CPI Aerostructures, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. CPI Aero manufactures aircraft structures and systems and provides engineering, supply-chain, kitting, and repair services for commercial and defense customers.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $100.2 million | $39.7 million |
| Gross profit (loss) | $16.6 million | $(29.7) million |
| Gross margin | 16.6% | (74.9%) |
| Operating income (loss) | $9.0 million | $(37.0) million |
| Net income (loss) | $5.0 million | $(25.2) million |
| Diluted EPS | $0.58 | $(2.98) |
| Cash from operations | $2.1 million | $(3.4) million |
| Cash at year-end | $1.0 million | $1.5 million |
Revenue increased about 153% year over year, principally reflecting the unusually depressed FY2014 comparison after a major A-10 Wing Replacement Program estimate revision. FY2015 government-subcontract revenue was $57.0 million and commercial revenue was $42.3 million. Commercial revenue rose 14.9%, led by higher Honda and Embraer program deliveries.
FY2015 cost-of-sales contract estimate revisions reduced gross profit by a net $1.9 million. This compares with a net $42.6 million reduction in FY2014, including approximately $39.9 million related to the A-10 program. Interest expense was $0.9 million.
Liquidity, debt, and backlog
- Working capital was $67.3 million, versus $59.3 million a year earlier; current assets were $112.4 million and current liabilities $45.1 million.
- Total debt was approximately $25.2 million at year-end, including $23.7 million outstanding on a $35 million revolving facility. The company reported compliance with credit covenants.
- Unbilled costs and estimated earnings, net of billings in excess, were approximately $102.4 million, up from $78.9 million. Management notes that percentage-of-completion estimates can cause reported earnings to differ materially from cash receipts.
- Total backlog was $387.3 million, down from $403.6 million; $101.1 million was funded and $286.2 million unfunded. Approximately 68% of funded backlog was expected to convert to revenue during 2016. Substantially all backlog was subject to termination or rescheduling, often without significant penalty.
Changes, outlook, and risks
The year’s earnings recovery does not by itself indicate a comparable improvement against a normal operating year: FY2014 included a large cumulative reduction in A-10 contract revenue after the U.S. defense budget outlook raised the prospect that the program would not reach its originally anticipated scale. Management stated that the program likely would not continue through all 242 aircraft originally expected.
No specific revenue or earnings guidance is provided. Management said existing resources and available credit were expected to meet working-capital needs for at least 12 months. On March 24, 2016, after year-end, CPI Aero refinanced its Santander facilities with a BankUnited agreement comprising a $30 million revolver and a $10 million term loan, with a term through March 2019.
Key risks include reliance on government programs and congressional funding; fixed-price contract overruns and estimation uncertainty; customer and supplier concentration; termination or delay of contracts; and the cash demands of unbilled work and upfront program costs. The four largest commercial customers generated 30%, 17%, 13%, and 12% of FY2015 revenue.
Control weakness: Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2015, due to inadequate review controls for revenue recognition associated with a customer request for equitable adjustment (REA). Management said it strengthened review procedures and planned to expand accounting staff expertise. Disclosure controls were also deemed ineffective. The financial-statement audit opinion was unqualified; the auditor issued an adverse opinion on internal control effectiveness.
Management reported an expected future effective tax rate of approximately 37%, following expanded state tax provisions. The company reported no legal proceedings and did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether A-10 program funding, production, or further contract-estimate changes materially affect future revenue and margins.
- Whether the REA-related material weakness is fully remediated, and whether any revenue or contract-asset adjustments result.
- Conversion and collectability timing of the $102.4 million net unbilled contract balance, including customer concentration and cash-flow implications.
- How much of the $286.2 million unfunded backlog is ultimately funded, retained, and delivered on schedule.
- Terms, borrowing-base availability, covenants, and actual utilization under the post-year-end BankUnited facility.