CPI Aerostructures, Inc. - 10-K Summary (Fiscal Year Ended Dec 31, 2009)
Business Context and Reporting Period
CPI Aerostructures, Inc. (CPI Aero) is a contract manufacturer of structural aircraft parts, serving primarily as a prime contractor to the U.S. Government (Air Force) and as a subcontractor to major defense and commercial prime contractors (e.g., Boeing, Northrop Grumman, Spirit AeroSystems). The company specializes in smaller modifications, spare parts, and assemblies for military aircraft (C-5A, T-38, A-10) and commercial aircraft (Gulfstream G650). This report covers the fiscal year ended December 31, 2009.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $43,906,825 | $35,588,831 |
| Gross Profit | $11,309,617 | $8,523,588 |
| Gross Margin | 25.8% | 24.0% |
| Net Income | $3,946,007 | $2,590,613 |
| Diluted EPS | $0.64 | $0.42 |
| Cash and Equivalents | $2,224,825 | $424,082 |
| Working Capital | $39,118,450 | $35,135,395 |
| Total Debt (Short + Long Term) | $4,637,949 | $3,321,874 |
| Backlog (Total) | $229,482,000 | $244,191,000 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 23% to $43.9 million, driven by a 75% surge in government subcontract revenue (A-10 and E-2D programs) and a 73% increase in commercial subcontract revenue (Gulfstream G650 program). This offset a 30% decline in prime government contract revenue.
- Profitability: Net income rose 52% to $3.9 million. Gross margin improved to 25.8% due to better margins on maturing long-term programs and renegotiated pricing.
- Liquidity: Cash balances increased significantly by $1.8 million to $2.2 million. Working capital grew by $4.0 million.
- Debt Structure: Interest expense increased 694% to $253,000 due to a new $3 million term loan obtained in late 2008 to fund tooling for commercial contracts. Total debt increased to support working capital needs.
- Backlog: Total backlog decreased slightly to $229.5 million. Funded backlog was $35.5 million (expected to be recognized in 2010), while unfunded backlog remained high at $194.0 million.
Guidance, Outlook, and Risks
2010 Outlook: Management expects revenue in the range of $48-$51 million (9-16% increase), gross margins of 24-26%, and net income of $4.3-$4.8 million. Growth is anticipated from continued work on the A-10, E-2D, and G650 programs.
Key Risks:
- Government Dependence: 28% of 2009 revenue was from prime government contracts; 71% of total revenue was government-related (prime + subcontract). The company is subject to contract termination for convenience and funding uncertainties.
- Concentration: Two prime contracts (T-38 and C-5A) and one subcontract (A-10) accounted for significant portions of revenue. The Spirit G650 contract accounted for 21% of 2009 revenue.
- Cash Flow Timing: The use of percentage-of-completion accounting creates a disparity between reported earnings and cash receipts. The company often incurs upfront costs before billing, requiring access to credit facilities.
- Subcontractor Risk: Reliance on third-party suppliers for parts could impact performance if suppliers fail to meet quality or delivery schedules.
Investor Verification Checklist
- Verify the funding status and release schedule of the $194 million unfunded backlog, particularly for the Boeing A-10 and Spirit G650 programs.
- Monitor the company's ability to maintain liquidity given the significant "costs and estimated earnings in excess of billings" ($43 million) which represents cash invested in work not yet billed.
- Assess the impact of the new $3 million term loan and interest rate swap on future interest expenses and cash flow.
- Review the stability of the U.S. Department of Defense budget and its effect on the C-5A and T-38 prime contracts.
- Confirm the progress of the Gulfstream G650 program, which represents a major commercial revenue stream.