CPI Aerostructures, Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022; filed April 14, 2023. This is an annual report, not a standalone fourth-quarter report. CPI Aero manufactures aerospace and defense structural assemblies, integrated systems, and kitted components, primarily as a supplier to defense primes and the U.S. government.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $83.34 million | $103.37 million |
| Gross profit / margin | $16.30 million / 19.6% | $15.01 million / 14.5% |
| Operating income | $4.89 million | $3.18 million |
| Income before tax | $2.62 million | $6.83 million |
| Net income | $9.18 million | $6.82 million |
| Operating cash flow | $0.94 million | $2.80 million |
- Revenue fell 19.4%, mainly from lower activity on Raytheon’s SDTA program and Northrop Grumman’s E-2D programs; growth in Sikorsky HIRSS partly offset the declines.
- Gross margin improved to 19.6%, which management attributed to better operating efficiency and lower factory overhead. Favorable net contract-estimate adjustments added $1.76 million to gross profit, compared with net unfavorable adjustments of $0.21 million in 2021.
- FY2022 net income includes a $6.47 million deferred-tax valuation-allowance release. FY2021 included $4.80 million of PPP loan-forgiveness income. Excluding those items and the 2022 $0.77 million severance charge, management reported adjusted net income of $3.47 million in 2022 versus $2.03 million in 2021; these are management’s non-GAAP-style comparisons.
- Interest expense nearly doubled to $2.27 million, reflecting higher rates, partly offset by lower borrowings. Cash fell 39.0% to $3.85 million, while operating cash flow was positive but lower year over year.
Liquidity, debt, and backlog
- Working capital was $12.90 million, versus $12.18 million a year earlier. Current assets were $43.20 million and current liabilities were $30.30 million.
- At year-end, the company had $21.0 million outstanding on its revolving credit facility and $1.79 million of long-term debt, including finance leases and notes. The facility is secured by company assets; management reported no availability for additional borrowings. The year-end interest rate was 11.0%.
- After year-end, a March 2023 amendment extended facility maturity to November 30, 2024; the term-loan balance was to be repaid by June 30, 2023. The amendment also provides for scheduled reductions in the revolving-loan maximum and requires related payments if needed.
- Total backlog was $514.5 million, up from $501.7 million, but funded backlog declined to $122.1 million from $134.7 million. Approximately 98% of backlog was government-related; substantially all unfunded backlog is subject to termination or rescheduling.
- Customer concentration is significant: Lockheed Martin, Raytheon, and Northrop Grumman represented approximately 35%, 17%, and 12% of FY2022 revenue, respectively. Defense-prime subcontracts generated 82% of revenue.
Material changes, outlook, and risks
- A first-quarter 2022 cost-reduction initiative included headcount reductions and furloughs; the company had 208 full-time employees at year-end, down from 249. Management said savings began benefiting results in the second quarter.
- The filing provides no specific consolidated revenue or earnings guidance. CPI Aero cited potential program opportunities, including its expectation that the NGJ-MB program could exceed $210 million through 2030; this is a company estimate, not guaranteed orders.
- Management stated that it expected to meet obligations and continue as a going concern over the coming year, while cautioning that its plans were not assured. Liquidity depends on internally generated cash, customer payment terms, and continued access to credit; covenant compliance, past waivers, and fully utilized revolving capacity are material concerns.
- Other principal risks include dependence on a few defense customers and government appropriations, fixed-price contract cost overruns, supply-chain and skilled-labor constraints, interest-rate exposure, and reliance on estimates for over-time revenue recognition and contract costs.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses involving vendor invoice processing and accruals, accounts-receivable and contract-asset reconciliations, and inventory-control documentation. The filing describes prior-period restatements. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- The company recorded a $3.6 million class-action settlement obligation and an equal insurance-recovery receivable at year-end. The class action was terminated in March 2023; a proposed derivative-action settlement, including $585,000 in attorneys’ fees and governance reforms, remained subject to final court approval as described in the filing.
Important facts for investors to verify
- Whether cash generation, customer collections, and contract-asset conversion are sufficient to support operations and scheduled debt payments, given the absence of revolver availability.
- Compliance with amended credit covenants and the status of the term-loan repayment and revolving-credit reductions under the March 2023 amendment.
- Whether funded backlog converts into revenue on schedule, and how much unfunded backlog is ultimately funded or canceled.
- Progress in remediating the disclosed internal-control weaknesses and whether future filings avoid further accounting corrections.
- Realizability of deferred tax assets and the sensitivity of reported earnings to contract-estimate changes, customer program rates, and the tax valuation allowance.
- Final resolution and insurance coverage of the derivative litigation settlement, and any remaining company-paid costs.