 
Net income for the three months ended September 30, 2012 was $2,795,437, or $0.33 per basic share, compared to net income of $1,805,042, or $0.26 per basic share, for the same period last year.  Net income for the nine months ended September 30, 2012 was $7,410,775, or $0.99 per basic share, compared to net income of $4,743,907, or $0.69 per basic share, for the same period last year.  Diluted income per share for the three months ended September 30, 2012 was $0.33, calculated utilizing 8,476,691 average shares outstanding.  Diluted income per share for the nine months ended September 30, 2012 was $0.96, calculated utilizing 7,684,508 average shares outstanding.
 
 
Liquidity and Capital Resources
 


 
General
 


 
At September 30, 2012, we had working capital of $77,318,207 compared to $52,186,436 at December 31, 2011, an increase of $25,131,771, or 48.2%.
 
 
On June 13, 2012, the Company sold 1,000,000 shares of common stock at a sales price of $12 per share, upon the closing of an underwritten stock offering.  Roth Capital Partner, LLC acted as representative of the several underwriters (the “Underwriters”).  The gross proceeds of the offering were $12 million and net proceeds, after deducting the Underwriters’ fees and estimated offering expenses were approximately $11.1 million.  The Company used $3 million of the net proceeds to repay a portion of the Sovereign Revolving Facility.
 
 
On July 3, 2012, the Underwriters exercised their over-allotment option whereby the Company sold an additional 195,750 common shares at a price of $12 per share.  The Company’s net proceeds were approximately $2.2 million after deducting Underwriters’ fees and estimated offering expenses.  The Company used $1 million of the net proceeds to repay a portion of the Sovereign Revolving Facility.
 


 
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, 2012, we had a cash balance of $1,072,107 compared to $878,200 at December 31, 2011.
 
 
Our costs and estimated earnings in excess of billings increased by approximately $17.2 million during the nine months ended September 30, 2012.  The Boeing A-10 contract accounted for approximately $7.0 million of this increase.  Although this contract does provide for milestone billings, the program has reached the end of the milestone billing phase and as such we are no longer able to invoice this program on a progress basis.  Additionally, Boeing has made engineering changes to parts under contract with us.  We have not yet completed pricing negotiations related to these changes.  We are contractually obligated to continue production on these parts, however we are not able to invoice for the expected full value until price negotiations are completed.
 
 
Because of our high growth rate, in order to perform on new programs, such as the recently announced Goodrich and Embraer programs, we may be required 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
 

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

 
Credit Facilities
 
 
Line of Credit
 


 
In August 2007, we entered into a revolving credit facility with Sovereign Bank (the “Sovereign Revolving Facility”), secured by all of our assets.
 
 
On May 26, 2010, the Company entered into a third amendment to its credit agreement with Sovereign Bank increasing the existing revolving credit facility under the Credit Agreement (the “Credit Agreement”) from an aggregate of $3.5 to an aggregate of $4.0 and extending the term of the revolving credit facility from August 2011 to August 2013.  In addition, the interest rate on borrowings under the revolving credit facility was decreased to (i) the greater of 3.75% or 3.25% in excess of the LIBOR Rate or (ii) the greater of 3.75% or 0.50% in excess of Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement.
 
 
On May 10, 2011, the Company entered into a fifth amendment to its credit agreement with Sovereign Bank, increasing the existing revolving credit facility from an aggregate of $4.0 million to an aggregate of $10.0 million and extending the term from August 2013 to August 2014.  In addition, the interest rate of borrowings under the revolving credit facility will no longer be subject to a minimum rate of 3.75%.
 
 
On September 1, 2011, the Company entered into a sixth amendment to its credit agreement with Sovereign Bank providing for a $3.0 million increase until November 30, 2011 of the existing revolving credit facility under the Credit Agreement, from an aggregate of $10.0 million to an aggregate of $13.0 million.
 
 
On November 29, 2011, the Company entered into a seventh amendment to the Sovereign Revolving Facility which increased the existing revolving credit facility from an aggregate of $13.0 million to an aggregate of $18.0 million and extended the term of earlier terminating revolving credit loans to August 2014.  The Amendment also provides for a reduction in the interest rate of borrowings under the revolving credit facility to 2.75% in excess of the LIBOR rate or Sovereign Bank’s prime rate, as elected by the Company in accordance with the Credit Agreement, a reduction in the commitment fee to a rate of 0.4% per annum on the average daily unused portion of the revolving credit commitment, commencing December 31, 2011 and the addition of a covenant to the Credit Agreement requiring that the Company maintain a ratio of Unsubordinated Liabilities to Capital Base, as such terms are defined in the Credit Agreement.
 
