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Section 1: 10-K (ANNUAL REPORT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-11398
CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
11-2520310
(I.R.S. Employer
Identification No.)
91 Heartland Blvd., Edgewood, New York 11717
(Address of principal executive offices)
(631) 586-5200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.001 par value
Name of each exchange on which registered
NYSE MKT
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☐
Non-accelerated filer ☐
(do not check if a smaller reporting company)
Accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).
Yes ☐ No ☒
As of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock (based on its
reported last sale price on the NYSE MKT of $6.15) held by non-affiliates of the registrant was $47,792,843.
As of March 1, 2017, the registrant had 8,752,171 common shares, $.001 par value, outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission no
later than 120 days after the end of the Registrant’s fiscal year covered by this report.
PART I
PART II
PART III
Item 1.
Item 1A.
Item 1B
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV Item 15.
CPI AEROSTRUCTURES, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO FINANCIAL STATEMENTS
2
3
10
14
14
14
14
14
15
15
16
17
28
28
28
29
32
32
32
32
32
32
32
33
35
PART I
Item 1. BUSINESS
General
CPI Aerostructures, Inc. (“CPI Aero®” or the “Company”) is a United States (“U.S.”) supplier of aircraft parts for fixed wing aircraft and helicopters in both the commercial and
defense markets. We are a manufacturer of structural aircraft parts and aerosystems. Additionally, we leverage our global supply chain skills to assist our customers in managing a
diverse worldwide supplier market by providing “one stop shopping” for an assortment of aerospace parts. Within the global aerostructures supply chain, we are either a Tier 1
supplier to aircraft original equipment manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S. Department of
Defense, primarily the United States Air Force (“USAF”). In addition to our assembly operations, we provide engineering; program management, supply chain management, and
maintenance repair and overhaul (“MRO”) services.
Among the key programs that CPI Aero supplies are the E-2D Advanced Hawkeye surveillance aircraft, the A-10 Thunderbolt attack jet, the Gulfstream G650, the UH-60 BLACK
HAWK® helicopter, the S-92® helicopter, the MH-60S mine countermeasure helicopter, the AH-1Z ZULU attack helicopter, the HondaJet-Advanced Light Jet, the MH-53 and CH-
53 variant helicopters, the C-5A Galaxy cargo jet, the F-16 fighter aircraft, the Embraer Phenom 300 light business jet and the Cessna Citation X+.
We are a subcontractor for leading defense prime contractors such as Northrop Grumman Corporation (“NGC”), The Boeing Company (“Boeing”), Lockheed Martin Corporation
(“Lockheed”), Sikorsky Aircraft Corporation (“Sikorsky”) and Bell Helicopter (“Bell”). 46%, 57% and 5% of our revenue in 2016, 2015 and 2014, respectively, was generated by
subcontracts with defense prime contractors. Our 2016 and 2014 defense subcontractor revenue was significantly decreased because of the change in estimate on the A-10 program,
described in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MDA”).
We also operate as a subcontractor to prime commercial contractors, including Sikorsky, Honda Aircraft Company, Inc. (“Honda”), Embraer S.A. (“Embraer”) and The Triumph
Group (“Triumph”), in the production of commercial aircraft parts. 50%, 42% and 93% of our revenue in 2016, 2015 and 2014, respectively, was generated by commercial contract
sales.
CPI Aero has over 36 years of experience as a contractor. Most members of our management team have held management positions at large aerospace contractors, including NGC and
GKN. Our technical team possesses extensive technical expertise and program management and integration capabilities. Our competitive advantage lies in our ability to offer large
contractor capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior quality products.
CPI Aero was incorporated under the laws of the State of New York in January 1980 under the name Composite Products International, Inc. CPI Aero changed its name to Consortium
of Precision Industries, Inc. in April 1989 and to CPI Aerostructures, Inc. in July 1992. In January 2005, we began doing business under the name CPI Aero®, a registered trademark
of the Company. Our principal office is located at 91 Heartland Blvd., Edgewood, New York 11717 and our telephone number is (631) 586-5200.
3
We maintain a website located at www.cpiaero.com. Our corporate filings, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on
Form 8-K, our proxy statements and reports filed by our officers and directors under Section 16-(a) of the Securities Exchange Act, and any amendments to those filings, are available,
free of charge, on our website as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission. We do not intend for
information contained in our website to be a part of this Annual Report on Form 10-K.
Significant Contracts
Some of our significant contracts are as follows:
Military Aircraft – Subcontracts with Prime Contractors
E-2D “Advanced Hawkeye” The NGC E-2 Hawkeye is an all-weather, carrier-based tactical Airborne Early Warning aircraft. The twin turboprop aircraft was designed and
developed in the 1950s by the Grumman Aircraft Company for the United States Navy as a replacement for the E-1 Tracer. The United States Navy aircraft has been progressively
updated with the latest variant, the E-2D, first flying in 2007. In 2008, we received an initial $7.9 million order from NGC to provide structural kits for the E-2D. We initially valued
the long-term agreement at approximately $98 million over an eight-year period, with the potential to be in excess of $195 million over the life of the aircraft program. The cumulative
orders we have received on this program through January 2017 exceed $144 million.
In addition, in 2015 we won an award to supply structural components and kits for the Outer Wing Panel (“OWP”) on the E-2D Advanced Hawkeye airborne early warning and
control (“AEW&C”) aircraft that will be manufactured for Japan. We will be responsible for component source selection, supply chain management, delivery of kits, and will provide
manufacturing engineering services to NGC during the integration of the components into the OWP. The contract from NGC is valued at between $25 million and $30 million.
A-10 “Thunderbolt” The A-10 Thunderbolt II is a single-seat, twin-engine, straight-wing jet aircraft developed by Fairchild-Republic for the United States Air Force to provide close
air support of ground forces by attacking tanks, armored vehicles, and other ground targets with a limited air interdiction capability. It is the first U.S. Air Force aircraft designed
exclusively for close air support. In 2008, we received an initial order of $3.2 million from the Integrated Defense Systems unit of Boeing in support of its $2 billion award to produce
up to 242 enhanced wings for the A-10.
UH-60 “BLACK HAWK” The UH-60 BLACK HAWK helicopter is the leader in multi-mission-type aircraft. Among the mission configurations its serves are troop transport,
medical evacuation, electronic warfare, attack, assault support and special operations. More than 3,000 BLACK HAWK helicopters are in use today, operating in 29 countries. We
have long-term agreements from Sikorsky to manufacture gunner window assemblies, fuel panel assemblies, and perform MRO on stabilators for the BLACK HAWK helicopter
through 2018.
F-16 “Fighting Falcon” The Lockheed Martin Fighting Falcon is a single-engine multirole fighter aircraft. Originally developed by General Dynamics for the USAF, over 2,900 F-16
aircraft are flown by the USAF and by air forces around the world today. CPI Aero has a contract with United Technologies Aerospace Systems to manufacture pod structures for the
DB-110 reconnaissance system, which is used primarily on exported F-16 aircraft.
4
Commercial Aircraft – Subcontracts with Prime Contractors
Gulfstream G650 In March 2008, Spirit Aerosystems (“Spirit”) awarded us a contract to provide leading edges for the Gulfstream G650 business jet, a commercial program that
Spirit was supporting. In December 2014, Spirit transferred its work-scope on this program to Triumph. We will continue to provide leading edges for the G650 as our purchase orders
and long term agreement have transferred to Triumph.
HondaJet In May 2011, Honda awarded us a contract to manufacture engine inlets and flaps and vane assemblies for the HondaJet advanced light business jet. We have received
approximately $23.6 million in orders on this program through December 2016. We estimate the potential value of this program to be approximately $70 million.
Embraer Phenom 300 In May 2012, Embraer awarded us a contract to manufacture engine inlets for the Embraer Phenom 300 business jet. We have received approximately $28.90
million in orders on this program through December 2016. We estimate the potential value of the program to be in excess of $40 million.
Cessna Citation X In November 2012, Cessna Aircraft Company (“Cessna”) awarded us a contract to supply structural assemblies, predominately wing spars, for Cessna’s flagship
aircraft, the newly-relaunched Cessna Citation X. We have received approximately $15.6 million in orders on this program through December 2016.
Military Aircraft – Prime Contracts with U.S. Government
F-16 “Fighting Falcon” In November 2014, The Defense Logistics Agency (“DLA”) awarded CPI Aero a multi-year contract to provide structural wing components and logistical
support for global F-16 aircraft MRO operations. We estimate the value of the contract, including options, to be approximately $53.5 million.
Sales and Marketing
We are recognized within the aerospace industry as a Tier 1 or Tier 2 supplier to major aircraft suppliers. Additionally, we may bid for military contracts set aside specifically for
small businesses.
We are awarded contracts for our products and services through the process of competitive bidding. This process begins when we first learn, formally or otherwise, of a potential
contract from a prospective customer and concludes after all negotiations are completed upon award. When preparing our response to a prospective customer for a potential contract,
we evaluate the contract requirements and determine and outline the services and products we can provide to fulfill the contract at a competitive price. Each contract also benefits from
various additional services that we offer, including program management, engineering, and global supply chain program management, which streamlines the vendor management and
procurement process and monitors the progress, timing, and quality of component delivery.
Our average sales cycle, which generally commences at the time a prospective customer issues a request for proposal and ends upon delivery of the final product to the customer,
varies widely.
Because of the complexities inherent in the aerospace industry, the time from the initial request for proposal to award ranges from as little as a few weeks to several years.
Additionally, our contracts have ranged from six months to as long as ten years. Also, repeat and follow-on jobs for current contracts frequently provide additional opportunities with
minimal start-up costs and rapid rates to production.
The Market
Since our founding in 1980 until 2007, our Company concentrated on manufacturing small assemblies and structures to prime contractors for use by the U.S. Military. Government-
based contracts are subject to the national defense budget and procurement funding decisions which, accordingly, drives demand for our business in that market. Government spending
and budgeting for procurement, operations and maintenance are affected not only by military action, but also the related fiscal consequences of these actions, as well as the political
electoral process.
Since 2008, we have widened the scope of our target markets, positioning our Company to take advantage of the opportunities a broader customer base provides while simultaneously
reducing the impact of direct government contracting limitations. Our success as a subcontractor to defense prime contractors has provided us with opportunities to act as a
subcontractor to prime contractors in the production of commercial aircraft structures, which also reduced our exposure to government spending decisions.
5
Over time, our Company has expanded both in size and capabilities, with growth in our operational and global supply chain program management. These expansions have allowed us
the ability to supply more complex aerostructure assemblies and aerosystems and structures in support of our government-based programs as well as to pursue opportunities within the
commercial and business jet markets. Our capabilities have also allowed us to acquire MRO and kitting contracts.
Approximately $8.7 million, $9.9 million and $7.1 million of our revenue for the years ended December 31, 2016, 2015 and 2014, respectively, was from customers outside the U.S.
All other revenue for each of the three years in the period ended December 31, 2016 has been attributable to customers within the U.S. We have no assets outside the U.S.
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Backlog
We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and purchase orders,
excluding the portion previously included in operating revenues on the basis of percentage of completion accounting, and including estimates of future contract price escalation.
Substantially all of our backlog is subject to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on a yearly or
quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our
contracts. Our total backlog as of December 31, 2016 and 2015 was as follows:
Backlog
(Total)
Funded
Unfunded/unreleased
Total
December 31, 2016
December 31, 2015
$
$
94,540,000
321,744,000
416,284,000
$
$
101,145,000
286,171,000
387,316,000
Approximately 77% of the total amount of our backlog at December 31, 2016 was attributable to government contracts. Our backlog attributable to government contracts at December
31, 2016 and 2015 was as follows:
Backlog
(Government)
Funded
Unfunded
Total
Our backlog attributable to commercial contracts at December 31, 2016 and 2015 was as follows:
Backlog
(Commercial)
Funded
Unfunded/unreleased
Total
December 31, 2016
December 31, 2015
92,189,000
229,543,000
321,732,000
$
$
95,048,000
181,826,000
276,874,000
December 31, 2016
December 31, 2015
2,351,000
92,201,000
94,552,000
$
$
6,097,000
104,345,000
110,442,000
$
$
$
$
Our unfunded backlog is primarily comprised of the long-term contracts that we received from Spirit and NGC during 2008, Honda and Bell during 2011 and Cessna, Sikorsky and
Embraer during 2012. These long-term contracts are expected to have yearly orders which will be funded in the future.
Approximately 66% of the funded backlog at December 31, 2016 is expected to be recognized as revenue during 2017.
Material and Parts
We subcontract production of substantially all parts incorporated into our products to third party manufacturers under firm fixed price orders. Our decision to purchase certain
components generally is based upon whether the components are available to meet required specifications at a cost and with a delivery schedule consistent with customer
requirements. From time to time, we are required to purchase custom made parts from sole suppliers and manufacturers in order to meet specific customer requirements.
We obtain our raw materials from several commercial sources. Although certain items are only available from limited sources of supply, we believe that the loss of any single supplier
would not have a material adverse effect on our business.
