CPI Aerostructures Inc (CVU) 2009 Q3 法說會逐字稿

Good day everyone and welcome to the CPI Aero third-quarter 2009 conference call. At this time I would like to inform you that this conference is being recorded. (Operator Instructions). I will now turn the conference over to Mr. Ed Fred, President and CEO.

Good morning and thank you all for joining us for our third-quarter 2009 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 we get started I want to remind investors that 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 those risks are the government's ability to terminate their contracts with us at any time. The government's ability to reduce or modify its contract 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 price 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 on our filings with the SEC.

This morning I will give you a brief overview of our nine-month results. I will then hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details. Then I will comment on the current business environment, outlook for the remainder of 2009, and then briefly wrap things up and up and open the call to questions.

As reported earlier this morning, for the first nine months of 2009 revenue was approximately $31 million compared to approximately $26.4 million in the first nine months of 2008, an increase of 18%. Pretax income was approximately $3.575 million compared to pretax income of approximately $2.542 million for the same period last year, representing an increase of 40%.

Net income for the first nine months of 2009 was approximately $2,359,000 or $0.38 per diluted share compared to net income of approximately $1,682,000 or $0.27 per diluted share in the first nine months of 2008.

Selling, general, administrative expenses for the first nine months of 2009 were approximately $3,880,000 or 12.5% of revenue compared to approximately $3,470,000 or 13.2% of revenue for the same period of 2008.

So with that prelude, let me introduce Vince Palazzolo so he can walk you through the details of the quarter.

As reported in this morning's press release, revenue increased approximately 5% to $9,916,000 in the third quarter of 2009 from $9,434,000 in the third quarter of 2008. Gross margin was 26% as compared to 23% in the prior year's third quarter.

Pretax income for the third quarter increased to $1,358,662 compared to $1,352,122 in the prior year's third quarter. Net income for the third quarter was $944,662 or $0.15 per diluted share compared to $892,122 or $0.14 per diluted share in the third quarter of 2008.

Selling, general and administrative expenses for the third quarter of 2008 where approximately $1,201,000 or 12.1% of revenue compared to approximately $806,000 or 8.5% of revenue for the same period of 2008. This increase was primarily due to the reclassification of employees from factory overhead to the SG&A category.

New orders through November 9, 2009 were approximately $15 million. And unawarded solicitations remain at extremely high level, with open solicitations totaling a maximum realizable value of approximately $393 million. At this point let me hand the call back over to Ed for an overview of the business.

As Vince just reported, the gross margin for the third quarter of this year was higher than that of last year's third quarter, and that of this year's first half. As we have discussed previously this is representative of the variances you will see as new programs come online.

As we stated in our press release we expect that there still be -- still be ebbs and flows, but that for the full year the results will fall into the range of 23% to 25% gross margin.

It is always the case that new development programs, there are many -- I'm sorry -- it is always the case that in new development programs there are many, many changes in the design, engineering, and material requirements of the structures to be produced. Even when those design modifications are anticipated and accounted for, others occur that cause the Company to incur overtime and additional expense in order to meet the delivery requirements and production standards.

This has been the case of two of our three new programs, which is currently holding our margin down somewhat from the levels we expect to achieve in the future. However, we anticipate that these excess costs will be recovered and that the margins will end up in the range we expected when we bid on these programs originally.

We are even more pleased to report that through all of this effort the Company has been successful in delivering the first four sets of leading edges to Spirit, and we are continuing low-rate deliveries on the E-2D outerwing panel kits.

Also as just reported, new orders through November 9 of 2009 were approximately $15 million. This includes approximately $6.4 million in C-5 TOP awards, which long-term investors will recall relates to the contract we received from the Air Force in 2004.

The decrease from last year's awards at this time can be directly attributed to the fact that at this time last year we had been awarded some major programs from our subcontracting customers. There have been no such awards yet this year, though this is not a negative comment. Major aerospace programs are not awarded every day, and we are very fortunate to receive awards on all three major long-term programs on which we bid last year.

