CPI Aerostructures, Inc. Q4 2007 Earnings Call Transcript

Mar.25.08 | About: CPI Aerostructures, (CVU)

CPI Aerostructures, Inc. (NYSEMKT:CVU)

Q4 2007 Earnings Call

March 25, 2008 11:00 am ET

Executives

Edward J. Fred - President and Chief Executive Officer

Vincent Palazzolo - Chief Financial Officer

Analysts

David Cohen - Midwood Capital

Michael Potter - Monarch Capital

Russ Silvestri - Skiritai Capital

John Kohler - Oppenheimer

Adam Mizel - Aquifer Capital

Paul Verger - PLA Associates

Edward J. Fred

Good day everyone and welcome to the CPI Aerostructures’ fourth quarter and year end 2007 conference call. If you need a copy of the press release issued today please contact Linda Latman of the Equity Group at 212-836-9609 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 we get started, I want to remind investors that this conference call will contain forward-looking statements, which involve unknown risks, and uncertainties and other factors that may cause actual results to 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 debar us from doing business with them; as well as competition in the bidding process for government contracts.

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 risks can be found in our filings with the SEC.

This morning I will give you a brief overview of our year end 2007 results and then hand over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details. I will then review our current business environment and the outlook for 2008. Then we will briefly warp things up and open the call to questions. I also just want to make you aware; I am not in the office today, so Vincent and I are not sitting with each other. So, if there is a delay when you ask a question, it’s not that you stumped us, it’s that we are trying to determine who is going to answer it.

As reported earlier this morning, for the year ended December 31, 2007, revenue was approximately $28 million compared to approximately 17.9 million for the year ended December 31, 2006, an increase of approximately 56%. Pre-tax income was approximately $3 million compared to a loss before tax benefit of approximately $1.9 million for the same period last year. Net income for 2007, was approximately $1.9 million or $0.32 per diluted share compared to a net loss of approximately $1.265 million or negative $0.23 per diluted share for the same period last year.

New orders received through December 31, 2007, of 37.7 million as compared to 30 million in 2006, making 2007 CPI Aero’s greatest award year ever. Unawarded solicitations remain at a high level, totaling a maximum realizable value of approximately $220 million.

So, with that prelude let me introduce Vincent Palazzolo, so he can walk you through the details of the final quarter of 2007. When he is done, I will come back on and then open the floor to questions. Vince.

Vincent Palazzolo

Thank you, Ed. As reported earlier this morning, fourth quarter revenue increased by approximately 29% to approximately $7.8 million from approximately $6 million in the final quarter of 2006. This resulted in pre-tax income of $793,123 compared to a pre-tax loss of $12, 011 and the net income of $528, 123 or $0.09 per diluted share compared to a net loss of $12,011 or zero per diluted share in 2006.

Gross profit margin for the fourth quarter of 2007 was 24% compared to 16% for the same quarter last year. The gross margin for the year was 26% compared to 9% last year. Selling, general, and administrative expenses for the fourth quarter of 2007 was approximate $1.56 or 13.6% of revenue compared to approximately $945,000 or 15.7% of revenue for the fourth quarter of 2006.

SG&A expenses for the year ended December 31, 2007, were approximate $4.355 or 15.6% of revenue compared to approximately $3.552 or 19.8% of revenue for 2006.

At this point let me hand the call back over to Ed for an overview of the business.

Edward J. Fred

Thanks Vince. As I just reported, new orders for 2007 were $37.7 million compared to $30 million during 2006, this award number, the highest in our history, represents tremendous growth from the subcontracting arena. We anticipate that awards will remain strong as we continue to diversify our customer base, as it is evidenced by our recent award from Sparid Arrow Systems and we expect that our future revenue mix will reflect a larger portion of work to be performed in our capacity as a subcontractor to major prime contractors.

As we reflect on our new business opportunities, let me update you on two of these. As announced in late June, Boeing was awarded a contract to provide the air force with new wings for up to 242 A-10 Warthogs. This RFP involved a new wing design followed by production of up to 242 new wings for this aircraft. The value of this program is to be slightly in excess of $2 billion. CPI Aero is currently exploring its opportunities to participate in this program with Boeing. CPI Aero has vast experience of the A-10 aircraft including the manufacture of the current wings.