7
Competition
We face competition in our role as both a prime contractor to the U.S. Government and as a Tier 1 or Tier 2 subcontractor to military and commercial aircraft manufacturers. For
certain unrestricted contracts for the U.S. Government, we may compete against well-established prime contractors, including NGC, Lockheed and Boeing. All of these competitors
possess significantly larger infrastructures, greater resources and the capabilities to respond to much larger contracts. We believe that our competitive advantage lies in our ability to
offer large contractor capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior quality products. While larger
prime contractors compete for significant modification awards, they generally do not compete for awards in smaller modifications, spares and replacement parts, even for aircraft for
which they are the original manufacturer. In certain instances, the large prime contractors often subcontract much of the work they win to their Tier 1 suppliers so we also may act as
a subcontractor to some of these major prime contractors. Further, in some cases, these companies are not permitted to bid, for example when the U.S. Government designates a
contract as a Small Business Set-Aside. In these restricted contracts for the U.S. Government, CPI Aero typically competes against numerous small business competitors. We believe
we compete effectively against the smaller competitors because smaller competitors generally do not have the expertise we have in responding to requests for proposals for
government contracts, nor will they typically have the more than 35 years of past performance in conducting more than 2000 contracts for the U.S. Government.
We also compete at the Tier 1 and Tier 2 levels for work for major subcontracts with OEMs in both the military and commercial markets. We often compete against much larger Tier
1 suppliers, such as Triumph Group, Spirit AeroSystems, Kaman Aerospace, GKN Aerospace, Ducommun, LMI Aerospace, and Precision Castparts Corp. We believe that we can
compete effectively with these larger companies by delivering products with the same level of quality and performance at a better value for our customer.
Government Regulation
Environmental Regulation
We are subject to regulations administered by the U.S. Environmental Protection Agency, the U.S. Occupational Safety and Health Administration, various state agencies and county
and local authorities acting in cooperation with federal and state authorities. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to
protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous
chemicals and substances. The extensive regulatory framework imposes compliance burdens and risks on us. Governmental authorities have the power to enforce compliance with
these regulations and to obtain injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several liability on the present and former owners and
operators of facilities that release hazardous substances into the environment. The Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation,
transportation, treatment, storage and disposal of hazardous waste. In New York State, the handling, storage and disposal of hazardous substances are governed by the Environmental
Conservation Law, which contains the New York counterparts of CERCLA and RCRA. In addition, the Occupational Safety and Health Act, which requires employers to provide a
place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to
employees regarding the presence of hazardous chemicals and to train employees in the use of such substances.
Our operations require the use of a limited amount of chemicals and other materials for painting and cleaning, including solvents and thinners, which are classified under applicable
laws as hazardous chemicals and substances. We have obtained a permit from the Town of Islip, New York, Building Division in order to maintain a paint booth containing flammable
liquids.
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards
and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease
production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our
contracts, which could have a material adverse effect on our operations.
8
Government Contract Compliance
Our government contracts and sub-contracts are subject to the procurement rules and regulations of the U.S. Government. Many of the contract terms are dictated by these rules and
regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”), which provide guidance on the types of costs that are allowable in
establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to charitable contributions, advertising, interest expense, and
public relations are unallowable, and therefore not recoverable through sales. During and after the fulfillment of a government contract, we may be audited in respect of the direct and
allocated indirect costs attributed thereto. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. Government inquiries and
investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government
contracts and fulfill existing contracts. We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
The U.S. Government generally has the ability to terminate our contracts, in whole or in part, without prior notice, for convenience or for default based on performance. If a U.S.
Government contract were to be terminated for convenience, we generally would be protected by provisions covering reimbursement for costs incurred on the contract and profit on
those costs, but not the anticipated profit that would have been earned had the contract been completed. In the unusual circumstance where a U.S. Government contract does not have
such termination protection, we attempt to mitigate the termination risk through other means. Termination resulting from our default may expose us to liability and could have a
material adverse effect on our ability to compete for other contracts. The U.S. Government also has the ability to stop work under a contract for a limited period of time for its
convenience. In the event of a stop work order, we generally would be protected by provisions covering reimbursement for costs incurred on the contract to date and for costs
associated with the temporary stoppage of work on the contract. However, such temporary stoppages and delays could introduce inefficiencies for which we may not be able to
negotiate full recovery from the U.S. Government, and could ultimately result in termination for convenience or reduced future orders on certain contracts. Additionally, we may be
required to continue to perform for some period of time on certain of our U.S. Government contracts, even if the U.S. Government is unable to make timely payments.
Insurance
We maintain a $2 million general liability insurance policy, a $100 million products liability insurance policy, and a $5 million umbrella liability insurance policy. Additionally, we
maintain a $10 million director and officers’ insurance policy. We believe this coverage is adequate for the types of products presently marketed because of the strict inspection
standards imposed on us by our customers before they take possession of our products. Additionally, the FAR generally provide that we will not be held liable for any loss of or
damage to property of the U.S. Government that occurs after the U.S. Government accepts delivery of our products and that results from any defects or deficiencies in our products
unless the liability results from willful misconduct or lack of good faith on the part of our managerial personnel.
Proprietary Information
None of our current assembly processes or products is protected by patents. We rely on proprietary know-how and information and employ various methods to protect the processes,
concepts, ideas and documentation associated with our products. These methods, however, may not afford complete protection and there can be no assurance that others will not
independently develop such processes, concepts, ideas and documentation.
CPI Aero® is a registered trademark of the Company.
Employees
As of March 1, 2017, we had 259 full-time employees. We employ temporary personnel with specialized disciplines on an as-needed basis. None of our employees are members of a
union. We believe that our relations with our employees are good.
9
Item 1A. RISK FACTORS
In addition to other risks and uncertainties described in this Annual Report on Form 10-K, the following material risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results
could differ materially from those projected in any forward-looking statements.
Risks related to our business
We depend on government contracts for a significant portion of our revenues.
We are a supplier, either directly or as a subcontractor, to the U.S. Government and its agencies. Government subcontracts accounted for 46% of our revenue in 2016, 58% of our
revenue in 2015 and 5% of our revenue in 2014. In addition, 4% percent of revenue for 2016, 1% of revenue for 2015 and 2% of revenue for 2014 was derived from prime
government contract sales. We depend on government contracts for a significant portion of our business. If we are suspended or barred from contracting with the U.S. Government, if
our reputation or relationship with individual federal agencies were impaired, or if the U.S. Government otherwise ceased doing business with us or significantly decreased the amount
of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected.
We face risks relating to government contracts.
The funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For many programs, U.S. Congress appropriates funds on a
fiscal year basis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only
as Congress makes further appropriations. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced
in budgets approved by Congress or be included in the scope of separate supplemental appropriations. In the event that appropriations for any of our programs becomes unavailable,
or is reduced or delayed, our contract or subcontract under such program may be terminated or adjusted by the U.S. Government, which could have a material adverse effect on our
future sales under such program, and on our financial position, results of operations and cash flows.
We also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature of war-related activity on existing, follow-on or
replacement programs. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs in which we do
participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, the U.S. Government generally has the ability to terminate contracts, in whole or in part, without prior notice, for convenience or for default based on performance. In the
event of termination for the U.S. Government’s convenience, contractors are generally protected by provisions covering reimbursement for costs incurred on the contracts and profit
on those costs but not the anticipated profit that would have been earned had the contract been completed. Termination by the U.S. Government of a contract for convenience could
also result in the cancellation of future work on that program. Termination by the U.S. Government of a contract due to our default could require us to pay for re-procurement costs in
excess of the original contract price, net of the value of work accepted from the original contract. Termination of a contract due to our default may expose us to liability and could
have a material adverse effect on our ability to compete for contracts.
We have risks associated with competing in the bidding process for contracts.
We obtain many of our contracts through a competitive bidding process. In the bidding process, we face the following risks:
● we must bid on programs in advance of their completion, which may result in unforeseen technological difficulties or cost overruns;
● we must devote substantial time and effort to prepare bids and proposals for competitively awarded contracts that may not be awarded to us; and
10
● awarded contracts may not generate sales sufficient to result in profitability.
We are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the event of non-compliance.
We are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these regulatory bodies impose
restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of
the storage, use and release of certain hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In
addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in our facilities without regard to whether we
knew of, or caused, the release of such substances. Furthermore, we are required to provide a place of employment that is free from recognized and preventable hazards that are likely
to cause serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our
operations require the use of a limited amount of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and
substances. If we are found not to be in compliance with any of these rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our
business practice, any of which could result in substantial costs that would adversely impact our business operations and financial condition.
We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.
We are subject to regulation by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft
and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with
FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material
adverse effect on our operations and financial condition.
If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance and our ability to obtain future business and our profitability
could be materially and adversely impacted.
Most of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services that we must provide to our customers. There is a risk that
we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the
subcontract, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of personnel of a subcontractor. A failure by one or more of our
subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our
obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer eliminating our ability to progress bill or terminating our contract for default. A
prohibition on progress billing may have an adverse effect upon our cash flow and profitability and a default termination could expose us to liability and have a material adverse effect
on our ability to compete for future contracts and orders. In addition, a delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet
our customers’ needs and may have a material adverse effect upon our profitability.
Due to fixed contract pricing, increasing contract costs exposes us to reduced profitability and the potential loss of future business.
Operating margin is adversely affected when contract costs that cannot be billed to customers are incurred. This cost growth can occur if estimates to complete a contract increase due
to technical challenges or if initial estimates used for calculating the contract price were incorrect. The cost estimation process requires significant judgment and expertise. Reasons
for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials,
the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to
complete. A significant increase in cost estimates on one or more programs could have a material adverse effect on our financial position or results of operations.
11
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial position.
We primarily recognize revenue from our contracts over the contractual period under the percentage-of-completion (POC) method of accounting. Under the POC method of
accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the
contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded on our balance sheet as an asset captioned “Costs and estimated
earnings in excess of billings on uncompleted contracts.” Contracts where billings to date have exceeded recognized revenues are recorded on our balance sheet as a liability captioned
“Billings in excess of costs and estimated earnings on uncompleted contracts.” Changes to the original estimates may be required during the life of the contract. Estimates are
reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in the financial statements in the period the change becomes known.
The use of the POC method of accounting involves considerable use of estimates in determining revenues and profits and in assigning the amounts to accounting periods. As a result,
there can be a significant disparity between earnings (both for accounting and taxes) as reported and actual cash received by us during any reporting period. We continually evaluate
all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, there is no assurance that our estimates
will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we
may have a shortfall in our cash flow and we may need to borrow money to pay for costs until the reported earnings materialize to actual cash receipts.
If the contracts associated with our backlog were terminated, our financial condition would be adversely affected.
The maximum contract value specified under each contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract. Because we may not
receive the full amount we expect under a contract, we may not accurately estimate our backlog because the earnings of revenues on programs included in backlog may never occur or
may change. Cancellations of pending contracts or terminations or reductions of contracts in progress could have a material adverse effect on our business, prospects, financial
condition or results of operations. As of December 31, 2016, our backlog was approximately $416 million, of which 23% was funded and 77% was unfunded.
We may be unable to attract and retain personnel who are key to our operations.
Our success, among other things, is dependent on our ability to attract and retain highly qualified senior officers and engineers. Competition for key personnel is intense. Our ability to
attract and retain senior officers and experienced, top rate engineers is dependent on a number of factors, including prevailing market conditions and compensation packages offered
by companies competing for the same talent. The inability to hire and retain these persons may adversely affect our production operations and other aspects of our business.
We are subject to the cyclical nature of the commercial aerospace industry, and any future downturn in the commercial aerospace industry or general economic conditions
could adversely impact the demand for our products.
Our business may be affected by certain characteristics and trends of the commercial aerospace industry or general economic conditions that affect our customers, such as fluctuations
in the aerospace industry’s business cycle, varying fuel and labor costs, intense price competition and regulatory scrutiny, certain trends, including a possible decrease in aviation
activity and a decrease in outsourcing by aircraft manufacturers or the failure of projected market growth to materialize or continue. In the event that these characteristics and trends
adversely affect customers in the commercial aerospace industry, they may reduce the overall demand for our products.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and
potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common stock.
Our management determined that as of December 31, 2015, our internal controls over financial reporting were not effective based on the criteria created by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) set forth in Internal Control – Integrated Framework (2013).
