CPI Aerostructures, Inc. (“CPI Aero®”) (NYSE American: CVU) today
announced financial results for its fourth quarter and year ended
December 31, 2019.
With the filling of Form 10-K for fiscal year 2019, the Company
has comprehensively completed its restatement of financial
statements included in its annual report on Form 10-K for the year
ended December 31, 2018. The Company has also filed amended
quarterly reports on Forms 10-Q/A for the quarters ended March 31,
2019, June 30, 2019, and September 30, 2019, which filings include
restated financial results for the quarters ended March 31, 2018,
June 30, 2018, and September 30, 2018, respectively. The
Company is working on completing its Form 10-Q for its fiscal first
quarter ended March 31, 2020 and has commenced preparing financial
statements for the fiscal second quarter ended June 30, 2020.
The company intends to conduct a conference call with investors to
discuss the first quarter results in conjunction with the first
quarter earnings press release.
Commenting on the completion of the restatements, Douglas
McCrosson, president and CEO of CPI Aero stated, “During the
restatement process, we engaged a “Big Four” public accounting and
advisory firm to assist us in developing accounting policies and
internal control procedures to be compliant with a new standard of
revenue recognition from contracts with customers that we adopted
as of January 1, 2018. We are confident that we now
have appropriate and compliant accounting policies in place for
reporting results in future periods. We have also begun the process
to remediate certain material weaknesses in our internal control
over financial reporting as we further describe in our 10-K filed
today.”
Review of 2019 Financial Results (as compared to restated 2018
financial results)
Revenue, profit, profit margin, cash flow improved in 2019
compared to the restated results of 2018. Revenue increase
was driven by high single digit percentage organic growth, as well
as revenue from Welding Metallurgy (“WMI”), the subsidiary that was
acquired in December 2018, which did not contribute meaningful
revenue in 2018. Gross profit margin expanded by 440 basis
points as production rates increased for key military programs,
including the Next Generation Jammer – Mid Band pod structure
program with Raytheon Technologies, Inc. As a result, the
Company reported a significant increase in gross profit and reduced
its net loss compared to 2018. Cash flow from operations improved
by more than $2 million to approach breakeven. Gross profit margins
on defense programs in 2019 was approximately 15%; commercial
programs were not profitable.
Management Commentary on Backlog Growth in 2019
Mr. McCrosson stated, “We had exceptional success in winning new
contract awards in 2019 that resulted in higher total backlog and
funded backlog at year-end. Total backlog increased more than 37%
to more than $561 million, and funded backlog grew more than 21% to
a company record $147.6 million during 2019 driven by purchase
orders to our WMI subsidiary, as well as new orders from Boeing,
Sikorsky, Lockheed Martin, Raytheon, and Northrop Grumman.
“Our backlog strength is attributable to continued successful
execution on our defense-centric business development strategy that
targets segments of the defense industry that are aligned with
national security priorities such as electronic warfare (EW),
intelligence, surveillance, reconnaissance (ISR); advanced missile
technologies, including hypersonics, and autonomous systems. As a
result, we set a company record for defense backlog of $496.7
million at year-end, up more than 55% from $319.5 million at the
end of 2018, driven by new multi-year program wins and program
extensions. Notable additions to the defense backlog included: a
$48 million potential value contract from Boeing for the re-winging
of A-10 aircraft; a $67.7 million potential value U.S. Air Force
contract for T-38 aircraft modification kits; and an $8.1 million
contract for E-2D Advanced Hawkeye wing kits from Northrop
Grumman.”
2020 Business Trends
Mr. McCrosson stated, “Contract momentum continued into 2020. We
recently announced major new funded orders from Northrop Grumman
for the E-2D Advanced Hawkeye that contributed to our funded
backlog during the first quarter and drove a sequential increase in
funded backlog of more than $63 million to nearly $211 million.
Also included in funded backlog at March 31st is the initial $1.3
million purchase order CPI Aero previously announced from Northrop
Grumman to support its proposal on the Next Generation Jammer-Low
Band Capability Block 1 electronic warfare system. These and other
awards drove funded defense backlog to a second consecutive company
record at $206 million at quarter-end.”
Commenting on the impact of the pandemic on the Company’s
operations, Mr. McCrosson continued, “We expect that the impact of
the COVID-19 pandemic will have an adverse effect on the results of
our operations, financial position and cash flow for the year
ending December 31, 2020, particularly during the first six months
of 2020. Although we have been classified as an “essential
business” by New York State and we remained in operation while
non-essential New York businesses were required to be closed,
certain of our staff have been working modified hours and remotely
due to social distancing protocols and concern over their safety
and the safety of others since on or about March 19, 2019.