As future contracts become available for bid, we hope to experience the same level of success we did in 2008. However, even with this year-over-year reduction in awards, we are very pleased with the high level of unawarded solicitations that are outstanding, which total approximately $393 million. Having this amount of potential new business in the pipeline makes us believe that we have a vast amount of opportunity ahead of us to acquire additional new contracts as these programs get funded.

This high level is an indication that our reputation has been elevated in our industry, thanks to our impressive list of existing customers. We are now on the radar screens of additional prime manufacturers, including other helicopter and business private jet companies, who are beginning to acknowledge CPI Aero as a prime supplier of aerospace structure.

Even with the large multiyear contract awards of 2008, the amount of total bids outstanding continues to remain significantly high, as we are now bidding on contracts with these new potential customers.

We are hopeful that several of these solicitations will become awards and contracts in the future. Based on all of the above factors, we reaffirm our projection that 2009 revenue will be in the range of $42 million to $45 million, with resulting net income in the range of $3.9 million to $4.3 million.

For those of you questioning that, please be aware that we are fully cognizant of the fourth-quarter results that are required to meet these targets. And with approximately seven weeks left in our fiscal year, we are confident in our ability to achieve these results.

Before closing, I would like to thank all of our shareholders for your continued support of CPI Aero. And I assure you that your management team and your Board of Directors are 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 be remiss if I didn't once again thank the CPI management team for sharing my vision of where we can take this Company, but more importantly, for making it happen. I would also like to thank all the employees of CPI Aero for executing on that vision and being an integral part in winning such impressive awards as the one I mentioned earlier.

I look forward to the future of this Company with great eagerness and anticipation of now executing on these contracts and entertaining new ones due to the quality of our work.

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

(Operator Instructions). David Cohen, Midwood Capital.

I was wondering maybe you could just -- without going into great detail -- but just give us a sense, if you look at the awards in your -- I will use the word backlog, not necessarily formally backlog -- but if you look at your biggest awards where are you in terms of the revenue cycle on those initial quantities or production -- what kind of production level, and are you 10% of where you expect to be, 5%, that sort of measurement?

I am going to general, Dave, since we haven't published any kind of information like that. Basically we are in the early stages of all of our major programs. I don't think any yet, maybe one, has reached a 10% stage -- maybe one.

What would that be? Could you say?

I would say the Spirit program is probably the closest to 10%. Everything else is well under 10%. Keep in mind we have only received the first releases on the other two major programs, so there is a ton more revenue to come.

This goes back to my whole point that I try to make on every one of these calls, when people panic about what we have in new awards, that the long-term contracts are revenue generators. I don't have to fill the hopper again the way I have been doing for years and years and years, because these have long ranging impact.

We have yet to really scratch the surface of the revenue on the E-2D and the A-10 programs with Boeing and Northrop Grumman; that will come. So that I won't tell you I am thrilled that we haven't won a whole lot of new contracts. I can also tell you we haven't lost a whole lot of new potential bids either. There just isn't that much out there that has been awarded so far. The fact that I have almost $400 million of potential business that I can already add to our base is rather exciting.

But as I explain again on every call, the projections we have out there through 2011 that show the compounded annual growth rates in both revenue and net income are in essence based on the awards that we have already won. The fact that we won contracts that are huge dollars for us, and have a lifespan that layer revenue in year after year after year.

It is a new concept at CPI. We have never had programs that really did that. And apparently it is a new concept for shareholders because everybody does really panic when they see where our awards are.

Were there any particular programs on which you actually thought you would generate more revenue in Q3 and those was effectively pushed to Q4?

Not necessarily that. More so that the mix in '04 is a high gross margin mix. That is why you're seeing a little skewing in revenue between the third and fourth quarters. There really wasn't a push out or change in revenue as we have seen it, no. And again, I didn't give quarterly guidance, obviously.

And I understand.

So we are not surprised by what is happening, although apparently some of you are.

