Greetings, and welcome to the CPI Aerostructures Inc. Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Edward Fred, Chief Executive Officer. Thank you, Mr. Fred. You may now begin.

Thank you, Jesse. Good morning, and thank you all for joining us for our second quarter 2013 conference call. If you need a copy of the press release issued this morning, please contact Lena Cati of the Equity Group at (212) 836-9611, and she will fax or email a copy to you. Also, if you would like to listen to this call again, you can hear a replay on our website's Investor Relations section in about 1 hour at www.cpiaero.com. Before we get started, I want to remind investors that this conference call will contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. Included in these risks are the government's ability to terminate their contracts with us at any time, the government's ability to reduce or modify its contracts, if its requirements or budgetary constraints change, the government's right to suspend or bar us from doing business with them, as well as competition in the bidding process for both government and subcontracting contracts. Our subcontracting customers also have the ability to terminate their contracts with us if we fail to meet the requirements of those contracts, or if their customer reduces or modifies its contracts to them due to budgetary constraints. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Additional information concerning these and other risks can be found on our filings with the SEC. As announced earlier this morning, our first half results were in line with our expectations. Revenue for the first half of 2013 was approximately $41,038,000 compared to approximately $40,576,000 in the first half of 2012, with the G650 and the A-10 programs accounting for most of this increase. Gross margin was 21.1% compared to 26.5%. Pretax income was approximately $5,006,000 compared to pretax income of approximately $6,734,000 for the same period last year. Net income for the first half of 2013 was approximately $3,456,000 or $0.41 per diluted share, compared to net income of approximately $4,615,000 or $0.63 per diluted share in the first half of 2012. Selling, general and administrative expenses for the first half of 2013 were approximately $3,374,000 or 8.2% of revenue compared to approximately $3,675,000 or 9.1% of revenue for the same period of 2012. So with that prelude, I will now hand the call over to Vince Palazzolo, our CFO, who can walk you through the financial statement details for the second quarter. And I will comment on the current business environment, our guidance for the current year and new opportunities going forward. I will then wrap things up and open the call to questions. Vince?

Thank you, Ed. As reported in this morning's press release, comparing the second quarter of 2013 to the second quarter of 2012, revenue was $21,110,452 compared to $20,854,627. Gross margin was 20.1% as compared to 27.7%. Pretax income was $2,584,276 compared to $4,024,019. Net income was $1,784,276 or $0.21 per diluted share compared to $2,696,019 or $0.36 per diluted share. Selling, general and administrative expenses were approximately $1,496,000 or 7.1% of revenue compared to approximately $1,570,000 or 7.5% of revenue. Ed?

Thanks, Vince. As we've discussed for what seems like 5 or 6 quarters, the federal budget sequester resulted in delayed contract decisions by many prime contractors in the aerospace and defense sector, including our customers. However, even with the federal budget sequester, we have recently seen acceleration in new order releases for military aircraft, as our customers have received more definite information regarding certain key defense programs. In that regard, in July we received a $47 million long-term agreement from Sikorsky for the production of the BLACK HAWK fuel panels, a program for which CPI Aero has provided assembly labor since 2010. We expect this program to transition into full production during the third quarter of 2013. Including this new order, new contract awards, as of July 31, from all customers were approximately $68 million or 50% higher than the approximately $45 million of new contract awards reported for the same period in 2012. We expect additional contracts to be released before 2013 year end and to have another solid year for new business from both the military and commercial segments. There is also a real business potential from our current bid pipeline of unawarded solicitations outstanding, once these programs either become funded or are awarded. In the past several years, our reputation has been elevated in our industry, thanks to our impressive list of customers, the success we've experienced on the important programs we've been working on and the exposure we have had and the contacts we've made at various aerospace and defense institutional investment conferences. We are now in the midst of establishing relationships with additional prime manufacturers, including other helicopter and business private jet companies, who have come to recognize CPI Aero as a premier supplier of aircraft structure. Among the unawarded bids outstanding are contract opportunities…

[Operator Instructions] Our first question is coming from the line of Joe Bess with Roth Capital Partners.

