CPI Aerostructures, Inc.

Thank you, Claudia. Good morning, and thank you all, for joining our second quarter 2012 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 e-mail 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 an hour at www.cpiaero.com.

Before I 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 contract 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, for the first half of 2012, we reported record second quarter results with substantial increases in revenue and net income.

Specifically, revenue was approximately $40,576,000 compared to approximately $33,436,000 in the first half of 2011, an increase of approximately 21%, with the G650 and Honda programs accounting for most of this increase.

Gross margin was 26.5% compared to 24.2%.

Pretax income was approximately $6,734,000 compared to pretax income of approximately $4,107,000 for the same period last year, an increase of approximately 64%.

Net income for the first half of 2012 was approximately $4,615,000 or $0.63 per diluted share compared to net income of approximately $2,939,000 or $0.41 per diluted share in the first half of 2011.

Selling, general and administrative expenses for the first half of 2012 were approximately $3,675,000 or 9.1% of revenue compared to approximately $3,883,000 or 10.1% of revenue for the same period of 2011.

So with that prelude, I will now hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement's details in the second quarter. Then, 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 2012 to the second quarter of 2011, revenue increased 19.7% to $20,854,627 from $17,426,223.

Gross margin was 27.7% as compared to 24.4%. Pretax income increased 92% to $4,024,019 compared to $2,094,816.

Net income increased 71.6% to $2,696,019 or $0.36 per diluted share compared to -- sorry, compared to $1,570,816. Selling, general and administrative expenses were approximately $1,570,000 or 7.5% of revenue compared to approximately $2,082,000 or 12% of revenue.

Ed?

New orders through August 3, 2012 were $44.6 million. This award total includes contracts with 2 new customers, Goodrich Aerospace and EMBRAER.

Additionally, we have continued to receive follow-on releases of some of our major subcontracting programs including a $12.7 million order from Boeing, the A-10 program. All of these awards have given us a predicable revenue stream which previously enabled me to issue our 2012 guidance.

There is also a real business potential from the nearly $1 billion of unawarded solicitations outstanding once these programs are funded and/or awarded.

Included in this number are the 2 bids totaling approximately $647 million from an international aerospace company for work on the Boeing 787. These bids are exciting to us.

They relate to an offload program, which means a potential new customer sought us out and asked CPI to potentially build assembly for them. While there is no certainty we will be successful with these bids, we believe that being solicited by this potential new customer proves that we have demonstrated to the industry our ability to perform, and that we are capable of obtaining substantial orders for work on long-term significant projects such as the Boeing 787.

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 that we're working on and the exposure we have had and the contracts 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 with these potential customers, including our first serious opportunities to perform work on a commercial jetliner, as discussed a moment ago. We look forward to reporting on our progress of turning solicitations with these prospects into awards and contracts in the very near future.

Our second quarter and first half results were in line with our expectations, and we are projecting the balance of 2012 to have a similar quarterly performance profile as 2011. We are expecting a strong second-half and a particularly strong fourth quarter as our newest contracts begin to generate revenue and income.

As a result, we are reaffirming our 2012 guidance, which calls for revenue to be in the range of $95 million to $98 million, primarily due to continued work on our 3 major long-term programs. With gross margin in the range of 25% to 27%, we anticipate net income in the range of $12 million to $13 million.

Our 2012 guidance has factored in the current defense budget environment and reflects the cuts mandated by the Budget Control Act of 2011. However, it is still unclear whether or not sequestration will take effect in January '13 and what the impact of even deeper cuts in defense spending will have on CPI's existing and projected defense contracts.

And please understand that this uncertainty is not confined to CPI, but to all aerospace and defense companies and has been the subject of discussion on many of their earnings calls for this quarter.

Therefore, we believe it is imprudent to provide financial projections for 2013 until later in the second half of 2012 when we anticipate the federal budget situation will be more sufficiently defined and an election cycle will have been completed. We believe that timing of the guidance to the latter part of the year also more closely aligns ourselves with our industry peers.

To support our expected growth in new orders, customers, programs and of course, revenue and profits over the coming years, not only have we amended and increased our credit lines to a combined borrowing capacity of $22.5 million, but the company raised approximately $13.5 million through a public offering in June and July. We used approximately $4 million of those net proceeds to repay a portion of our revolver.

Additionally, we have increased our workforce to 180 people, and we are conducting our operations at our new, 3x larger 171,000 square-foot facility, which we moved into in mid-December 2011.

Also, in July of this year, some of CPI Aero's management team attended the Farnborough Airshow held in London. For those who are unaware, the Paris and Farnborough Airshows are on alternate years and had such great success in making new contacts and opening new doors in Paris during the last 2 shows, we believed it was extremely important that we continue to have an increased presence in the industry by attending Farnborough for the first time.