12
Because of the material weakness identified in our internal controls over financial reporting, our management was unable to report favorably as to the effectiveness of our internal
control over financial reporting and/or our disclosure controls and procedures, and we therefore implemented measures in 2016 and remediated the material weakness. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or detected on a timely basis. If we identify material weaknesses, such remedial measures could be expensive
and time consuming and could potentially cause investors to lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our
stock price and potentially subject us to litigation. For more information see, “Management’s Report on Internal Control over Financial Reporting”
We incur risk associated with new programs
New programs with new technologies typically carry risks associated with design changes, development of new production tools, increased capital and funding commitments, ability
to meet customer specifications, delivery schedules and unique contractual requirements, supplier performance, ability of the customer to meet its contractual obligations to us, and
our ability to accurately estimate costs associated with such programs. In addition, any new program may not generate sufficient demand or may experience technological problems or
significant delays in the regulatory or other certification or manufacturing and delivery schedule. If we were unable to perform our obligations under new programs to the customer’s
satisfaction, if we were unable to manufacture products at our estimated costs, or if a new program in which we had made a significant investment was terminated or experienced
weak demand, delays or technological problems, then our business, financial condition and results of operations could be materially adversely affected. This risk includes the potential
for default, quality problems, or inability to meet specifications, as well as our inability to negotiate final pricing for program changes, and could result in low margin or forward loss
contracts, and the risk of having to write-off costs and estimated earnings in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the
program. In addition, beginning new work on existing programs also carries risk associated with the transfer of technology, knowledge and tooling.
In order to perform on new programs we may be required to expend up-front costs which may not have been negotiated in our selling price. Additionally, we may have made margin
assumptions related to those costs, that in the case of significant program delays and/or program cancellations, or if we are not successful in negotiating favorable margin on scope
changes, could cause us to bear impairment charges which may be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material
adverse impact on our liquidity.
We are presently classified as a small business and the loss of our small business status may adversely affect our ability to compete for government contracts.
We are presently classified as a small business under certain of the codes under the North American Industry Classification Systems (“NAICS”) industry and product specific codes
which are regulated in the United States by the Small Business Administration. We are not considered a small business under all NAICS codes. While we do not presently derive a
substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts which are open
to non-small business entities. As the NAICS codes are periodically revised, it is possible that we may lose our status as a small business. The loss of small business status would
adversely impact our eligibility for special small business programs and limit our ability to partner with other business entities which are seeking to team with small business entities
as may be required under a specific contract.
Cyber security attacks, internal system or service failures may adversely impact our business and operations.
Any system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately mitigated, could disrupt our
business and impair our ability to effectively provide products and related services to our customers and could have a material adverse effect on our business. We could also be subject
to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters,
power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive,
confidential or otherwise protected information related to us or our products, customers or suppliers, or other acts that could lead to disruptions in our business. Any such failures
could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs or subject us to claims and damage our reputation. In addition, the failure or
disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures
and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Our property and business interruption
insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business,
results of operations and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures and controls could adversely affect our results of
operations and financial condition.
13
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
CPI Aero’s executive offices and production facilities are situated in an approximately 171,000 square foot building located at 91 Heartland Blvd., Edgewood, New York 11717. CPI
Aero occupies this facility under a ten-year lease that commenced in June 2011. The current monthly base rent is $136,615, including real estate taxes.
Item 3.
LEGAL PROCEEDINGS
None.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
14
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares are listed on the NYSE MKT under the symbol CVU. The following table sets forth for 2016 and 2015, the high and low sales prices of our common shares for
the periods indicated, as reported by the NYSE MKT.
Period
2015
Quarter Ended March 31, 2015
Quarter Ended June 30, 2015
Quarter Ended September 30, 2015
Quarter Ended December 31, 2015
2016
Quarter Ended March 31, 2016
Quarter Ended June 30, 2016
Quarter Ended September 30, 2016
Quarter Ended December 31, 2016
High
$12.35
$12.24
$10.15
$ 9.84
$ 9.66
$ 8.00
$ 7.29
$ 9.75
Low
$10.46
$ 9.91
$ 8.50
$ 8.40
$ 6.93
$ 5.50
$ 6.31
$ 6.48
On March 1, 2017, the closing sale price for our common shares on the NYSE MKT was $7.65. On March 1, 2017, there were 205 holders of record of our common shares and, we
believe, over 2,200 beneficial owners of our common shares.
Dividend Policy
To date, we have not paid any dividends on our common shares. Any payment of dividends in the future is within the discretion of our board of directors and will depend on our
earnings, if any, our capital requirements and financial condition and other relevant factors. Our board of directors does not intend to declare any cash or other dividends in the
foreseeable future, but intends instead to retain earnings, if any, for use in our business operations.
Recent Sales of Unregistered Securities, Use of Proceeds from Registered Securities
There have been no sales of unregistered sales of our equity securities for the three months ended December 31, 2016. The have been no repurchases of our outstanding common
stock during the three months ended December 31, 2016.
15
Equity Compensation Plan Information
The following table sets forth certain information at December 31, 2016 with respect to our equity compensation plans that provide for the issuance of options, warrants or rights to
purchase our securities.
Plan Category
Equity Compensation Plans Approved by Security
Holders
ITEM 6. SELECTED FINANCIAL DATA
Number of Securities to be
Issued upon Exercise of
Outstanding Options, Warrants
and Rights
Weighted-Average Exercise Price of
Outstanding Options, Warrants and
Rights
Number of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plans (excluding securities
reflected in the first column)
149,466
$
10.43
580,514
The following table sets forth our financial data as of the dates and for the periods indicated. The data has been derived from our audited financial statements. The selected financial
data should be read in conjunction with our audited financial statements and MDA. Our results of operations for 2016 and 2014 were materially affected by the change in estimate
described in MDA.
Statement of Operations Data:
Revenue
Cost of sales
Gross profit (loss)
2016
Years Ended December 31,
2014
2015
2013
2012
$ 81,329,858
$ 100,202,557
$ 39,687,010
$ 82,988,522
$ 89,272,582
77,010,940
83,600,854
69,411,709
64,555,275
65,039,969
4,318,918
16,601,703
(29,724,699)
18,433,247
24,232,613
Selling, general and administrative expenses
8,614,190
7,636,148
7,308,220
6,704,524
7,322,630
Income (loss) from operations
Other income (expense):
Interest/other income (expense)
Interest expense
Total other income (expense), net
Income (loss) before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net income (loss)
Income (loss) per common share – basic
Income (loss) per common share – diluted
(4,295,272)
8,965,555
(37,032,919)
11,728,723
16,909,983
(22,659)
(1,356,645)
(1,379,304)
(5,674,576)
(2,066,000)
($ 3,608,576)
($
($
0.42)
0.42)
$
$
$
(40,433)
(918,129)
(958,562)
145,072
(794,428)
(649,356)
78,957
(653,786)
(574,829)
31,520
(416,373)
(384,853)
8,006,993
2,991,000
(37,682,275)
(12,473,000)
11,153,894
3,417,000
16,525,130
5,514,000
5,015,993
($ 25,209,275)
$ 7,736,894
$ 11,011,130
0.59
0.58
($
($
2.98)
2.98)
$
$
0.92
0.91
$
$
1.43
1.40
Basic weighted average number of common shares outstanding
8,655,848
8,522,817
8,465,937
8,389,048
7,721,304
Diluted weighted average number of common shares outstanding
8,655,848
8,579,986
8,465,937
8,470,578
7,865,090
16
Balance Sheet Data:
Cash
2016
2015
At December 31,
2014
2013
2012
$
1,039,586
$
1,002,023
$
1,504,907
$
2,166,103
$
2,709,803
Costs and estimated earnings in excess of billings on uncompleted contracts
99,578,526
102,622,387
79,054,139
112,597,136
108,909,844
Total current assets
Total assets
Total current liabilities
Working capital
Short-term debt
Long-term debt
Shareholders’ equity
111,288,206
112,355,720
95,992,457
120,181,761
119,354,056
117,791,895
116,712,536
103,404,723
124,272,594
124,883,516
40,692,721
45,062,803
36,707,815
31,741,678
39,645,331
70,595,485
67,292,917
59,284,642
88,440,083
79,708,725
23,780,609
24,711,491
26,121,713
22,370,349
24,550,564
8,860,725
483,961
1,289,843
2,198,187
3,209,873
67,605,706
70,532,109
64,813,156
88,951,519
80,594,199
Total liabilities and shareholders’ equity
117,791,895
116,712,536
103,404,723
124,272,594
124,883,516
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Annual Report on Form 10-K and in future filings by us with the Securities and Exchange Commission, the words or phrases “will likely result,” “management
expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.
Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
The risks are included in “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual
Report on Form 10-K. We have no obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such statements.
You should read the financial information set forth below in conjunction with our financial statements and notes thereto.
Business Operations
We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. We have also recently
expanded our presence in the aerosystems segment of the market, with our production of various reconnaissance pod structures and fuel panel systems. Within the global aerostructure
and aerosystem supply chain, we are either a Tier 1 supplier to aircraft OEMs or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S.
Department of Defense, primarily the U.S. Air Force. In conjunction with our assembly operations, we provide engineering, program management, supply chain management and
kitting, and MRO services.
17
Critical Accounting Policies
Revenue Recognition
We primarily recognize revenue from our contracts over the contractual period under the percentage-of-completion (“POC”) method of accounting. Under the POC method of
accounting, revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the
contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned “Costs and estimated earnings in excess of
billings on uncompleted contracts.” Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned “Billings in excess of costs and estimated
earnings on uncompleted contracts.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in
the estimated gross margin percentage for a contract is reflected in the financial statements in the period the change becomes known. The use of the POC method of accounting
involves considerable use of estimates in determining revenues and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between
earnings (both for accounting and taxes) as reported and actual cash received by us during any reporting period. We continually evaluate all of the issues related to the assumptions,
risks and uncertainties inherent with the application of the POC method of accounting; however, we cannot assure you that our estimates will be accurate. If our estimates are not
accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and
we may need to borrow money to pay for costs until the reported earnings materialize to actual cash receipts.
When adjustments are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates
of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
18
Results of Operations
Non-GAAP Financial Measures
We prepare and publicly release audited financial statements prepared in accordance with U.S. GAAP. We also are disclose and discuss certain non-GAAP financial measures in our
public releases. The non-GAAP financial measures that we disclose are adjusted earnings (arrived at by eliminating the Company’s A-10 Program with Boeing from reported results).
Adjusted earnings is a key metric that we have used in evaluating our financial performance. Adjusted earnings is considered a non-GAAP financial measure as defined by Regulation
G promulgated by the SEC under the Securities Act of 1933, as amended. We consider adjusted earnings important in evaluating our financial performance on a consistent basis
across various periods. Due to the significance of the non-cash and non-recurring change in estimate recognized in the year ended December 31, 2016, adjusted earnings enables the
Company’s Board of Directors and management to monitor and evaluate the business on a consistent basis. We use adjusted earnings as a measure, among others, to analyze and
evaluate financial and strategic planning decisions regarding future operating decisions and investments. The presentation of adjusted earnings should not be construed as an inference
that the Company’s future results will be unaffected by unusual or non-recurring items or by non-cash items, such as changes in estimates. This non-GAAP measure should be
considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.
In June 2014, the Company concluded that the long term future of the A-10 was uncertain when the U.S. Department of Defense released its 2015 Budget Request that called for the
retirement of the entire A-10 fleet. In addition, the Company estimated that the A-10 program would be terminated prior to the completion of the Company’s orders, which was
through ship set 173 instead of the expected 242 ship sets that the contract initially permitted. At that time the Company recorded a change in estimate which reduced the estimated
revenue on the program to about 41% of the original estimate. The adjustment aggregated approximately $47.7 million.
From June 2014 through December 2015 the Company revised estimates, based on the best available information each quarter, to properly account for the program. The Company’s
estimate in March 2015 assumed that the program would be canceled at approximately 135 ship sets. In addition to revenue earned based on parts shipped, the Company would be
entitled to compensation upon early termination of the program (“Termination Liability”) for certain costs incurred. The amount of Termination Liability varies based on exactly when
the program is canceled and the amount of costs incurred through the date of termination. In June and September 2015, the Company estimated costs based on the best information
available at each period and made adjustments as needed, including deferring certain costs based on the Termination Liability.
During the three months ended March 31, 2016, and prior to the filing of the Company’s Form 10-K for the year ended December 31, 2015, the Company had information that the
USAF was intending to increase the number of ship sets on order for the A-10. Because of the expectation that the USAF would increase its orders, the Company projected that its
current order of A-l0 parts would not be cancelled before ship set 173. An increase in the number of ship sets on order would improve the Company’s estimated gross margin on the
overall program. In the December 31, 2015 financial statements the Company did not alter gross margin of the program for this potential order, as the Company couldn’t determine if
the realization of the new order was probable and that the improved margin would be realized.
In April 2016, the Company became aware that the USAF had reevaluated its position and as such had deferred any decision regarding increasing the orders on the A-10 program.
These changes in position by the USAF were supported by communications from Boeing, the Company’s customer.
Based on the above facts, the Company believes that, it is not probable that there will be any future orders on the A-10 beyond the 173 currently on order. As a result of the
information that management became aware of in April 2016, for the quarter ended March 31, 2016 the Company estimated that the A-10 program would run through the conclusion
of its current purchase order with Boeing at ship set number 173. There is no justification for the deferral of any expenses incurred or expected to be incurred related to the contract
under POC or any authoritative guidance in GAAP, nor is there any justification of increasing estimated revenue on the program as the recovery of such amounts is not deemed
probable. The change in estimate resulted in a reduction of revenue of approximately $8.9 million in the quarter ended March 31, 2016.