In 1995, CPI Aero was awarded a $3.5 million contract to re-outfit the entire fleet of A-10 aircraft with deleting edges of the wing, which was necessitated by the Persian-Gulf conflict of 1991. So, we are very familiar with the current design and its short comings. Additionally, CPI Aero currently employs at least 6 people who were employed by Fair-Child Republic, the original manufacturer of the A-10 and who participated in the engineering and manufacture of the current wing configuration. Accordingly, we bring significant experience to this assembly as a manufacturer of critical subassemblies on the new design.

Next, CPI succeeded in exploiting subcontracting opportunities with some of the leading US prime aerospace and defense manufacturers. We have established solid working relationships with Lockheed Martin and Vought, and we have now become the key supplier to Northrop Grumman, Sikorsky, and Spirit. 2007 subcontracting awards from prime were more than triple the value of subcontracting awards for all of 2006. Subcontracting work will play a significant role in CPI-Aero’s future, as we continue to capitalize on these opportunities. We will continue to receive new work from all of these manufacturers, as well as others in our industry and we will strive to continue to perform at the highest levels possible in our effort to support their initiatives.

During 2007, our net income and overall gross margin was lower than originally projected, as we incurred cost to reconfigure the physical layout of our facility to accommodate the increased activity that we anticipate from our recently awarded contracts. While this initiative reduced our 2007 bottom line, we expect that it will enhance our ability to increase net income in future years. Based upon the level of new and pending orders, CPI Aero expects 2008 revenue to be approximately $35 million, a 25 %increase over 2007, and resulting net income of approximately $2.6 million, an increase of 37 %over last year. We anticipate that 2008 will the best revenue year in CPI’s history and we believe that this trend will continue into 2009.

As I have stated quite often, you will continue to hear more from us in the upcoming months. We are sticking to our plan of increased IR effort and we will be meeting with institutional investors and analyst in one-on-one or group meeting. In fact the current plan helps us visiting the West Coast in April and the Boston area in May. We will also be visiting our New York shareholders during this period of time. Additional, Vincent and I are available for conference call and we would also welcome visits by institutional investors and analysts.

Before closing I would like to thank all of our shareholders for your continued support of CPI Aero and I assure that your management team and your Board of Directors is working diligently to continue this profitable growth and reach our full potential as the world’s premier small business supplier of aircraft structure. I would also like to take this opportunity to publicly thank the CPI management team for sharing my vision of the company’s future and working so diligently to make it happen. I would also like to thank all the employees of CPI for executing on that vision and being iatrical part of enabling us to win such impressive awards as Sikorsky HIRRS contract and the Spirit Aero System’s Gulfstream G650 contract.

At this point I would like to open the floor to questions. Luann, can you allow callers to place questions now please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Cohen with Midwood Capital.

David Cohen - Midwood Capital

Hey guys.

Edward J. Fred

How are you Dave?

David Cohen - Midwood Capital

Congrats on a solid finish of the year and the awards.

Edward J. Fred

Thanks.

David Cohen - Midwood Capital

Your patience, you know, was well rewarded I guess. The contact you announced with Spirit, effectively you say -- or you exclusively say in the press release, it’s an $80 million contract. What kind of duration is there to the contract, what is sort of the -- the ramp look like at this point if you have a preliminary sense of that?

Edward J. Fred

Yeah, I can give you generality; it should be about $86 million contract over a 7 year deliverable period. There will be some consistent revenue the first two, a little higher in the third and then it should ramp up quite significantly. If you saw the Gulfstream release on this aircraft, they expect deliveries to begin in 2012, which means obviously all work would have to have ramped up significantly by 2010 or 2011.

David Cohen - Midwood Capital

And with respect to the A-10 program that you mentioned, I mean, are you just -- you know, are you just, sort of, still in the process of trying to negotiate a roll through yourself or you feel like you’re going ahead of that and well it’s full constraint of what concern about the opportunity?

Edward J. Fred

I can’t get too specific on it with you obviously, but its nine months in essence since they won it and still mentioning to you that we are in discussions with them, you know, I think that should be some indication as to what our role appears to be.

David Cohen - Midwood Capital

Okay. And any sense of the order potential around the C-5.

Edward J. Fred

C-5?

David Cohen - Midwood Capital

Having won the new TOPs contract, you still have, a ton of un-let work on it relative to the size of that contract. So, I guess what’s in the pipeline today from the TOPs contract in terms of awards, and are you seeing that loosen up at all?