It was a very fruitful event and once again, CPI validated its increased standing in the aerospace community. We look forward to our immediate and long-term future with great anticipation and excitement as we execute on our contracts, develop new customers and deliver unprecedented financial results for our company.

At this point, I'd like to open the floor to questions. Claudia, can you now allow callers to place questions, please?

First, on the unawarded solicitations outstanding, can you give us a sense of how much of that relates to Sikorsky? It looks like they made some progress on their contract with the government for the BLACK HAWK.

I'm just curious how that's flowing down to you?

Yes, that's still in the range of about $125 million to $150 million as it's been for a while. You are correct, they have made progress while we are at Farnborough.

They actually, first day of the show, signed multiyear rate with the U.S. government.

All I can tell you is there has been increased activity from Sikorsky now with us, and I'm sure, with all their other suppliers, a sense of urgency in getting things under contract that they believed, they would have had under contract by now. So we're optimistic that the logjam at Sikorsky should break loose now, now that their customers finally signed up with them.

Okay. That's helpful.

And second question, on your SG&A, it decreased quite a bit from Q1 to Q2. Can you give us a sense of what is a good run rate for SG&A?

That is predominantly the result of the way we compensate our Board of Directors. In prior years, we split stock options to them, partially, in the first quarter and partially, in the second quarter.

This year, they only got a limited amount of stock options in the first quarter, so the second quarter SG&A decreased by a substantial amount, almost entirely because of the not having a stock option charge in there.

Okay. So that's about a $500,000 charge, is that right?

Yes, roughly, that's right. The run rate for the remainder of the year is comparable to the second quarter.

Okay. That's helpful.

That was the outlier quarter.

Any sense, you, I guess, commented on the potential 787 by stating that you hope to be reporting something in the near term. Is that an implication that you would expect some form of feedback here on that outsourcing opportunity in the next 90 days?

Absolutely correct. It is my highest priority, and -- I mean, obviously I have a lot of priorities here.

But as far as new business goes, my highest priority is getting a resolution to that bid. Knowing if we're going to win it, if we're not going to win it, if there's other work we're going to get from them, what have you.

But yes, I would say within 90 days, we will know, one way or the other, whether we're going to win some of this work, all of this work, or if there's also additional work on the horizon from this particular aerospace manufacturer.

All right. Second question, I guess, technical one, the over allotment announcement went out July 3, so is the cash from that not reflected -- the $2.2 million cash from the over allotment, not reflected in the balance sheet as it's shown today?

That's correct, Mark.

Okay. And looking at the third quarter, should we be assuming -- am I correct with the share base should be around 8.85 million?

The share base should be about, for the quarter alone, I would guess around 8.3 million. We got 8.1 million outstanding.

And the outstanding options, upon conversion, we are always 200,000 to 250,000 more. So for the quarter alone, it's about 8.3 million.

Yes. Mark, don't get confused.

Some of the shares sold in the offering were already in the share count, inside a few shares [ph].

A couple of hundred thousand [indiscernible].

And that's [indiscernible].

Okay. Final question, if I may.

Could you discuss where you are with regards to your Boeing accounts receivable in the A-10?

Nothing new to report on it other than we've had much more progress discussions with them certainly over the last 3 weeks and more, our plans, to get this resolved as quickly as possible. This is an item that we're all hoping is resolved by the end of the third quarter.

So no promises, okay? I have to preface it with that or make it a subscript.

But, I am dealing with one of the largest companies on the face of the earth, and just because I want to move quickly, it doesn't mean they're going to. But they are anxious to get this resolved.

We're anxious to get this resolved. So hopefully, this will get done soon.

Most of my questions have been asked. Just out of curiosity, as Goodrich is a relatively new customer and they've been acquired by UTX, which, I guess, owns Sikorsky, can we talk about any dynamic that you've seen there or any dynamic that you would expect to see given that acquisition?

Well, the only -- I mean, we've seen nothing. It's relatively new in that regard.

The only thing we've seen is they've told us to stop calling them Goodrich and start calling them UTC [ph]. But the only thing we do see is, last Monday morning -- last Tuesday morning, Sikorsky came down and awarded us our second consecutive Supplier Gold recognition.

And with that, that is -- the Supplier Gold is actually, not a Sikorsky recognition. It's a UTC recognition.

We are being recognized as being a Sikorsky supplier. But what that should do is, the group that was Goodrich, that is now another piece of UTC, also then has us on their list as a Gold Supplier for structure.

