CPI Aerostructures, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. CPI Aero manufactures structural parts and assemblies for commercial and defense aircraft, and provides engineering, program and supply-chain management, and maintenance services. The report was filed March 11, 2014.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $82.99 million | $89.27 million |
| Gross profit / margin | $18.43 million / 22.2% | $24.23 million / 27.1% |
| Operating income | $11.73 million | $16.91 million |
| Net income | $7.74 million | $11.01 million |
| Diluted earnings per share | $0.91 | $1.40 |
| Cash from operating activities | $3.27 million | $(22.08) million |
| Cash at year-end | $2.17 million | $2.71 million |
| Working capital | $88.44 million | $79.71 million |
| Total debt | $24.57 million | $27.76 million |
Revenue fell 7.0%; gross profit declined 23.9% and net income declined 29.7%. Gross margin compression reflected contract estimate and pricing adjustments on Spirit, NGC, Boeing and the C-5 TOP program, plus additional engineering time on a UTS Aerospace program. Interest expense increased 57% to $653,786, reflecting higher average borrowings.
Operating cash flow turned positive, but cash declined by $543,700. The company reported $112.6 million in costs and estimated earnings in excess of billings, including approximately $30 million not expected to be collected within one year. The $35 million revolving credit facility matures in December 2016; $21.35 million was drawn at year-end. The company said it complied with its financial covenants and expected available resources and credit capacity to cover working-capital needs for at least 12 months.
Total backlog was $431.4 million, up from $391.9 million; $110.4 million was funded, compared with $52.3 million a year earlier. Approximately 80% of funded backlog was expected to convert to revenue in 2014. Most backlog is subject to cancellation or rescheduling without significant penalty.
Fourth-quarter results
Unaudited fourth-quarter 2013 revenue was $21.29 million, gross profit was $5.28 million, and net income was $2.37 million, compared with $27.36 million, $7.70 million, and $3.60 million, respectively, in fourth-quarter 2012.
Business changes, outlook and notable items
- Revenue mix in 2013 was 66% defense subcontracts, 32% commercial contracts, and 2% direct government contracts. Management said the decline in direct government-contract revenue was consistent with its strategy to transition away from prime government contracting.
- New contract awards totaled approximately $122.3 million in 2013, including $96.0 million in government subcontracts and $26.3 million in commercial awards.
- Management’s 2014 soft guidance anticipated revenue growth over 2013, potentially approaching 2012 revenue; gross margin of 20%–21%; and operating cash flow of approximately $1.0–$1.25 million. It expected commercial programs to move toward fuller production. For 2015, management anticipated higher revenue and improved gross margin, subject to program rates and execution.
- On March 5, 2014, CEO and President Edward J. Fred resigned. He was to serve in an advisory capacity through May 16, 2014 and then as a consultant for 18 months. The separation agreement included a $100,000 cash payment, continued medical and dental premium payments for up to 18 months, and payment of his earned 2013 performance bonus.
- Percentage-of-completion accounting depends on estimates of costs to complete. Revisions to estimated contract profits reduced total expected profits by approximately $3.7 million in 2013. Further cost increases could reduce future revenue or margins.
Risks, contingencies and controls
Key risks include dependence on U.S. government-funded programs, competitive fixed-price contracts and cost overruns, contract funding delays or termination, customer and supplier concentration, and reliance on commercial aerospace demand. Other risks include the large unbilled contract asset and associated cash-conversion timing, new-program upfront costs and delays, FAA and environmental compliance, and the possibility that cost estimates or backlog will not translate into expected cash or revenue. The filing reports no pending legal proceedings. The independent auditor expressed unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether 2014 revenue, gross-margin and operating-cash-flow guidance was achieved, especially given management’s lower 20%–21% margin outlook.
- Whether the $112.6 million unbilled contract balance converts to billings and cash on schedule, including the Boeing A-10 program trend.
- How much of the $431.4 million backlog is funded, retained, and ultimately delivered; most backlog is cancelable or reschedulable.
- Whether contract pricing and cost-estimate adjustments—particularly on Spirit, NGC, Boeing, C-5 TOP and UTS Aerospace—cause further margin reductions.
- How commercial-program ramp-up and customer concentration affect revenue, working capital, and cash generation.
- The impact of the CEO transition and separation-related payments on operations and expenses.