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CPI Aerostructures (NYSEMKT:CVU)

Q4 2013 Earnings Call

March 06, 2014 10:00 am ET

Executives

Douglas J. McCrosson - Chief Executive Officer, President and Director

Vincent Palazzolo - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Les Sulewski - Sidoti & Company, LLC

Matt Koranda - Roth Capital Partners, LLC, Research Division

Michael Crawford - B. Riley Caris, Research Division

Alex Silverman

Operator

Welcome to CPI Aero's 2013 Fourth Quarter and Year-end Conference Call. With us today are Douglas McCrosson, President and Chief Executive Officer; and Vincent Palazzolo, Chief Financial Officer. [Operator Instructions]

As a reminder, this conference call contains 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 government's ability to terminate their contracts with the company 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 the company from doing business with them, as well as competition in the bidding process for both government and subcontracting contracts. Subcontracting customers also have the ability to terminate their contracts with the company if it fails to meet the requirements of those contracts or if the customer reduces or modifies its contracts to them due to budgetary constraints.

Given these uncertainties, listeners are 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 in the filings with the SEC.

Now we'll transfer the call to Douglas McCrosson, CPI Aero's President and Chief Executive Officer. Sir, you may begin.

Douglas J. McCrosson

Thank you, Latonya. Good morning, and thank you, all, for joining us for our 2013 fourth quarter and year-end results conference call. If you need a copy of the press release issued this morning, please contact Lena Cati of the Equity Group at phone number (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 discussing results for the 2013 fourth quarter and year, I would like to start this conference call by addressing an important announcement we made this morning. As you all know, earlier today, we announced that Edward Fred resigned as President and Chief Executive Officer and as a board member of CPI Aero for personal reasons. Also effective today, I have been named President and CEO, and I have been appointed to fill the vacancy on the board created by Ed's resignation.

On behalf of our board and our management team, I would like to thank Ed for his service and dedication over the past 11 years as our CEO. Under his leadership, CPI Aero has become a world-class aerospace manufacturer with an international reputation for quality and service while retaining its entrepreneurial culture. We are happy that Ed will remain with CPI at an advisory capacity for the next couple of months and then continue to be a consultant to the company until November 2015.

It is a great honor to be named CEO. Since 2003, when I joined CPI as both an engineer and now as an executive, I have experienced first hand our commitment to continuous improvement, product quality and extraordinary customer service, and I am excited to address the opportunities that lie ahead. I look forward to continuing to work with our senior management team, our board and the incredibly talented team of professionals at CPI Aero, as well as with our suppliers and customers as we continue our efforts to grow our business and expand our markets.

So with that prelude, I will now hand over the call to Vince Palazzolo, our CFO, to discuss our financial results for the fourth quarter and the full year 2013. Then I will comment on the current business environment, backlog and contract awards, our guidance for the year and new growth opportunities going forward. I will then wrap things up and open the call to questions. Vince?

Vincent Palazzolo

Thank you, Doug. As announced earlier this morning, our 2013 fourth quarter and year-end results were in line with our expectations. Since February of last year, when we provided initial guidance for 2013, we expected that due to uncertainties related to the government sequester, revenue and net income for 2013 would be lower than those for 2012.

Starting with the fourth quarter results. Our revenue was $21.3 million as compared to $27.4 million reported in the same period of 2012. This revenue was slightly better than we expected as some anticipated first quarter 2014 revenue moved into the 2013 fourth quarter. Gross margin was 24.8% compared to 28.1% in the fourth quarter of 2012. Pretax income was $3.4 million as compared to $5.8 million in the fourth quarter of 2012, and net income was $2.4 million or $0.28 per diluted share compared to $3.6 million or $0.43 per diluted share in the same period of 2012.

For 2013 as a whole, total revenue decreased to $83 million as compared to $89.3 million in 2012. The decrease was due to lower revenue from prime government contracts and government subcontracts offset by slightly higher revenues generated from commercial subcontracts. Specifically, revenue generated from government subcontracts decreased by 2.7% to approximately $54.9 million largely due to a marked decline in our military fixed wing business segment offset by slight increases in the remaining 3 military market segments: helicopter; maintenance, repair and overhaul; and pod systems.