Ed, when you talk about new business opportunities looking forward, can you talk a little bit about where you're seeing product mix potentially shifting between fixed wings, rotary wings, pod systems and MRO?

I think the new business opportunities we're seeing the most of, at this moment, are obviously on the fixed wing side of the business, commercial aircraft, obviously, both from, and I'll say -- I'll call it, from Boeing and from Airbus, though not necessarily direct from them as customers, but from their sub tiers as well. That's where the bulk of the bids come from. That is where the bulk of the growth that we see coming to CPI will come from. There's still plenty of work in the rotary business, obviously. MRO, not as much. The MRO that we're doing right now is one contract with one customer, and we're getting our feet wet on it. We're only in it about 3 or 4 months now, so I'm not sure how big that will eventually become. And pod work is -- it's a wonderful business and we've got some great programs we're working on. However, it remains to be seen, that with sequestration, how much of this will get funded and when. So I think fixed wing, mostly in the commercial area, is the best answer I can give you to that question.

Okay, great. And then speaking about SG&A, and as you guys reduce some of your cost to be able to maintain guidance in 2013, how does this impact you guys when you look out to 2014? Are these costs that you expect to return back to your income statement as you continue to grow the business moving forward?

I think you would return some of it back. I mean, these are not massive cuts, first of all. These aren't employee cuts, necessarily. Unless we see a place where we think we might be a little top heavy and don't need to be. So I think part of it will come back, but a lot of it is just making cost-conscious decisions, not to spend X,Y or Z on something. And also, whether there will be a long-term effect is we're also looking at inefficiencies and saying, "How do we fix those?" Lower the cost this year and then have it be a constant going forward.

Okay, great. And then thinking about gross margins, a little bit more in the quarter, it's a little bit surprising to see it 2 consecutive quarters. Can you talk a little bit more about how you see some of your contracts, potentially, doing similar things to it with adjustments going forward? Or how -- what can you guys do to offset these going forward?

I don't know if there's necessarily a need to offset more reductions. I mean, let's -- and I'll -- this might be a long-winded answer, but I'm going to try to clear this up for everybody. A-10, we've had a 2-year negotiation with Boeing on engineering changes, et cetera. We finally concluded that, there'll be, as you'll see in the third quarter, an influx of cash from the Boeing program to settle outstanding receivables and claims. However, in any negotiation, you will lose something. Now at the current time, we've basically have taken a 2-point reduction in our gross margin. Let me move on to Spirit. Spirit comes to us, and we go to them, and we have a contract to build 134 ship sets of leading edges on the Spirit -- or the Gulfstream G650. Spirit offers us the opportunity to have what, in essence, is the life of the contract, contract. Now if anybody listened to the Spirit call yesterday, their block, the G650, of 350 ships sets has now increased to 400 ship sets. So using layman's terms, Spirit is either under contract or anticipating to be under contract for almost 400 of those aircraft. That's 266 more planes than we had on contract 6 months ago. In order to get the ability to build those 266 sets of leading edges, we had to take a price reduction in the unit price of delivered items from unit 135 out. Now you make a management decision to do that, because that's going to create 4 to 5 more years of production on a program. That said, let's take the 2 -- and real quick, the Northrop Grumman one. Northrop Grumman is going for, and this is well-publicized, this is not inside information, so nobody panic here, Northrop Grumman…

Great. And then just a quick follow-up on the Spirit contract with G650 and the 400 ship sets now. Is there sort of timing behind when they think that they might release the orders for the remaining 266 that you guys haven't been on yet?

No. Because the contract we have now doesn't -- there's a change, in other words, we had a contract that said 134 ship sets. The purchase order we now have has an unlimited end. It doesn't say the number at all. It's just that, every year, they will order whatever their requirement is. So if you simply go by their own build plan, you'll see this thing now runs out through 2019.

Our next question is coming from the line of Mark Jordan with Noble Financial.

Follow-up relative to the multiple contract adjustments that you've worked on in the first half of the year. In aggregate, does that represent about $1.5 million to $2 million in increased costs in the first half?

