CPI Aerostructures, Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Welcome to today’s CPI Aero's 2015 Third Quarter Results Conference Call. With us today are Douglas McCrosson, President and Chief Executive Officer; and Vincent Palazzolo, Chief Financial Officer. After management’s prepared remarks, there will be a Q&A 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. Included 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 or budgetary constraints change; the government's right to suspend or bar the company from doing business with them, as well as competition in the bidding process for both government and subcontracting contracts. Subcontracting customers also have the ability to terminate their contracts with the company if it fails to meet the requirements of those contracts or if their customer reduces or modifies its contracts to them due to budgetary constraints. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Additional information concerning these and other risks can be found in the filings with the SEC. Now, I will transfer the call to Douglas McCrosson, CPI Aero's President and Chief Executive Officer. Please begin.

[Doug McCrosson:]

Good morning and thank you all for joining us for our 2015 third quarter and nine months results conference call. Our results for the third quarter and nine months were issued yesterday after the close of the market. Before I turn the call over to Vince to discuss our financial results, I would like to provide a summary of our achievements. Third quarter revenue and net income increased as we began to recognize revenue from the multi-year defense contracts we were in awarded in late 2014 and earlier this year. For the third quarter of 2015, as, compared to the same quarter of 2014, we reported 25% increase in revenue, 44% increase in net income, and 40% increase in fully diluted earnings per share. Also, our backlog at September 30 was $421.7 million, approximately $18 million higher than backlog at 2014 year end. We expect the fourth quarter of 2015 will be a record revenue quarter and as full year 2015 revenue will exceed our historical high set in 2012. I’m also very excited to announce this morning that last evening CPI Aero received Aviation Week’s Program Excellence Award. We were recognized for the Phenom 300 engine inlet program we performed for Embraer, the manufacturer of the Phenom 300 executive jet. I want to take a moment to congratulate the talented men and women that worked on the Embraer program for this amazing accomplishment. This award recognizes the years of investment we had made in creating world class manufacturing, program management, and supply chain management capabilities, and it is especially gratifying to be considered the best of the best in this regard. The award was accepted by our Embraer Program Manager, Derick Martin last night in Scottsdale, Arizona during the annual Aerospace/Defense Supply Chain conference sponsored by the Aviation Week Network and SpeedNews. Derick was accompanied by Bobby Muller, Vice President of Business Development and Nazz Palmerini, our Director of Program Management. This award would not have been possible without Embraer’s commitment to its supply chain partners, so I would like to thank Embraer for its culture of co-operation and team work that puts CPI Aero in the best position to succeed on this assembly program. I will now hand the call over to Vince Palazzolo, our CFO to discuss our recent financial results and expectations for 2015. Then I will comment on the current business environment, backlog and contract awards and new growth opportunities going forward. I will then open the call to questions. Vince?

[Vince Palazzolo:]

