Hello and welcome to the CPI Aerostructures' Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. And now I would like to turn the conference over to Sanjay Hurry. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to CPI Aerostructures' 2018 third quarter financial results conference call. A copy of the company's earnings press release that was issued earlier today and the accompanying PowerPoint presentation to this call are available for download on the Investor Relations section of the CPI Aero website. On today's call are Douglas McCrosson, President and Chief Executive Officer; and Vincent Palazzolo, Chief Financial Officer. At the conclusion of their prepared remarks, management will hold a question-and-answer session. As a reminder, 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. Including in these risks are the 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 are budgetary constraints change the government are right to spend or borrow 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 their customer reduces or modifies its contracts 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 in the company's filings with the SEC. Before turning the call over to management for their prepared remarks, please note that management is available for follow-up calls with institutional investors. Following the conclusion of this call. Please contact my office via a contact details listed in today's press release to schedule a follow-up. With that said, I'd like to turn the call over to Douglas McCrosson President and Chief Executive Officer. Good morning, Doug.

Good morning, Sanjay, and thank you all for joining us on our call. I'll begin this morning with a brief review of our performance for the third quarter, after which Vince will provide a detailed analysis of our financial results. I’ll then conclude with some commentary on market trends and contract opportunities that position us for a multi-year top and bottom-line growth heading into 2019 and beyond. To begin, we are pleased to report another quarter of strong operational performance. Our sixth consecutive quarter of profitability and a return to positive operating cash flow. I'd like to spend a few minutes to put our third quarter performance into a historical context for the benefit of our newest shareholders following our recent public offering of stock. Our quarterly results reflect continued successful execution on our strategy to drive growth and profitability by leveraging our roots in the defense market and placing greater sales emphasis on multi-year contract opportunities. Coming out of a very challenging 2014, we made a series of strategic and operational choices to reorient CPI arrow to the defense market. From 2014 through 2016, we added $225 million to total backlog for programs on numerous military aircraft that included the E2D Advanced Hawkeye, the F-16, T-38 trainer and the F-35. In 2016, we implemented efficiency initiatives to drive operating leverage and improve free cash flow and working capital through cost reduction and process improvements. Fiscal 2017 was a turning point for CPI Aero, during which we returned to annual profitability and positive operating cash flow, while continuing to execute on a defense market growth strategy. Entering 2018 with an efficient infrastructure in place to drive consistent profitability, together with strengthening long-term industry fundamentals we implemented an M&A initiative to supplement our organic growth opportunities. In March, we entered into…

Thank you, Doug. Before I review our third quarter results, I want to remind you that effective January 1, 2018, we adopted a new revenue recognition standard known as ASC Topic 606. Following the adoption of ASC 606 our revenue recognition on all of our current contract has not changed materially over the life of those contracts. As a further reminder, and as a consequence of our adoption of ASC 606, the asset previously called cost and estimated earnings in excess of billings on uncompleted contracts is now under ASC 606 called contract assets. And the liability, previously called billings in excess of cost and estimated earnings on uncompleted contracts is now called contract liabilities. Starting on slide seven, revenue for the third quarter of 2018 was $19.9 million compared to $20.7 million for the third quarter of 2017. Revenue for the quarter reflected the anticipated wind down of our current Northrop Grumman E-2D multi-year program as we begin to transitioning to a new multi-year contract. Partially offset by increased revenue from direct from our prime contracts with the U.S. government for F-16 components and T-38 kits. Gross profit and margin was essentially unchanged at $4.8 million and 24.1% respectively, as compared to the year ago period. SG&A increased by approximately $600,000 for the third quarter compared to the same period last year, primarily reflecting increases in legal fees for the WMI litigation, salaries and IT related expenses. Pre-tax income for the third quarter was $2.2 million compared to $2.9 million in the year ago period. The decrease was due to higher SG&A expenses. Net income for the third quarter of 2018 was $1.3 million or $0.15 per diluted share, compared to $1.7 million or $0.19 per diluted share in the year ago period. We estimate that the incremental costs…

Thank you, Vince. As reflected in our financial guidance, we expect a strong fourth quarter in terms of revenue, profitability, and cash flow from operations. We expect this will be driven by our next generation Jammer mid-band pod program, our new agreement on the Honda Jet Elite, and continued production of T-38 kits and F-16 wing components. As we look ahead to 2019, we see opportunities for multi-year top and bottom line growth, reflecting very favorable long-term defense spending trends. A growing backlog and a bid pipeline with several multi-year program awards on the horizon that will leverage our cost efficient infrastructure. As you can see on slide 11, 82% of our bid pipeline is cited on defense platforms. Virtually all bids are at the Tier 1 level. I noted earlier that we saw high award activity in the third quarter that drove backlog growth. With the 2019 budget passed on time, we are currently bidding on programs funded with fiscal 2019 moneys and therefore we expect our business development activity to maintain its high cadence through the rest of this year and into 2019. On slide 12 you'll see some opportunities ahead in each of the segments that we operate in. These are opportunities born not only of the expanded capabilities we have developed over the past several years that enable us to supply more complex aerostructure assemblies and aerosystems in support of our defense based programs, but also a market dynamics that very much favor CPI Aero. On today's call I want to provide some color around some of these trends and how the strengthening defense spending environment is serving to enhance our competitive advantage in the marketplace. We believe years of sequestration created a capabilities gap within our customers organization, skills such as produceability engineering, manufacturing engineering,…

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Ken Herbert with Canaccord.