Year Ended December 31, 2016 as Compared to the Year Ended December 31, 2015
Revenue. Revenue for the year ended December 31, 2016 was $81,329,858 compared to $100,202,557 for the same period last year, representing a decrease of $18,872,699.
19
Overall, revenue generated from prime government contracts for the year ended December 31, 2016 was $3,493,343 compared to $892,752 for the year ended December 31, 2015, an
increase of $2,600,591. This increase is a result of our deliveries on our F-16 contract, that began in 2016.
Revenue generated from government subcontracts for the year ended December 31, 2016 was $37,355,447 compared to $56,982,785 for the year ended December 31, 2015, a
decrease of $19,627,338. This decrease is the result of many factors including: a $13.4 million decrease in revenue on the Company’s A-10 program with Boeing because of a change
in estimate on the program, as previously described, a $5.6 million decrease in revenue from the Company’s E-2D program with NGC, due to the timing of work related to the
multiyear order received in 2014, a $1.0 million decrease in revenue from the Company’s gunner window program with Sikorsky, due to lower orders and a $1.3 million decrease in
revenue from the Company’s fuel panel program with Sikorsky, due to lower orders. These decreases were offset by a $4.8 million increase in the Company’s E-2D wet outer wing
program, which had only nominal activity in 2015 and was in production in 2016.
Revenue generated from commercial contracts was $40,481,068 for the year ended December 31, 2016 compared to $42,327,020 for the year ended December 31, 2015, a decrease of
$1,845,952 or 4.4%. This decrease is predominately the result of a $3.9 million decrease in the Company’s Cessna program, as we completed production on our outstanding order, a
$1.3 million decrease in the Company’s Embraer program, as Embraer cut back on delivery requirements in the fourth quarter of 2016, a $800,000 decrease in revenue on the
Company’s Honda program, as we near completion of the flap and vane portion of this program and a $2.8 million decrease in revenue from various Sikorsky commercial programs,
the result of lower demand. These decreases were offset by a $6.5 million increase in revenue from the Company’s G650 program.
During the year ended December 31, 2016, we received approximately $36.5 million of new contract awards, which included $6.3 million of government prime contract awards,
approximately $10.4 million of government subcontract awards and approximately $19.8 million of commercial contract awards, compared to $61.6 million of new contract awards in
2015, which included $13.3 million in government prime contract awards, $14.1 million of government subcontract awards and $34.2 million of commercial contract awards.
Cost of sales
Cost of sales for the years ended December 31, 2016 and 2015 was $77,010,940 and $83,600,854, respectively, a decrease of $6,589,914 or 7.9%.
The components of cost of sales were as follows:
Procurement
Labor
Factory overhead
Other contract costs
Cost of Sales
Year ended
December 31,
2016
December 31,
2015
$
$
$
52,504,318
8,112,981
15,750,146
643,495
57,473,129
9,188,417
16,431,764
507,544
77,010,940
$
83,600,854
Procurement for the year ended December 31, 2016 was $52,504,318 compared to $57,473,129, a decrease of $4,968,811 or 8.6%. The decrease in procurement was the result of
lower procurement on the Company’s E-2D program, as we did multiyear volume discounted buys in 2015.
Labor costs for the year ended December 31, 2016 were $8,112,981 compared to $9,188,417, a decrease of $1,075,436 or 11.7%. This decrease is predominately due to decreases in
labor on our A-10 program, as we near completion on some of the assemblies from that program, as well as a decrease in labor on the Company’s Cessna Citation program, as we
completed the assemblies on order on that program.
Factory overhead for the year ended December 31, 2016 was $15,750,146 compared to $16,431,764, a decrease of $681,618 or 4.2%. This decrease is the result of a decrease in
employee benefits, factory supplies and indirect salaries, as shop production has declined.
20
Gross profit. Gross profit for the year ended December 31, 2016 was $4,318,918 compared to $16,601,703 for the year ended December 31, 2015, a decrease of $12,282,785. Gross
profit percentage (“gross margin”) for the year ended December 31, 2016 was 5.3% compared to 16.6% for the same period last year, predominately the result of the change in
estimate on the Company’s A-10 program.
Favorable/Unfavorable Adjustments to Gross Profit
During the years ended December 31, 2016, 2015 and 2014, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in
decreases in total gross profit as follows:
Favorable adjustments
Unfavorable adjustments
Net adjustments
2016
Years Ended December 31,
2015
2014
$
$
269,000
(1,936,000)
(1,667,000)
$
$
1,067,000
(2,942,000)
(1,875,000)
$
$
700,000
(43,268,000)
(42,568,000)
During the year ended December 31, 2016 we had one contract which had an approximately $270,000 unfavorable adjustment caused by excess labor and procurement costs due to
difficulty in the manufacturing process. In addition, we had an approximate $354,000 unfavorable adjustment on one contract that was canceled by the government. Also, we had 4
contracts that each had between $140,000 and $245,000 (cumulatively $890,000) of unfavorable adjustments caused by excess labor costs incurred. No other individual favorable or
unfavorable changes in estimates for the year ended December 31, 2016 were material.
For the year ended December 31, 2015, we had one contract on which we have experienced technical issues, which resulted in excess engineering time and additional procurement
costs that caused an unfavorable adjustment of approximately $1,434,000. Additionally there was one contract that was running over the budgeted labor, which caused an unfavorable
adjustment of approximately $758,000. No other individual favorable or unfavorable changes in estimates for the year ended December 31, 2015 were material. Additionally, on one
contract we had significant engineering changes, which resulted in excess labor and procurement costs that caused an unfavorable adjustment of approximately $3,000,000.
For the year ended December 31, 2014, approximately $39,915,000 of the unfavorable adjustment was the result of the changes in estimates on the Company’s A-10 WRP described
earlier. In addition, the Company has one contract that has had shipping dates extended a number of times. As a result, labor and procurement costs have changed since the initial
contract estimate, which resulted in an unfavorable adjustment of approximately $693,000. The Company also has one contract on which we have experienced technical issues, which
resulted in excess engineering time that caused an unfavorable adjustment of approximately $599,000. Also, the Company has one multi-year contract that has experienced
procurement price increases that has caused an unfavorable adjustment of approximately $555,000. No other individual favorable or unfavorable changes in estimates for the year
ended December 31, 2014 were material.
Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2016 were $8,614,190 compared to $7,636,148 for the
year ended December 31, 2015, an increase of $978,042, or 12.8%. This increase was primarily due to an approximately a $460,000 increase in accounting and legal fees related
mostly to the extended 2015 audit process and an executive compensation study, a $411,000 reserve for disputed account receivables with various customers and an increase of
$355,000 in salaries.
Interest expense. Interest expense for the year ended December 31, 2016 was $1,356,646, compared to $918,129 for 2015, an increase of $438,517 or 47.8%. The increase in interest
expense is the result of an increase in the average amount of outstanding debt during 2016 as compared to 2015.
Income (loss) from operations. We had loss from operations for the year ended December 31, 2016 of $4,295,272 compared to income from operations of $8,965,555 for the year
ended December 31, 2015.
21
Provision for (benefit from) income taxes. Our historic effective tax rate has been between 30%-32% of taxable income. The rate has been below the statutory federal income tax rate
of 34% because of our ability to utilize the domestic production activity deduction, available to companies that do manufacturing within the United States. Beginning in 2015, we are
providing for state income taxes in states where, although we don’t have any property or full time employees, the historic method for the allocation of state income taxes, we do have
sales and have employees present on at least a part-time basis. As such the effective tax rate for both 2016 and 2015 is approximately 37%.
22
Adjusted Earnings
On an as adjusted basis, which excludes the impact of the A-10 program on the Company’s financial performance for all periods presented, revenue for the year ended December 31,
2016 was $81.8 million compared with $86.8 million for the year ended December 31, 2015. Gross profit was $19.6 million for the year ended December 31, 2016 compared to $19.6
million year ended December 31, 2015. Net income for the year ended December 31, 2016 was $6.1 million or $0.71 per diluted share compared with $6.9 million or $0.81 per diluted
share in the year ended December 31, 2015.
Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Income (loss) from operations
Other expense, net
Income (loss) before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net income (loss)
Diluted earnings (loss) per share
For the Year ended December 31, 2016
GAAP
as Reported
Adjustments
Adjusted
Earnings
$
81,329,858
$
457,905
$
81,787,763
77,010,940
(14,826,245)
62,184,695
4,318,918
8,614,190
15,284,150
19,603,068
—
8,614,190
(4,295,272)
15,284,150
10,988,878
(1,379,304)
—
(1,379,304)
(5,674,576)
15,284,150
(2,066,000)
5,573,000
3,608,576)
$
9,711,150
0.42)
9,609,574
3,507,000
6,102,574
0.71
$
$
($
($
23
Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Diluted earnings per share
For the Year Ended December 31, 2015
GAAP
as Reported
Adjustments
Adjusted
Earnings
$
100,202,557
($
13,393,109)
$
86,809,448
83,600,854
(16,400,878)
67,199,976
16,601,703
3,007,769
19,609,472
7,636,148
8,965,555
(958,562)
8,006,993
2,991,000
7,636,148
3,007,769
11,973,324
3,007,769
1,084,000
$
$
5,015,993
$
1,923,769
0.58
$
$
(958,562)
11,014,762
4,075,000
6,939,762
0.81
Year Ended December 31, 2015 as Compared to the Year Ended December 31, 2014
Revenue. Revenue for the year ended December 31, 2015 was $100,202,557 compared to $39,687,010 for the same period last year, representing an increase of $60,515,547.
Overall, revenue generated from prime government contracts for the year ended December 31, 2015 was $892,752 compared to $778,175 for the year ended December 31, 2014, an
increase of $114,577 or 14.7%.
Revenue generated from government subcontracts for the year ended December 31, 2015 was $56,982,785 compared to $2,059,029 for the year ended December 31, 2014, an increase
of $54,923,756. Because of the change in estimate on our Wing Replacement Program for the U.S. Air Force’s A-10 Thunderbolt aircraft (“WRP”) described below, our 2014 revenue
from government subcontracts was unusually low, which resulted in the increase in revenue for 2015 as compared to 2014.
Revenue generated from commercial contracts was $42,327,020 for the year ended December 31, 2015 compared to $36,849,806 for the year ended December 31, 2014, an increase
of $5,477,214 or 14.9%. This increase is the result of an approximate $2.8 million increase in revenue on our Embraer Phenom 300 program and an approximate $5.1 million increase
in our Honda program. These programs have progressed out of the low rate early stage into a more normal production phase. These increases were offset by small decreases in our
G650 program and our Sikorsky S-92 programs.
During the year ended December 31, 2015, we received approximately $61.6 million of new contract awards, which included $13.3 million of government prime contract awards,
approximately $14.1 million of government subcontract awards and approximately $34.2 million of commercial contract awards, compared to $92.9 million of new contract awards in
2014, which included $0.5 million in government prime contract awards, $67.1 million of government subcontract awards and $25.3 million of commercial contract awards. In
September of last year we received a $65 million multi-year contract modification adding four additional years’ worth of E-2/C-2 wing kits. This amount was entirely included in new
contract awards for the 2014 period. This means we will no longer receive annual purchase orders for our largest program as has been the case historically, making the comparison to
last year less informative.
24
Cost of sales
Cost of sales for the years ended December 31, 2015 and 2014 was $83,600,854 and $69,411,709, respectively, an increase of $14,189,145 or 20.4%.
The components of the cost of sales were as follows:
Procurement
Labor
Factory overhead
Other contract costs
Cost of Sales
Year ended
December 31, 2015
December 31, 2014
$
$
$
57,473,129
9,188,417
16,431,764
507,544
45,106,460
8,558,125
15,350,942
396,182
83,600,854
$
69,411,709
Procurement for the year ended December 31, 2015 was $57,473,129 compared to $45,106,460, an increase of $12,366,669 or 27.4%. The increase in procurement was the result of
increased procurement on the Company’s E-2D program, as we ramp up to support our recently won multi-year contract.
Labor costs for the year ended December 31, 2015 were $9,188,417 compared to $8,558,125, an increase of $630,292 or 7.4%. This increase is due to more direct touch employees
needed to support increased delivery volume in 2015 compared to 2014, specifically on our Embraer and Honda programs.
Factory overhead for the year ended December 31, 2015 was $16,431,764 compared to $15,350,942, an increase of $1,080,822 or 7.0%. This increase is the result of an increase of
approximately $1,002,645 for employee benefits, predominantly increasing insurance rates, offset by decreases in indirect labor of $337,322 as we continue to improve the efficiency
of our workforce.
Gross profit/loss. Gross profit/loss for the year ended December 31, 2015 was a profit of $16,601,703 compared to a loss of $29,724,699 for the year ended December 31, 2014, an
increase of $46,326,402. Gross profit/loss percentage (“gross margin”) for the year ended December 31, 2015 was 16.6% compared to (74.9%) for the same period last year. The
swing in gross margin from a profit to a loss is the result of the change in estimate on the A-10 program described above.
Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2015 were $7,636,148 compared to $7,308,220 for the
year ended December 31, 2014, an increase of $327,928, or 4.5%. This increase was primarily due to an approximately a $70,000 increase in accrued bonuses, the result of officers
not earning a bonus in 2014 because of our net loss, a $90,000 increase in Board of Directors’ fees, which was the result of having 6 outside directors on our board of directors for all
of 2015, an $88,000 increase in marketing and advertising expenses and a $78,000 increase in computer expenses, resulting from increased computer licensing costs associated with
our larger staff.
Interest expense. Interest expense for the year ended December 31, 2015 was $918,129, compared to $794,428 for 2014, an increase of $123,701 or 15.6%. The increase in interest
expense is the result of an increase in the average amount of outstanding debt during 2015 as compared to 2014.
Income (loss) from operations. We had income from operations for the year ended December 31, 2015 of $8,965,555 compared to a loss from operations of $37,032,919 for the year
ended December 31, 2014 resulting predominantly from the A-10 change in estimate.
Provision for (benefit from) income taxes. Our historic effective tax rate has been between 30%-32% of taxable income. The rate has been below the statutory federal income tax rate
of 34% because of our ability to utilize the domestic production activity deduction, available to companies that do manufacturing within the United States. Beginning in 2015, we are
providing for state income taxes in states where, although we don’t have any property or full time employees, the historic method for the allocation of state income taxes, we do have
sales and have employees present on at least a part time basis. As such the effective tax rate for 2015 is approximately 37%. We expect that future tax rates will approximate the 2015
effective tax rate.
25
Business Outlook
The statements in the “Business Outlook” section and other forward-looking statements of this Annual Report on Form 10-K are subject to revision during the course of the year in
our quarterly earnings releases and SEC filings and at other times.
Liquidity and Capital Resources
General. At December 31, 2016, we had working capital of $70,595,485 compared to $67,292,917 at December 31, 2015, an increase of $3,302,568, or 4.9%.
Cash Flow. A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments.
Costs for which we are not able to bill on a progress basis are components of CEE on our balance sheet and represent the aggregate costs and related earnings for uncompleted
contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract
terms.
Because the POC method of accounting requires us to use estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods, there can be a
significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that
we may have a shortfall in our cash flow and may need to borrow money until the reported earnings materialize into actual cash receipts.
In order to perform on new programs, we may be required to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant
program delays and/or program cancellations, we could be required to bear impairment charges, which may be material for costs that are not recoverable. Such charges and the loss of
up-front costs could have a material impact on our liquidity and results of operations.
We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative funding sources.
At December 31, 2016, our cash balance was $1,039,586 compared to $1,002,023 at December 31, 2015, an increase of $37,563. Our accounts receivable balance at December 31,
2016 increased to $8,514,613 from $7,665,837 at December 31, 2015.
26
Bank Credit Facilities.
On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement with Santander Bank (“Restated Agreement”) as the sole arranger, administrative agent,
collateral agent and lender and Valley National Bank as lender. The Restated Agreement provided for a revolving credit facility of $35 million (the “Revolving Facility”). The
Revolving Facility and term loan under the Restated Agreement are secured by all of our assets.
On March 9, 2012, the Company obtained a $4.5 million term loan from Santander Bank to be amortized over five years (the “Santander Term Loan”). The Santander Term Loan was
used by the Company to purchase tooling and equipment for new programs. The Santander Term Loan was continued under the Restated Agreement, and was payable in monthly
installments of $75,000, with a final payment of the remaining principal balance on March 9, 2017. The Santander Term Loan bore interest at the lower of LIBOR plus 3% or
Santander Bank’s prime rate. The Santander Term Loan was subject to the amended and restated terms and conditions of the Restated Agreement.
In connection with the Santander Term Loan, the Company and Santander Bank entered into a five-year interest rate swap agreement, in the notional amount of $4.5 million. Under
the interest rate swap, the Company paid an amount to Santander Bank representing interest on the notional amount at 4.11% and received an amount from Sovereign representing
interest on the notional amount at a rate equal to the one-month LIBOR plus 3%. The effect of this interest rate swap was that the Company paid a fixed interest rate of 4.11% over the
term of the Santander Term Loan.
On March 24, 2016, the Company entered into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral agent (the “BankUnited Facility”).
The BankUnited Facility provides for a revolving credit loan commitment of $30 million and a $10 million term loan. The proceeds of the BankUnited Facility were used to pay off
all amounts outstanding under the Santander Term Loan and the Revolving Facility. The term of the BankUnited Facility is through March of 2019. The revolving loan bears interest
at a rate based upon a pricing grid, as defined in the agreement. The range for LIBOR based loans is between 2.5% and 3.25% above the then applicable LIBOR rate. The range of
base rate loans is between the bank’s prime rate and 0.75% above the bank’s prime rate.
In connection with the BankUnited Facility, the Company terminated the Santander interest swap agreement.
On May 9, 2016, the Company entered into an amendment (the “Amendment”) to the BankUnited Facility. The Amendment changes the definition of EBITDA for the Leverage
Coverage Ratio Covenant for the remainder of 2016 and changes the maximum leverage ratio to 3 to 1 to 3.5 to 1 for the quarters ending June 30, 2016 and September 30, 2016. Also,
the Amendment increased the interest rate on the BankUnited Facility by 50 basis points and requires the repayment of a portion of the Term Loan in and to the extent that the
Company receives any contract reimbursement payments from its current Request for Equitable Adjustment with Boeing on the A-10 program.
Also, in May 2016, the Company and BankUnited entered into a new interest rate swap with the objective of reducing our exposure to cash flow volatility arising from interest rate
fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt.
As of December 31, 2016, the Company was in compliance with all of the covenants contained in the Restated Agreement, as amended.
As of December 31, 2016, the Company had $22.4 million outstanding under the BankUnited Facility and as of December 31, 2015, the Company had $23.7 million outstanding
under the Santander Revolving Facility.
We believe that our existing resources, together with the availability under our credit facility, will be sufficient to meet our current working capital needs for at least the next 12
months.
Contractual Obligations. The table below summarizes information about our contractual obligations as of December 31, 2016 and the effects these obligations are expected to have on
our liquidity and cash flow in the future years.
27
Contractual Obligations
Debt
Capital Lease Obligations
Operating Leases
Interest Rate Swap Agreement
Total Contractual Cash Obligations
Payments Due By Period
Total
9,666,667
584,116
9,212,304
13,685
19,476,772
$
$
Less than 1
year
1,166,667
175,257
1,639,382
—
2,981,306
$
$
1-3 years
4-5 years
After 5 years
$
$
8,500,000
291,810
3,400,215
13,685
12,205,710
—
117,049
3,570,349
—
3,687,398
$
$
$
$
—
—
602,358
—
602,358
Inflation. Inflation historically has not had a material effect on our operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears following Item 15 of this Report and is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, as
appropriate, to allow timely decisions regarding required disclosures. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons performing similar functions, and Board of Directors, as appropriate, to allow timely decisions regarding
required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2016. Based on this evaluation, they have concluded that the Company’s
disclosure controls and procedures as of the end of the period covered by this report are effective in timely providing them with material information relating to the Company required
to be disclosed in the reports the Company files or submits under the Exchange Act.
There were no material changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
The report called for by Item 308(a) of Regulation S-K is included herein as “Management’s Report on Internal Control Over Financial Reporting.”
The attestation report called for by Item 308(b) of Registration S-K is included herein as “Report of Independent Registered Public Accounting Firm”.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on
our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
29
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control- Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and anticipates to continue to use this criteria in the future. Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.
As we reported in our annual report on form 10-K for the year ended December 31, 2015, as a result of the material weakness described below, the Company’s internal control over
financial reporting was not effective as of December 31, 2015.
A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. The following material weakness was identified as of December 31, 2015: due to an ongoing negotiation with
one customer, the Company submitted a request for equitable adjustment (“REA”) on a contract, as allowed under the contract. During the fourth quarter of 2015, the Company
initially concluded that it had sufficient documentation to recognize revenue based upon the REA. After further evaluation, management concluded that it did not have sufficient
documentation to record such revenue and therefore its review controls over this REA were not adequate. During 2016 management implemented practices and procedures to address
the foregoing material weakness, including more timely reviews of infrequently occurring transactions, such as an REA. Additionally, the Company increased the size and technical
expertise of its accounting staff to evaluate all complex transactions on a more timely basis. As a result of these actions we have remediated the material weakness identified at
December 31, 2015.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016, that have materially affected, or are reasonably
likely to materially affect, out internal control over financial reporting.
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CPI Aerostructures, Inc.
We have audited CPI Aerostructures, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CPI Aerostructures, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, CPI Aerostructures, Inc. has maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of December 31, 2016 and 2015,
and the related statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, of
CPI Aerostructures, Inc. and our report dated March 8, 2017 expressed an unqualified opinion.
/s/ CohnReznick LLP
Jericho, New York
March 8, 2017
31
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See Item 14.
Item 11. EXECUTIVE COMPENSATION
See Item 14.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Item 14.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Items 10, 11, 12, 13 and 14 will be contained in our definitive proxy statement for our 2017 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission not later than 120 days after the end of our fiscal year covered by this report pursuant to Regulation 14A under the Exchange Act, and
incorporated herein by reference.
32
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. The following financial statements are filed as a part of this report:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2016 and 2015
Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014
Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014
Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Financial Statements
Exhibit Number
Name of Exhibit
No. in Document
3.1
3.1(a)
3.2
*10.11
*10.12
*10.19
10.20
10.23
*10.26
*10.27
10.31
14
**21
Certificate of Incorporation of the Company, as amended. (1)
Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2)
Amended and Restated By-Laws of the Company. (5)
Employment Agreement between Vincent Palazzolo and the Company, dated as of December 16, 2009. (4)
Stock Option Agreement between the Company and Vincent Palazzolo, dated December 1, 2006. (3)
Employment Agreement between Douglas McCrosson and the Company, dated as of December 16, 2009. (4)
Performance Equity Plan 2009 (6)
Agreement of Lease, dated June 30, 2011, between Heartland Boys II L.P. and CPI Aerostructures Inc. (7)
Letter Amendment to Employment Agreement, dated November 4, 2011, from the Company to Vincent Palazzolo (8)
Letter Amendment to Employment Agreement, dated November 4, 2011, from the Company to Douglas McCrosson (8)
Amended and Restated Credit Agreement, dated as of December 5, 2012, among CPI Aerostructures, Inc., the several
lenders from time to time party thereto, and Sovereign Bank, N.A. (25)
3.1
3.1(a)
3.2
10.2
10.24
10.3
10.1
10.2
10.3
10.1
Code of Business Conduct and Ethics (13)
Subsidiaries of the Registrant
33
Exhibit Number
Name of Exhibit
No. in
Document
**23.1
**31.1
**31.2
**32.1
Consent of CohnReznick LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
***101.INS
XBRL Instance Document
***101.SCH
XBRL Taxonomy Extension Schema Document
***101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
***101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
***101.LAB
XBRL Taxonomy Extension Label Linkbase Document
***101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
***
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Management compensation contract or arrangement.
Filed herewith.
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, is
deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-49270) declared effective on September 16, 1992 and incorporated herein by reference.
Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1998 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 1, 2006 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 21, 2009 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2007 and incorporated herein by reference.
Included as Appendix A to the Company’s Proxy Statement filed on April 30, 2009.
Filed as an exhibit to the Company’s Current Report on Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference
Filed as an exhibit to the Company’s Current Report on Form 8-K dated November 7, 2011 and incorporated herein by reference
34
CPI AEROSTRUCTURES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets as of December 31, 2016 and 2015
Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014
Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014
Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Financial Statements
35
F-1
F-2
F-3
F-4
F-5
F-6 - F-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CPI Aerostructures, Inc.
We have audited the accompanying balance sheets of CPI Aerostructures, Inc. as of December 31, 2016 and 2015, and the related statements of operations and comprehensive
income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. CPI Aerostructures, Inc.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CPI Aerostructures, Inc. as of December 31, 2016 and 2015,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CPI Aerostructures, Inc.’s internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 8, 2017, expressed an unqualified opinion.
/s/ CohnReznick LLP
Jericho, New York
March 8, 2017
F-1
BALANCE SHEETS
ASSETS
Current Assets:
Cash
Accounts receivable, net
Costs and estimated earnings in excess of billings on uncompleted contracts
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Deferred income taxes, net
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Billings in excess of costs and estimated earnings on uncompleted contracts
Current portion of long-term debt
Contract loss
Line of credit
Income taxes payable
Total current liabilities
Long-term debt, net of current portion
Other liabilities
Total Liabilities
Commitments
Shareholders’ Equity:
Common stock - $.001 par value; authorized 50,000,000 shares, 8,739,836 and 8,583,511 shares, respectively, issued and
outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
F-2
CPI AEROSTRUCTURES, INC.