Since the pandemic began, we have experienced some minor
supply chain disruptions, higher than normal employee absenteeism,
order quantity reductions or cancellations from certain business
jet customers, and short-term suspensions of manufacturing at ours
or our customers’ facilities related to the COVID-19 pandemic.
Customer demand within our defense business is expected to be
largely sheltered from the impact of COVID-19, although the
profitability of these programs will be affected as our defense
programs must absorb more of the fixed costs due to weakened demand
from the commercial side of our business. The overhead absorption
is expected to stabilize at pre-pandemic levels by the end of 2020
as defense programs ramp up, largely offsetting the loss of labor
base working on our commercial programs. We have taken
mitigating steps to reduce the adverse effects. For example, we
have curtailed discretionary spending, deferred all business
travel, delayed hiring, and other measures to preserve cash.
We have also taken action to more closely manage the flow of
materials into the operations in response to weakened demand in our
commercial programs.”
Mr. McCrosson concluded, “Despite pandemic-induced headwinds
buffeting our commercial aviation business, we believe our book of
business on key defense programs and continued emphasis on defense
market opportunities should enable us to deliver revenue growth,
improved operating margins, a return to profitability, and positive
operating cash flow in 2020 and beyond.”
Amended Credit FacilityOn August 24, 2020, we
entered into a Sixth Amendment and Waiver (“Sixth Amendment”) to
that certain Amended and Restated Credit Agreement with the Lenders
named therein and BankUnited, N.A. (“BankUnited”) as Sole Arranger,
Agent and Collateral Agent, dated as of March 24, 2016 (as amended
from time to time, the “Credit Agreement”). In connection with the
Sixth Amendment, we also amended the Amended and Restated Revolving
Credit Note, dated as of March 24, 2016, which represents an
aggregate principal revolving loan commitment amount of $30 million
(“Revolving Note”) and the Amended and Restated Term Note, dated as
of March 24, 2016, with an original principal amount of $10 million
(“Term Note”).
Under the Sixth Amendment, and the related amendments to the
Revolving Note and Term Note, an aggregate of $6 million of the
outstanding balance under the Revolving Note was converted into and
added to the outstanding balance on the Term Note. The availability
under the Revolving Note was permanently reduced by $6 million, to
$24 million, and the outstanding principal amount on the Term Note
was increased to approximately $7,933,000.
Additionally, under the Sixth Amendment, the parties amended the
Credit Agreement by (i) extending the maturity date of the
Revolving Note and Term Note to May 2, 2022, and making conforming
changes to the payment schedule on the Term Note, (ii) amending the
fixed charge coverage ratio covenant by requiring the ratio to be
quarterly for September 30, 2020 and December 31, 2020 and then
determined on a trailing twelve-month basis beginning on March 31,
2021, (iii) waiving leverage covenant noncompliance for each
quarter ended during the period from March 31, 2018 through
December 31, 2019. The leverage covenant will not be tested
for the four quarters from March 31, 2020 through December 31,
2020, Then, beginning with the quarter ending March 31, 2021, the
funded debt to EBITDA ratio shall be 4.0:1.0, tested on a trailing
four quarter basis, (iv) reducing the minimum quarterly EBITDA
covenant from $2 million to $1 million beginning on September 30,
2020, (v) maintaining a minimum net income, after taxes, of no less
than $1.00 and (vi) replacing the interest pricing grid for the
Revolving Note with an interest rate for Eurodollar loans of LIBOR
plus 3.25% with a floor of 50 basis points or an interest rate for
base rate loans equal to BankUnited’s prime rate plus 0.25%.
The restatement of the financial statements for the Non-Reliance
Periods and our internal controls weaknesses caused us to be in
violation of certain financial and non-financial covenants under
the BankUnited Facility as of and after March 31, 2018. BankUnited
has agreed to waive each covenant violation under the Credit
Agreement in connection with the previously disclosed errors in our
financial statements for the Non-Reliance Periods and to
prospectively waive the covenant violation for late delivery of our
financial statements for the first three quarters of 2020.
BankUnited agreed not to test our compliance with the financial
covenants under the Credit Agreement for the first half of 2020.
