CPI Aerostructures, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This annual filing also reports fourth-quarter results. The company produces structural aircraft parts and assemblies for U.S. military and commercial aerospace programs, primarily as a subcontractor. Financial statements received unqualified audit opinions; management and the auditor concluded internal control over financial reporting was effective.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $89.27 million | $74.14 million | +20.4% |
| Gross profit / margin | $24.23 million / 27.1% | $18.81 million / 25.4% | Margin +1.7 percentage points |
| Operating income | $16.91 million | $10.88 million | +55.4% |
| Net income | $11.01 million | $7.42 million | +48.5% |
| Diluted EPS | $1.40 | $1.04 | +34.6% |
| Cash from operations | $(22.08) million | $(13.70) million | Greater cash use |
Fourth-quarter 2012 revenue was $27.36 million and net income was $3.60 million, compared with $24.09 million and $2.67 million, respectively, in fourth-quarter 2011. Fourth-quarter diluted EPS was $0.43 versus $0.37.
Revenue mix, liquidity and debt
- Government subcontract revenue was $56.36 million (63% of total), down about 1%; commercial revenue increased 162% to $26.68 million (30%), while direct government revenue declined 7.4% to $6.24 million (7%). The G650, A-10 and E-2D programs generated 17.6%, 16.7% and 25.5% of annual revenue, respectively.
- Working capital was $79.71 million, up 53%; cash was $2.71 million. Current assets included $108.91 million of contract costs and estimated earnings in excess of billings. The company reported $22.08 million of operating cash outflow and $0.83 million of capital spending; financing activities provided $24.73 million.
- Reported total debt was approximately $27.76 million at year-end, including a $23.45 million revolving-credit balance. A December 2012 amended facility provides a $35 million revolver and a $3.9 million term loan through December 2016. The company said it complied with covenants and expected resources plus facility availability to meet working-capital needs for at least 12 months.
- Funded backlog was $52.32 million and unfunded backlog $339.56 million, totaling $391.88 million at year-end; approximately 55% was attributable to government contracts. The company expected all funded backlog to be recognized as 2013 revenue. Backlog is generally terminable or reschedulable, and unfunded amounts depend on future orders and appropriations.
Outlook, risks and notable items
- Management expected 2013 revenue and earnings to be below 2012 and similar to 2011, citing sequestration uncertainty, slower new awards and delayed releases. It expected higher shipments, lower start-up costs and fewer nonrecurring costs to support positive operating cash flow.
- Contract assets increased approximately $29.8 million during 2012. The A-10 program accounted for about $10.4 million of the increase: milestone billing had ended, and pricing negotiations for Boeing engineering changes remained unresolved while production continued. Management was pursuing improved payment terms and other funding sources.
- Revenue and profit use percentage-of-completion estimates, so revisions to costs or contract scope may affect reported results and cash conversion. Other key risks include defense-budget reductions and sequestration, contract cancellation or termination, fixed-price cost overruns, supplier performance, commercial aerospace cyclicality, and customer concentration.
- New awards totaled about $81.6 million in 2012 versus $83.6 million in 2011. The company added commercial programs with Embraer and Cessna and secured its first Sikorsky overhaul-and-repair contract. It also issued shares in a 2012 offering, with $13.32 million of proceeds. No dividends were paid and none were planned for the foreseeable future.
- The filing contains a backlog inconsistency: its backlog table reports $391.88 million, while a risk-factor passage describes approximately $355 million and says 15% was funded. The table indicates funded backlog was about 13% of total. The filing text does not reconcile these figures.
Investor verification priorities
- Reconcile reported backlog totals and funded percentages, and confirm what portion is supported by appropriated funding and firm orders.
- Track Boeing A-10 change-order pricing, billing eligibility and collection timing, along with the growth in unbilled contract assets.
- Compare management’s 2013 revenue, earnings and positive operating-cash-flow expectations with subsequent results and disclosures.
- Assess borrowing availability, covenant headroom and liquidity needs if customer payments or program funding are delayed.
- Monitor revenue and receivable concentration among major commercial customers and the three large defense programs.