Edward J. Fred

Well, what we are getting from the government is, if you will, schedules would say well this is what we believe we are going to need however, we don’t have the funding. I think some important decisions were made if you will about the C-5 recently as we all know there is a giant battle between Senators, Congressmen, States with a particular interest in having either C-17 or the C-5 built. On the latest turn of events was that they did not authorize more money to C-17 and they did not call for the retirement of the C-5 fleet or even of the C-5A which was quite frankly my projection, I thought they retired C-5A. What they did say is they are not going to do engine upgrade and avionics upgrade on the C-5A is however, they do believe they still need in this part of the fleet.

They will continue to go ahead with engine upgrade on the C-5B and the couple of fleets that are out there. So, I think that decision in general bolts well for us getting some work on the C-5 top down the road, how high, higher level that will be remains to be seen. Requirements or, we certainly number in the tens of millions of dollars whether or not that fundamental will come through I think our elections in November will go a long way in deciding that. Right now, it looks as if (inaudible) will still keep a pretty healthy presence in Iraq and therefore you still need to fund that effort quite significantly and that has been what has kept us from getting funding for the repair and maintenance we normally do.

On the other side of fence, there is Obama and Clinton seem to agree that they want this to end much, much sooner if they are elected that would seem free out money for things like C-5 and repair and maintenance of other aircrafts. So, you know, I can tell you that we know the requirements of Denair I can’t predict that you just haven’t been able for the last three years and he is going to come to back that up.

David Cohen - Midwood Capital

Okay. All right, thanks Ed, good work.

Edward J. Fred

Thanks David.

Operator

(Operator Instructions). Your next question comes from David Cohen with Midwood Capital.

David Cohen - Midwood Capital

All right my questions have been answered.

Operator

And your next question comes from Michael Potter with Monarch Capital.

Michael Potter - Monarch Capital

Hi, congratulations.

Edward J. Fred

HI, Mike how are you doing?

Michael Potter - Monarch Capital

Good, thanks. Okay, so we have the Spirit which is seven years, which is, I would think, can you us an update with regards to Sikorsky? Do you anticipate, I guess increasing the amount of work that we are doing with them currently for 2008 and 2009, is it a lot more work to be had with Sikorsky?

Edward J. Fred

There is a tremendous amount of work to be had from Sikorsky, there are chart full of work, they continue to win their work, they are, obviously, the premier builder of helicopters. We are constantly pursuing their work, we have involved in bidding proposals basically every minute and every day somebody is working on Sikorsky proposal. Our record of performance would like to, let me believe we are going to win much more work from them. We have attended two supplier conferences that they gave within the last six weeks; I think CPI is very highly thought of by the procurement people, the buyers, meet up our levels of sub management. So, yes, we certainly in our own mind, in our own eyes and based the number of quotes that are coming out, we certainly believe we’re going to grow this Sikorsky business. They are terrific customer and like I said they seem to be extremely pleased with the work we have done for them as well. So, we are hoping that’s one of the fascist about business that goes even larger.

Michael Potter - Monarch Capital

Okay, great. To go back to the C-5 a bit, I know, it’s been in prior calls I think perhaps even by me, with regards to what and they incurred some significant expense to ramp up for the C-5 releases that never materialized and have much higher carrying costs, if you will, can you further along with talking a word about perhaps taking over more of the C-5 contract that they won?

Edward J. Fred

Right. Mike, the only answer I knew is this, what is completely, totally, fully aware of the CPI’s desire to take on any of the C-5 work they don’t want to do or if they want to get out of the C-5 top contract all together. The customers have been made aware that CPI will gradually step in and pick up whatever work falls out from that. But again, they are in way, they are in the same boat we are and that they are not getting any releases on it anyway. So, I think, given what overall situation which has been pretty well documented in Carlyle (ph) situation. It’s not high on the list to just put out some things, okay, CPI will going to give you everything until something that materializes revenue wise and they take a look and say that we really want those or not. I think it will stay pretty quite. However, we are absolutely on our way as far as the C-5 top contractors and we are hoping to get some of the work that they don’t want to do for that. But again, little bit of nothing to stole that.

Michael Potter - Monarch Capital

But again, it still I don’t think things have changed or let me ask how things change, it still a matter of when not if?

Edward J. Fred

I will have to say yes. I mean, there is still three years left on this contract and they go another three years without doing any kind of structural work on this plant, I can’t imagine how. Especially if they are sticking by the idea that they are not going to retire C-5A it thinks the whole concept of cannibalism out. Okay, which we would have been negative if you produce those structure, because the answer would have been okay. So, they take out all the C-5A maybe there are wing tips, spanners or flubs or panels that differ that, that I can take that C-5A and put on the C-5B.

