CPI Aerostructures, Inc. — 2016 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2016, CPI Aero manufactured aircraft structural parts and aerosystems and provided engineering, supply-chain, kitting, and maintenance, repair and overhaul services. It served commercial and defense aerospace customers as a subcontractor and as a U.S. government prime contractor. Revenue was approximately 50% commercial and 46% defense subcontract work; the filing separately reports 4% from prime government contracts.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $81.3 million | $100.2 million |
| Gross profit / margin | $4.3 million / 5.3% | $16.6 million / 16.6% |
| Operating income (loss) | ($4.3 million) | $9.0 million |
| Net income (loss) | ($3.6 million); diluted EPS ($0.42) | $5.0 million; diluted EPS $0.58 |
| Operating cash flow | ($6.6 million) | $2.1 million |
| Cash at year-end | $1.0 million | $1.0 million |
| Working capital | $70.6 million | $67.3 million |
| Debt, approximately | $32.7 million | $25.2 million |
Interest expense rose 47.8% to $1.36 million, reflecting higher average debt. The company reported a $2.1 million income-tax benefit for 2016. Its $30 million revolving credit facility had $22.4 million outstanding at year-end, alongside a $10 million term loan; the facility is secured by company assets. CPI Aero said it was in compliance with covenants and expected existing resources and credit availability to meet working-capital needs for at least 12 months.
Operating cash use occurred despite positive working capital. Costs and estimated earnings in excess of billings were $99.6 million, including about $35 million not expected to be collected within one year. The company relies on customer billings and financing to convert percentage-of-completion earnings into cash.
Material changes versus the prior period
- Revenue fell 18.8% year over year. Government subcontract revenue declined $19.6 million, including lower A-10 and E-2D activity; commercial revenue decreased $1.8 million. New contract awards declined to $36.5 million from $61.6 million.
- GAAP gross margin contracted to 5.3%, primarily because of an A-10 program estimate revision. In April 2016, management concluded further A-10 orders beyond the then-current 173 ship sets were not probable, recording an approximately $8.9 million revenue reduction for the first quarter. The filing also identifies a $13.4 million year-over-year decline in A-10 revenue.
- Management’s non-GAAP adjusted presentation, which excludes the A-10 program, reports 2016 revenue of $81.8 million, gross profit of $19.6 million, and net income of $6.1 million, or $0.71 diluted EPS. Comparable 2015 adjusted net income was $6.9 million, or $0.81 diluted EPS. These figures are not GAAP results.
- Total backlog increased 7.5% to $416.3 million, but funded backlog declined to $94.5 million from $101.1 million. Approximately 77% of year-end backlog was government-related, and approximately 66% of funded backlog was expected to convert to revenue during 2017. Backlog is substantially subject to termination or rescheduling.
- Cash from operations shifted from $2.1 million provided in 2015 to $6.6 million used in 2016. Debt increased, while cash remained nearly flat.
Outlook, risks, contingencies and unusual items
The filing provides no specific revenue or earnings guidance. Management stated that available resources and credit availability should support working-capital needs for at least 12 months. Future results depend on contract awards, funding and production schedules, and management’s estimates of costs and revenue under percentage-of-completion accounting.
- Contract and estimate risk: Fixed-price work, cost overruns, program delays, cancellations, and changes in estimated costs can materially affect margins. 2016 contract estimate revisions reduced expected gross profit by a net $1.67 million, excluding the separately discussed A-10 revenue adjustment. The filing notes that additional significant costs on open contracts are reasonably possible.
- Customer and program concentration: Three commercial customers represented 36%, 29%, and 11% of 2016 revenue. Government funding, customer demand, and the A-10 program remain material exposures. The filing’s defense-subcontract revenue share differs between sections (57% in the business discussion and 58% in the risk factors).
- Receivables: A $411,000 reserve for disputed customer receivables contributed to higher SG&A; the allowance for doubtful accounts rose to $535,514 from $75,000.
- Financing and liquidity: The May 2016 credit amendment increased facility interest rates by 50 basis points, revised leverage covenant terms, and requires repayment of a portion of the term loan if A-10 reimbursement payments are received. A request for equitable adjustment with Boeing remains relevant; the filing does not establish a clear amount or outcome.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective at December 31, 2016. A material weakness related to review of the Boeing equitable-adjustment revenue was reported for 2015 and management says it was remediated during 2016. The auditor issued an unqualified opinion on the financial statements.
- The company reported no legal proceedings. It also faces risks from government contract termination, supplier performance, FAA and environmental compliance, commercial aerospace cycles, and its substantial unbilled contract balances.
Important facts for investors to verify
- Whether A-10 reimbursement or termination-liability claims with Boeing are accepted, and their cash and covenant effects.
- Whether funded backlog converts on schedule and whether unfunded backlog receives appropriations and customer orders.
- Progress in turning unbilled contract assets into collections, including the large balances tied to commercial customers.
- Current revolver availability, covenant headroom, debt maturities, and interest costs under the BankUnited facility.
- Whether the 2016 operating cash outflow, customer receivable reserve, and contract cost estimates improve in subsequent periods.