So of course, we are hoping, after we start to deliver the first set of products to them and they see our capability, et cetera, that it will open the door in their business segment as well, to getting a lot more structural work. So that's the dynamic we are hoping for.

It Is what we expect to happen going forward, though, that's not a guarantee it will.

Okay. And then just lastly, big drivers in the quarter were G650 and Honda, expected big half, especially fourth quarter.

Can we talk about the dynamic, and my guess is those are the big drivers as well?

Well, when we say big drivers, let's just be careful with that distinction. They were big drivers for the quarterly year-over-year.

It's not -- they're not the big chunks of revenue that are driving our number to where it is. Those are still G650, yes, but obviously, Boeing A-10, the E-2D is a tremendous revenue driver, things like that.

So, I think it will be those major programs, with the addition now of Honda, picking up a little bit more as we try to deliver product in early 2013, et cetera.

Recently, you were awarded a $1 million contract for MH-60S AMDS. Considering that it's still in the early stage, what kind of visibility do you have over the platform with regards to the future potential and how big of an opportunity that could be for the company?

Okay. This is obviously speculation on our part.

We obviously know what could come. This can become a very major program, of tens of millions.

It is the type of program that is experiencing tremendous success in the testing phases and the low rate production usage phases. It has performed at the radar, something that goes inside the pod we produce, is performing at rates and success ideas that they never truly expected from it.

So, we all think it's got tremendous potential. Now, of course, that means the government still has to want it, and they're also looking, potentially, at selling this product overseas.

Because, again, its entire purpose is to find land mines or mines in the water, et cetera, and take them out. Now with all the shipping and issues that go on in the waters around the world, this can become a very, very strategic weapon, if you will, for many, many foreign countries.

So we think it has an awful lot of potential. And being the only one that's building the pod for them, there's hope for CPI that if this thing does take off, it will be a beautiful new program that nobody's really talked about or necessarily anticipated being a big revenue driver.

Right. Just a quick question on the tax rate, the tax rate seems to have picked up in the second quarter.

I mean, it's about 33%. Should that be considered going forward, I mean, that run rate, or is it going to be something else?

I mean, what's it going to be?

Just for the entire year, there's a little blip in the second quarter that caused the current rate to be higher. I would anticipate for the going forward quarters and then maybe blend it for the whole year to be closer to 30%, which is what we're running in the past few quarters.

Right. Okay.

And just to circle back on Mark's question on the SG&A. I'm not sure if I misheard, but was Q2 an outlier or is that the same run rate that should be expected going forward for the SG&A costs?

Neither one was a true outlier. But what Vince was trying to explain is because we did the compensation of options to our Board in January, that would be the outlier of the 4 quarters.

The second quarter is one that will much more likely represents the last 2 quarters of the year.

I appreciate completely the reluctance to give guidance for 2013. I was wondering if you could just kind of walk through your general thoughts.

The commercial exposure was close to 30% for the quarter, so your military exposure is decreasing. But if you could kind of speculate or walk us through, I guess, the potential scenarios of -- depending on different budget scenarios for the military.

Mark, your exact question is why we haven't gone out with a projection, and the answer is, I don't have a freaking clue. I can't say it any simpler than that.

If all things stay equal, do we expect a better year in '13 than '12? Yes, that's a pretty good guess.

That's the way this company is growing. So, I would say that's fine.

But I mean, everyday you read a different article on sequestration and you've got major, major aerospace companies out there talking about laying off hundreds of thousands of employees combined just because of how deep they think the costs may end up going. And I think Congress has backed itself into a corner here, where that I'm not sure they can get out of.

And I'm not even sure how the election in November comes into play here. If you keep the same administration but change the Congress, does something happen?

If you keep the same administration and the same Congress, then we're right back where we started. If you get a different party president, but Congress is just the opposite party, where does it go?

I just think, right now, it's so impossible to predict whether a sequestration cut will be 7% across the board, 18% across the board. And all of that tells -- determines where we go with this.

I mean, Boeing -- the Boeing program, on A-10 wing is a fully funded program, but does that mean they're going to give them the money for it, or just say, "Well, it's fully funded, but you're not getting it this year. " E-2D.

Tremendous program where we are winning contracts left and right on that as you folks have seen, and we generate tremendous amounts of revenue. And there isn't a person on the planet that I don't think that doesn't believe more E-2Ds are needed as the upgrades to the E-2C.

But are they going to get slashed in the sequestration event? My guess is they have to be, just like everything on the planet has to be cut that's in that budget according to the rules of sequestration.

So, I can't -- I would be irresponsible if I predicted to you and say, "Well, look, if we get a 10% cut, CPI is going to look like this. " I just don't know what we're going to look like.