Revenue generated from prime government contracts decreased to approximately $1.4 million. This decrease was expected as our largest prime contract with the government, the C-5 TOP contract, is virtually complete. Revenue generated from commercial contracts slightly increased by 0.4% to approximately $26.8 million due to growth in our business jet market segment. Particularly in our programs with Cessna and Embraer that are both emerging from the development stage.

As reported for the past 2 quarters, our gross margin for 2013 was affected primarily by adjustments to our long-term programs with Spirit, Northrop Grumman and Boeing. Additionally, during the fourth quarter, we experienced technical challenges during the final assembly phases of the first pod system we are building for United Technologies Aerospace Systems. While technical challenges are not uncommon during the first build of a highly complex system, the end result was the need for additional unplanned, nonrecurring expenses for new tooling, engineering labor and support labor that increased the estimated cost for this program. As a result, gross margin for 2013 was 22.2%, which is 80 basis points lower than the low end of our gross margin guidance for the year.

Our selling, general & administrative expenses continue to decrease as we have taken steps to improve the efficiency of our administrative processes. Our 2013 SG&A expenses as compared to 2012 decreased by approximately $600,000 or to 8.1% of total revenue as compared to 8.2% of total revenue in 2012, primarily due to a decrease in officers' bonuses, accounting and legal fees and payroll taxes, partially offset by an increase in general salaries as a result of increased headcount. Lower revenue and lower gross margin, although slightly offset by lower SG&A expenses, resulted in a decrease in net income for 2013 as compared to 2012.

As expected, during 2013, we had greater product shipments than in 2012 or any other year as many of our programs transitioned from development to production. Increased shipments combined with less spending for startup costs associated with new contracts and a decline in nonrecurring expenses on our maturing programs resulted in positive cash flow from operations of $3.3 million.

Now I will hand the call back over to Doug, who will discuss recent contracts, backlog and also expectations for 2014 and beyond. Doug?

Douglas J. McCrosson

Thank you, Vince. Although our 2013 results were affected by delayed contract decisions due to federal budget cuts and the sequester, at 2013 year-end, we experienced a surge of new order releases for military aircraft as our customers received more definite information regarding certain key defense programs.

As a result, in 2013, we received record new business awards from all customers totaling approximately $122.3 million. This total surpasses the previous record of $83.6 million established in 2011 by approximately $39 million, and it compares to $81.6 million in awards received in 2012. The 2013 total includes approximately $96 million of government subcontract awards and approximately $26.3 million of commercial contract awards. Of note, $39 million of the new awards were received during the fourth quarter, the majority of which were related to follow-on orders for our A-10 and E-2D military programs.

Our total backlog at December 31, 2013, increased to $431.4 million as compared to $391.9 million at December 31, 2012. This increase was attributable to a $24.5 million increase in backlog on commercial programs and a $15.1 million increase in backlog for military programs. Funded backlog at December 31, 2013, increased to $110.4 million from $52.3 million at December 31, 2012, due to a $39.6 million increase for military programs to $82.8 million and an $18.5 million increase for commercial programs to $27.6 million.

Now moving on to expectations for 2014. Due to our large funded backlog and diversified impressive list of customers for military and commercial programs, CPI Aero is well positioned to resume its growth in 2014 and beyond. As Vince just mentioned, although we did have some anticipated first quarter 2014 revenue move into the fourth quarter of 2013, based on our funded backlog, our set delivery schedules, we remain comfortable with the 2014 guidance we provided in November of 2013. Specifically for 2014, we expect our top line to grow over 2013, with revenue possibly reaching the 2012 results.

Our newer commercial programs, such as the HondaJet, the Cessna Citation X, the Embraer Phenom 300 business jet programs, are all expected to generate a higher percentage of total revenue on a quarter-over-quarter and year-over-year comparison basis. We typically experience lower margins during the early stages of long-term programs, and therefore, we expect our product mix to produce a gross profit margin for full year 2014 to be in the range of 20% to 21%. As marketing and sales forecast for this commercial programs permit us to increase our estimate of production quantity, our gross margins on these programs will typically improve as we move from early stages to full production.