Not actually increased costs, because...

It aggregates to about $2.5 million of margin saved. That is -- you're pretty close on that, Mark. But it's not an issue of costs, it's adjusting the carrying balance of that cost and estimated earnings account.

Right, right. Does that adjust increase in the cost of goods sold by $2.5 million approximately in the first half of the year?

Yes.

Okay. Second question relative to the multi-year buy that Northrop Grumman is working on, the 32-plane buy, would that represent a 5-year program?

I believe so. It's anticipated to be a 5-year program, but as you probably heard as much as we have, there's also, if budget issues get under control, the fact that they may even increase rate to 8 a year, which would make it even less than a 5-year buy. Theoretically, that would be a 4-year buy. But the intent right now is a 5-year buy.

Yes. Because I think, if I remember the original program went up to about 6 planes a year, at full rate production.

Correct.

As you mentioned, the Spirit call earlier this week, they've obviously announced that they're selling the Oklahoma facilities and...

If you're asking, we're not buying it. Just so you know.

They only have 2,700 employees. I realize, it would be a little bit -- subtly large for you to digest. The question relative to the restructuring that they're obviously going through, is this an opportunity, near term, for you, if they're rationalizing some other production plans? Or does this freeze the opportunity out of Spirit because they're just looking at everything and not moving forward on any outsourcing activity?

No, I think they'll still continue to outsource to a certain extent. And don't forget, this is only one facility, this isn't their overall entity, which is why, when the news came out a week and a half ago that GKN was buying Spirit, it was completely false. Spirit is not up for sale. So I think, there's still plenty of opportunity to get offload work from them. Will it be a little more selective perhaps? Because any buyer is going to want something, other than just a couple of wing programs? Sure. But with even the going-forward concern, that is Spirit, I believe, there'll still be plenty of offloading business.

Okay. A final question, relative to the 650, nearly -- or as I understand it, you've got tooling, specifically, to facilitate the current build plan. Do you have time that -- or plans to make additional investments in tooling and when might that occur?

There should be no need for additional tooling. We're almost off to their highest rate of production that they're predicting. And all we've done to do that is added a second shift and worked longer hours on this particular program. At this moment, we don't anticipate adding in a second set of tools or anything like that. And I don't know, unless I was pretty certain, somebody sent me a letter and said, "Guess what, Ed? You're building 400 of these." I don't think I'd anticipate, even considering something like that.

Okay. It's just that the G650 has about a 5-year backlog which, traditionally, is longer than -- General Dynamics likes to have for their large cabin aircraft. They usually like to have a backlog of about 3 years in duration, because they've -- I was wondering if you've heard of any thoughts or general discussions, because they had...

Have not, and again, we could go third shift, if we had to, before I would want to throw in additional cost in, with no reimbursement of those costs whatsoever.

Okay so you still have capacity versus their current build plan?

Yes.

Our next question is coming from the line of Michael Callahan with Topeka Capital Markets.

I guess, first thing here. On the guidance, on the revenue guidance, really, for the first half of the year, you're at a kind of a run rate of $82 million. Go back 2011, it goes down to $74 million, suggests a pretty big falloff in the second half. But then you have the, I guess, the BLACK HAWK program, which is supposed to ramp up in the third quarter. I'm just trying to connect the dots there, as to how you get to that kind of revenue reduction in the back half of the year.