Okay. I understand.

I actually just -- my question was answered. It was really more about the Boeing receivables, and are you confident doing business with them going forward, or is this just the way it's going to be forever?

This is Boeing. And I don't want to say anything bad about a tremendous customer, and I don't mean to.

Boeing has a way. And I think every supplier in the world knows that if you deal with Boeing, things will not always be smooth or easy.

But where does the work come from in this world? It comes from Boeing.

So, if you learn to adapt -- we'll do things a little bit differently going forward on new programs, et cetera, but at the end of the day, I think this is something we all just accept, learn to deal with and continue on with the best customer in the world for somebody in aerospace.

Another really strong quarter. Can you give us an update on the G650?

Has there been any further discussions about the, I guess, new awards on the leading edges? Any additional components that we're discussing that they're looking to offload?

And how far along are we on the initial contract with the leading edges?

Okay. Mike, I can't tell you about anything new that may or may not be in the hopper, because that's obviously, not public.

We haven't told people about other things we're looking at from them. As far as extending the contracts, we are in negotiations, and now, we've discussed that with them.

We'll be having more discussions about it. Obviously, everybody can do the math.

If you listen to a GD call, they'll tell you they've got over 200 planes on order. If you read any aerospace magazine, they all say they've got over 300 airplanes on order.

And everyone knows CPI's orders for 134 ship set from leading edges. So there's a 66 to 166 airplane upgrade are available to us, if you will.

So, we work that nearly every single day. It's obviously something we want.

I'm sure it's something they would like us to have given the fact that we produce at such a high level and such a quality product. So again, we'll continue to work on that on a daily basis.

What was the last part of your question again, Mike, I'm sorry?

Where are we with our initial contract on the leading edges? I guess on the 134, how many have shipped so far?

And you already answered the first part of where we are in discussions about getting the balance of the order of the 200.

We are probably in the range now of about 90 -- on order, about 90 ship sets, maybe a touch more, about 75% of the total order is on order with us. This year, 2012, we're going to deliver about 50 units, which is one a week, which is an incredible rate.

I think we've impressed them with that because the rate was supposed to be 3 a month, which would've delivered 36 units. They asked us if we could up tempo our delivery, and we've been able to do it without missing a beat.

We actually have a semi-second shift on at night, just[ph] the spirit and we are turning out one full set of wings, leading edges every single week. So that's where we stand with it.

Yes. So, see, I was just wondering if you could comment about the insider selling that took place in June?

It was substantial and it kind of, at least, gave the impression to me as a private investor, that $12 is a good price for the stock. And I was -- I would just like you to say whatever you want to say about that.

I don't want to say anything, Michael. But since you asked the question, I will.

No, quite -- I'll give it to you as cleanly as I can here, okay? No one that's an insider of CPI, had ever sold a share of stock.

We got to the point where -- and do I think $12 is the right price of our stock? No.

I think our stock should be $20. But what I think isn't necessarily important to the rest of the world.

We got in a situation where we are doing a follow-on offering and had the ability to sell some of the shares at CPI. Now, I'll talk about myself individually since I was the biggest seller of the insiders selling 200,000 shares.

I did it for a couple of reasons. Number one, the last stock option exercise I did, I incurred a tax bill of approximately $600,000 and wanted to be able to pay that off.

Secondly, I had an option coming due the end of that month, the end of June, that I obviously wanted to exercise. I believe in the company, I believe in its future, obviously, and so, I used the proceeds of that, of that sale in the follow-on offering, to buy those shares from the company, give the company $600,000 to $700,000 and then also pay the taxes on that transaction.

So at the end of the day, my holdings decreased by 200,000 shares and then increased by 100,000 shares in a 7-minute period of time. So I don't think, from any stretch, it was designed to have people think I don't have confidence in the company.

I also have 2 young men in high school, called my sons, who are looking to go to college and, quite frankly, I felt that the 17 years with this company, never having sold a share, I have the right to at least know that I had their college money put away in case anything ever happens to me, the stock price, the stock market, whatever. So that's why it was done.

One of my other officers who sold the biggest piece, has 2 daughters getting married and a son getting ready to go to college as well. And again, had been here for 9 years, haven't sold a share.

And so, again, got permission and a blessing from the Board to do so. And so that was the insider selling that took place.

I am still a significant shareholder in the company, as are all of us. We still have tremendous incentives to make sure that stock price goes up.

So that -- there is the best explanation I can give you.

Okay. Thank you, Claudia.

Well, I'd like to thank all of you participating in this call and look forward to speaking to you again in early November for our third quarter earnings call. Thank you.