Since the beginning of 2014, many of our commercial programs are beginning to transition toward full production. As a result, product deliveries and customer billings are expected to surpass those of 2013, our best year ever in terms of product shipments. The effect of increased product shipments will be partially offset by investments in new programs in 2014, and therefore, we are estimating cash flow from operations of approximately $1 million to $1.25 million.

Looking beyond this year to 2015, we see continued strength in production rates of our business jet programs. We see steady production on our more mature programs and also new programs that combined could produce the highest revenue in our history. At the same time, as unit costs decrease with increased build rates, we expect gross margins in full year 2015 to be higher than in 2014. We expect to be in a position to offer more definitive guidance for 2014 and 2015 when we announce our first quarter 2014 earnings in May.

I'd like to spend a moment on some recent developments pertaining to one of our defense programs that I know many of our shareholders have seen in the news. 2 days ago, on March 4, the president submitted his fiscal year 2015 defense budget request to Congress. Defense Secretary Chuck Hagel and Army General Martin Dempsey, the Chairman of the Joint Chiefs of Staff, previewed the budget request last week. In his remarks, Secretary Hagel requested that the air force reduce the number of tactical air squadrons, including retiring the entire A-10 fleet. This has obvious implications for our A-10 enhancement program that we perform for Boeing. It is too early in the 2015 budget process to say whether or not this request will become a reality. However, we will do our part to keep this program that is so vital to the national security of our country funded and flying well into the future. We will continue to closely monitor the situation and take the appropriate risk-mitigation steps to reduce our exposure.

Moving forward, we will continue to pursue new awards for military programs in addition to commercial programs, including other helicopter and business private jet programs, as well as large commercial aircraft. We will continue to pursue new opportunities with our existing clients. Over the past several years, we have diversified our customer base by establishing relationships with several new customers, especially prime manufacturers for military and commercial programs.

Also, we are in the midst of establishing new relationships with other potential customers, including other helicopter and business private jet companies. Additionally, we are pursuing opportunities for more work on commercial airliners. It is important to note that we are currently bidding on larger and more complex programs than we ever have before. We look forward to reporting on our progress of turning solicitations with these prospects into awards and contracts in the near future.

We are well prepared to support our future growth. We are operating from a 171,000 square-foot facility, which provides us with plenty of workspace for new programs. We have a credit line with a borrowing capacity of $35 million, which, if needed, can be expanded to $50 million. And finally for several years, we have invested in one of our greatest assets, our workforce, and we have put together an incredible team of over 270 professionals, including program managers, engineers, technicians, mechanics and also sales and marketing.

On a separate note, we will continue to tell our story as often as possible and share our message with our existing shareholders and potential new investors. We are scheduled to present at the Roth Capital conference on Tuesday, March 11, in Dana Point, California, where I will be meeting with many of our largest shareholders and other institutional investors. Additionally, we have planned non-deal roadshows in March and early April in several cities, including New York City and Chicago.

This concludes our prepared remarks. At this point, I would like to open the floor to questions. Operator, can you allow callers to place questions now?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Jordan with Noble Financial.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

First of all, Doug, congratulations on your new role at CPI. Hopefully, it will be as successful and rewarding as I'm sure that Ed's tenure was. Question relative to longer-term gross margins and the mix of business. Obviously, the ramping up of the commercial business is impacting 2014. Longer term being, say, 2015, 2016, given the mix of business that you have with the growing commercial and excluding the potential for, say, any large new startup business, what should be the normalized gross margin for this company? Can it return to that 25% to 27% range?

Douglas J. McCrosson

I would say, Mark, that we'd be looking in the 24%, 26% range. The mix is coming along nice. We alluded to the fact that 2015 would have higher gross product margins than this year. But I think it might take longer than '15 to get into those other areas. I mean, keep in mind, we are still planning on growing and introducing new products, particularly in commercial markets that don't typically enjoy those high margins. So I would say for long-term range 24% to 26% is reasonable.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Okay. Relative to free cash flow, it looked like, by my calculations, you generated 11 -- over $11 million in cash, which was very, very impressive. Your $1 million-plus in terms of cash flow from operations, does that include CapEx for tooling investments so that would be sort of net generation of cash or would that -- or it would be CapEx lowers that number for free cash flow?

