CPI Aerostructures, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. CPI Aero supplies structural aircraft parts and aerosystems to commercial and defense customers, as a subcontractor and as a U.S. government prime contractor.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $81.3 million | $81.3 million |
| Gross profit / margin | $18.6 million / 22.9% | $4.3 million / 5.3% |
| Operating income (loss) | $10.2 million | ($4.3 million) |
| Net income (loss) | $5.8 million; $0.65 diluted EPS | ($3.6 million); ($0.42) diluted EPS |
| Operating cash flow | $1.6 million | ($6.6 million) |
- Revenue was essentially flat, while cost of sales fell 18.7%. Commercial revenue declined $10.9 million to $29.6 million; government subcontract revenue rose $7.7 million to $45.1 million and prime government revenue rose $3.2 million to $6.6 million.
- Cash was $1.4 million at year-end. Working capital was $78.1 million, up from $70.6 million; current assets were $120.4 million and current liabilities $42.2 million. Current assets include $111.2 million of costs and estimated earnings in excess of billings; approximately $35 million of unbilled balances was not expected to be collected within one year.
- Total debt was approximately $31.9 million, including $22.8 million drawn on the revolving facility. The facility is secured by company assets and matures in March 2019; the reported rate on the revolver was 4.75% at year-end. The company reported covenant compliance and said existing resources and facility availability should meet working-capital needs for at least 12 months.
Material changes and notable items
- Profitability rebounded from 2016, primarily because the prior-year A-10 program estimate change had reduced revenue by about $8.9 million and weighed heavily on gross profit. 2017 included a $1.04 million net unfavorable change in estimated contract gross profit.
- Backlog was $388.7 million at December 31, 2017, down from $416.3 million. Only $71.1 million was funded; approximately 78% of total backlog related to government contracts. The filing says about 38% of funded backlog was expected to be recognized as 2018 revenue. Backlog is substantially subject to termination and rescheduling.
- The Tax Cuts and Jobs Act produced a provisional $207,000 income-tax credit, mainly from remeasurement of deferred taxes; the estimate remained subject to revision.
- On March 21, 2018, after year-end, CPI agreed to acquire Welding Metallurgy, Inc. for $9 million cash, subject to working-capital adjustment, plus up to $1 million in contingent payments. Closing was targeted for the second quarter of 2018 and depended on financing, customer approval, and other conditions.
Outlook, risks, and controls
- The filing provides no specific revenue or earnings guidance. Management described new program ramps and orders as supporting defense subcontract revenue, while lower G650 production and reduced Embraer requirements pressured commercial sales.
- Key risks include reliance on government programs and appropriations, contract termination and funding delays, fixed-price cost overruns, estimates under percentage-of-completion accounting, supplier performance, and commercial aerospace cyclicality. Customer concentration is also notable: three commercial customers represented 60% of 2017 revenue.
- Management and the auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued unqualified opinions on the financial statements and internal controls.
- Topic 606 was adopted January 1, 2018 using the modified retrospective method; the company said revenue recognition remained materially consistent, with balance-sheet presentation changing to contract assets and liabilities.
Investor verification checklist
- Track conversion of the largely unfunded backlog into funded orders and revenue, including the stated 2018 conversion expectation.
- Review contract-cost estimates and margin performance, especially the A-10 program and contracts with 2017 unfavorable estimate adjustments.
- Assess cash conversion and the growth of unbilled contract assets relative to low cash on hand and borrowing needs.
- Confirm revolver availability, covenant headroom, and refinancing or extension plans ahead of the March 2019 facility maturity.
- Verify whether the WMI acquisition closed, its financing terms, and any contingent payments or integration effects.