Financial covenant testing will resume for the quarter ending
September 30, 2020. BankUnited also consented to the incurrence of
additional indebtedness by the Company pursuant to the
previously-announced loan made by BNB Bank on April 10, 2020, of an
aggregate principal amount of $4,795,000 pursuant to the Paycheck
Protection Program under the Coronavirus Aid, Relief, and Economic
Security (CARES) Act and agreed that the income and debt effects of
such loan will be excluded for covenant calculation purposes.
Background on the RestatementOn February 14,
2020, the Company filed a Form 8-K disclosing that the Audit &
Finance Committee of the Company’s Board of Directors determined,
based on the recommendation of management, that the Company’s
financial statements which were included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2018, and its
Quarterly Reports on Forms 10-Q for the quarters ended March 31,
2018, June 30, 2018, September 30, 2018, March 31, 2019, June 30,
2019, and September 30, 2019 (“Non-Reliance Periods”) should no
longer be relied upon due to errors in such consolidated financial
statements relating to the Company’s recognition of revenue from
contracts with customers. The errors were uncovered as part of the
preparation of the Company’s consolidated financial statements as
of and for the fiscal year ended December 31, 2019.
The Company recognizes sales and profits for contracts with
customers using the cost-to-cost percentage of completion method of
accounting. Historically, for long-term programs, the Company
applied the cost-to-cost percentage of completion method at the
program level. The Company estimated its revenue recognition
utilizing the life of the program to both measure progress and
estimate profit margin. After reconsideration of the terms of the
Company’s contracts with customers, management concluded that its
life of the program accounting was not an appropriate application
of ASC Topic 606 and that certain revenues and net income were
recognized inaccurately due to this incorrect application of
generally accepted accounting principles in the United States of
America (“U.S. GAAP”). Therefore, previously reported revenue and
net income were overstated. The errors also had an impact on the
Company’s balance sheet for the affected periods. The accounting
errors had no impact on the Company’s cash flows from operations
for the Non-Reliance Periods. See Part IV, Item 15, “Note 18.
Restatement of Previously Issued Financial Statements” of the notes
to the consolidated financial statements of the Annual Report on
Form 10-K that was filed today for a more detailed discussion of
the error and the effects of the restatement.
In connection with its restatement, the Company and CohnReznick
LLP, our independent registered certified public accounting firm,
identified and reported to the Company’s Board of Directors
significant internal control matters that collectively constitute
“material weaknesses.” Please see “Item 9A, Controls and
Procedures” in the Annual Report on Form 10-K that was filed today
for a description of these matters.
About CPI AeroCPI Aero is a U.S. manufacturer
of structural assemblies for fixed wing aircraft, helicopters and
airborne Intelligence Surveillance and Reconnaissance and
Electronic Warfare pod systems in both the commercial aerospace and
national security markets. Within the global aerostructure supply
chain, CPI Aero is either a Tier 1 supplier to aircraft OEMs or a
Tier 2 subcontractor to major Tier 1 manufacturers. CPI also is a
prime contractor to the U.S. Department of Defense, primarily the
Air Force. In conjunction with its assembly operations, CPI Aero
provides engineering, program management, supply chain management,
and MRO services. CPI Aero is included in the Russell Microcap®
Index.
The above statements include forward looking statements that
involve risks and uncertainties, which are described from time to
time in CPI Aero's SEC reports, including CPI Aero's Form 10-K for
the year ended December 31, 2019.
CPI Aero® is a registered trademark of CPI Aerostructures, Inc.
For more information, visit www.cpiaero.com, and follow us on
Twitter @CPIAERO.