Vincent Palazzolo

CapEx would lower that number. That's an operating cash flow number. CapEx would lower it. We'd still be positive for the year. Our CapEx budget is under $1 million for this year.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Okay. But that would be positive result as you grow revenue again to be cash flow fairly neutral. Final question for me, relative to the TOPs program, are you getting any visibility as to will that reemerge -- what is the Air Force's plans relative to procurement of replacement parts for the C-5? Or do you see that as a significant opportunity moving forward?

Douglas J. McCrosson

I don't, Mark. The -- I'm fairly close -- as you know, having started my career here in the business development area, I'm still, obviously, very close to the bidding process and the opportunities that we see on a daily and weekly basis. We're just not seeing C-5 opportunities at the moment. We're finishing that program up. It was a great program while it lasted, and that is not factored into any of our forecast.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Okay. Finally, what was the mix of defense versus commercial in '13? And do you have an expectation for '14?

Douglas J. McCrosson

We do. The revenue breakdown, I believe -- just let me look at my notes here.

Vincent Palazzolo

2/3, 1/3.

Douglas J. McCrosson

It's 2/3, 1/3. And it's 2/3 military, 1/3 commercial. And next year, we're looking at around 60-40

Operator

Our next question comes from Les Sulewski with Sidoti & Company.

Les Sulewski - Sidoti & Company, LLC

Can you provide an update on your relationship with Embraer at this stage and perhaps opportunity size there?

Douglas J. McCrosson

All right. We've had a relationship with Embraer now for more than a year. Our production on the Embraer Phenom 300 is moving rapidly from a development stage to a full production phase. I would characterize our relationship with Embraer as very strong. We are still in that phase, though, quite honestly, Les, where they'd like to see another month or 2 of steady rate production. We are exploring opportunities with them on other work, including other commercial work. But it is -- I would not characterize it as a near-term opportunity. I can tell you that they're very impressed with our operation, and they are making the investments and their time and their money by sending people here and working with us to improve our operations and to understand what our capabilities really are. So I would describe it as a very good relationship. And it's certainly a strategic customer for us going forward, and I hope to be able to work on new opportunities with them in 2014.

Les Sulewski - Sidoti & Company, LLC

Okay. And then perhaps maybe you can touch upon HondaJet as well.

Douglas J. McCrosson

The HondaJet program is now on the Honda side doing very well. They're starting to build aircraft that will go to fine customers, and we are ramping up our production to support that new -- the new phase of development on that program. We are -- there's nothing more to report other than our build rates are substantially higher in 2014 and higher again in 2015 on our product line.

Les Sulewski - Sidoti & Company, LLC

And can you provide an update on what you're seeing from your suppliers, any changes in pricing or availability?

Vincent Palazzolo

No. As you probably are aware, our suppliers are, for the most part, under fixed-price contracts. In many cases, for our longer-term programs, they're on contract for as many aircraft as we are funded for. And so there has been no price increases in that regard. With that said, we're always looking for them to improve their cost structure so that they can, in fact, lower their prices going forward. And that is where we also see some incremental margin gain in the product that we will be selling in the '15 and beyond time frame, is that we very actively work with them to help them lower their cost structure so that they can offer us better pricing.

Operator

Our next question comes from Matt Koranda with Roth Capital.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Just wanted to start off with the gross margin topic here. You guys mentioned gross margin improvement when you move from the early stages of a long-term contract into the more mature stages. So I understand that some contracts may be different, but how much time into a contract does it take before you guys generally start to see gross margins improve? And if it's difficult to generalize, maybe you could use an example from one of your more mature contracts and how gross margins have trended since inception.