December 31,
2016
December 31,
2015
$
$
$
$
$
$
1,039,586
8,514,613
99,578,526
2,155,481
111,288,206
2,298,610
3,952,598
252,481
117,791,895
14,027,457
1,386,147
115,337
1,341,924
1,377,171
22,438,685
6,000
40,692,721
8,860,724
632,744
50,186,189
1,002,023
7,665,837
102,622,387
1,065,473
112,355,720
2,358,736
1,890,000
108,080
116,712,536
18,379,469
1,057,682
175,438
1,011,491
549,723
23,700,000
189,000
45,062,803
483,961
633,663
46,180,427
8,738
52,824,950
14,781,018
(9,000)
8,584
52,137,384
18,389,594
(3,453)
67,605,706
117,791,895
$
70,532,109
116,712,536
$
SEE NOTES TO FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years ended December 31,
2016
2015
2014
CPI AEROSTRUCTURES, INC.
Revenue
Cost of sales
Gross profit (loss)
Selling, general and administrative expenses
Income (loss) from operations
Other income (expense):
Interest/other income (expense)
Interest expense
Total other expense, net
Income (loss) before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net income (loss)
Other comprehensive income (loss), net of tax
Change in unrealized (gain) loss-interest rate swap
Comprehensive income (loss)
Income (loss) per common share-basic
Income (loss) per common share-diluted
Shares used in computing earnings (loss) per common share:
Basic
Diluted
$
81,329,858
$
100,202,557
$
39,687,010
77,010,940
83,600,854
69,411,709
4,318,918
16,601,703
(29,724,699)
8,614,190
(4,295,272)
7,636,148
8,965,555
7,308,220
(37,032,919)
(22,659)
(1,356,645)
(1,379,304)
(5,674,576)
(40,433)
(918,129)
(958,562)
8,006,993
145,072
(794,428)
(649,356)
(37,682,275)
(2,066,000)
2,991,000
(12,473,000)
(3,608,576)
5,015,993
(25,209,275)
(5,547)
6,263
11,399
($
($
($
3,614,123)
0.42)
0.42)
$
$
$
5,022,256
0.59
0.58
($
($
($
25,197,876)
2.98)
2.98)
8,655,848
8,655,848
8,552,817
8,579,986
8,465,937
8,465,937
SEE NOTES TO FINANCIAL STATEMENTS
F-3
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2016, 2015 and 2014
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance at January 1, 2014
Net loss
$
8,410,493
—
$
8,410
—
$
50,381,348
—
$
38,582,876
(25,209,275)
$
(21,115)
—
$
88,951,519
(25,209,275)
CPI AEROSTRUCTURES, INC.
Change in unrealized loss from interest
rate swap
Common stock issued upon exercise of
options
Common stock issued as employee
compensation
Stock based compensation expense
Tax benefit from stock option plans
Balance at December 31, 2014
Net income
Change in unrealized loss from interest
rate swap
Common stock issued upon exercise of
options
Common stock issued as employee
compensation
Stock based compensation expense
Tax benefit from stock option plans
Balance at December 31, 2015
Net loss
Change in unrealized gain from interest
rate swap
Common stock issued upon exercise of
options
Common stock issued as employee
compensation
Stock based compensation expense
—
85,312
4,750
—
—
8,500,555
—
—
25,352
6,255
51,349
—
8,583,511
—
—
3,448
98,645
54,232
—
86
5
—
—
—
447,665
57,992
467,765
86,000
8,501
—
51,440,770
—
—
26
6
51
—
—
79,974
59,417
524,223
33,000
—
—
—
—
—
—
13,373,601
5,015,993
—
—
—
—
—
8,584
—
52,137,384
—
18,389,594
(3,608,576)
—
3
97
54
—
(3)
163,354
524,215
—
—
—
—
11,399
—
—
—
—
(9,716)
—
6,263
—
—
—
—
(3,453)
—
(5,547)
—
—
—
11,399
447,751
57,997
467,765
86,000
64,813,156
5,015,993
6,263
80,000
59,423
524,274
33,000
70,532,109
(3,608,576)
(5,547)
—
163,451
524,269
Balance at December 31, 2016
8,739,836
$
8,738
$
52,824,950
$
14,781,018
$
(9,000)
$
67,605,706
SEE NOTES TO FINANCIAL STATEMENTS
F-4
Years ended December 31,
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss)to net cash provided by (used in) operating activities:
Depreciation and amortization
Amortization of debt issue costs
Deferred rent
Stock-based compensation expense
Common stock issued as employee compensation
Loss on disposal of fixed asset
Deferred portion of provision for income taxes
Tax benefit for stock options
Bad debt expense
Changes in operating assets and liabilities:
(Increase in accounts receivable
(Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts
Increase in prepaid expenses and other current assets
(Increase) decrease in refundable income taxes
Increase (decrease) in accounts payable and accrued expenses
Increase in accrued losses on uncompleted contracts
(Decrease) increase in income taxes payable
Decrease in billings in excess of costs and estimated earnings on uncompleted contracts
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Payment of line of credit
Proceeds from line of credit
Payment of long-term debt
Proceeds from long-term debt
Debt issue costs
Tax benefit for stock options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital lease
Supplemental schedule of cash flow information:
Cash paid during the year for interest
Cash paid for income taxes
CPI AEROSTRUCTURES, INC.
STATEMENTS OF CASH FLOWS
2016
2015
2014
($
3,608,576)
$
5,015,993
($
25,209,275)
661,921
61,320
8,235
524,269
163,451
—
(2,077,299)
—
460,514
(1,309,290)
3,043,861
(1,013,008)
(77,000)
(4,023,547)
827,448
(183,000)
(60,101)
(6,600,802)
(136,320)
(136,320)
—
(30,400,000)
29,138,685
(1,710,145)
10,000,000
(253,855)
—
6,774,685
37,563
1,002,023
1,039,586
465,475
1,182,791
302,025
$
$
$
$
854,063
—
46,017
524,274
59,423
—
2,659,000
(33,000)
50,000
(1,249,023)
(23,568,248)
(237,199)
8,133,433
9,446,948
153,541
220,822
(18,212)
2,057,832
(209,718)
(209,718)
80,000
(9,650,000)
8,200,000
(1,013,998)
—
—
33,000
(2,350,998)
(502,884)
1,504,907
1,002,023
247,881
1,000,403
351,275
$
$
$
$
763,736
—
17,098
467,765
57,993
1,042
(3,790,000)
(86,000)
—
(2,074,560)
33,542,997
(219,007)
(8,138,322)
1,715,580
396,182
(730,469)
(82,520)
(3,367,760)
(602,924)
(602,924)
447,751
(4,700,000)
8,500,000
(1,024,263)
—
—
86,000
3,309,488
(661,196)
2,166,103
1,504,907
67,283
915,695
855,000
$
$
$
$
SEE NOTES TO FINANCIAL STATEMENTS
F-5
NOTES TO FINANCIAL STATEMENTS
CPI AEROSTRUCTURES, INC.
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CPI Aerostructures, Inc. (“CPI Aero®” or the “Company”) is a U.S. supplier of aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. We
manufacture complex aerostructure assemblies, as well as aerosystems. Additionally, we supply parts for MRO and kitting contracts.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the use of estimates by
management. Actual results could differ from these estimates.
Revenue Recognition
The Company’s revenue is primarily recognized based on the percentage of completion method of accounting for its contracts measured by the percentage of total costs incurred to
date to estimated total costs at completion for each contract. Contract costs include all direct material, labor costs, tooling and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Estimated losses on uncompleted
contracts are recognized in the period in which such losses are determined. Changes in job performance may result in revisions to costs and income and are recognized in the period in
which revisions are determined to be required. The percentage of completion method of accounting involves considerable use of estimates in determining revenues, costs and profits
and in assigning the amounts to accounting periods and, as a result, there can be a significant disparity between earnings (both for accounting and taxes) as reported and actual cash
received by the Company during any reporting period. In accordance with industry practice, costs and estimated earnings in excess of billings on uncompleted contracts, included in
the accompanying balance sheets, contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. The
Company’s recorded revenue may be adjusted in later periods in the event that the Company’s cost estimates prove to be inaccurate or a contract is terminated.
When adjustments are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates
of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
During the year ended December 31, 2014, the Company adjusted the estimated total revenue and recorded a loss on its Wing Replacement Program (“WRP”) for the U.S. Air Force’s
A-10 Thunderbolt aircraft (“A-10”).
The long-term future of the A-10 has been uncertain since March 2014 when the U.S. Department of Defense released its 2015 Budget Request that called for the retirement of the
entire A-10 fleet. More recent events have led the Company to conclude that the Company’s A-10 WRP will likely not continue to the full 242 aircraft as anticipated at the start of the
program. The 2015 Department of Defense Appropriations Act passed by the United States House of Representatives on June 20, 2014 provides no funding for A-10 operations in U.
S. Government fiscal year 2015 that commenced October 1, 2014. Further, this bill rescinds funding from the 2014 U. S. Department of Defense Budget that was to have been used
for the procurement of additional wings for the A-10 in 2015.
Because of the probable termination of the Company’s A-10 WRP, the Company reduced its revenue estimates with respect to this program by approximately 41% in 2014. This
change in estimate results in an approximate cumulative $44.7 million decrease in revenue from the inception of the program in 2008 through June 30, 2014, all of which was
recorded in the quarter ended June 30, 2014. Also, the uncertainty of the future of the A-10 aircraft has impacted the Company’s ability to achieve normal program cost reductions at
suppliers. Accordingly, in addition to the $44.7 million adjustment to revenue in 2014, we have recorded a $2.6 million adjustment to cost of sales on the A-10 WRP.
F-6
CPI AEROSTRUCTURES, INC.
From June 2014 through December 2015 the Company revised estimates, based on the best available information each quarter, to properly account for the program. The Company’s
estimate in March 2015 assumed that the program would be canceled at approximately 135 ship sets. In addition to revenue earned based on parts shipped, the Company would be
entitled to compensation upon early termination of the program (“Termination Liability”) for certain costs incurred. The amount of Termination Liability varies based on exactly when
the program is canceled and the amount of costs incurred through the date of termination. In June and September 2015, the Company estimated costs based on the best information
available at each period and made adjustments as needed, including deferring certain costs based on the Termination Liability.
During the three months ended March 31, 2016, and prior to the filing of the Company’s Form 10-K for the year ended December 31, 2015, the Company had information that the
USAF was intending to increase the number of ship sets on order for the A-10. Because of the expectation that the USAF would increase its orders, the Company projected that its
current order of A-l0 parts would not be cancelled before ship set 173. An increase in the number of ship sets on order would improve the Company’s estimated gross margin on the
overall program. In the December 31, 2015 financial statements the Company did not alter gross margin of the program for this potential order, as the Company couldn’t determine if
the realization of the new order was probable and that the improved margin would be realized.
In April 2016, the Company became aware that the USAF had reevaluated its position and as such had deferred any decision regarding increasing the orders on the A-10 program.
These changes in position by the USAF were supported by communications from Boeing, the Company’s customer.
Based on the above facts, the Company believes that, it is not probable that there will be any future orders on the A-10 beyond the 173 currently on order. As a result of the
information that management became aware of in April 2016, for the quarter ended March 31, 2016, the Company estimated that the A-10 program would run through the conclusion
of its current purchase order with Boeing at ship set number 173. There is no justification for the deferral of any expenses incurred or expected to be incurred related to the contract
under POC or any authoritative guidance in GAAP, nor is there any justification of increasing estimated revenue on the program as the recovery of such amounts is not deemed
probable. The change in estimate resulted in a reduction of revenue of approximately $8.9 million in the quarter ended March 31, 2016.
In addition, the Company recognizes revenue for parts supplied for certain MRO contracts when parts are shipped.
Government Contracts
The Company’s government contracts are subject to the procurement rules and regulations of the U.S. government. Many of the contract terms are dictated by these rules and
regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”), which provides guidance on the types of costs that are allowable in
establishing prices for goods and services under U.S. government contracts. For example, costs such as those related to charitable contributions, advertising, interest expense, and
public relations are unallowable, and therefore not recoverable through sales. During and after the fulfillment of a government contract, the Company may be audited in respect of the
direct and allocated indirect costs attributable thereto. These audits may result in adjustments to the Company’s contract cost, and/or revenue.
When contractual terms allow, the Company invoices its customers on a progress basis.
Cash
The Company maintains its cash in three financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances
may exceed these limits. As of December 31, 2016 and 2015, the Company had approximately $1,276,000 and $1,103,000, respectively, of uninsured balances. The Company limits
its credit risk by selecting financial institutions considered to be highly credit worthy.
F-7
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances. The Company writes off accounts when they are deemed to be uncollectible.
Property and Equipment
Depreciation and amortization of property and equipment is provided by the straight-line method over the shorter of estimated useful lives of the respective assets or the life of the
lease, for leasehold improvements.
CPI AEROSTRUCTURES, INC.