Hi. Good morning, Doug and Vince.

Hi, Ken.

Hi, Ken.

Hey, Doug. I just wanted to first clarify, did you provide a date as to when you expect to sign the next multi-year for the E-2D?

No. That was one what I just mentioned there at the end that we believe will be the early part of next year for the multi-year.

Okay. But everything is on track with that process and I know obviously you've had a bit of a deep here near-term as the first multi-year has wind down. But when you think about the second multi-year, how does it compared to the current contract that's winding down? Are you seeing any increased content perhaps on a ship set basis or is the broader contract meaningfully different?

No, it's virtually the same in terms of content, there have been price adjustments now as it's later than the original contract was signed. But the physical contents of what we are providing will remain the same. The multi-year is envisioned to be five year program and it is also envisioned to include not just what is required from the U.S. Navy, which I believe is another 25 aircraft or so, but also anticipated sales of internationals E-2Ds for example for Japan. So the exact I'll say form the contract is yet to be decided by our customer and that's what's going to take another couple of months to kind of figure out.

Okay. No, that's great. Thanks for the color there. And if could, Vince or Doug, the gross margins in the quarter were obviously very good. And I know it's consistent with what we've seen in the last few years with the third quarter. Was there anything unique this quarter or was it really just what you're able to ship in the quarter?

I think it was a favorable mix even though the revenue might be down from the third quarter, it was -- of last year, the mix was favorable. And also it reflects the -- I'll say the increased content on the Raytheon program in particular.

Okay, that's helpful. And then just finally, when I look at your -- the bid activity and the bid pipeline. You've had some recent success obviously with HondaJet, but you're clearly putting more resources into the defense market and I think that's reflected of course in the backlog and the success you're seeing. How do you think strategically about commercial opportunities? Now when I say commercial specifically business jet for you. And is that an area you think you might start to see turn in the backlog there with pursuits of bid activity or really should we just think about defenses as the key source of upside for the next couple of years?

No, I don't think that's true at all actually. The -- you've reported on and others about the -- we'll speak at least now for the business jet segment. It's definitely strengthening market. We've made considerable I'll say investments in relationships with the major manufacturers of business jets, including some of our current customers. But we have before is now within the bid pipeline several large aerostructures programs for newer business jet that we expect to be awarded to -- hopefully to us. But it will be awarded by our customers into say the next four to six months called it. So we're very happy about the -- about seeing increased opportunities in that. And we are currently exploring opportunities to help I'll say outsourced production for some of the higher rate commercial programs such as maybe something new for us. But as these rates, particularly on the narrow body planes increases, we feel that there are maybe some potentially and we’re going to kind of pursue that a little bit over the next several months to see if there is any truth to our theory that there might be those opportunities for outsource production for higher rate aircraft. So we'll see. But right now, no, I wouldn't say that that defenses exclusive in a bid pipeline. I think we have a fairly good mix. And I think long-term you shouldn't expect to see this to be a 95% or 90% military company. I think we need to strike a good balance. So -- but clearly the backlog success of the last two years has been from the military environment.

Great. Well, thank you very much for the color. Really nice quarter.

Thank you.

Thank you. [Operator Instructions] And the next question comes from Mike Crawford with B. Riley FBR.

Thanks. Given that you…

Hi.

Hi. Given that you embarked on M&A strategy in 2018, and then agreed to this acquisition and that you said you are going to acquire with credit, why did you not do so and instead issue equities?

But we had the credit lined up as we reported previously. And the plan what event to finance this with the debt. That kind of changed as the bank commitment expired as the closing moved beyond and then went into litigation. And with the new ruling from the court that we have basically a three week time period, after which we have to close the original agreement was more open ended in terms of a financing contingency. We felt it was the prudent course to make sure that that opportunity didn't elude us and we wanted to secure the financing and we did so with equity.

So your credit agreement lapsed that's what happens?

The commitment lapsed, because all of these commitments have a certain period of time.

Okay. All right, thank you.

Thank you. And that does conclude the question-and-answer session. I would like to turn the floor Douglas McCrosson for closing comments.

All right. Thank you all again for participating on today's call. Vince and I look forward to speaking with you all again in March, when we announce our year-end 2018 results. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.