Thank you, Doug. Our financial performance for the third quarter and nine-months of 2015 was in line with our expectations. We reported increases in revenue and net income for both reporting periods as we began to recognize revenue from the multi-year defense contracts we were awarded in 2014 and earlier this year, and also from increased build rates of our business jet production contracts, particularly our programs with Honda and Embraer. As shown on slide 6, for the third quarter of 2015, as, compared to the third quarter of 2014, revenue was $26.8 million, compared to $21.5 million, an increase of 24.7%. Gross profit was $5.6 million, compared to $4.5 million, an increase of 25.2%. Income from operations was $3.7 million, compared to $2.7 million, an increase of 38.5%. Net income was $2.5 million, compared to $1.7 million, an increase of 44.1%, and earnings per diluted share was $0.28, compared to $0.20, an increase of 40%. For the nine months 2015 versus nine months 2014, revenue was $68.6 million, compared to $19.6 million. Gross profit was $13 million, compared to a loss of $34 million. Income from operations was $7.1 million, compared to a loss of $39.4 million. Net income was $4. 4 million, compared to a loss of $26.9 million and earnings per diluted share was $0.51, compared to a loss per share of $3.18. It should be noted that the nine-month period results for 2014 were impacted by the change in estimate of the A-10 Wing Replacement Program we recorded during the second quarter of 2014. Moving to slide 7, for the third quarter of 2015, approximately 58% of our total revenue or approximately $15.5 million was generated from defense programs of which $15 million was from Tier 1 military subcontracts with OEMs and $0.5 million was from government prime contracts. Commercial programs generated approximately 42% of our total revenue or $11 million. This revenue was generated mainly from or Triumph, Embraer, and Honda programs. For the nine months of 2015, approximately 55% of our total revenue or approximately $37.5 million was generated from defense programs of which $37 million was from Tier 1 military sub contracts with OEMs and $0.5 million was from government prime contracts. Commercial programs generated approximately 42% of our total revenue or $11 million. This revenue was generated mainly from Triumph, Embraer, and Honda. Moving on to slide 8, our gross margin for the third quarter and nine months of 2015 was 20.9% and 19% respectively and continues to be effected by the profit adjustment we made last year related to the revised estimates for the A-10 WRP as we continue to record revenue on this program with zero gross margin. Excluding the effect of the A-10 Wing Replacement Program, gross margin for the third quarter and nine months of 2015 on all remaining programs was 23.4% for both reporting periods, as, compared to 23.6% and 21.5% respectively in the same periods in 2014. This improvement in the nine month period is primarily the result of higher gross margins on our commercial product lines as production rates and custom demand has increased. Once the A-10 WRP program was concluded, we anticipate our gross margin to remain in the range of 23% to 24% given our current and projected product mix. Slide 9, summarizes our guidance for 2015. We are anticipating the fourth quarter to be the highest revenue quarter in our history. Based on our nine month performance and our expectations for the fourth quarter, we are updating our guidance to a more narrow range. For 2015, revenue guidance was $92 million to $102 million. We now expect revenue to be in the range of $95 million to $98 million, exceeding the previous record of $89.8 million in 2012. Gross margin guidance was between 19% and 21%. We now expect gross margin to be in the range of 19% to 20%, lower than our historical margin as we continue to book the A-10 Wing Replacement Program revenue at zero profit. Net income guidance was $7.2 million to $8 million. We now expect net income to be in the range of $7.2 million to $7.5 million. The following slides, provide 2015 revenue break-down by market sub contractor role and segments, starting with the revenue breakdown by market as shown on slide 10. In 2015, due to recent military contract wins, we expect military revenue to account for approximately 61% of total revenue. Production activity on our new defense programs has ramped up supporting our expectations for strong fourth quarter. Regarding our revenue breakdown by sub contractor role as shown on slide 11, the majority of our revenue approximately 83% is expected to be generated from programs which we have at Tier 1 role. 2015 Tier 2 revenue is expected to slightly decline while our revenue generated from foreign contracts are expected to double in 2015 as, compared to 2014. Slide 12, shows the breakdown within our three main segments. Kitting SCM is to account for 33% of total revenue and is expected to grow by over 65%, compared to 2014, primarily due to our E2, C2 multi-year program. While just 7% of our total 2015 revenue was expected to be from our Aerosystems segment, we project this figure to increase in 2016 as certain international part program should be awarded to our customers later this year or earlier in 2016. Our Aerostructures business is expected to decline year-over-year, due to decreases in revenue from certain programs most notably the A-10 Wing Replacement Program, as well as purposeful business development activities aimed at increasing revenue derived from our other segments. Moving to slide 13. We have several initiatives to improve our financial position. These initiatives include the following. To continue to pay down debt and reduce interest expense, to continue to drive product cost down to improve cash flow from operations. During the first nine months of 2015, we generated $1.6 million in cash from operations and ended the period with approximately $1.9 million in cash. While for the same period in 2014, operating activities used more than $7.6 million in cash. The improvement in operating cash in 2015 is largely the result of an income tax refund we received resulting from the change in estimate we made on the A-10 WRP combined with higher product sales and increased operating margins on product sales. Additionally, as of September 30, 2015 we had approximately $407,000 of federal net operating loss carry forwards available, which should offset future federal income taxes. Also, we are taking steps to further improve operating efficiencies. Doug will provide more details shortly. We continue to reduce our overhead and SG&A rates, which currently are at historical low rates. As shown on slide 14, our initiatives are supported by the approximately $8.1 million tax refund we received. Approximately $0.5 million in both federal and state net operating loss carry forwards and also our $35 million revolving credit facility of which $10.3 million was available as of September 30, 2015. Now, I will hand the call over to Doug who will comment on the backlog, contract awards, current business environment, and new growth opportunities going forward. He will then open the call to questions. Doug?

[Doug McCrosson:]