Douglas J. McCrosson

Yes. That obviously has many different answers. But the one I'll start with, if a program is, I'll say, relatively trouble-free, the -- and in terms of where we can get into the meat of the learning curve quickly, probably after maybe 18 months or so, we're clicking along pretty good. And then our biggest gains are in kind of after that time period where everything is kind of smoothed out, the engineering is stable, the build plan is stable and we can dedicate a team and they can work on it and basically, get efficiencies through lean manufacturing and just learning curve. And when things just take shorter to build, the more you build it. Some programs are more -- I'll say take longer than that. For example, the DB-110 pod program with Goodrich or now UTC is a good example of that. That is a new design. We're still working out the kinks, took a little bit longer, as we've discussed in the quarter. And so that now is going to take maybe another -- say, another year of production before we really start getting the margin wrung out on that jet. So it's difficult to generalize but it's certainly not within the first year, and it's more typically, say, 2 years and out.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Okay. That's really helpful. And then we've been hearing that the Air Force has added funding in its FY '14 budget for development of its new combat rescue helicopter, which just sounds like Sikorsky is a frontrunner to win. So once this goes through, how long do you think it would take for you guys to start seeing RFPs for work on a potential contract? And do you have a sense for the size of the potential opportunity there?

Douglas J. McCrosson

We're obviously very -- I expect to learn more about that opportunity at the end of March when Sikorsky has a meeting with all of its suppliers. I don't really have any more information than the general public has on that particular opportunity with Sikorsky so I can't really address that. I can say that we are one of their premier suppliers of aircraft structure, so I would anticipate that we will get our fair share of opportunity when that time comes.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Okay. That's helpful. And then one last one here for me, you guys have done a nice job in holding down OpEx over the last 2 years. How can we think about how OpEx trends in 2014?

Vincent Palazzolo

We are continuing the leaning-out process not just in all manufacturing, but what I'll call -- I know we're not supposed to use lean to discuss the administrative side of the business, but we are streamlining that also. So as a percentage of revenue, our overall expenses at every level, operational, administrative, selling or all, should be expected to decline, not double-digit decline but by a few percent here and there. So I would expect that to continue at least through the end of 2014.

Operator

Our next question comes from Mike Crawford with B. Riley & Co.

Michael Crawford - B. Riley Caris, Research Division

First, I want to wish Ed all the best and hope his personal reasons are more related to pursuit of some new opportunity than for health or otherwise. Getting back to the A-10. How does it work if a customer reduces or modifies a contract with you? And what are the risk-mitigation steps you can take to reduce exposure?

Douglas J. McCrosson

Okay. The -- what will happen or what could happen in this particular instance is the A-10 program is not currently in the fiscal year '15 budget request. What we're trying to do right now is we're looking at all -- any of our cash expenses that would be required for 2014 and making sure that they really are required in 2014. What happens is that we have contracts out there, we're working with our suppliers. We don't want our suppliers to get too far ahead of themselves in terms of when they're building products for us so that we ensure that we minimize whatever kind of claim they might have in the case of a contract termination. So those are the types of things that we will be undertaking over the next several months as this unwinds. But to answer your question about the rates, we don't really have a lot of control over that, and there's not a lot of contract relief, quite honestly, to allow for rate reductions or program extensions, if you will, extending the time of performance. That's kind of written into the contract that there's a certain amount of that to be expected. So we just have to really closely monitor our costs and make sure that our force structure in terms of how many people we have and the activity that we're spending on it is directly in line with our customers need. And that just requires a lot of communication between ourselves and Boeing, between ourselves and our suppliers and ultimately, between the Air Force and all of us. So those are the types of steps that I alluded to when I say risk-mitigation steps.

Michael Crawford - B. Riley Caris, Research Division

Okay. That's helpful. And of the $431 million in backlog, how much of that is related to the A-10 right now?

Douglas J. McCrosson

Do you know that number?

Vincent Palazzolo

Yes. It's about $15 million.

Michael Crawford - B. Riley Caris, Research Division

Okay. And of the -- you booked $39 million in the quarter, yet the total backlog declined a little bit despite that $21 million or so in revenue. And I believe that's because some of the A-10 and/or E-2D work was included in unfunded backlog, so it's already counted in backlog before you got the order. Is there similar phenomenon we could expect to see this year? And what would that be related to?