Because the -- we anticipated -- the best I can say to you is, we anticipated having some of that BLACK HAWK revenue in the back half of this year, based on discussions we had been having with Sikorsky, back in even 2012. And yes, you're 100% correct, and I think all shareholders need to be aware of that. The third and fourth quarters will be significantly lower than the third and fourth quarters were of last year. And I would assume that's been built into the stock price and everybody's investment strategy, et cetera, because we do stew what we say we're going to do. And we did say that revenue would be approximately $75 million and, you're right, it's at $41 million right now. And so, yes, it has to come down in those quarters. The fact that we didn't have the full year of Sikorsky's fuel panels like we would have had there not been sequestration. The fact that we have not received the Boeing A-10 newest release, because of sequestration, and a couple of other programs, which we haven't discussed specifically, and I won't here now. But that is what drove this revenue number down to $74 million, $75 million. Had there not been sequestration, as we've said numerous times now, we would have gotten an A-10 release at the end of last year. The Sikorsky release would have been here at the end of last year, a couple of other things would have happened and we would have continued our increase in revenue and bottom line for 2013. So everything you're seeing here is a result of that, it's exactly what we've predicted and projected. And so, in answer to your question, even though we've got, now, Sikorsky revenue coming in at the third and fourth quarters, it was anticipated revenue that was going to get us to the $75 million.

Okay. I guess, I've just one follow-up on that. So in the second quarter, you actually still grew the top line a little bit. From second quarter to third quarter, what are the primary programs there? Can you share that? Is it the A-10 primarily or...

One of the primary programs that, what?

That, I guess, that are seeing the big reductions from second quarter to third quarter.

Yes. A-10 will have a reduction in revenue recorded in the second half of the year, albeit there'll still be shipments but, remember, because of percentage of completion, you don't see and always match up revenue with shipments.

Okay. Understood there. I guess, then on the -- just kind of a follow-up on the margins so that, I guess, I'm clear. So I understand that adjustments to your percentage of completion in the first and second quarter, but then when you go out to the third and fourth, it seems like there's somewhat of a continued lower run rate through the back half of the year. And you guys talked about, hopefully, getting some of that back. But is that a safe assumption then, going forward, because of these program changes, you're going to have kind of a permanent reduction in margins, or maybe not permanent, but it will be lower, for now, until you can work through those issues?

That answer is correct. Yes, it will be lower until we can work through the issues. Meaning, though, it might only be 25% per quarter, instead of the 27% we had been hitting the last quarters of last year. It will take us time to negotiate with all of these suppliers to get the rates back up to where they belong. The other thing you have to keep in mind is, when you do an adjustment to any AC and the gross margin, that big hit comes in the quarter you do it in. So in other words, this is, not now, a 3% hit across the board in every quarter, you expect to see it down 3%. If the percentage changed, the reason we're 20% now is, it changes the gross margin from the inception of the program. And so you reduce -- you're going back and adjusting cost of goods sold, if you will, for 3 to 5 years on some of these programs. And so that's why the big hit in the second quarter, but why? We can look and say to you, "Yes, but we're still going to hit 23% or 24% for the year, because it doesn't mean the third and fourth quarters are going to be at 20% each." Otherwise, we'd never get there.

Right. Okay. And then just the last thing here, I guess, what the revenue reduction in the back half of the year, or the lower revenue in the back half of the year, but you guys mentioned shipments will be your record, ever, I think. Is it right to draw the conclusion then that cost and estimated earnings account will come down pretty significantly to get to your free cash flow number, in addition to that Boeing agreement, or is that...

It's a 100% correct. That's exactly how it will work.

[Operator Instructions] Our next question is coming from the line of Bhakti Pavani with B. Riley and Company.

Just a quick question. I know you already covered questions on margins and the C&EE, the cost and estimated earnings, that Mark asked. Just a quick clarification on that. For this quarter, the margins were 20%, and that included the price negotiations for Boeing, Spirit and Northrop. So you are taking the result for the E-2D program. So is that fully baked in, in this quarter margin? Or do we expect a further risk of concentrations for the third and the fourth quarter?

No. It's baked in right now. No, I said, it's baked in to the second quarter. We're not anticipating taking an adjustment every quarter on it. We believe there was an adjustment to be made, we discussed it with our auditors and we decided, okay, if we believe there's an adjustment to be made, if we believe this is going to happen, let's do it when we know about it. We're not -- plain and simple, we're not going to manage our results, okay? When we know something is certain at a certain time, or at least, likely, we go ahead and book it, and whatever impact that has, it has. And that's what we did with the Northrop Grumman piece.