Contact:Investor Relations Counsel:LHA Investor
RelationsJody Burfening(212) 838-3777cpiaero@lhai.com
www.lhai.com
– Tables to Follow – CPI
AEROSTRUCTURES, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, |
|
2019 |
|
2018(As Restated ) |
|
|
|
Revenue |
$ |
87,518,688 |
|
$ |
70,366,016 |
|
|
|
|
Cost of sales |
|
78,386,997 |
|
|
66,155,986 |
|
|
|
|
Gross profit |
|
9,131,691 |
|
|
4,210,030 |
|
|
|
|
Selling, general and administrative expenses |
|
11,562,781 |
|
|
9,780,027 |
|
Loss from operations |
|
(2,431,090 |
) |
|
(5,569,997 |
) |
|
|
|
Other expense: |
|
|
Other income |
|
89,666 |
|
|
28,709 |
|
Interest expense |
|
(2,104,851 |
) |
|
(1,989,417 |
) |
Total other expense, net |
|
(2,015,185 |
) |
|
(1,960,708 |
) |
Loss before provision for income taxes |
|
(4,446,275 |
) |
|
(7,530,705 |
) |
|
|
|
Provision for income taxes |
|
3,877 |
|
|
16,048 |
|
Net loss |
|
(4,450,152 |
) |
|
(7,546,753 |
) |
|
|
|
Other comprehensive income, net of tax |
|
|
Change in unrealized loss-interest rate swap |
|
--- |
|
|
14,800 |
|
|
|
|
Comprehensive loss |
$ |
(4,450,152 |
) |
$ |
(7,531,953 |
) |
Loss per common share-basic |
$ |
(0.38 |
) |
$ |
(0.80 |
) |
|
|
|
Loss per common share-diluted |
$ |
(0.38 |
) |
$ |
(0.80 |
) |
|
|
|
Shares used in computing loss per common share: |
|
|
Basic |
|
11,808,052 |
|
|
9,480,948 |
|
Diluted |
|
11,808,052 |
|
|
9,480,948 |
|
CPI AEROSTRUCTURES, INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE
SHEETS
|
December 31, |
December 31, |
|
|
2019 |
|
2018(As Restated ) |
ASSETS |
|
|
Current Assets: |
|
|
Cash |
$ |
4,052,109 |
|
$ |
4,128,142 |
|
Restricted Cash |
|
1,380,684 |
|
|
2,000,000 |
|
Accounts Receivable, net |
|
7,029,602 |
|
|
8,722,571 |
|
Contract Assets |
|
15,280,807 |
|
|
17,588,866
|
|
Inventory |
|
5,891,386 |
|
|
9,361,611 |
|
Refundable Income Taxes |
|
474,904 |
|
|
434,903 |
|
Prepaid expenses and other current assets |
|
721,964 |
|
|
1,972,630 |
|
Total Current Assets |
|
34,831,456 |
|
|
44,208,723 |
|
|
|
|
Operating lease right-of-use assets |
|
3,886,863 |
|
|
--- |
|
Property and equipment, net |
|
3,282,939 |
|
|
2,545,192 |
|
Intangibles, net |
|
375,000 |
|
|
--- |
|
Goodwill |
|
1,784, 254 |
|
|
--- |
|
Refundable Income Taxes |
|
--- |
|
|
434,903 |
|
Other assets |
|
179,068 |
|
|
249,575 |
|
Total Assets |
$ |
44,339,580 |
|
$ |
47,438,393 |
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
|
|
Current Liabilities: |
|
|
Accounts payable |
$ |
8,199,557 |
|
$ |
9,902,481 |
|
Accrued expenses |
|
2,372,522 |
|
|
1,558,160 |
|
Contract Liabilities |
|
3,561,707 |
|
|
5,252,579 |
|
Loss reserve |
|
2,650,963 |
|
|
3,663,558 |
|
Current portion of long-term debt |
|
2,484,619 |
|
|
2,434,981 |
|
Operating lease liabilities |
|
1,709,153 |
|
|
--- |
|
Income taxes payable |
|
1,216 |
|
|
113,992 |
|
Total current liabilities |
|
20,979,737 |
|
|
22,925,751 |
|
|
|
|
Line of credit |
|
26,738,685 |
|
|
24,038,685 |
|
Long-term operating lease liabilities |
|
2,596,784 |
|
|
--- |
|
Long-term debt, net of current portion |
|
1,764,614 |
|
|
3,876,238 |
|
Other liabilities |
|
--- |
|
|
531,124 |
|
Total Liabilities |
|
52,079,820 |
|
|
51,371,798 |
|
|
|
|
Shareholders’ Deficit : |
|
|
Common stock - $.001 par value; authorized 50,000,000
shares, |
|
|
11,818,830 and 11,718,246 shares,
respectively, issued and outstanding |
|
11,819 |
|
|
11,718 |
|
Additional paid-in capital |
|
71,294,629 |
|
|
70,651,413 |
|
Accumulated deficit |
|
(79,046,688 |
) |
|
(74,596,536 |
) |
Total Shareholders’ Deficit |
|
(7,740,240 |
) |
|
(3,933,405 |
) |
Total Liabilities and Shareholders’ Deficit
|
$ |
44,339,580 |
|
$ |
47,438,393 |
|
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