CPI Aerostructures, Inc.

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CPI Aerostructures, Inc.

60 Heartland Boulevard
Edgewood, New York 11717
U.S.A.
Telephone: (631) 586-5200
Fax: (631) 586-5814
Web site: http://www.cpiaero.com

Public Company
Incorporated: 1980 as Composite Products International, Inc.
Employees: 67
Sales: $30.27 million (2004)
Stock Exchanges: American
Ticker Symbol: CVU
NAIC: 336413 Other Aircraft Parts and Auxiliary Equipment Manufacturing

CPI Aerostructures, Inc. (CPI Aero) produces structural aircraft parts, primarily for the U.S. Air Force and other branches of the military. The company outsources most of its manufacturing; its niche is combining components from third parties into complex assemblies. Major programs for the company include the massive C-5A freighter, the T-38 jet trainer, the A-10 Thunderbolt attack aircraft, and the E-3 AWACS. CPI is little known outside the aerospace industry but has been growing both organically and by acquisitions.

Origins

CPI Aero was formed in Farmingdale, New York, in 1980 as Composite Products International, Inc. It had been started by Arthur August, a 25-year veteran of Grumman Corp., as a technical consulting firm. CPI was manufacturing components within three or four years. In 2003, CPI President Edward J. Fred told the Wall Street Transcript that the idea was to create a company with the technical expertise of a prime contractor but the flexibility of a much smaller organization.

CPI assembled replacement parts for U.S. military aircraft under contract to the government. Projects included windscreens for the Fairchild A-10 attack jet. Annual sales were about $2-$3 million in the early years. In the late 1980s CPI became a subcontractor to San Diego-based Rohr Industries, putting together structural components and subassemblies for a number of civil airliner projects.

"We call ourselves a mini-prime," Arthur August told Long Island Business News. CPI brought a high level of skills to jobs that were too small ($10 million to $50 million) for prime contractors. August added that the new availability of electronic data via floppy disk closed the "information gap" between large and small companies. "It used to be that huge staffs of people had to be utilized to access the information in government files," he explained.

CPI was able to find a ready supply of aerospace talent after the closing of Fairchild Republic's Long Island factory in 1987. August praised Long Island as "a hotbed of excellent machine shops." Another official explained to LI Business News that CPI was an assembler, rather than a parts manufacturer.

Sales for 1988 were reportedly between $5 million and $7 million. The firm had grown to 50 employees by this time and was adding another 10,700 square feet to its 15,000-square-foot plant in Islip, New York. In 1989, the company's name was changed to Consortium of Precision Industries, Inc.

Military Emphasis in the 1990s

The company went public in 1992 in an offering, raising about $4 million. Its name was changed to CPI Aerostructures, Inc. At the time, business was split 60-40 between commercial and military. The latter component would eventually make up virtually all revenues.

There were a couple of aborted deals in the mid-1990s. CPI canceled the acquisition of Valentec International, a producer of stamped metal parts and ammunition components. An agreement to merge CPI with VTX Electronics Corp., parent company of Vertex Technologies, was allowed to lapse.

CPI bought precision electronics parts manufacturer Kolar Machine, Inc. for $14.5 million in 1997. Based in Ithaca, New York, Kolar employed about 60 people. This operation was terminated in 2001. CPI had announced plans to acquire another precision machining company but this deal was canceled. In 2000 CPI called off an acquisition of another New York aerospace manufacturer due to the equity interest demanded by a financier.

Though the acquisition plans faced such setbacks, CPI was displaying strong organic growth spurred by a military shift towards more outsourcing under the Clinton administration. This produced new demand for CPI's program management services. The company ended the 1990s with record revenues of $21.3 million in spite of the Asian financial crisis and cancellation of a major airliner program, the MD-90.

Record Contracts After 2000

CPI's shares migrated from the NASDAQ SmallCap Market (ticker: CPIA) to the American Stock Exchange in September 2000. "We believe that moving to the American Stock Exchange will increase the Company's support and visibility within the investment community" said Chairman Arthur August. The company's new ticker symbol, CVU, was an acronym for "ceiling and visibility unlimited"—pilot talk for clear skies ahead.