Douglas J. McCrosson

I'm not sure I understand the question, Mike.

Michael Crawford - B. Riley Caris, Research Division

So you -- in Q4, you generated $21 million of revenue. You took in $39 million of orders yet your backlog declined, right? So there's...

Douglas J. McCrosson

Total backlog?

Michael Crawford - B. Riley Caris, Research Division

Yes.

Douglas J. McCrosson

I'll let Vince address. But basically, when we win these long-term contracts, we place the anticipated value of those contracts in unfunded backlog. When it becomes an order release, it moves out of the unfunded into funded. And then we're also booking revenue in the quarter that will drive that down further.

Michael Crawford - B. Riley Caris, Research Division

Right. So I understand that. So my question was how do you see funded and unfunded backlog trending in 2014?

Douglas J. McCrosson

Well, we have a corporate goal this year to increase our total funded backlog. We fully anticipate that our new order wins, further releases against our long-term contracts will increase our overall backlog at year-end. So we do anticipate another full year increase in backlog. I'm not sure that answers your question but -- okay.

Michael Crawford - B. Riley Caris, Research Division

Yes, a little bit. Final question. You're -- well, actually, 2 questions, if you don't mind. One, on the United Technologies Aerospace Systems pods that we saw in your Investor Day, what's the size and scope of that contract? And the, I guess, technical difficulties you discovered, is that something that might lead to some kind of engineering change requests or negotiations like we've seen in the past? Or is this something that is, you think, resolved?

Douglas J. McCrosson

No, the challenges we exhibited or had in the fourth quarter are definitely as a result of some design changes, some of which would be what's contributed by the customer. We do have some amount of contract claim relief with the customer, which is not presently reflected in the margin decline at the moment. But there's definitely some contribution by the customer in that particular example. When we reestimated the total cost of that job, we included the onetime nonrecurring charges, which we alluded to, and a slight -- but very slight increase in the recurring labor to produce the product. So there is an element, very small, that contributed, that will be felt on a recurring basis, but the bulk of the adjustment was behind us. Now in terms of the total scale, we're not really at liberty to say what that total scale is. We have a firm contract for 10 aircraft at the moment. We're engaged with the customer now on potential follow-ons to that, which we would expect to hear from in, say, the third quarter of this year. But we are -- we feel that this is a very long-term and a very high revenue-producing program for the foreseeable future.

Michael Crawford - B. Riley Caris, Research Division

Okay, Doug. And then the final question is, you alluded to bidding on larger and more complex programs. You've said that in the past. Can you give any examples of what these programs are or when we might expect to hear, one way or the other, on some of them?

Douglas J. McCrosson

Well, some have been -- some of our larger commercial airliner bids had been in for quite a while. Quite honestly, I expected some of these to be in -- to have been awarded to us last year. We're still very actively in discussion with some of the airliner Tier 1. This is a Tier 1 opportunity with a major airframe manufacturer. So I would hope that in the second quarter to be able to announce something of that nature. Again, it's not going to be a watershed. It's not going to be a game changer. It's factored into the guidance I just gave you. It's factored into the '15 guidance. So I don't want to say that there's this mountain of a contract potential out there in the near future. It's a very nice contract, it will be something that sets up our capability for the future. That said, there is a growing amount of such large commercial airliner opportunities, many of which we are actively bidding on now. So I, obviously, can't describe what those are or even what airplanes they're on for competitive reasons, but that is becoming an increasingly larger part of our business development pipeline. What I will say is that part of being able to project an image of a major aero structure manufacturer is capability. And to that extent, one of the things that we will be doing, not in the '14 time frame but looking forward into the '15 time frame, is we are making investments and strategic investments in some automation technologies and in other computer-related technologies that will enable us to very favorably compete with some of the bigger suppliers and competitors in the market. And so part of the first win in the large airliner market is really going to be something that just puts our footprint and allows us to be in the conversation on a global basis with manufacturers of aircraft structure. So there are strategic reasons that we want to -- why we think that this would be a very nice first win for us in that market. But look, we can't compete effectively for large commercial airliner when we do everything by hand. When it's just the managerial and a rivet gun, it just won't work. So we are looking to dip our toe in that space. It will be a job that will allow us to introduce automation into the factory. And then from there, we will be using that as a platform to really get a stronger foothold in that market.

