CPI Aerostructures, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. CPI Aero manufactures aircraft structures and aerosystems for commercial and defense customers, and provides engineering, program management, supply-chain, kitting, and maintenance services.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $39.7 million | $83.0 million |
| Gross profit (loss) | $(29.7) million | $18.4 million |
| Gross margin | (74.9%) | 22.2% |
| Operating income (loss) | $(37.0) million | $11.7 million |
| Net income (loss) | $(25.2) million | $7.7 million |
| Diluted EPS | $(2.98) | $0.91 |
| Cash from operating activities | $(3.4) million | $3.3 million |
The 2014 net loss included a $12.5 million income tax benefit. The company reported a $7.6 million net operating loss carryforward, expected to expire in 2029.
Liquidity, debt, and backlog
- At year-end, cash was $1.5 million, working capital was $60.9 million, and current assets and current liabilities were $97.7 million and $36.8 million, respectively.
- Debt totaled approximately $27.4 million: $25.2 million drawn under a $35 million revolving facility and approximately $2.3 million of long-term debt, including its current portion. The revolver matures in December 2016 and is secured by company assets. CPI Aero said it was covenant-compliant at year-end.
- Management believed cash and available credit would meet working-capital needs for at least 12 months. Operating cash flow was negative, and cash declined by $0.7 million during the year.
- Total backlog was $403.6 million, down from $431.4 million a year earlier; $120.6 million was funded and $283.1 million unfunded or unreleased. About 70% of funded backlog was expected to be recognized as 2015 revenue. Substantially all backlog was subject to cancellation or rescheduling.
Material changes and unusual items
- A-10 program estimate change: The expected program scope was reduced after U.S. budget actions and uncertainty over the aircraft’s future. CPI Aero reduced its estimate of total A-10 program revenue by about 41%, recording a cumulative $44.7 million revenue reduction in the second quarter of 2014 and a further $2.6 million cost-of-sales adjustment. The company concluded the program was likely not to reach the originally anticipated 242 aircraft; as of February 2015, it estimated termination at approximately 130 shipsets and about $54 million in value.
- The estimate change drove the sharp decline in reported revenue and the full-year loss. Government-subcontract revenue fell to $2.1 million from $54.8 million, while commercial revenue rose 37.6% to $36.8 million, supported by production ramp-ups on the Embraer Phenom 300, Cessna Citation, and HondaJet programs.
- Quarterly results reflect the catch-up accounting adjustment: the second quarter reported a $23.8 million revenue loss/adjustment, a $43.0 million gross loss, and a $29.7 million net loss; the other three quarters reported positive revenue and net income.
- New contract awards were approximately $92.9 million, compared with $122.3 million in 2013. Total funded backlog rose, but commercial backlog declined to $148.9 million from $183.1 million, including a substantial reduction in funded commercial backlog.
Outlook, management commentary, and risks
- Management expected 2015 gross margin of 19%–21%, citing competitive commercial-market pricing, a cost-justification audit related to a potential multiyear E-2D release, lower margins early in long-term commercial programs, and continuing A-10 effects.
- The company is shifting toward commercial work and subcontracting to large defense primes. Commercial contracts generated 93% of 2014 revenue; defense subcontracts and direct government contracts represented 5% and 2%, respectively. The filing attributes the unusually low defense-subcontract share chiefly to the A-10 estimate change.
- Key risks include further contract cost or revenue estimate revisions under percentage-of-completion accounting; customer cancellation, funding delays, or rescheduling; dependence on a small number of customers and programs; supplier performance and fixed-price cost overruns; and commercial aerospace cyclicality. Unfunded backlog is not a guarantee of orders or revenue.
- The company reported no legal proceedings. Management and the independent auditor concluded that internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Subsequent A-10 funding, contract termination terms, remaining recoverable costs, and any further estimate revisions.
- Actual 2015 gross margins and revenue conversion from funded backlog, particularly for commercial programs and the E-2D contract.
- Availability and covenant terms of the revolving credit facility, borrowing needs, and cash conversion from contract assets.
- Customer concentration and the status, funding, and cancellation exposure of unfunded or unreleased backlog.
- Assumptions supporting deferred tax assets and the expected use of the net operating loss carryforward.