Rent
We recognize rent expense on a straight-line basis over the expected lease term. Within the provisions of certain leases there are escalations in payments over the lease term. The
effects of the escalations have been reflected in rent expense on a straight-line basis over the expected lease term.
Long-Lived Assets
The Company reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be
fully recoverable. As a result of its review, the Company does not believe that any such change has occurred. If such changes in circumstance are present, a loss is recognized to the
extent the carrying value of the asset is in excess of the fair value of cash flows expected to result from the use of the asset and amounts expected to be realized upon its eventual
disposition.
Short-Term Debt
The fair value of the Company’s short-term debt is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Using this method, the fair
value of the Company’s short-term debt was not significantly different than the stated value at December 31, 2016 and 2015.
Derivatives
Our use of derivative instruments has primarily been to hedge interest rates. These derivative contracts are entered into with financial institutions. We do not use derivative
instruments for trading purposes and we have procedures in place to monitor and control their use.
We record these derivative financial instruments on the balance sheet at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the effective
portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive loss and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings.
F-8
CPI AEROSTRUCTURES, INC.
Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations immediately. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in the results of operations immediately. See below for a discussion of the Company’s use of derivative instruments,
management of credit risk inherent in derivative instruments and fair value information.
In March 2012, the Company entered into interest rate swaps with the objective of reducing its exposure to cash flow volatility arising from interest rate fluctuations associated with
certain debt. The notional amount, maturity date, and currency of these contracts match those of the underlying debt. The Company has designated these interest rate swap contracts as
cash flow hedges. The Company measures ineffectiveness by comparing the cumulative change in the forward contract with the cumulative change in the hedged item. The interest
rate swap contract was terminated as of March 24, 2016. The Company paid approximately $4,000 at termination to settle the swap contract.
In May 2016, the Company entered into a new interest rate swap with the objective of reducing our exposure to cash flow volatility arising from interest rate fluctuations associated
with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt. The Company has designated this interest rate swap contract as
a cash flow hedge. The Company measures ineffectiveness by comparing the cumulative change in the forward contact with the cumulative change in the hedged item. As of
December 31, 2016, we had a net deferred loss associated with cash flow hedges of approximately $13,700 due to the interest rate swap, which was included in Other Liabilities.
As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties may fail to meet their contractual obligations. Recent adverse developments in
the global financial and credit markets could negatively impact the creditworthiness of our counterparties and cause one or more of our counterparties to fail to perform as expected.
To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and
continually assess the creditworthiness of counterparties. To date, all counterparties have performed in accordance with their contractual obligations.
Fair Value
At December 31, 2016 and 2015, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these
instruments.
Debt
Short-term borrowings and long-term debt
Carrying Amount
Fair Value
Carrying Amount
Fair Value
2016
2015
$
32,689,467
$
32,692,672
$
25,195,452
$
25,195,452
We estimated the fair value of debt using market quotes and calculations based on market rates.
F-9
The following tables present the fair values of liabilities measured on a recurring basis as of December 31, 2016 and 2015:
CPI AEROSTRUCTURES, INC.
Description
Interest Rate Swap
Total
Description
Interest Rate Swap
Total
Fair Value Measurements 2016
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
—
—
$
$
13,685
13,685
Fair Value Measurements 2015
Quoted Prices in
Active Markets for
Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
—
—
$
$
4,453
4,453
—
—
—
—
Total
13,685
13,685
Total
4,453
4,453
$
$
$
$
The fair value of the Company’s interest rate swap was determined by comparing the fixed rate set at the inception of the transaction to the “replacement swap rate,” which represents
the market rate for an offsetting interest rate swap with the same notional amounts and final maturity date. The market value is then determined by calculating the present value
interest differential between the contractual swap and the replacement swap.
As of December 31, 2016 and 2015, $13,685 and $4,453, respectively, was included in other liabilities related to the fair value of the Company’s interest rate swap, and $9,000 and
$3,453, respectively, net of tax of $4,685 and $1,000, respectively, was included in Accumulated Other Comprehensive Loss.
Earnings Per Share
Basic earnings (loss) per common share is computed using the weighted-average number of shares outstanding. Diluted earnings (loss) per common share is computed using the
weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. No incremental shares were used in
the calculation of diluted loss per common share in 2016 and 2014, as the effect of incremental shares would be anti-dilutive. Incremental shares of approximately 85,000 were used
in the calculation of diluted earnings per common share in 2015. Incremental shares of 184,983 were not included in the diluted earnings per share calculations at December 31, 2015,
as their exercise price was in excess of the Company’s quoted market price and, accordingly, these shares are not assumed to be exercised for the diluted earnings (loss) per share
calculation.
F-10
CPI AEROSTRUCTURES, INC.
Income taxes
Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary
differences between the financial statements carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company does not have any liabilities for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return. It is the Company’s
policy to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. Uncertain tax positions are evaluated and adjusted as appropriate,
while taking into account the progress of audits of various taxing jurisdictions.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers
(Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In April 2015, the FASB proposed deferring the effective date of ASU 2014-09 for
one year, and proposed some modifications to the original provisions. On July 9, 2015, the one year deferral of the effective date was approved and, as such, ASU 2014-09 is effective
for the first quarter of fiscal year 2018 using either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its
financial statements and related disclosures. The Company has not yet selected a transition method nor have they determined the effect of the standard on its ongoing financial
reporting, but it expects to determine the effect in the second quarter of 2017.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The updated accounting
guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
rather than as a deferred asset.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating
leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The
updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect on its consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718).” The intent of the updated guidance is to simplify the accounting for stock-based
compensation. The updated guidance is effective for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the effect on its financial
statements; however, the Company does not expect that this guidance will have a material effect on its financial statements.
F-11
CPI AEROSTRUCTURES, INC.
2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
At December 31, 2016, costs and estimated earnings in excess of billings on uncompleted contracts (unbilled) consist of:
Costs incurred on uncompleted contracts
Estimated earnings
Less billings to date
Costs and estimated earnings in excess of billings on uncompleted contracts
U.S. Government
Commercial
$
341,003,461
39,638,231
380,641,692
331,277,942
$
153,898,425
58,346,518
212,244,943
162,145,504
Total
494,901,886
97,984,749
592,886,635
493,423,446
49,363,750
$
50,099,439
$
99,463,189
$
$
At December 31, 2015, costs and estimated earnings in excess of billings on uncompleted contracts (unbilled) consist of:
Costs incurred on uncompleted contracts
Estimated earnings
Less billings to date
Costs and estimated earnings in excess of billings on uncompleted contracts
U.S. Government
Commercial
Total
$
$
$
349,458,368
62,718,792
412,177,160
353,601,903
$
123,078,356
49,539,299
172,617,655
128,745,963
472,536,724
112,258,091
584,794,815
482,347,866
58,575,257
$
43,871,692
$
102,446,949
The above amounts are included in the accompanying balance sheets under the following captions at December 31, 2016 and 2015:
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings in excess of costs and estimated earnings on uncompleted contracts
Totals
F-12
2016
2015
$
$
99,578,526
(115,337)
99,463,189
$
$
102,622,387
(175,438)
102,446,949
Unbilled costs and estimated earnings are billed in accordance with applicable contract terms. As of December 31, 2016, approximately $35 million of the balances above are not
expected to be collected within one year. There are no amounts billed under retainage provisions.
Revisions in the estimated gross profits on contracts and contract amounts are made in the period in which the circumstances requiring the revisions occur. During the years ended
December 31, 2016, 2015 and 2014, the effect of such revisions in total estimated contract profits resulted in a decrease to the total gross profit to be earned on the contracts of
approximately $1,667,000, $1,875,000 and $42,568,000, respectively, from that which would have been reported had the revised estimate been used as the basis of recognition of
contract profits in prior years.
Although management believes it has established adequate procedures for estimating costs to complete on uncompleted open contracts, it is at least reasonably possible that additional
significant costs could occur on contracts prior to completion.
CPI AEROSTRUCTURES, INC.
F-13
3.
ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables as follows:
Billed receivables
Less: allowance for doubtful accounts
4.
PROPERTY AND EQUIPMENT
Machinery and equipment
Computer equipment
Furniture and fixtures
Automobiles and trucks
Leasehold improvements
Less accumulated depreciation and amortization
CPI AEROSTRUCTURES, INC.
December 31,
2016
2015
$
$
9,050,127
(535,514)
8,514,613
$
$
7,740,837
(75,000)
7,665,837
December 31,
2016
2015
Estimated
Useful Life (years)
$
$
2,289,175
3,417,701
610,323
13,162
1,694,900
8,025,261
5,726,651
2,298,610
$
$
1,910,532
3,326,594
610,323
13,162
1,562,856
7,423,467
5,064,731
2,358,736
5 to 10
5
7
5
Lesser of lease
term or 10 years
Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 was $661,921, $854,063 and $763,736, respectively.
During the years ended December 31, 2016 and 2015, the Company acquired $465,475 and $247,881, respectively, of property and equipment under capital leases.
5.
LINE OF CREDIT
On December 5, 2012, the Company entered into an Amended and Restated Credit Agreement (“Restated Agreement”) with Sovereign Bank, now called Santander Bank, N.A.
(“Santander”), as the sole arranger, administrative agent and collateral agent and Valley National Bank. The Restated Agreement provided for a revolving credit loan (“Revolving
Facility”) commitment of $35 million.
On March 24, 2016, the Company entered into a Credit Agreement with Bank United, N.A. as the sole arranger, administrative agent and collateral agent and Citizens Bank N.A. (the
“BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”).
The proceeds of the BankUnited Facility were used to pay off all amounts outstanding under the Santander Term Loan and the Revolving Facility. The Revolving Loan bears interest
at a rate based upon a pricing grid, as defined in the agreement.
On May 9, 2016, the Company entered into an amendment (the “Amendment”) to the BankUnited Facility. The Amendment changes the definition of EBITDA for the Leverage
Coverage Ratio Covenant for the remainder of 2016 and changes the maximum leverage ratio from 3 to 1 to 3.5 to 1 for the quarters ending June 30, 2016 and September 30, 2016.
Also, the Amendment increased the interest rate on the BankUnited Facility by 50 basis points and requires the repayment of a portion of the Term Loan if and to the extent that the
Company receives any contract reimbursement payments from its current Request for Equitable Adjustment with Boeing on the A-10 program.
F-14
As of December 31, 2016, the Company was in compliance with all of the financial covenants, contained in the Restated Agreement, as amended. As of December 31, 2016, the
Company had $22.4 million outstanding under the Restated Agreement bearing interest at 4.25%.
CPI AEROSTRUCTURES, INC.
The BankUnited Facility is secured by all of the Company’s assets.
6.
LONG-TERM DEBT
On March 9, 2012, the Company obtained a $4.5 million term loan from Santander to be amortized over five years (the “Santander Term Facility”). The Santander Term Facility was
used to purchase tooling and equipment for new programs.
Additionally, the Company and Santander entered into a five-year interest rate swap agreement, in the notional amount of $4.5 million. Under the interest rate swap, the Company
pays an amount to Santander representing interest on the notional amount at a fixed rate of 4.11% and receives an amount from Santander Bank representing interest on the notional
amount of a rate equal to the one-month LIBOR plus 3%. The effect of this interest rate swap will be the Company paying a fixed interest fixed rate of 4.11% over the term of the
SantanderTerm Facility.
The Santander interest swap agreement was terminated and the Santander Term Facility was paid off on March 24, 2016 using the proceeds of the BankUnited Facility. (See Note 5)
The Company paid approximately $254,000 of debt issuance costs in connection with the Bank United Facility of which approximately $144,000 is included in other assets and
$48,000 is a reduction of long-term debt.
The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on March 31, 2019. The maturities of the Term
Loan are included in the maturities of long-term debt.
The maturities of the long-term debt (excluding unamortized debt issuance costs) are as follows:
Year ending December 31,
2017
2018
2019
2020
2021
$
1,341,924
1,982,296
6,809,514
105,473
11,575
$ 10,250,782
Also included in long-term debt are capital leases and notes payable of $584,116 and $295,452 at December 31, 2016 and 2015, respectively, including a current portion of $175,257
and $111,491, respectively.
The cost of assets under capital leases was $1,829,450 and $1,363,977 at December 31, 2016 and 2015, respectively. Accumulated depreciation of assets under capital leases was
approximately $1,157,000 and $971,000 at December 31, 2016 and 2015, respectively.
7.
COMMITMENTS
The Company leases an office and warehouse facility under a non-cancelable operating lease which expires in April, 2022. The aggregate future commitment under this agreement is
as follows:
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
$
$
1,639,382
1,679,465
1,720,751
1,763,274
1,807,074
602,358
9,212,304
F-15
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $1,608,701, $1,608,701 and $1,608,702, respectively.
8
INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
Year ended December 31,
2016
2015
2014
CPI AEROSTRUCTURES, INC.