Mark Jordan, Noble Financial.

I would like to ask you a couple questions just specifically on backlog. What is the funded backlog currently? And as you mentioned, you've got what we would generally call unfunded backlog, which would be the program -- expected program volume of things like the G650, etc. Do you have a total that you would like to share over the next five years on the unfunded piece?

I can't give you that data, because we don't publish that quarterly, except on -- in our 10-Ks once a year. So while I would like to help you with that question, it is not public information. It is not anything we have put in writing anywhere and so I can't do that on the call, obviously.

You did mention a few moments ago that on the G650, you, I believe, said that you delivered your first four leading edge sets. Could you tell us, once Gulfstream gets the 650 into steady rate production, what would be the number of sets that you would expect to deliver to them, and what is the ASP per set?

The long-term agreement we have with Gulfstream calls for a production run of 134 units. The first four units are not -- they are all prototypes, test units. One of them is actually used for bird strike testing. The units that we are in process building now are the first that will go on an actual customer airplane.

So the long-term outlook right now, the long-term agreement is for 134 shipped sets. Gulfstream in their rollout of the program mentioned that they were anticipating upwards of around 200 units to be sold in production. We don't have any confirmation of that, but that would only (multiple speakers).

I think that the highest peak year is 29 units, 2.5 units approximately a month.

Per month.

What is the ASP per unit in general terms?

What do you mean by ASP? I'm not sure what you mean by that.

As said, is it $2 million for a set or --?

We have not finalized price negotiations with them, so I can't present that data yet.

We are still undergoing engineering changes, which was continually changing the price.

Just back to the question earlier, just to ask it a different way about some of your major program ramps. You talked about the G650, but the A-10 and the E-2D, clearly those will be in a ramping mode through 2010. Is it your belief that those would be at a high steady-state delivery rate as -- by the end of 2010?

I won't say -- they are not consistent both of them being at a high rate by 2010. The A-10 should have started to fully kick in by the end of '10, and will be, I would say, full rate by '11 and '12.

The E-2, based on government funding and the determination of whether they will build four in a year or six in a year to do a catch up, or they will add C2s to it as well, make it a little less obvious, but as of right now, I would say that would start off in a more fruitful manner at the end of '10, but not be into full-scale anything until late '11, early '12.

A final question, just on the tax rate was down a little bit this quarter, the third quarter. What caused that? And what do you see for a full-year tax rate, and any comments that you might have on 2010 tax rate.

Our tax rates for the nine months in both periods is 34%. Our tax rate is 34% -- anticipated to be 34% for the whole year. The tax rate for the second quarter was a little bit higher than that because of an immaterial adjustment that we didn't flow through, and that might have skewed the current rate a little bit, but 34% is the number.

Then I guess the final question, if I may. The implication of your guidance is obviously for a good quarter here going into the fourth quarter, both on a revenue and a margin basis. With programs coming on stream here is that higher plateau probably a more representative kind of consistent run rate that might be expected on a quarterly basis in 2010?

The fourth quarter margin rate and anticipated earnings is -- because we are down to only one quarter to project, so we already know what is in production for this quarter. As Ed mentioned earlier on the call, we still do expect some little ebbs and flows in margin, so I would not read into that 26%, 27%, 28% rate that we are looking to do in the third quarter plus the fourth quarter to carry consistently into the first quarter of next year.

I would expect that there will still be slight ebbs and flows to keep us closer to that 24%, 25% range that we have been doing over the last 9 to 12 months.

The first year we are looking at -- a truly increased gross margin would be 2011 as some of these programs are maturing and you start to earn the kinds of margins on them that you would expect. Efficiencies go up. You have been able to get material costs down over that period of time. Less engineering changes, less overtime required to meet the demands, etc.

So we are very pleased, obviously, with this year's gross margin. But I wouldn't anticipate dramatic changes in '10. I think the first year you will see a change where you would have a wow factor would be 2011.

Michael Potter, Monarch Capital.