Okay. And last quarter, you had a revision in gross margin of about $1.4 million. What were the revisions for this quarter in cost and estimated earnings? I mean, the revisions and gross margins?

Yes. That was -- the cumulative number that we had talked about when Mark was on the phone, $2.5 million, that's the cumulative.

So $1.4 million and $1.1 million.

Got it. Also now that you have completed negotiations with Boeing, how does that correlate to the cost and estimated earnings for the third and the fourth quarter? How should we see that? Is it going down? How would we deploy?

The C&EE should be declining overall and of that's -- a very large piece of that will be for Boeing. That's ultimately how we're going to achieve the positive cash flow that we've been talking about since the beginning of the year. The conclusion of that negotiation is allowing us to bill at the full amounts. We're going to get some progress billings to help fund some of the inventory that we have in the building and that will lower the C&EE and pop the cash up. And Boeing's [indiscernible] for that.

Okay. Just a housekeeping question, what was the depreciation and amortization for the quarter?

Depreciation for the quarter was $175,000.

Our next question is coming from the line of Mike Crawford with B. Riley and Company.

I just wanted to follow-up from Bhakti's questions. You mentioned earlier in the call that you were bidding in commercial aircraft parts. I believe that commercial jetliners is a segment of the market you've yet to break into. What are your prospects there?

I think our prospects are very good there. There hasn't been a part of the market that we haven't, eventually, been able to break into. You build a good product, you deliver a good product, it's high-quality, it's on time, and you are going to get customers who will give you a try. We have numerous, numerous bids outstanding on commercial airline work. And I believe we're going to be successful. There was the one big one, that everybody knew about, we did not lose that. The company decided not to give it out because they did not win something they thought they were going to, that was going to free up more space, et cetera. CPI did nothing negative or lose a bid, or lose it to someone else or anything else. It was kept in-house and not offloaded like it was supposed to be. Other than that, the things that we're bidding on now are, pure and simple, bids outstanding, where they've come out with an RFP or an RFQ, and CPI has responded. And we believe, as we've said, in all of our investor presentations and said since the beginning of the year, we believe, before this year is out, we will win some commercial programs. At least one, perhaps more. But we're certainly feeling confident enough to say that we feel like we will win at least one. And like everything else that has happened here at CPI, one leads to 2, which leads to 4, which leads to 10. And so, we're really excited about the possibility. If it were not for sequestration, we'd be riding a heck of a wave right now, and everybody would be high on us. So nothing about CPI has changed, from a year-to-year, except the impact of sequestration for a 1-year period. So we're highly optimistic about commercial work and we hopefully have something to report to you folks, prior to the end of this year, on a nice win.

Okay. And then regarding next year. So we've seen some recent E-2D awards, and we also -- you've also now settled with Boeing. So presumably, you have some more visibility into how that's shaking up for next year. What kind of -- and given the other work you have in your backlog, in your shipping schedules, how -- what kind of recovery would you be targeting for next year, in terms of -- on the revenue side?

Mike, you're asking me to give you a projection for 2014, which we haven't done yet. It was a cute way to get to it, but I'm not going to go there yet. My words have been pretty clear, we expect to resume growth in 2014. Now I think we did $89.1 million in '13, if you would like to assume that's $89.2 million, or a million -- I mean, $1,089,200,000, that's going to be your call right now. We're simply saying that, as I just phrased it a minute ago, in my answer to you about commercial airliners and stuff, we believe we are positioned to resume growth in 2014, because sequestration is behind us, because our orders are now coming in the way they were, and because of the bid pipeline we have. I am not in a position to give you a range, or a number or anything else right now, other than, to repeat what we said, we anticipate returning to growth in 2014.

Our next question is a follow-up question from the line of Mark Jordan with Noble Financial.

Saw an article that the DOD is planning to put new engines on the C-5, obviously, extending the -- that would materially extend the useful life of that airplane. Would that act as a catalyst to start driving more business on the C-5, which has been relatively slow for you?