Current:
Federal
Prior year under accrual
State
Deferred:
Federal
$
$
—
—
(51,000)
(2,015,000)
(2,066,000)
$
$
82,000
143,000
107,000
2,659,000
2,991,000
The difference between the income tax provision computed at the federal statutory rate and the actual tax provision (benefit) is accounted for as follows:
December 31,
Taxes computed at the federal statutory rate
State income tax, net
Prior year true-up
Research and development tax credit
Reduction in domestic production activity
AMT credit carryforward
Permanent differences
Provision for (benefit from) income taxes
The components of deferred income tax assets and liabilities are as follows:
Deferred Tax Assets:
Interest rate swap
ASC 740 liability
Allowance for doubtful accounts
Credit carryforwards
Deferred rent
Stock options
Restricted stock
Charitable contributions carryforward
Net operating loss carryforward
Deferred Tax Assets
Deferred Tax Liabilities:
Prepaid expenses
Revenue recognition
Property and equipment
Deferred tax liabilities
Net Deferred Tax Assets
F-16
2016
2015
$
$
(1,929,000)
(34,000)
(3,000)
(246,000)
—
—
146,000
(2,066,000)
$
$
$
$
2,722,000
70,000
325,000
(177,000)
—
—
51,000
2,991,000
2016
9,000
—
187,000
1,548,000
221,000
295,000
47,000
—
5,057,000
7,364,000
130,000
2,807,000
475,000
3,412,000
3,952,000
$
$
$
$
$
$
(8,646,000)
44,000
6,000
(3,877,000)
(12,473,000)
2014
(12,812,000)
4,000
44,000
(140,000)
893,000
(584,000)
122,000
(12,473,000)
2015
3,000
33,000
26,000
1,303,000
212,000
626,000
—
18,000
1,006,000
3,227,000
156,000
606,000
575,000
1,337,000
1,890,000
CPI AEROSTRUCTURES, INC.
The Company recognized, for income tax purposes, a tax benefit of $33,000 and $86,000 for the years ended December 31, 2015 and 2014, respectively, for compensation expense
related to its stock option plan for which no corresponding charge to operations has been recorded. Such amounts have been added to additional paid-in capital in those years.
At December 31, 2016, the Company has net operating loss carryforwards of approximately $14.6 million which will expire in 2031.
9.
STOCK BASED COMPENSATION
The Company accounts for compensation expense associated with stock options and restricted stock units (“RSUs”) based on the fair value of the options and units on the date of
grant.
The Company used the modified transition method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock based
compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of the fair value method.
The Company’s net income (loss) for the years ended December 31, 2016, 2015 and 2014, includes approximately $688,000, $524,000 and $468,000 of stock based compensation
expense, respectively, for the grant of stock options and RSUs.
On January 1, 2016, the Company granted 53,882 RSUs to its board of directors as partial compensation for the 2016 year.
On August 2, 2016, the Company granted a total of 98,645 shares of common stock to various employees. In the event that any of these employees voluntarily terminates their
employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criterion are not achieved, portions of these shares may be
forfeited. These shares will be expensed at various periods through March 2019 based upon the service and performance thresholds. For the year ended December 31, 2016,
approximately $135,100 of compensation expense is included in selling, general and administrative expenses and approximately $28,400 of compensation expense is included in cost
of sales for this grant.
The Company recorded reductions in income tax payable of approximately $325,000 and $513,000 for the years ended December 31, 2015 and 2014, respectively, as a result of the
tax benefit upon exercise of options. The compensation expense related to the Company’s stock based compensation arrangements is recorded as a component of selling, general and
administrative expenses. Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized from options exercised (excess tax benefits) are
classified as cash inflows from financing activities and cash inflows from operating activities.
In 2000, the Company adopted the Performance Equity Plan 2000 (the “2000 Plan”). The 2000 Plan, as amended, reserved 1,230,000 common shares for issuance. The 2000 Plan
provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options’
exercise price is equal to the closing price of the Company’s shares on the day of issuance, except for incentive stock options granted to the Company’s president, which are
exercisable at 110% of the closing price of the Company’s shares on the date of issuance.
In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved 500,000 common shares for issuance. The 2009 Plan provides for the
issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options’ exercise price is equal
to the closing price of the Company’s shares on the day of issuance, except for incentive stock options granted to any person possessing more than 10% of the total combined voting
power of all classes of Company stock, which are exercisable at 110% of the closing price of the Company’s shares on the date of issuance.
The Company has 128,481 options available for grant under the 2009 Plan.
In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved 600,000 common shares for issuance, provided that no more than
200,000 common shares be granted as incentive stock options. Awards may be made or granted to employees, officers, directors and consultants in the form of incentive stock
options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.
F-17
The Company has 452,033 shares available for grant under the 2016 Plan.
The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model. The following weighted average
assumptions were used for option grants during the year ended December 31, 2014:
CPI AEROSTRUCTURES, INC.
Risk-free interest rate
Expected volatility
Dividend yield
Expected option term in years
2014
1.45%
102.0%
0%
5
The Company did not grant any stock options in 2016 or 2015. The risk free interest rate for the year ended December 31, 2014 is based on the five year U.S. Treasury note rate on the
day of grant. The expected volatility computation for the year ended December 31, 2014 is based on the average of the volatility over the most recent five year period, which
represents the Company’s estimate of expected volatility over the expected option term. The Company has never paid a dividend, and is not expected to pay a dividend in the
foreseeable future, therefore the dividend yield is assumed to be zero. The Company assumes zero forfeitures of options.
A summary of the status of the Company’s stock option plans is as follows:
Fixed Options
Options
Weighted
Average
Exercise
Price
Average
remaining
contractual
term
(in years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2014
Granted during period
Exercised
Outstanding at December 31, 2014
Granted during period
Exercised
Forfeited/Expired
Outstanding at December 31, 2015
Granted during period
Exercised
Forfeited/Expired
Outstanding at December 31, 2016
Vested at December 31, 2016
461,919
43,064
(155,000)
349,983
—
(55,000)
(25,000)
269,983
—
(25,000)
(95,517)
149,466
149,466
$
$
$
9.80
14.67
8.52
10.97
—
8.00
14.08
11.29
—
6.75
13.83
10.43
10.43
2.28
2.20
1.71
1.58
1.58
$
$
151,500
151,500
F-18
CPI AEROSTRUCTURES, INC.
The weighted-average fair value of each option granted during the years ended December 31, 2014, estimated as of the grant date using the Black-Scholes option valuation model was
$10.86.
The Company’s stock options granted to non-employee directors vest immediately upon grant and have a maximum contractual term of five years. Stock options granted to employees
vest over three years and have a maximum contractual term of ten years. The expected option term is calculated utilizing historical data of option exercises.
During the year ended December 31, 2016, no stock options were exercised for cash. During the same period, 25,000 options were exercised, pursuant to provisions of the stock
option plan, where the Company received no cash and 21,552 shares of its common stock in exchange for the 25,000 shares issued in the exercise. The 21,552 shares that the
Company received were valued at $168,750, the fair market value of the shares on the dates of exercise.
During the years ended December 31, 2015 and 2014, the Company recognized a tax benefit of $33,000 and $86,000, respectively, from the exercise of stock options.
The intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was approximately $27,000, $230,500 and $679,000, respectively.
The fair value of all options vested during the years ended December 31, 2016, 2015 and 2014 was approximately $151,000, $221,000 and $387,000, respectively.
10.
EMPLOYEE BENEFIT PLAN
On September 11, 1996, the Company’s board of directors instituted a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “Code”). On October 1,
1998, the Company amended and standardized its plan as required by the Code. Pursuant to the amended plan, qualified employees may contribute a percentage of their pretax
eligible compensation to the Plan and the Company will match a percentage of each employee’s contribution. Additionally, the Company has a profit-sharing plan covering all
eligible employees. Contributions by the Company are at the discretion of management. The amount of contributions recorded by the Company in 2016, 2015 and 2014 amounted to
$351,932, $422,334 and $355,428, respectively.
F-19
11.
MAJOR CUSTOMERS
Four percent of revenue in 2016, 1% of revenue in 2015 and 2% of revenue in 2014 were directly to the U.S. government. Less than 10% and 1% of accounts receivable at December
31, 2016 and 2015, respectively, were from the U. S. Government.
In addition, in 2016, 36%, 29% and 11% of our revenue were to our three largest commercial customers, respectively. In 2015, 30%, 17%, 13% and 12% of our revenue were to our
four largest commercial customers, respectively. At December 31, 2016, 35%, 24% and 17% of accounts receivable were from our three largest commercial customers. At December
31, 2015, 30%, 18% and 16% of accounts receivable were from our three largest commercial customers.
At December 31, 2016 and 2015, 1% of costs and estimated earnings in excess of billings on uncompleted contracts were from the U.S. Government.
At December 31, 2016, 33%, 26%, 12%, and 11% of costs and estimated earnings in excess of billings on uncompleted contracts were from our four largest commercial customers. At
December 31, 2015, 26%, 23%, 13% and 11% of Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts were from our four largest commercial customers.
CPI AEROSTRUCTURES, INC.
In 2016, approximately 11% of our revenue was from a customer who is located outside the United States.
12.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of any single quarter are not necessarily indicative of the Company’s results for the full year. Earnings (loss) per share data is computed independently for each of the
periods presented. As a result, the sum of the earnings per share amounts for the quarter may not equal the total for the year.
Revenue
Gross Profit (loss)
Net Income (loss)
Income (loss) per common share
Revenue
Gross Profit
Net Income
Income per common share
2016
Basic
Diluted
2015
Basic
Diluted
$
$
$
$
March 31,
12,670,032
(11,639,104)
(9,220,220)
(1.07)
(1.07)
19,876,566
3,602,071
928,120
0.11
0.11
Quarter ended
June 30,
September 30,
December 31,
$
$
22,280,964
5,034,001
1,790,580
0.21
0.21
21,944,320
3,848,369
990,108
0.12
0.12
$
$
22,110,829
5,024,368
1,686,065
0.19
0.19
26,790,881
5,596,432
2,446,085
0.29
0.28
24,268,033
5,899,653
2,134,999
0.24
0.24
31,590,790
3,554,831
651,680
0.08
0.08
F-20
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
SIGNATURES
undersigned, thereunto duly authorized.
Dated: March 8, 2017
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature
/s/ Eric Rosenfeld
Eric Rosenfeld
/s/ Douglas McCrosson
Douglas McCrosson
/s/ Vincent Palazzolo
Vincent Palazzolo
/s/ Walter Paulick
Walter Paulick
/s/ Kenneth McSweeney
Kenneth McSweeney
/s/ Harvey Bazaar
Harvey Bazaar
/s/ Michael Faber
Michael Faber
/s/ Terry Stinson
Terry Stinson
/s/ Corey Bond
Corey Bond
(Back To Top)
Title
Chairman of the Board of Directors
Date
March 8, 2017
Chief Executive Officer and President
March 8, 2017
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
Director
Director
Director
Director
Director
Director
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
Section 2: EX-21 (SUBSIDIARIES OF THE REGISTRANT)
CPI Aerostructures, Inc. - 10-K
SUBSIDIARIES OF REGISTRANT
None
(Back To Top)
Section 3: EX-23.1 (CONSENT OF COHNREZNICK LLP)
CPI Aerostructures, Inc. - 10-K
Exhibit 21
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Numbers 333-11669, 333-42403, 333-130077, 333-164687 and 333-212837)
and on Form S-3 (Registration Number 333-181056), of CPI Aerostructures, Inc. of our report dated March 8, 2017, on our audits of the financial statements of CPI Aerostructures,
Inc. as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, and of our report dated March 8, 2017 which expresses an unqualified
opinion on the effectiveness of internal control over financial reporting of CPI Aerostructures, Inc. as of December 31, 2016 included in this Annual Report on Form 10-K of CPI
Aerostructures, Inc. for the year ended December 31, 2016.
/s/ CohnReznick LLP
Jericho, New York
March 8, 2017
(Back To Top)
Section 4: EX-31.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER)
CPI Aerostructures, Inc. - 10-K
I, Douglas McCrosson, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
EXHIBIT 31.1
1.
2.
3.
4.
5.
(a)
(b)
(c)
(d)
(a)
(b)
I have reviewed this Annual Report on Form 10-K of CPI Aerostructures, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: March 8, 2017
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CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Douglas McCrosson
Douglas McCrosson
Chief Executive Officer, President and Director
(Principal executive officer)
Section 5: EX-31.2 (CERTIFICATION OF CHIEF FINANCIAL OFFICER)
CPI Aerostructures, Inc. - 10-K
I, Vincent Palazzolo, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
EXHIBIT 31.2
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this Annual Report on Form 10-K of CPI Aerostructures, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: March 8, 2017
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CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
Section 6: EX-32.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER)
CPI Aerostructures, Inc. - 10-K
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CPI Aerostructures, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 as filed with the Securities and
Exchange Commission (the “Report”), the undersigned, in the capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Dated: March 8, 2017
Dated: March 8, 2017
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CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Douglas McCrosson
Douglas McCrosson
Chief Executive Officer, President and Director
(Principal executive officer)
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)