Congratulations on another good quarter. Just a couple questions. I know I brought it up in the past, Ed, with regards to achieving the Sikorsky gold supplier rating. Is it gold or platinum? I keep on getting it -- my medals confused.

They are gold.

Gold is right.

Gold is right. Are we still on track to achieve this certification before the end of the year?

I am not sure it is going to be the end of the year with that. Don't blame us. Don't blame them either. They've got a massive undertaking, because they have orders from their parent company, United Technologies, to get X number of people certified, or get as many certified as they can. I think they're a little bit behind the curve. I don't think it is a lot. If it doesn't happen by year-end it should certainly happen in the first quarter.

To that end, Doug McCrosson, my Senior VP, and myself were just invited to their top supply -- top 100 supplier conference again this year in January. Which means, obviously, we are still very highly thought of, and we are absolutely on the track to be their next group of gold suppliers. There is no doubt there.

Will that help seed the time of getting contracts -- contract awards and sign-offs at Sikorsky?

I wish I knew when we would know when they are were going to award things, etc. They have an extremely long process.

But by having that certification will that help speed the process in some way? Are they (multiple speakers)?

I don't know that it will speed the process. What it will do though is when you are being weighed against other bidders, it certainly gives you a leg up that a non-gold supplier will not have. As they have stated publicly at their conferences and on their conference calls actually, they want to work with their gold suppliers. That is true of the entire UTC family.

And so anything you can do to be gold puts you ahead of a company that isn't gold. And you are treated differently, and therefore you do have advantages when the bidding process occurs.

You mentioned the bidding on contracts with a new private plane manufacturer and helicopter manufacturer. Can you give us a little bit more color?

Not really, other than to say, think of the other big executive jet manufacturers in the world, and think of the other big helicopter manufacturer in the country, and understand that those are the people we are now up in talks with.

The fact that we have produced product for Sikorsky has helped us with the other helicopter manufacturer. And the fact that the people at Gulfstream, who actually build the plane, said that our leading edges were the finest leading edges they had ever seen from anybody.

That gets through the industry pretty quick. And we are now getting inquiries and doing bidding with at least one, and working on a second, business jet manufacturer. All I can say to you is they are the names everybody would recognize in both categories.

But we are getting on work?

Yes, we absolutely are.

Just other housekeeping. What was EBITDA for the quarter?

You have it?

I don't have that number.

Vince will give you a call right after we are done here. He doesn't have the number sitting in front of him, but we will get it to you.

Okay, all right. I appreciate it. Thanks guys.

J.D. Abouchar, GRT Capital.

Another great quarter. Thank you. The first question is that you mentioned we actually had $6.4 million of the C-5 TOP release. Are we seeing a break in the log jam there or is it still just dribbling out?

It is still just dribbling out. They obviously had some requirements for the panels and things that they put on order with us, but we are still -- nothing from the government has changed from five years ago now at this stage -- four years ago, things just dribble out.

Are you going to retire before that thing releases?

Gee, I don't know. I would say I hope so, but I'm having so much fun doing this that maybe not.

Second question is just give us a timeframe, because the new open bids moving from what they were in the past when it was all government stuff, what is a time to revenue on that, and has it changed over the last couple of years?

Well, with the government, when we were all-government, the bidding process was much, much quicker for most things. Not on major programs, but the day-to-day bidding process was much different. You would submit a bid, and you would basically have a response as to whether you are a winner or a loser in 30 to 60 days. You would then get the contract and start building immediately. So you would almost immediately start building revenue. And your finished products would usually be done anywhere from 6 to 18 months after you began. So it was a very quick cycle, if you will.

In the subcontracting arena it is a very, very different ballgame. A lot of times with the government it is simply, who's got the best price or the best value, they are out the door. With OEMs the competitive process is much greater. That is why we are so proud of our win rate last year of three out of three on the big ones, because there is much more scrutiny. It is played much tighter to the vest by the firm giving out the bid. They want to make sure they don't do anything wrong. So it is a process that is much more strenuous and takes a whole lot longer to get through.

