CPI Aerostructures, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request identifies 2018 Q4, this is an annual filing; the supplied text does not provide standalone fourth-quarter financial results.
Business context
CPI manufactures aircraft structures and aerosystems, provides engineering, supply-chain, kitting and MRO services, and serves defense and commercial aerospace customers as a prime contractor or subcontractor. Defense prime-contractor subcontracts generated 52% of 2018 revenue; commercial contracts generated 37%. CPI acquired Welding Metallurgy, Inc. (WMI) on December 20, 2018, for approximately $7.9 million; WMI’s post-acquisition results were immaterial to 2018 reported results.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $83.9 million | $81.3 million |
| Gross profit / margin | $18.2 million / 21.6% | $18.6 million / 22.9% |
| Income from operations | $8.6 million | $10.2 million |
| Interest expense | $2.0 million | $1.7 million |
| Income before tax | $6.7 million | $8.5 million |
| Income tax provision | $4.5 million | $2.7 million |
| Net income / diluted EPS | $2.2 million / $0.23 | $5.8 million / $0.65 |
| Cash from operating activities | $(2.5) million | $1.6 million |
Revenue increased 3.3%, but gross profit and operating income declined. Lower gross margin principally reflected production issues and higher-than-estimated labor costs on the G650 program. SG&A rose 12.8% to $9.5 million, mainly due to acquisition-related legal fees and higher salaries. The 2018 effective tax rate was approximately 67%, including a $3.1 million provision for uncertainty over an IRS examination of a previously used net operating loss carryback; CPI had received no formal notice or assessment by the filing date.
At December 31, 2018, cash was $4.1 million and restricted cash was $2.0 million, held in escrow for the WMI acquisition working-capital adjustment. Working capital was $98.4 million, including $113.3 million of contract assets, highlighting the importance of converting unbilled work into cash. Total debt carrying amounts were approximately $30.3 million, including $24.0 million outstanding under the BankUnited facility. The company reported $457.4 million of backlog, of which $94.5 million was funded; approximately 81% of funded backlog was expected to be recognized in 2019. Separately, remaining performance obligations were approximately $78.9 million, with about 97% expected to be recognized in 2019.
Material changes and notable items
- October 2018 public offering of 2.76 million shares at $6.25 per share generated approximately $16.1 million net proceeds. CPI used $4.1 million to repay facility borrowings and used part of the proceeds for the WMI acquisition and general corporate purposes.
- Operating cash flow turned negative, mainly reflecting working-capital movements, including lower accounts payable and accrued expenses, higher contract assets, and increased receivables.
- Total backlog increased from $388.7 million to $457.4 million. Government backlog rose to $386.4 million, while commercial backlog declined to $71.0 million. Most backlog is unfunded and substantially all is subject to termination or rescheduling without significant penalty.
- The BankUnited facility maturity was extended to June 30, 2020. CPI was not in compliance with leverage and net-profit covenants at year-end; the bank waived the covenant breaches. The facility was secured by company assets, and the reported rate on outstanding borrowings was 5.72%.
- The WMI purchase price included $2.0 million in escrow pending the final working-capital adjustment. CPI expected to retain at least the escrowed amount, but the adjustment was not final as of the filing.
Outlook, risks and controls
The filing provides no specific revenue or earnings guidance. Management stated that existing resources and credit availability should meet working-capital needs for at least 12 months from issuance of the financial statements. The company expected to adopt the new lease standard in 2019 and estimated recognition of $5.3–$5.8 million of right-of-use assets and lease liabilities.
Key risks include dependence on government funding and prime contractors, contract termination and rescheduling, supplier and subcontractor performance, fixed-price cost overruns, estimates used in percentage-of-completion revenue recognition, and cash-flow timing associated with substantial contract assets. Commercial aerospace cyclicality, program delays or cancellations, customer concentration, regulatory compliance, and acquisition integration are also risks.
CPI restated its September 2018 interim financial statements after an invoice-coding error overstated revenue. Management identified a material weakness in revenue invoice review controls and concluded internal control over financial reporting was ineffective at December 31, 2018; the auditor issued an adverse opinion on internal controls. Management described planned remediation in 2019, including an independent reconciliation of shipments to billings. The auditor’s opinion on the consolidated financial statements was unqualified.
Important facts for investors to verify
- Whether the revenue-recognition control remediation was implemented and independently validated, and whether subsequent filings report any further errors or restatements.
- The outcome of the IRS review of the 2014 net operating loss carryback and whether the $3.1 million tax reserve proves sufficient.
- Compliance with BankUnited covenants after the year-end waivers, borrowing availability, and repayment or refinancing plans before the June 2020 maturity.
- Conversion of contract assets and funded backlog into billings and operating cash flow, particularly given the negative 2018 operating cash flow.
- Final WMI working-capital adjustment and acquisition integration results, along with delivery, margin and cost performance on the G650 and other significant programs.