As long as they want to keep all of these in the fleet, that goes away to. So, I still firmly do believe that yes, it’s a matter of when not if.

Michael Potter - Monarch Capital

And the C-5A currently flying?

Edward J. Fred

I’m sorry.

Michael Potter - Monarch Capital

The C-5 is flying?

Edward J. Fred

Yes. Not all of them, lot of them are sitting in hangers.

Michael Potter - Monarch Capital

Okay. One moment. The expenses that we incurred in Q4, how much were they?

Edward J. Fred

I’m not sure that we got it. I’m sure Vince can quantitatively give you a number but a lot of it was indirect labor, I mean we actually had to reconfigure the entire shop from front to back. And also do some building of some areas within the shop area for offices for program managers, for example a place for a experienced person to come sit, when we really start producing here, I don’t know Vince if you got that number readily available, if not you could call Mike and give it to him.

Vincent Palazzolo

It’s between 200,000 and 300,000 roughly.

Michael Potter - Monarch Capital

And we incur any additional expenses in Q1? And whether they were taken in Q4?

Vincent Palazzolo

That overhead will absorb some expenses going first half of the year, which is why we project to slightly lower than our gross margin in the 2008 overall year. We projected a margin of about 24% for 2008 because absorbing some costs related to ramping the new work.

Michael Potter - Monarch Capital

Okay. Do you still think, with the wheel on track to get back to those 30% plus gross margin levels?

Edward J. Fred

Absolutely. Now this is one of those good point and bad point things. When you win something like we won from Spirit you look at what this will do for the company long term and it a win full, it’s huge, it’s something that I never mentioned to anyone of you because it wasn’t public. It was obviously company to company and not governmental open zone where you know, it was something you could find that we had bid on or whatever. So, in the long term the Spirit award is absolutely fantastic. However, when you get on award this type and for a type of product like this, your profitability will not be as high early on as it is later in the program. And so, that impacting us without the program yeah, we probably would have been close to the 30% range this year.

So, you know, it depends on how you want to look at you’d rather been 30% this year and not as the Spirit award or would like to be 33 or 34 or 35 you know, three or four years from now when Spirit is slowing and some of these other things that we are chasing also come into position. So, yes Mike I absolutely expect us to get back to the star grades being big jobs that we want big jobs for pursuing, we will do a tremendous amount that yield out all of the overhead that we have in the company and take our profit margins of where they belong, from where they have been in retirement.

Michael Potter - Monarch Capital

’09, ’10, you think we could see mid 30% gross margin rates?

Edward J. Fred

I think would be closer getting and this is strictly I guess but given the work that we have the work that I foresee is getting, I think you are probably talking more ‘10 or ‘11 then ‘09 or ‘10 to get to the mid 30.

Michael Potter - Monarch Capital

Okay. And then just one last question on the Boeing. I guess that we (indiscernible) as far as negotiating the final terms on the contract, I guess a Carian supplier or sub ways #2?

Edward J. Fred

Three, three and half was named in their proposals was one of the providers of surface material for the wing, that will also a couple of other companies named in their proposal one of which was CPI, as I told everyone. In the universal order things, yes we were third one they were talking to, third in the food chain if you will. Okay, if you did not see release publicly CarianAir did announced their piece of Boeing A-10 contract probably a month so ago I think and so they are done and they have negotiated, they have determined what their role is in the program. We are still in the process of doing that so as the company that was #2 in the food chain that is not to mean that there going to be finished before we are or that they will get something and we won’t or we will get something and they won’t. This is a long process with the 800 pound deliver of all companies. We continue to forge ahead, I am optimistic about our prospects because of what we bring to the table but also because Boeing did main mass in their proposal as a subcontract, so it has been there intention all along to give CPI a piece of work.

Michael Potter - Monarch Capital

Okay. So, we hope we are talking weeks not months?

Edward J. Fred

Mike, I am always hopefully talking weeks not months.

Michael Potter - Monarch Capital

Thanks guys.

Edward J. Fred

Okay, Mike thank you.

Operator

Your next question comes from Jeff Fier with Skiritai Capital.

Russ Silvestri - Skiritai Capital

Hi, this is actually Russ Silvestri. In your guidance of 37 million for the year, do you have any Boeing revenues included in that number?