Not only that, but a lot of times companies, OEMs I should say, I don't want to say change their strategy, but what is important today may not be as important tomorrow. And so what you are working on may not hit the top of the screen as quickly as you had thought it would, or as you had been told it would. And something else takes priority, and then when that gets cleared out, they come back to the programs that you are working on.

Now the number we give, that $393 million, is anything submitted within a 12 month period. If it is older than 12 months, we drop it off that list. It doesn't mean it is gone, it just means we drop it off that list. If somebody "'reactivates' it and says, okay, look, we know we had this. We have had it for 14 months, 26 months, 13 months, whatever it is -- could you give us a new prize? We will bring it back into the fold as now a current bid.

But it is a much longer process. And then sometimes the revenue from that won't even begin for a six-month period, because you will win the contract and then you spend forever just negotiating all the engineering changes and everything else. It is a different breed of animal than the government processes was.

Then final question is, obviously you only give out the backlog in the K yearly, but the backlog is still there for all the projections that you have publicly laid out, and any of the bids -- opened bids outstanding, would be additive to that.

That's correct.

Great. Keep up the good work. Thank you.

John Kohler, Oppenheimer & Close.

Vince, I know you're overworked, but I would like take a plug for full financial presentation in the release; it would help.

You had mentioned that the last time.

We are working on it.

Yes, we are working on it.

We are working on it.

We might do that at the year-end.

Great. But because my question -- I noticed that gross margin was up, but obviously net margin was relatively flat, and I was wondering what the swing was. I think you touched on it that it was reclassification with the SG&A. I was wondering if you could give me a little more information and help me understand that a little better.

It is very, very simple unfortunately. We had people who were in factory overhead, who -- we sat in discussions -- just general discussions where the Company said, you know, that is really not classified correctly. They're not factory overhead. They support the selling, general, and administrative function of the Company, and we really should move them into there.

It was more internal housekeeping than anything. Those people whose jobs had changed over time and they were overhead, and after a time they really weren't any more. So we just internally cleaned it up and put everyone in the right spot.

Okay. Was this just part of a normal operational review or --?

Absolutely.

Yes.

Exactly what it was part of.

Obviously, you're not seeing any increase in government prime activity, that has been covered.

None at all.

I understand that the awards are lumpy. We all know that. And you say that if you have anything that is more than a year, you drop it out of your bids outstanding?

Just to report to the public.

Right, right. I was just wondering if you could talk about any other changes that might have occurred within that -- any bids that you might have lost and replaced with others? I'm assuming it is not a homogeneous block that there are changes within that. And I wonder if you will discuss it?

You know what, you're right. Normally there are changes within it. This quarter was very bland. And I think the reason is, I think you hit that spot where if the government doesn't let out a lot of stuff, either bids or dollars, that the third quarter tends not to change a whole lot. It is funny, because we talked about that, because when I first saw the number I said, it is only changed by $3 million quarter to quarter?

But quite honestly it was almost homogeneous. There wasn't a whole lot of big bidding, either to the government or in the subcontracting role. Now that is all going to change in the fourth quarter. We have lots of stuff to put out.

So you're going to put out a lot more bids --?

Yes, now we might drop a bunch out too. I haven't examined that yet. But the third quarter was as bland as you could get, quite frankly.

That leads to my next question. Given the obvious constraints in government spending and what we are seeing with the larger defense companies, I am wondering if you're still seeing interest by the prime contractors for sub work?

Even more.

Even more?

Even more, because the reason they got into it doesn't change. And that it is lower cost to have it done outside. And if you have less programs, or you are trying to increase your margins internally, you are not going to do that if you pull the work back in.

So in a lot of ways it is still looking to dish out a lot more. The bidding process, while flat in the third quarter, is relatively active. Understand something, it doesn't mean we didn't work on bids in the third quarter, they just weren't submitted.