Operator

[Operator Instructions] Our next question comes from Alex Silverman with Special Situations Fund.

Alex Silverman

Congrats, Doug. Most of my questions have been asked. Two quick questions. One, the G650 is -- the backlog is now over 5 years. Clearly, that's not optimal. Have they asked you to increase your production rate at all?

Douglas J. McCrosson

The production rate of the G650 is at what we anticipate to be our high point, currently. That production will stay pretty constant all of this year and into the foreseeable future, including out through '16 and '17. As you know, we do have a contract that goes out many years, and so that is a very stable, very predictable -- I don't want to say it's running itself, but pretty close. So...

Alex Silverman

Are they asking you to produce more per month than what was expected?

Douglas J. McCrosson

A little. A little but not that much. I can't -- I'm not at liberty really because of their requirements on us not to see what rate we're building at. But it is -- that has been the plan, and we're at the plan.

Alex Silverman

Okay. Second question, assuming -- in terms of the A-10, I mean, the House and the Senate still have to produce their budgets this summer. They've got a conference. If there's a cancellation, it's a way off, is it not?

Douglas J. McCrosson

Yes. I would say that's absolutely true. I mean, it would be, I think, a very highly unlikely scenario, where anything substitutes on the A-10 in terms of -- I mean that is a major, major national security decision, as you might guess. And I can't imagine that in an election year, in particular, these things are going to resolve themselves now, in 2014.

Alex Silverman

And especially since it's flown by Air National Guard in many, many, many states.

Douglas J. McCrosson

The -- after the Hagel announcement, there was, I'll say, a ground swell of grassroots support, and a lot of the papers, particularly a lot of the military periodicals that come out and -- on how this aircraft is needed, and it's needed for a long time. So I feel good that there's support. I'll feel better if I see it actually in the -- in one of the bills you just mentioned in the summer. And as I mentioned, we're going to be beginning our own little campaign here at CPI. To the extent that a small company can play a role in helping Congress see the benefit of this aircraft, we're willing to do that.

Alex Silverman

Is it fair to say that should it be canceled in the end, whenever that might be, it would result in a pretty large cash inflow to you?

Douglas J. McCrosson

It would. I think it's too early to say the extent of that cash inflow. But typically on a termination, all of the unamortized pooling, we would get -- basically, they try to make you as whole as they can on your expenses. We don't want that to happen, but certainly, that would typically be the case.

Alex Silverman

North of $10 million?

Douglas J. McCrosson

It would be a big number, and that would not be a bad guess.

Operator

Our next question comes from Mark Jordan with Noble Financial.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Couple of quick follow-ups. Tax rate assumption for 2014?

Vincent Palazzolo

30% to 31%.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Okay. When you're looking at funded backlog, is there a difference in terms of the length of the release from, say, the defense versus the commercial side? Is the defense typically 12-month of funding, 18 months of funding and commercial shorter? Or how would you characterize the duration of the 2 different types of customers' orders?

Vincent Palazzolo

By and large, the military backlog is a 1-year backlog, and the commercial backlog is somewhat shorter, not a lot shorter, maybe even a 9-month range, 3 quarters of a year.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Okay. And finally, do you have a depreciation and amortization number for the fourth quarter and the full year?

Vincent Palazzolo

For the full year, it was 704. I actually don't have the fourth quarter number in front of me. I just have the full year.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

So $7,040,000?

Vincent Palazzolo

No, $704,000.

Operator

At this time, I would like to turn the call back over to Mr. McCrosson for closing comments.

Douglas J. McCrosson

Okay. Thank you, all, for participating in this call. I look forward to speaking to you again in early May, when we announce our first quarter 2014 results. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a great day.

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Source: CPI Aerostructures Management Discusses Q4 2013 Results - Earnings Call Transcript

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