CPI Aerostructures, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Filed August 25, 2020. This is an annual report, not a standalone fourth-quarter report. CPI makes aerostructures, integrated systems and kits for aerospace and defense customers; it acquired Welding Metallurgy, Inc. (WMI) in December 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018, restated |
|---|---|---|
| Revenue | $87.5 million | $70.4 million |
| Gross profit / margin | $9.1 million / 10.4% | $4.2 million / 6.0% |
| Operating loss | Approximately $2.4 million | $5.6 million |
| Net loss | $4.5 million | $7.5 million |
| Operating cash flow | -$2.7 million | -$0.4 million |
| Cash at year-end | $4.1 million | $4.1 million |
| Working capital | $13.9 million | $21.3 million |
| Bank facility outstanding | $26.7 million | $24.0 million |
Revenue increased 24% year over year, with approximately 7% organic growth; most of the increase reflected WMI, which contributed little revenue in 2018. Defense prime-contractor subcontracts represented 72% of revenue, commercial contracts 21%, and direct government sales 7%. Cost of sales rose 18%; SG&A rose 18%, partly due to WMI and higher legal and accounting costs. Interest expense was $2.1 million. Year-end funded and unfunded backlog totaled $561.9 million, up from $408.8 million; about 59% of funded backlog was expected to be recognized in 2020. Backlog is substantially subject to cancellation or rescheduling.
At December 31, 2019, total debt carrying value was approximately $31.0 million, including the revolving credit balance and long-term debt. The BankUnited facility is secured by Company assets. The company reported a $4.1 million cash balance and $1.4 million of restricted cash; the latter relates to the WMI acquisition escrow. Operating cash flow was negative despite the net loss improving year over year.
Restatement and material changes
The filing restates 2018 results and supersedes prior financial reporting for specified 2018 and 2019 interim periods. CPI had incorrectly recognized revenue and profit over the life of entire programs, including anticipated purchases under unexercised, nonbinding options, rather than using the applicable ASC 606 performance obligations. The company says this caused previously reported revenue and net income to be overstated and misstated approximately $100.9 million of contract assets, contract liabilities and loss reserves. For 2018, revenue was reduced by $13.6 million, and reported net income of $2.2 million became a net loss of $7.5 million.
The company and auditor identified material weaknesses in financial reporting controls, including revenue recognition, accounting for complex transactions, staffing and technical oversight, documented accounting procedures, and IT general controls. Management and the independent auditor concluded that internal control over financial reporting was ineffective at December 31, 2019 and 2018. The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
Outlook, risks and contingencies
- No quantified company-wide guidance is provided. Management said COVID-19 could adversely affect operations, cash flow and financial condition. The company remained open as an essential business but anticipated supply-chain disruption, absenteeism, added costs and weaker commercial aerospace demand; it took steps to conserve cash.
- In May 2020, Triumph Group cancelled nearly all open G650 wing-component orders, reducing backlog by $3.6 million. Gulfstream stated an intention to continue purchasing components after a proposed program transfer, but timing and future orders were uncertain.
- In August 2020, BankUnited waived specified covenant violations and amended the facility: maturity was extended to May 2, 2022; revolving availability was reduced by $6 million to $24 million; and covenant testing and thresholds were revised. The company warned future covenant compliance was not assured.
- The company received a $4.795 million PPP loan in April 2020 at 1% interest, with potential forgiveness subject to program requirements. Forgiveness was not assured.
- A court decision was pending in the WMI working-capital dispute with Air Industries. The company sought approximately $3.5 million beyond about $619,000 released from escrow; collection was uncertain.
- Shareholder class and derivative actions and a books-and-records lawsuit relate to the restatement. The SEC Division of Enforcement also issued a subpoena in a non-public fact-finding investigation; the company said the inquiry does not establish a violation and it intended to cooperate.
- Management believed available resources and facility availability would cover working-capital needs for at least 12 months from issuance of the financial statements, but noted uncertainties around COVID-19 and financing. The filing also notes delayed SEC filings and potential listing, financing and customer-confidence consequences.
Important facts for investors to verify
- Restated 2018 and interim-period figures, the full impact of the ASC 606 correction, and progress in remediating the material weaknesses.
- Current cash generation, debt and revolver availability, and compliance with the amended BankUnited covenants.
- Whether backlog converts to funded orders and revenue, particularly for major defense programs, and the status of the G650 program.
- COVID-19 effects on commercial demand, production, suppliers, costs and customer payments; and whether the PPP loan was forgiven.
- Outcomes and potential costs of the Air Industries dispute, shareholder litigation and SEC investigation.