No, I don't see that happening. I think, and this is personal interpretation, not anything factual here, but I think the primes are starting to look at that old philosophy of fill it or kill it. Meaning, we have a facility here, here or here, and we either have to fill it or we have to close it. Now filling it is costing us more money, because we have to pay our rates to fill those facilities.

So I don't think they're going to be looking to do that. We have no indication that that is the case at all based on our activity. Now you can get on a different conference call and another subcontractor could say something different. I can only give you our experience. For the things we do, we are not seeing a decrease in that effort at all.

Then also I would think that with general economic difficulties that more work might be brought in-house just to keep efficiencies running. But you're not even seeing that?

Not at all. Not at all.

I was wondering in the $383 million that is out there, is it possible that you could break out maybe what percent of that is solicitations greater than $25 million or so? Is that asking too much?

Right now it is. It is not public. We may do that in the 10-K at year-end, and give people more insight into the numbers, but right now I couldn't do that.

Then the mix shift, I know you didn't lay out quarterly guidance and you are obviously assuming that Q4 is better from a margin perspective due to mix. And someone else asked the question regarding any business that might have gotten pushed out from Q3 into Q4. That was none, right?

No.

So Q3 went pretty much as you expected.

Absolutely.

Just not as we expected.

Right. Let's face it, I know you all expected, okay, quarter one was X, quarter two was higher than that, quarter three should be higher than that, quarter four should be higher than that. It didn't work out that way based on our production schedules. And we knew that going in. We knew the fourth quarter was going to be very large and very profitable.

And that is what I am reiterating here today is that -- because I was sure somebody would ask the question, so I beat you to the punch on both the press release and the script, and that is, yes, folks, we understand what the numbers have to be in the fourth quarter, and we are sitting here telling you that it will be that.

Then to switch gears altogether and go to the 650, I thought they had -- I know they unveiled the prototype, and I figured there would be no additional engineering changes, but apparently there are.

There are engineering changes right through the first one coming off the line. And even after that, if they find -- they determine we want to decrease some weight, we want to increase aerodynamic, anything, you can still have an engineering change.

Now it is not going to go into unit 100. But the first -- as a matter of fact, a lot of times why you do these first units like they are doing is so that you can play around with things, and see if you can get more fuel efficiency, etc.

We are halfway through set number five. Set number five is literally called a bird strike set. They are going to put these on the plane and they're going to throw birds at it -- frozen birds, dead birds, you name it. They are going to throw birds to see how all of these parts hold up to bird strikes. And they may redesign engineering after that. They may say we need to do X,Y or Z. So engineering changes don't stop for quite a while.

But these aren't problems like we saw earlier with the design. These are just normal, run-of-the-mill type?

Yes, at this point I think it is normal stuff. I think the design is pretty much nailed down now. The end customer, Gulfstream, seems to be extremely happy with their aircraft. Which if you have seen pictures of it, they should be, it's beautiful. So I think that is now on its proper course.

Then once you go into production, or they go into production rather, any possibility of additional parts on that?

Absolutely. Our original contract called for us doing the trailing edges and the flaps. We were going to build all three parts. Due to the engineering issues, etc., Gulfstream -- I'm sorry, Spirit, wisely so, decided they would take back two of the parts and make them in-house in what they call their Blue Streak facility, which is a facility that they can take and completely dedicate to one project. And they have done that for the trailing edges and the flaps, while we have done the leading edges.

The information we have from them is that the business philosophy that caused us to put those three parts out for subcontracting bid has not changed. We just all need to get through this process of getting the first 10 sets delivered, and then we will go right back with them and, again, negotiate the return of those parts to us.

Carter Newbold, Rutabaga Capital.

I just wondered if you could talk us through your views on working capital financing. I have asked the question before, but clearly now you're telling us you're going to have the biggest revenue quarter in the history of the Company this quarter. I just want to make sure you feel confident that you have the borrowing capacity lined up to support the working capital and fixed capital you are going need to, not just execute this quarter, but on through the rest of the medium-term plan that you have given us.