Most of CPI's contracts were relatively small. Arthur August described a $2 million award from Tinker Air Force Base to supply nose cowls for the E-3 Sentry as the largest single military contract the company had landed in two years. Revenues, $8.3 million in 2000, would almost double annually in the first few years of the millennium as CPI landed increasingly larger contracts.

While the U.S. Air Force was spending billions on new stealth aircraft, Vietnam era warhorses made up a large segment of its fleet. The service planned to keep these planes flying for many more years, supplying an increasing source of business for CPI.

In 2001, CPI landed a ten-year, $61 million contract to supply structural inlets for the T-38 Propulsion Modification program. The award size was a record for the company, which typically dealt in contracts worth $200,000 or so.

Chief Financial Officer Edward J. Fred took the role of CEO from company founder Arthur August in 2003. Fred, a ten-year veteran of Grumman, had joined CPI in 1994. Eric S. Rosenfeld succeeded August as chairman in late 2004.

CPI had a record sales year in 2004, as revenue rose 11 percent to $30.3 million. However, net income slipped $3 million, though gross margins remained in the 33 to 34 percent range. CPI employed a little more than five dozen employees at year end and was eligible for preferential treatment as a small business.

This helped CPI win its largest contract to date, which was also the largest government set-aside for small business: a seven-year contract to supply components including wingtips and panels for the Lockheed C-5A Galaxy. The deal had a potential value of $215 million. From 1995 to 2004, CPI had received awards of $71 million related to the program. The C-5, one of the world's largest freighters, was first delivered in 1970 and the Air Force was planning to keep them operational until 2040. Rival Vought Aircraft Industries Inc. was also farming out some of its C-5 production to CPI.

CPI initially profited from the U.S. occupation of Iraq. Its share price boomed and the company was able to raise $9 million in a secondary offering, eliminating its debt. However, heavy use of the C-5 kept the aircraft out of routine maintenance, resulting in a temporary fall off in CPI's spares sales. Aerospace industry giants such as The Boeing Company and Northrop Grumman Corp. were increasingly outsourcing their production of replacement parts to smaller companies.

CPI moved into new quarters in January 2005. At 75,000 square feet, the new facility was almost double the size of its previous plant. CEO Edward Fred told Newsday the company was remaining in Edgewood, New York, after several decades due to the availability of skilled workers and Long Island's aviation legacy.

Long Island Business Journal reported that local machine shops handled 30 to 40 percent of CPI's subcontracting requirements. The company patronized retired workers as well as its neighbors. In Inc. magazine, Fred credited his over-65 hires with improving the work ethic of his younger employees.

In a 2003 interview with the Wall Street Transcript, Fred compared the CPI's corporate culture to that of "The Grumman Family." Staff operated on a first-name basis. "There are no politics," said Fred. "We will not allow it." The company enjoyed low turnover. Underpinning it all was the importance of their work to the U.S. air fleet.

Company Perspectives:

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, is what defines CPI.

Key Dates:

1980:: Company is incorporated in New York as Composite Products International, Inc.
1989:: Name is changed to Consortium of Precision Industries, Inc.
1992:: Company goes public; name is changed to CPI Aerostructures, Inc.
1997:: Clinton administration outsourcing spurs growth boom.
2004:: CPI wins record contract to supply wingtips and other parts for the C-5A Galaxy.
2005:: Company begins doing business as CPI Aero.

CPI was not well-known in the investment community, and had been working with an IR firm to raise its profile. The company also got a new logo and a new name in 2005, abbreviating its trade name to CPI Aero. Its rise landed it a spot on the Fortune Small Business fastest growing companies list. With virtually no similar competitors, a number of long-term contracts, and a supporting role every time C-5s delivered U.S. military resources abroad, more growth seemed likely for CPI. CEO Edward Fred told the Long Island Business Journal, "We don't consider ourselves a mini-prime anymore…. We do everything the primes do."