CPI Aerostructures, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
CPI Aero manufactures structural aircraft parts and assemblies for U.S. military and commercial aerospace programs, as both a prime contractor and subcontractor. Growth was led by defense subcontract programs, particularly Boeing’s A-10 and Northrop Grumman’s E-2D, alongside commercial work on Gulfstream’s G650. Government subcontracts supplied 77% of 2011 revenue, direct government contracts 9%, and commercial contracts 14%. The three major A-10, E-2D and G650 programs represented 30%, 26% and 11% of revenue, respectively.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $74.1 million | $44.0 million |
| Gross profit / margin | $18.8 million / 25.4% | $6.1 million / 13.9% |
| Operating income | $10.9 million | $0.7 million |
| Net income | $7.4 million | $0.5 million |
| Diluted EPS | $1.04 | $0.08 |
| Net cash from (used in) operations | $(13.7) million | $(4.0) million |
Revenue increased 68.5%, mainly from higher production on the three major long-term programs. Fourth-quarter 2011 revenue was $24.1 million and net income was $2.7 million, compared with $7.5 million revenue and a $3.0 million net loss in fourth-quarter 2010. The 2010 quarter included significant contract estimate reductions.
At year-end, cash was $0.9 million, working capital $52.2 million, and total assets $88.9 million. Current liabilities were $32.9 million. Revolver borrowings were $16.1 million, up from $0.8 million; reported short- and long-term debt totaled approximately $17.9 million. The revolving facility commitment was increased to $18 million and the company reported compliance with its financial covenants. Shareholders’ equity was $54.0 million.
Operating cash use reflected a $31.8 million increase in costs and estimated earnings in excess of billings on uncompleted contracts, which reached $79.0 million. Cash provided by financing was $15.3 million, largely from increased revolver borrowings. Accounts receivable declined to $4.3 million from $6.2 million.
Backlog, changes and outlook
- Year-end backlog was $260.0 million, down from $290.0 million in 2010: funded backlog increased to $65.7 million from $43.5 million, while unfunded backlog declined to $194.4 million from $246.5 million. Management expected all funded backlog to be recognized as revenue in 2012. Backlog is substantially terminable or reschedulable and is not equivalent to committed revenue.
- Gross margin recovered to 25.4% from 13.9%. Management attributed the prior-year weakness to contract estimate changes; the filing reports reductions in estimated contract profits of approximately $3.0 million in 2011, versus $10.2 million in 2010.
- For 2012, management forecast revenue of $95–$98 million, gross margin of 25%–27%, and net income of $12–$13 million, driven principally by continued growth on A-10, E-2D and G650 programs. The company reported approximately $282 million of bids outstanding as of February 28, 2012.
- New awards in 2011 totaled approximately $83.6 million, including $47.1 million in commercial awards and $24.8 million in government subcontract awards. Bell and Honda were among new customers.
Risks, contingencies and notable disclosures
- Billing and supplier delays: A supplier’s performance limited milestone invoicing on the Boeing A-10 program. Although the supplier was replaced in fourth-quarter 2011, CPI Aero remained behind schedule on portions of the work. First-article approval and a customer configuration change also delayed billing or shipment. Management said the resulting unbilled costs materially affected liquidity.
- Contract accounting: Revenue and profit use percentage-of-completion estimates of costs to complete. The company cautioned that further cost increases or inaccurate estimates could require later adjustments; reported earnings may not translate into cash in the same period.
- Customer and funding concentration: A substantial share of revenue depends on defense programs and prime contractors, with exposure to federal appropriations, program changes, cancellations and contract termination. Unfunded backlog is especially contingent on future orders and funding.
- Fixed-price and execution risks: Cost overruns, supplier failures, program delays, quality issues, and up-front tooling or launch costs could reduce profitability or liquidity. Commercial aerospace demand is also cyclical.
- Financing and obligations: The company relies on bank credit to fund working capital. It reported $17.0 million of operating lease commitments due within one year and $17.0 million of total operating lease commitments through the lease term, which runs to 2022. A $4.5 million term loan for tooling and equipment was obtained on March 9, 2012, after year-end.
- The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. No legal proceedings were reported. The company paid no dividends and did not expect to pay them in the foreseeable future.
Important facts for investors to verify
- Progress on A-10 supplier recovery, schedule catch-up, first-article approval, configuration changes, and conversion of the $79.0 million unbilled balance into billings and cash.
- Whether 2012 guidance is supported by funded customer orders, given that most backlog was unfunded and terminable or reschedulable.
- Cash-flow performance and revolver usage as production ramps; reconcile the $16.1 million year-end line-of-credit balance with the contractual-obligations table, which lists $1.15 million of debt payments.
- Contract estimate changes, margins, and customer concentration—particularly the four largest commercial customers, which together accounted for 88% of 2011 revenue according to the filing.
- Funding, timing and expected returns on new programs and the post-year-end $4.5 million term loan, including the associated interest-rate swap.