Edward J. Fred

It's first of the guidance is 35 million not 37.

Russ Silvestri - Skiritai Capital

Okay, sorry. I see in the order sign.

Edward J. Fred

And now do not specifically have Boeing in there obviously in our guidance we have some new revenue, some on, as of yet on unallocated revenue if you will.

Russ Silvestri - Skiritai Capital

So, something that that’s not been booked.

Edward J. Fred

Exactly.

Russ Silvestri - Skiritai Capital

Okay.

Edward J. Fred

Which is always the case.

Russ Silvestri - Skiritai Capital

If you look out into ’09 given that what you have this year with Spirit and Sikorsky what would cause orders to be down versus ’08?

Edward J. Fred

If I look out at what I have now for Sikorsky and Spirit you are asking me what would cause orders to be down next year?

Russ Silvestri - Skiritai Capital

Yeah, I mean it seems your backlog will build in ’09 as oppose to where it is in ’08, I am just curious is there anything after that would cause your new orders for ’09 to shrink or the orders that you have on book for ’08 large enough that ’09 should be an up year for ’08?

Edward J. Fred

Well, at this current stage of the year March normally I could not stand on a, I just want to tell you ’09 will be better. However, as I said in the press release what we have on board and the fact that we got some long-term stuff now between Sikorsky and Spirit potentially some others, we expect the revenue increases that you are seeing, the net income increases that you are seeing to continue into ’09. So, as of right now, yes, I am saying to you ’09 that was better than ’08 and I don’t really have something on the horizon that should change that philosophy.

Russ Silvestri - Skiritai Capital

Okay. Thank you.

Edward J. Fred

Okay.

Operator

Your next question comes from John Kohler with Oppenheimer.

John Kohler - Oppenheimer

Good morning guys.

Edward J. Fred

How are you John?

John Kohler - Oppenheimer

Good, how are you doing?

Edward J. Fred

Good.

John Kohler - Oppenheimer

Good. I guess just quick question, 200,000 to 300,000 in cost to reconfigure the facility, I guess on earlier expectations in that profit was 2.3 to 2.5 million the actual fee was 1.9 what was the, what other costs were there that cause some of the short fall from the guidance?

Edward J. Fred

Well, I will answer this one, I am not going to put Vince on the spot on this one. Our bonus is we are exceedingly high.

John Kohler - Oppenheimer

Okay.

Edward J. Fred

Quite honestly, you know, we reconfigured them a couple of times always in the Spirit of that we got when the company produced and if it wasn’t producing and wasn’t producing as high as we expected outdoor that you know, the bonus is wouldn’t be as high as they were, that’s was an exceptionally high area so the kind of increase we had over the previous year. Now, if you annualize and say well we don’t get bonuses for three years it's wasn’t of the charge crazy, they were very, very high numbers and that’s certainly impacted you know, the bottom line of the company no doubt about it.

John Kohler - Oppenheimer

Okay. Are there any additional costs that you have to take on for the CallStreet business new tools or anything like that that you have do spend money on?

Edward J. Fred

Well tooling is included in the proposal it becomes a part of cost of sales and nothing like that as you know we don’t have machines out there, so like we have to go out and buy another machine so, there will be nothing like that. You know, at some point as it starts to gear up if you will, we will have to incur more direct labor but that’s obviously concluded in cost of sales and in our proposal also.

John Kohler - Oppenheimer

Okay, I didn’t know if there is a fee you had to get into the program or anything like that or?

Edward J. Fred

Oh, no, no.

John Kohler - Oppenheimer

Okay. All right. Thanks for that. I also noticed in the News Day article there you talked about hiring a couple of more people, five to ten year employees?

Edward J. Fred

Right.

John Kohler - Oppenheimer

When will that actually take place is that ongoing now or is that ongoing now or is that?

Edward J. Fred

No, no, no that’s probably in the period, it won’t start, it won’t be in the beginning of the Spirit program, but I would think a year or two down the line and then overall on the questions on the interview I has made, will this mean new jobs at CPI, oh yes it will and as we gear up for the program and start to get more into it that’s what I think we will start adding more people.

John Kohler - Oppenheimer

Okay. Then the reconfiguration facilities, does that increase it all or change I guess in any way your expectations and what your one shift through put might be in dollar terms?

Edward J. Fred

It could possibly bring it higher again it's going to depend on what the mix of additional work we get beside Spirit.

John Kohler - Oppenheimer

Okay.

