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CPI Aerostructures squeezed by defense cuts

Keywords: Tags  aerospace, defense cuts, sequestration, CPI Aerostructures Inc., Edward J. Fred, defense indusssssstry, profit concessions, Spirit Aerosystems Inc. Northrup Grumman

LOS ANGELES — Federal budget sequestration and other cost-cutting pressures from prime contractors are rippling down the aerospace supply chain, compelling CPI Aerostructures Inc. to absorb profit concessions while seeking similar compromises from its suppliers.

Edward J. Fred, president of the Edgewood, N.Y.-based manufacturer of structural aircraft parts, said CPI has made deals with some of its customers to insure its long-term participation on key programs, including the leading wing edge for the Gulfstream G650 twin-engine business jet CPI is building for Spirit AeroSystems Inc., Northrop Grumman Corp.’s E-2D Advanced Hawkeye surveillance aircraft and the Boeing Co. A-10 Thunderbolt attack jet.

Price reductions and adjustments on certain programs contributed to a 33.8-percent year-on-year drop in CPI’s second-quarter net income on a slight increase in revenue. Fred said that nothing about CPI has changed from last year, "except the impact of sequestration for a one-year period."

Budget sequestration is spurring CPI, which does most of its business in defense, to seek more commercial aircraft business. Last year, 63 percent of CPI’s revenues were in defense, compared to 77 percent in 2011, according to documents filed with the U.S. Securities and Exchange Commission.

Fred said CPI has a contract with Wichita, Kan.-based Spirit to build 134 shipsets of wing leading edges on the Grumman G650. But Spirit now anticipates being under contract for a total of 400 aircraft.

"In order to get the ability to build those (additional) 266 sets of leading edges, we had to take a price reduction in the unit price of delivered items from unit 135 out," he said, stressing this "management decision" by CPI will create four to five more years of production on this program.

CPI made similar concessions on the E-2D Hawkeye, built for the U.S. Navy, and the A-10 Thunderbolt, built for the U.S. Air Force.

CPI expects an influx of cash in the third quarter resulting from two years of negotiations on engineering and other program changes regarding the A-10.

While he maintained CPI will likely rebuild its margins as its rates move back up, he emphasized this is "not a one-day process. It’s a six-month to one-year process on some of this."

Fred pointed out commercial CPI’s total backlog as of June 30 increased by $20 million to $411.9 million compared to Dec. 31. This gain was attributable to a $35.7 million increase in backlog on commercial programs, which was partially offset by a $15.7 million decrease in backlog for military programs.

Fred did say that, despite the budget sequester, CPI has recently seen "acceleration" in new order releases as its customers receive "more definite information" on key programs. Among these were a $47 million long-term agreement for Sikorsky Aircraft Corp.’s Black Hawk helicopter fuel panels, which will reach full production in the current quarter.

While CPI’s 2013 revenues will be lower than the $89.3 million reached last year, the company is "well-positioned to resume growth in 2014 and beyond," said Fred.

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