CPI Aerostructures moves beyond defense work

CPI Aero chief executive Douglas McCrosson on a CPI Aero chief executive Douglas McCrosson on a manufacturing floor in Edgewood on March 25, 2014, where leading edges for the Gulfstream G650 aircraft are made. Photo Credit: Heather Walsh

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CPI Aerostructures Inc., once on a course toward insolvency, has a new CEO, a bigger home and a revised flight plan.

Change has been a constant for the Islip Town aerospace company, whose business model as a government contractor was faltering a decade ago.

"We would have been out of business in 2005," said Douglas McCrosson, 51, an 11-year company veteran named chief executive on March 6.

The pulse of Long Island's aerospace industry -- whose labor pool now is only a fraction of the 80,000 workers during the Reagan administration defense buildup and the heyday of Grumman Corp. -- still beats within the 171,000-square-foot plant of CPI Aero and at other corporate survivors like Telephonics Corp., Aeroflex Corp., and Air Industries Group Inc. However, the 800 aerospace and defense firms counted in a 2012 estimate by the Long Island Forum for Technology, and their highly paid workers, remain an economic pillar.

Inside CPI Aero's cavernous headquarters, mechanics work on 11 long-term contracts, building windows for machine guns on Sikorsky Black Hawk helicopters and assembling the leading edge of the wings for Gulfstream G650 business jets. Despite last year's partisan budget bickering and automatic spending cuts in Washington, the company had a $431.4 million order backlog as of Dec. 31 -- a large sum, says Mike Crawford, an analyst with Los Angeles-based brokerage B. Riley & Co., for a company with fourth-quarter revenue of $21 million.

In the 12 months ended April 4, CPI Aero's stock price has climbed 55 percent on rising expectations.

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Using new strategiesTwo pivotal decisions set the stage for the growth of CPI Aero, which nearly doubled revenue to $82.3 million in 2013 from 2010's levels and expanded its workforce to 272 as of March from levels about half that just two years earlier.

In 2004 and 2005 the company shed its focus on bidding for government contracts. The problem? Direct contracts within the scope of a company like CPI Aero are small potatoes, often worth $1 million or less.

"We might have been 99 percent direct to the U.S. government," chief financial officer Vincent Palazzolo said of the business mix in those days.

Instead, CPI Aero decided to pursue subcontracts with "the primes" -- giant contractors like Boeing, Northrop Grumman and Sikorsky -- for replacement parts.

The second strategic move was to redouble CPI Aero's efforts to land nonmilitary business. These days, CPI Aero, seeking a Goldilocks balance between military and civilian work, also makes parts for business jets made by HondaJet and Cessna.

That effort to avoid concentrating on one sector is a common theme among Long Island's surviving aerospace contractors, said Jamie Moore, president of Hauppauge-based industry group ADDAPT, the Aerospace and Defense Diversification Alliance in Peacetime Transition.

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"There's a push and understanding of the importance in diversifying your product line," he said.

 

Company's past troublesCPI Aero's early years were full of turbulence.

The company was founded in January 1980 as Consortium of Precision Industries in Melville and pursued business directly from the government. Like seemingly all Long Island aerospace figures, CPI Aero founder Arthur August -- who died three months ago -- was a veteran of Bethpage-based Grumman Corp., which later was bought by Northrop.

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In 1992, the company was renamed CPI Aerostructures and staged an initial public offering. The company's ticker symbol, CVU, is pilot jargon for "ceiling and visibility unlimited."

By 1995, commercial contracts, including one for apron assemblies -- part of the pylon that attaches the engine to the body -- on the McDonnell Douglas MD-90 jetliner, accounted for more than 90 percent of company revenue.

But CPI Aero suffered a case of corporate whiplash when the MD-90 contract was scrapped after Boeing bought McDonnell Douglas in 1997. Cancellation of the program, accounting for about a quarter of revenue, forced CPI Aero to take a write-off of almost $12 million, resulting in a 1998 net loss of $8.6 million.

CPI Aero ran into more trouble after it bought Ithaca-based circuit board manufacturer Kolar Machine Inc. in 1997 for $14.5 million. Initially that foray beyond aerospace worked well, but by 2001 Kolar's business had gone south, and CPI Aero shut it down. In July of that year, CPI Aero's stock, which had been in the $20s seven years earlier, slumped under $2. CPI Aero at year's end had only $180,578 in cash and a working capital deficit of $2.8 million.

 

Focus back on civilian workTo raise additional capital, CPI Aero sold about 16 percent of the company to investor Eric Rosenfeld and his activist hedge fund, Crescendo Partners, in 2003. (Rosenfeld and Crescendo still own 9 percent, and Rosenfeld is chairman of CPI Aero.)

The pendulum at that time had swung back toward government work, accounting for 98 percent of company revenues at the end of 2003. A voice warning of undue concentration arrived that year when CPI Aero hired McCrosson, its eventual CEO, as director of business development.

"He was one of the champions to diversify the customer base," Palazzolo said.

By 2008 that renewed effort to land civilian work paid off when the company won its contract for the Gulfstream G650.

"That proved we could compete against bigger competitors with greater resources," McCrosson said. "That gave us a confidence boost to go after other bids in the commercial arena."

The same year, CPI Aero won two other core long-term subcontracts, for the E-2D Hawkeye, an electronics-laden radar and battlefield-control plane, and the A-10 "Warthog," a close air-support jet.

 

Hopes for airliner contractAs CPI Aero's confidence grew, so did its need for space. In 2011 Empire State Development, New York's key agency for distributing business aid, provided $900,000 in state tax credits to the company, which agreed to retain 142 jobs and create 80 more as it moved to its current plant, more than double the size of its 75,000-square-foot facility nearby.

"CPI considered different states for this expansion, and I'm glad that we were able to offer assistance to help them choose to continue to grow and create jobs here in New York State," Empire State Development CEO Kenneth Adams said.

The company may have the wind at its back, but challenges remain.

In February Defense Secretary Chuck Hagel outlined a plan to retire the entire fleet of A-10 "Warthogs," originally built by Fairchild-Republic Co. in Farmingdale.

The projected $3.5 billion budget cut also could lop off two-thirds of CPI Aero's $92 million contract.

"The fight has yet to begin, but I'm suspecting that there will be a vocal constituency out there that will support the A-10 remaining in the fleet," McCrosson said.

Former Long Island congressman George Hochbrueckner, once an aerospace engineer and now a lobbyist, volunteered to lead the charge.

"When those A-10s come over the horizon, it brings great comfort to our troops and great fear to our enemies," he said.

Another hurdle for CPI Aero: landing a commercial airliner contract.

"The only thing missing from our product portfolio at the moment is a place on Boeing or Embraer or Airbus," McCrosson said.

McCrosson said that working on an aircraft like a Boeing 737 would elevate the company.

"Does it matter if it's a wing section of an A-10 or a wing section of a 737?

"The answer is: 'Yeah. It matters a lot.' They're making 40-plus aircraft a month on the 737 . . . .That's the next challenge for us: to convince some of these large airliner companies and their suppliers to trust us to make products for them."

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