CPI Aerostructures, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Filed August 19, 2022. CPI manufactures aerospace and defense structural assemblies, integrated systems and kitted components, primarily for defense contractors and the U.S. government.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Revenue | $103.37 million | $87.58 million |
| Gross profit / margin | $15.01 million / 14.5% | $9.76 million / 11.1% |
| Operating income (loss) | $3.18 million | $(2.29) million |
| Net income (loss) | $6.82 million; $0.56 per share | $(3.65) million; $(0.31) per share |
| Net income excluding PPP loan forgiveness | $2.03 million; $0.17 per share | — |
| Cash from (used in) operations | $2.80 million | $(1.60) million |
| Cash | $6.31 million | $6.03 million |
| Working capital | Approximately $12.18 million | $7.67 million |
| Debt, including line of credit and long-term debt | $26.16 million | $33.45 million |
| Shareholders’ deficit | $(5.34) million | $(12.98) million |
Revenue rose 18%, mainly on higher defense subcontract work, including Raytheon’s Next Generation Jammer, Raytheon NRC Wing, USAF T-38 and Boeing A-10 programs. Government subcontracts accounted for $93.66 million of revenue; direct government contracts contributed $3.66 million and commercial contracts $6.05 million. Gross margin improved with program growth and lower factory overhead. Operating cash flow was positive, but contract assets increased by $4.73 million, reflecting revenue recognized ahead of customer billings.
FY2021 net income included $4.795 million of PPP loan forgiveness recognized as other income. The loan was forgiven in July 2021. Excluding that one-time benefit, management reported $2.03 million of net income, versus a restated net loss in 2020.
Backlog and material changes
- Total backlog was $501.72 million at year-end, up from $476.19 million a year earlier. Funded backlog declined to $134.72 million from $169.57 million; unfunded backlog rose to $367.00 million from $306.62 million. The filing says approximately 52% of funded backlog was expected to be recognized as 2022 revenue.
- Approximately 98% of total backlog was attributable to government contracts. Backlog is subject to termination or rescheduling, often without significant penalty, and unfunded amounts depend on future orders and funding.
- Commercial revenue fell to $6.05 million from $8.36 million, including effects from the HondaJet and Sikorsky S-92 kit programs. Defense subcontract revenue increased substantially, while direct government contract revenue declined.
- The $4.795 million PPP forgiveness was the principal unusual item in reported earnings. A $3.6 million securities class-action settlement was preliminarily approved; the company recorded a $3.00 million settlement obligation and a $2.85 million insurance receivable at year-end. The filing expected the insurer to cover the settlement amount after the company’s retention, subject to final court approval.
Outlook, liquidity, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided. Management described a first-quarter 2022 cost-reduction initiative, including a March headcount reduction and furloughs, to align costs with near-term revenue amid timing gaps between mature programs ending and new programs starting. Savings were expected to benefit results beginning in the second quarter of 2022; severance costs were expected in the first quarter.
- Management stated it believed the company could meet obligations and continue as a going concern over the coming year, but identified significant liquidity risk. It reported no current availability for borrowing under the BankUnited facility and reliance on internally generated cash. The company had a shareholders’ deficit and a history of operating losses and negative operating cash flow.
- BankUnited repeatedly amended the facility and waived or consented to covenant and reporting non-compliance. The April 2022 amendment extended maturity to September 30, 2023 and set progressively higher interest-rate spreads, reaching Prime plus 8% from January 2023. An August 2022 amendment further adjusted covenant terms and exclusions. Compliance and access to further waivers remain material uncertainties.
- Management and the auditor identified material weaknesses in internal control over financial reporting; management also concluded disclosure controls were ineffective at December 31, 2021. Inventory-costing and reserve errors led to restatements of 2019 and 2020 results. Management said some remediation was completed, but inventory-costing and disclosure-control weaknesses remained. The 2021 audit opinion on the financial statements was unqualified; the auditor did not opine on internal-control effectiveness.
- The filing describes delayed SEC reports, including the 2021 annual report and 2021 quarterly reports. As of the filing, the 2022 first- and second-quarter reports were also not filed. NYSE American had suspended trading and initiated delisting proceedings; the stock was quoted on the OTC Markets Expert Market, where trading was limited to unsolicited quotations. The company was also not then eligible to use Form S-3.
- Other key risks include customer and program concentration, government budget and termination decisions, fixed-price contract cost overruns, supplier and labor availability, COVID-19 effects, and higher material and transportation costs associated with geopolitical disruption. The SEC staff had concluded its investigation without intending to recommend enforcement action, while noting that this did not constitute exoneration. Derivative litigation settlements remained subject to court approval.
Important facts for investors to verify
- Whether delayed 2022 quarterly filings were completed and whether the company regained exchange or public-market quotation eligibility.
- Current BankUnited borrowing availability, outstanding balances, interest costs, covenant compliance, waivers and maturity/refinancing arrangements.
- Whether operating cash flow can support production and working-capital needs, particularly given rising contract assets and limited credit availability.
- Progress in remediating inventory-costing and financial-disclosure control weaknesses, and whether subsequent filings required further corrections.
- Actual conversion of funded and unfunded backlog into orders and revenue, including program schedules, funding and termination risks.
- Final disposition and cash impact of the securities and derivative litigation settlements, and collectability of the insurance receivable.