CPI Aerostructures in Edgewood said it learned the IRS might disallow a...

CPI Aerostructures in Edgewood said it learned the IRS might disallow a loss taken in 2014. Credit: Barry Sloan

CPI Aerostructures Inc., an Edgewood defense contractor, Wednesday reported it swung to a net loss for the fourth quarter after  allowing for a noncash "reserve" to pay an IRS challenge related to a 2014 operating loss.

The 39-year-old maker of structural parts for the F-16 multirole fighter, the E-2D command and control aircraft and the HondaJet business jet posted a net loss of $800,000, or 7 cents per share, in the quarter ended Dec. 31, compared with net income of $2.1 million, or 23 cents per share, in the 2017 period.

In a news release, the company said about $4.5 million was assigned for 2018 income taxes — including $3.7 million for the fourth quarter — after it learned that the loss it claimed in 2014 might be disallowed. About $3.1 million of that amount was related to the 2014 issue. 

In a telephone interview, CPI Aero's chief financial officer Vincent Palazzolo stressed that the tax issue is still unfolding and that the company has not set aside any cash.

"It's a liability sitting on the books," he said. 

The tax  reserve gave CPI an effective tax rate of about 66 percent, the company said.

Palazzolo said the IRS review of the issue dates to 2015 and has been "dormant for a long time."

Douglas McCrosson, CEO of CPI Aero, says the defense contractor...

Douglas McCrosson, CEO of CPI Aero, says the defense contractor has a "large backlog" of orders. Credit: Heather Walsh

He said the agency is not disallowing CPI Aero's claim of an operating loss, but was questioning in what year it should be applied. That matters because the company's corporate income tax rate varies from year to year. Palazzolo said the company has yet to receive written notice of the IRS position, but could appeal a ruling. 

Fourth-quarter revenue climbed to $26.5 million from $23.8 million in the year-earlier period.

The company forecast 2019 revenue of $98 million to $102 million. That compares with $83.9 million in 2018.

"In 2018, new multiyear program wins, contract extensions and program acquisitions added more than 17 percent to an already large backlog," CPI Aero's president and chief executive Douglas McCrosson said in a conference call. 

Shares of CPI were up  7.04 percent to $7.30 at Wednesday's trading close. Twelve months ago the stock was trading at $8.25.

In February the company disclosed in a government filing that an accounting "error" had been identified in its third-quarter results requiring reductions in revenue of $900,000 to $950,000.

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