Yes, we are very comfortable. We have two avenues, two alternatives to go to if we need to. First off, we have established a wonderful relationship with Sovereign Bank, who has been with us since this growth period started. And raised our line, gave us a term loan for the Spirit tooling last year, as we went through the first year of the agreement we had with them.

They extended the term. So they have expressed a willingness to be as active a lender to us as we absolutely require.

Secondly, we did put out a shelf registration statement about a month ago. It is effective. And it is there for that very reason, if the Company determines that it needs additional working capital, it doesn't want to go too much deeper into the debt mode or wants to combine both debt and equity, we have a vehicle with which we can do that.

We talked to many investment banks along the way about that, and each and every one of those told us to file a shelf registration. That the world had changed a lot from the old days, where if you filed a shelf, it sent these horrible signals that you were going to raise money, etc. Their thing is with the credit markets, etc., you want to be able to have access if you decide that you need it.

So you file a shelf, along with the other million companies in this country that were filing shelves, and you let it sit there. And if you decide you need to pull it down, you pull it down. But otherwise it is there. It is good for a while. And it is also a -- I will call it, a quick way to raise money if you need to.

So between the two things, between our relationship with Sovereign and the fact that there is a shelf out there, we feel very comfortable that if we need more working capital we have the access to it.

With that, I'm also going to say publicly here, and it is not a secret, so I am not saying anything I'm not supposed to, but the largest shareholder we have in this Company is our Chairman of the Board. He is obviously an integral part of any discussions we have when we talk about debt or equity or anything else, because it impacts him as much as every other shareholder. So whatever we do, we do with the shareholders' best interest in mind.

As of right now we're just looking at all of our options and determining whether or not there will be need for additional capital as we go forward.

Good. Thanks. I think I am the third person to go fishing on this, but let me ask again. Just remind me, will you tell us what you think fiscal 2010 looks like at the next earnings release?

That's correct. I will absolutely tell you that. You already know what I think 2011 looks like.

So that's -- I mean obviously many of us are probably interested in trying to bridge, but for now you responded to what you think normalized margins are going to look like. But as to which of the quarters of 2009 are most representative in terms of run rate revenue, not really ready to answer that yet?

Not at the moment. There are a couple of things going on, things we are discussing, things we are being asked to look at, etc., that could change -- where I am right now -- could change them up or down. I don't want to go out there with a number and then three weeks from now say, okay, wait, it went out. Okay, no wait, now that number came down. And now we are here. In the 8 to 12 weeks it will take us to get ready to release fourth-quarter earnings, etc., we will have a much, much better handle on it.

I think you have been around long enough to know, I don't like my projections to jump around. I like to tell you what we are going to do and then make those numbers. I know that disappoints a lot of the shareholders, because they always want us to raise things, but I am a firm believer, tell people what you're going to do and just do it. And if you surprise them upward, it is because something magical happened and not because you're sandbagging or you're stuck with changes that you didn't anticipate.

So we considered putting out the numbers in the -- here in the third quarter -- at the end of the third quarter, but with the number of items we have in flux, I would much rather give you a solid number.

Fair enough. Just one last question for me. Somewhere out there in the next eight or ten quarters it seems likely, or at least probable, that in addition to everything that you've got in your long duration contract book, the stuff that you can see coming, there is a chance that you're going to have a quarter or two where maybe the prime -- the government prime market reawakens, and you have significant C-5 or T-38 or both.

When -- if/when that happens can you just give us a view into how the balance sheet is going to look, how the manufacturing facility is going to look? And how ready are you if you actually get -- if you have a hugely revenue loaded quarter are you going to be able to make everybody happy in your constituent base from customers to shareholders to employees?

I would like to believe, and I hope I am correct, that we are ready for that now. I think we have been ready for it for a while. We have our facility laid out so that New York can be dropped in certain sections, almost over night, quite frankly.