Mark, you would think it would. But since the Iraq War started in 2004, nothing with the C-5 has been what we anticipated. I can't answer you. Yes. Common sense says, if you're going to spend the money to re-engine planes, they're doing the engine modernization and the avionics modernization, apparently, only on B aircraft, C-5Bs. It looks like the As will be taken out of service. You would think, then, you need to do structural modifications, maintenance, repair, replacement, whatever words you want to use, too. One thing we do know is that there's a huge drive, if you will, because of the budget reductions, of cannibalizing As and using any usable part on an A and putting it on a B. That would, obviously, be a detriment to us, or anybody else, for that matter, getting to make replacement parts for the C-5 right now. The other side of the argument is, why are you going to put all this new stuff on a plane and then just put old panels on, or old doors on, and have to replace them 3 years from now. So I'm talking totally from opinion and guess work here. I don't know what they're going to do with the C-5, as far as structural goes. I do know this, if they go to a structural modification program, prior to the Iraq War, CPI was the second largest provider of replacement parts on that aircraft in the world, trailing only Lockheed Martin. And I'll be second to them any day of the week. Okay. We used to do $30 million a year in revenue and $25 million of that was probably C-5 replacement parts, okay? So we're prepared to do it, if it comes out. It would be a huge boost to our revenue stream and it's very profitable dollars on that aircraft. So it just remains to be seen. I have no idea what they're going to do.

Okay. One last question, just following up. You were talking about expecting growth and, obviously, you didn't -- in 2014, you did reference, I believe, that 2012's $89.2 million. Is that the base in which you think you will meet or exceed? Or is that growth measured off of the current year, which is in the $74 million to $75 million range?

I would say to you that, I'm not prepared to go all the way and give you the answer that you're looking for, just, should we model you with better than $89.2 million? We will absolutely be well up over 2012 -- I'm sorry, '13, sorry. And if a few things fall right, then you'll know about it, you'll hear about it, you'll see the press releases on it, and we will come out with the projection that, perhaps, then takes us past the 2013 number -- 2012 number as well. At this point in time, given the fact that we're about to enter another budget cycle, and we still have no idea what's going to happen, I'm not about to go out and shout from the rooftops that we're going to do $100 million this year, or $95 million next year. I just don't know yet. Given the new way business is being done, it's too early for me to give you that kind of a number.

Our next question is coming from the line of Ron Artenian [ph], a private investor.

I have a -- I take my license as just a private investor to ask you a very rudimentary question. I apologize for it. Just very simply, hold my hand on the definition of your backlog versus your funded backlog. Just explain the funded part to me.

Okay. Ron [ph], let's suppose we get a contract award that's 5 years, $100 million, okay?

Right.

With that award, we're going to -- the customer releases to us -- the fact that we can go ahead and spend $20 million, right now. When we -- In theory, and we're going take this in really rudimentary steps, in theory, the way we would do it first is, $100 million goes into the backlog, unfunded backlog of the company. We, then, would immediately pull $20 million out, because we've been told we had the right to go ahead and build to that. The $20 million would be in funded, now we have $80 million of unfunded, for a total of $100 million. So the total we have, that's $411 million, and I will point out, that's as of as June 30, so it does not include the Sikorsky BLACK HAWK helicopter, which came on July 31, I believe, or something to that effect. We had $411 million in anticipated orders from customers. Of that amount, $75 million, $78 million is, had we have been told to go ahead and start building on, if we incurred cost and if that program got canceled, they would have to pay us all that money back, et cetera. So that's the difference between funded and unfunded.

It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Edward Fred for any of the concluding remarks.

Thanks, Jesse. Before I close the call, I'd just like to let people know, if you'd like to see our facility, firsthand, we have produced a 2.5 minute video that will give you a flavor of what we do here and what the inside of the facility looks like. It's posted on the company's website and will also be used on our business development presentations going forward. Additionally, we are planning to organize an Investor Day here at CPI, later on this fall. For additional details, interested investors and analysts may contact Lena Cati at the Equity Group at (212) 836-9611. I'd like to thank all of you for participating in this call and look forward to speaking to you again in early November for our third quarter earnings call. Thank you. And thank you, Jesse.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.