Edward J. Fred

But, we reconfigured it in order to be able to hand all the Spirit job and perhaps one or two others that we you know, hopefully see as potential programs for us, all of them large or when I will say large then I will just mean it dollars but also in configuration of tooling arrangements and the size of the parts themselves. So, the whole concept here was to make sure we had enough room to meet what we think our capacity meets today to be able to generate the kind of revenue we've talked about on a one shift basis.

John Kohler - Oppenheimer

Okay. Oh, that’s good. And I guess the next question is, the win with Spirit obviously change the company’s configuration somewhat from striping all the way to commercial but beyond that having Spirit as relationship with CPI does that seriously give you on trade to other manufacturers like maybe Denair helicopter or something like that?

Edward J. Fred

Well, Spirit would necessarily give us the intra to Bell you know, we have people that know a lot of the primes, we can get into see them all extra what will give us an intra to Bell and quite honestly I can readily say publicly that we pursue Bell just like we pursue a bunch of companies, is a fact that we've now done helicopter work at Sikorsky.

John Kohler - Oppenheimer

Right.

Edward J. Fred

Prior to working with Sikorsky, we could not walked into Bell’s door and say don’t worry we can make helicopter parts, now we can Sikorsky gave us that opportunity. So, it's an on trading to that, how I look at Spirit is more, we start to perform on this program and they are pleased with what we do, they do in tremendous, they are the largest producer of structure sub contractor of structure in the world they do $5 billion, they do a tremendous amount of work on the 787 somewhere along the line I would like to be guy they will upload 787 structural work to.

John Kohler - Oppenheimer

Right.

Edward J. Fred

So, you know, I want to leverage that within Spirit. And understand how we got Spirit and maybe this important to point out to everybody. Spirit has no idea that we work when we went to the bidders conference on the A-10 wing, Vince was there and (discernible) team was there, Spirit was there, I was there, and we understood that Spirit was bidding as a client. Just like we went to Boeing and said, we are giving you an unsolicited bid here is what we can build few, here is what we would like to do, where you are interested, we did the same thing with Spirit. Spirit also included us having never met us before this proposal.

John Kohler - Oppenheimer

Okay.

Edward J. Fred

Came out, so of lot what we did in CPI and included us in their proposal as well as a critical sub contractor to them. Now, they did not win the A-10, Boeing did. We were critical sub contractor for them hopefully that’s leading to bunch of business from Boeing. But that on-trading into Spirit is what brought us here now to do in the Gulfstream shifting.

John Kohler - Oppenheimer

Right.

Edward J. Fred

Okay. So, we leverage that one proposal into hopefully two major jobs.

John Kohler - Oppenheimer

Okay. That is, it is helpful. One last question on, somebody asked it, can you, I know it is right, because you have no idea what your words are going to be but in three or four years time if you worked at the decomposition of business that you had could you make an estimate now or would you feel comfortable so as what percentage that would be in non defense?

Edward J. Fred

Impossible to do John.

John Kohler - Oppenheimer

Okay.

Edward J. Fred

Really don’t know. It’s just as simple I mean if Spirit wants to give us a lot more work that would certainly up to commercial aspects of it. If we land a Boeing A-10 work does that mean we get some Boeing commercial work as well, somewhere down the road as it start to off load possibly but today I couldn’t answer that to you at all.

John Kohler - Oppenheimer

Okay. Are you, you are going to pursue more commercial there is that a fair assessment?

Edward J. Fred

At this stage, yes, because as I said many times, depending on how the commercial work comes to us, I’m more than happy to do it. As long as I’m not going to get stuck out there for $5 million or $6 million or $10 million that goes away if a program goes away. I’m always willing to do commercial work it’s the same exact structure just painted differently.

John Kohler - Oppenheimer

Right. Okay, great. Thank you.

Edward J. Fred

You are welcome.

Operator

Your next question comes from Adam Mizel with Aquifer Capital.

Adam Mizel - Aquifer Capital

Good morning guys how are you?

Edward J. Fred

Hi, Adam how are you?

Adam Mizel - Aquifer Capital

Good, I’m, show to show better the 2008 gross margin estimate as you said that without Spirit we would have been approaching a 30% gross margin in 2008?

Edward J. Fred

Between 27 and 30, yes.

Adam Mizel - Aquifer Capital

Yeah, I mean so, to get the 20 that you said that 3.5 million is Spirit revenue was no gross margin zero, that will takes 30 or 27 and 10% of your revenues approximately, 10% after gross margin so, what else going on in driving our gross margin down in 2008?