Our employees are anxious to have even that much more work. One of the things we do here every month is have an employee luncheon. And I am quite open about where the Company is, where it is going, the things we're looking at, the things we're bidding on, what it means to the employees, what it means to the stock price of the Company if certain things happen.

So I believe we are well prepared. Now you ask the question, and anybody who has seen my investor presentation, I go through how we get to the projections that we have put out there in the public arena. And then I talk about things that aren't in those projections. And one of the things is the one you just brought up.

CPI was the second largest supplier of structure to the aircraft part of the US government in 2004, 2005, and the largest small-business one. The only person, or company, I should say that we trailed was Lockheed Martin, who was the OEM on most cargo stuff that was getting replaced.

We were receiving $20 million to $30 million -- I think we hit a high of $35 million a year in awards in that category. The things like C-5, C-130, etc. We're also doing repairs on A-10s and T-38s and everything else. And that market died, if you will, when we went to war. Because the money is not being used to repair aircraft, it is being used to fund the war effort.

Now because we still haven't gotten out of Iraq, and because now we are looking at staying in Afghanistan or getting into it even deeper, these planes have still not come home. These planes are still not spending the money on the repair of these -- and the replacement of parts on these aircraft. So nothing has changed in the last four years.

In my presentation I point out that given our status then, if we return to that status, and I have no reason to believe we won't. First of all, we still do exactly the same thing we did then. Secondly, a lot of smaller competitors are gone. They couldn't survive the four-year downturn that we were able to. Even one of our bigger competitors has gotten out of the Air Force market and has gone to Navy and Army kind of stuff.

So there is a huge market there for us when it reopens. Now given that, we used to generate $25 million to $30 million a year of revenue from that type of work. I don't have that in my projections. I have $5 million or $6 million or $7 million of stuff that we have still been doing, T-38 and some C-5, etc. When that other work comes back, it drops right on top of the projections I already have out there.

It is an increase to the projections. Then I will make all those shareholders who think I am a bad guy, because I never raise my guidance, I will make them all happy, because we will be able to raise guidance then.

But we are equipped. I have done extensive work in this Company, and my management team -- well first off, I have done extensive work giving myself a very, very strong management team. As we grew, we knew we needed more strength. They in turn have layered below them very, very strong people. This is not the same Company it was 3 or 4 years ago.

We have a different vision. We are always looking to making this a $100 million company, a $150 million company. So this was a very long-winded answer, I know, but I hope it gets to the point of what you asked. We are equipped to grow this Company to $100 million, $150 million, if that is what we can be. And that is our mindset; that is our preparedness level. And we welcome -- I would welcome more and more work.

As you saw, we have eaten three giant contracts in 2008. And we are not stumbling. We were prepared for it. We were ready for it. Even if we had to overstaff to make sure we were ready, that was the right thing to do.

Thanks, Ed. That's helpful.

Sorry you asked?

No, I'm glad. Just -- I guess the only thing I would add onto that is, you remember, we get paid on what comes out the bottom end of the income statement, not what comes in the top. I know you're pretty focused on that.

I absolutely agree. That is why my projections show a 50% to 60% increase at the bottom, while only a 30% to 35% at the top.

Thanks Ed.

George Melas, MKH Management.

I am very new to this story, unlike all the previous callers. I would just like you -- could you explain briefly the working capital model of the Company, and this huge amount of unbilled receivables?

I have to be honest with you. That's an awful long discussion. Would you be open to calling our CFO, Vince, and he will have a one-on-one conversation with you and go through all of that?

Good. I would be happy to do that. That would be good.

Okay, so anytime after we are off the call, if you want to arrange with Vince to get together on the phone, and he will give you a half hour, 45 minutes on that whole topic.

Okay. (multiple speakers).

He will make you as comfortable as you need. Okay, thank you.

There are no further questions. I will now turn the conference back to management.

Okay, I thank you all for listening in. My guess is the next time we talk will be sometime in 2010. So enjoy your holidays and we will talk very soon. Thanks again for the support.

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