 
As of September 30, 2012, we were in compliance with all of the financial covenants contained in the Credit Agreement, as amended, and $16.6 million was outstanding under the Sovereign Revolving Facility.
 
 

 
 
Term Loan
 
 
On October 22, 2008, we obtained a $3.0 million term loan from Sovereign Bank to be amortized over five years (the “Sovereign Term Facility”).  The Sovereign Term Facility bears interest at LIBOR plus 2.5% and is secured by all of our assets.
 
 
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 $3.0 million.  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.
 
 
On March 9, 2012, the Company entered into an eighth amendment to its credit agreement with Sovereign Bank which provides for an additional term loan from the Sovereign in the principal amount of $4.5 to be amortized over five years (the “Sovereign Term Facility 2”).  The Sovereign Term Facility 2 shall be used by the Company to purchase tooling and equipment in connection with certain contracts.  The Sovereign Term Facility 2 is subject to the same acceleration provision as the Revolving Credit Loans and Sovereign Term Facility, which provision allows the Sovereign, at its option, to declare all Loans and other outstanding amounts under the Credit Agreement as due and payable upon the occurrence of any Event of Default.  The Amendment also requires a prepayment of the Sovereign Term Facility 2 upon the Company’s receipt of a termination or cancellation payment in connection with the Designated Contracts in an amount equal to the lesser of 50% of such payment or the outstanding principal balance of the Sovereign Term Facility 2.
 
 
Pursuant to the terms of the ISDA 2002 Master Agreement and Schedule between Sovereign and the Company, dated October 22, 2008, the Registrant also 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 the Sovereign representing interest on the notional amount at a fixed 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 rate plus 300 basis points.  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 Facility 2.
 
 
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, 2011
 


 
20 

 

Item 3 – Quantitative and Qualitative Disclosure About Market Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows.  We are exposed to market risk primarily due to fluctuations in the interest rates.

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, 2012 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, 2012.
 
 
Changes in Internal Control Over Financial Reporting
 
 
No change in our internal control over financial reporting occurred during the quarter ended September 30, 2012 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
 
 

 

 
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, 2011, as filed with the SEC on March 14, 2012.  Except as set forth below, there have been no material changes to such risk factors.  The risk factors disclosed in our Annual Report, in addition to the risk factor disclosed below, 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, or cash flows.

The impact, severity and duration of the current U.S. economic situation, the sweeping economic plans adopted by the U.S. Government, and pressures on the federal budget could also adversely affect the total funding and/or funding for individual programs.  The U.S. Government has been unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011 (the "Budget Act") passed by Congress. Unless Congress and the Administration take action, the Budget Act will trigger automatic reductions in both defense and discretionary spending in January 2013 (commonly known as “sequestration”). While the impact of sequestration is yet to be determined, automatic across-the-board cuts would approximately double the $487 billion top-line reduction already reflected in the defense funding over a ten-year period, with a $52 billion reduction occurring in the government’s fiscal year 2013. The resulting automatic across-the-board budget cuts by sequestration would have significant adverse consequences for our industry. If sequestration is implemented, funding for programs in which we participate may be reduced, delayed or cancelled, which could have a material adverse effect on our business, financial condition and results of operations.

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, or 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.



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

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Discosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits


Exhibit 31.1
Section 302 Certification by Chief Executive Officer and President
Exhibit 31.2
Section 302 Certification by Chief Financial Officer (Principal Accounting Officer)
Exhibit 32
Section 906 Certification by Chief Executive Officer and Chief Financial Officer
Exhibit 101
The following financial information from CPI Aerostructures, Inc Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheet, (ii) the Condensed Income Statements, (iii) the Condensed Statement  of Shareholder Equity, (iv) the Condensed Statements of Cash Flows, and (v) the Notes to the Condensed Financial Statements



 
 
22
 


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 9, 2012
By.
/s/ Edward J. Fred
   
Edward J. Fred
   
Chief Executive Officer and President
     
     
     
Dated: November 9, 2012
By.
/s/ Vincent Palazzolo
   
Vincent Palazzolo
   
Chief Financial Officer (Principal Accounting Officer)