Edward J. Fred

I’m going to, I’m not trying to dodge the question, there is new business and our projection, as I stated to a caller earlier. Some of that new business is very much like Spirit and then that it’s rather large and it will not be as profitable early on.

Adam Mizel - Aquifer Capital

Okay.

Edward J. Fred

If that were not too occur; then we probably have a higher profit margin and not increase revenue as much as I would think we will before the year is over. So, well, I can’t mention what those things are, there is a whole, this is like a puzzle and there are pieces you don’t have that I can’t give you at the moment. But, that have gone into all four process as to what the year would look like if such and such occurs.

Adam Mizel - Aquifer Capital

Okay.

Edward J. Fred

Thank you. And I’m not trying dodge your question. But, there is only so much I can talk about.

Adam Mizel - Aquifer Capital

No, it’s fair. Is it really assumption than yet to think about of this Spirit program we just want any other large ones in those initial first 12 to 20 from at least 12 months. If that revenue which really is somewhat gross margin? Thank you about it.

Edward J. Fred

I am not sure about zero. I would say to you it is much lower make sure incurring of all your upfront costs, the development and you know if you just want to do a very simple one think about how many hours it will take you to make the part of first time versus it will take you to make the 150th time. You know all of those kind of things happened to the beginning of the job.

Adam Mizel - Aquifer Capital

Okay. It makes sense. Other question would be when you look at the 2008 and then even 2009 what do you expect to see in new government related work on top of or in the new program other than has been the normal course of what your business has been historically.

Edward J. Fred

Actually, we are projecting very, very little for this, the simple reason is that has been very little for the last three years. In my opinion if we had any kind of major governmental money flowing out into repair and maintenance or replacement parts etcetera, that will be windfall and that would probably somewhere along the line increase our guidance because our guidance is very, very conservative when it comes to new military business just based on the fact as a three years we haven’t seen much and there is nothing other than Bernanke giving us an indication and that’s going to change anytime soon.

Adam Mizel - Aquifer Capital

If it is, do we have the capacity given the way you are reconfiguring and line here, business?

Edward J. Fred

We doubt that would be an issue at all.

Adam Mizel - Aquifer Capital

Ok thanks guys.

Edward J. Fred

You’re welcome Adam.

Operator

The next question comes from Paul Verger with PLA Associates.

Paul Verger - PLA Associates

Good morning.

Edward J. Fred

How are you Paul?

Paul Verger - PLA Associates

Can you give us a little more call on the backlog as it moved anything going in, come out, I am sorry the backlog of orders of 200 million we are talking about?

Edward J. Fred

Not a whole lot has gone in, not a whole lot has come out, it’s been very, very stagnant, obviously Spirit came out. That was a good thing. Not too much else has gone in, nothing significant big away that will be as I said to you, you know we are betting a tremendous amount of work for Sikorsky at the moment that will start to fill that backlog off, make it even larger. There has been very few governmental awards, once again but there are also finely have been that almost sounds negative but there have been a whole lot less RFPs, RFQs from the government as well because I think they finally got tired of sending old RFPs when they couldn’t form in the beginning, so the requirement still exists but now they have stop the process of sending them out where we used to do 25 to 50 a day. We are only seeing a half dozen a day perhaps come in the door at the moment and again that is a systemic issue, that is not CPI has not seen them. That is anybody who wants to see them, is not seeing them because they just not put them out, that’s true for a competitors and everyone else.

Paul Verger - PLA Associates

Okay and now with some of these deals that you are getting into the long term, are you comfortable that you protected on inflation?

Edward J. Fred

Absolutely. Yeah the escalation factors in some other things we are looking at or have received so far. We piggy back on to the purchase deals that the prior manufactures have with their suppliers so we will cover in that regard and that goes into the pricing accordingly. So yeah we are not too concerned with that at all.

Paul Verger - PLA Associates

Ok great, fine.

Edward J. Fred

Ok Paul, take care.

Paul Verger - PLA Associates

Bye.

Operator

(Operator Instructions). There are no further questions. I’ll now turn the conference back to management.

Edward J. Fred

Okay thank you Luanne and I just want to thank all of you for participating in the call. I look forward to seeing a bunch of you in a mat on the road and we will talk to you again in about six weeks. Thank you very much.

Operator

Ladies and gentlemen this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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