Thank you Vince. From the beginning of the current fiscal year through September 30, 2015 we received approximately $48 million of new contract awards, which included approximately $12.7 million of government prime contract awards, $12.3 million of government subcontract awards, and approximately $23 million of commercial subcontract awards, compared to a total of $87.8 million of new contract awards from all types in the same period last year. In September of last year, we received a $65 million multi-year contract modification adding four additional years worth of E2, C2 wing kit. This amount was entirely included in new contract awards for the 2014 period. This means we will no longer receive annual purchase orders for our largest program as has been the case historically, making the comparison to last year less informative. Slide 16 shows at September 30, 2015, our total backlog increased to $421.7 million as compared to $403.7 million at December 31, 2014. Funded backlog was increased to $125.7 million, up $5.1 million as compared to funded backlog of $120.6 million at December 31, 2014 and the value of the unfunded backlog at September 30, 2015 increased to $295.9 million from $283.1 million at December 31, 2014, with 38% related to our long-term commercial Aerospace programs. Slide 17 shows our largest contracts currently in progress, which collectively have the potential to generate revenue of $421.7 million during the remainder of their performance periods. Moving to slide 18, this provides an update of a few of our programs currently in progress. Starting with our contract for the E2D C2A outer wing panel kit, this is our largest program of any type and was a major contributor to our financial performance during the third quarter and we expect it will be an even bigger contributor during the current fourth quarter. Moving on to our Phenom 300 engine inlet assembly program with Embraer, as I mentioned at the start of the call, this continues to be a well executed program for CPI and we have very recently began producing at peak rate and this rate is projected to continue through at least the end of 2016. HondaJet, one of the newest and most technologically advanced light jets on the market is another important program for CPI. In late March, Honda Aircraft received FAA provisional type certification for its business jet and it is in the final certification phase and hopes to begin shipping plans to customers very soon. Honda has publicly stated it has booked orders for more than 100 aircrafts and that they expect to deliver at least this many aircrafts during the first 24 months following the final type certification. Also we recently won three large defense programs that added approximately $113 million to our backlog. These programs have ramped up and our projected by us to generate steady revenue for many years, starting with our newest program for the F-35 aircraft. Under this new contract with Lockheed Martin’s aeronautics division based in Fort Worth, Texas, CPI Aero will provide four lock assemblies for the arresting gear door on the conventional take-off and landing version of the aircraft. This variant is expected to be the version with the largest production quantity. Delivery is as scheduled to begin in 2017. The term of the contract is for a period of three years with a single option for an additional three year period. We estimate the total value of the contract included in the option to be an approximately $10.6 million. This was an important win for CPI as it adds to new aircraft platform, a new customer and it bolsters our reputation as a leading supplier of military aircraft structure. The F-35A aircraft will be a vital system for global security for decades to come and we are proud to have earned the opportunity to support this program. We’re also excited to add Lockheed Martin aeronautics division as a new customer for CPI Aero and we look forward to growing this relationship in the future. Next, our F-16 aircraft contract. Currently, we are acquiring inventory and establishing the small satellite location within the F-16 wing overall shop at Hill Air Force Base, in Northern Utah. The first delivery dates are contractually required in early 2016, but there is a chance that we could begin to make a limited number of shipments before the end of 2015. Our contract to the T-38 Pacer Classic program is progressing well and we plan to deliver the first article in mid-2016 and start production in the first quarter of 2017. To date, we have received funded orders totaling $11.8 million for deliveries through September 2018. Moving to slides 19 and 20, these slides summarize our bid pipeline and the competitive landscape. We estimated proposal for both military and commercial programs and around 68% of our total bids are for commercial aircraft structure. While 32% are for military aerostructures and military aerosystems, 92% of our bids are for Tier 1 programs, about 5% for Tier 2, and 3% as direct prime contracts. We continue to prioritize new opportunities for military prime contractors and believe we will be successful on at least one sizeable new contract within the coming months. We see growth potential in repairing and manufacturing spares for the current fleet of aging military aircraft and we have recently submitted several proposals to the U.S. Government for the production of new structural assemblies and the repair of existing structure. The Government expects to make awards on these solicitations in 2015. Regarding our commercial market opportunities, our bids are principally within the business jet and regional jet markets that align with our size, expertise, and capability as a Tier 1 supplier. We continue to pursue large commercial airliner opportunities, but we are very selective with our entry into this market as we want to make sure that there will be an acceptable balance between risk and sustainable profitability. Moving to slide 21, our focus areas for the balance of 2015 and into early 2016. We are focusing on gaining market share at the Tier 1 level, particularly within high mix, lower volume markets such as defense, business aviation, and regional airliners. We will continue to build world class structures and systems that exceed our customers’ expectations. Our business development team has been focusing its efforts on further diversifying our customer base and sources of revenue. We seek ways to be less dependent on new aircraft production by developing products and services for both commercial and military end markets that take advantage of the anticipated growth in aircraft usage. Just a small fraction of our 2015 revenue is expected to come from our aftermarket services. We want to grow this segment of the business aggressively over the next couple of years. We are seeking to develop new sales channels and service offerings for our aftermarket and MRO Services business to provide a better balance between long cycle and short cycle sales. On the commercial side, we will undertake to become a FAA certified repair station so that we can perform structural overhaul and repair of the various assemblies we currently manufacture, as well as provide other services for the installed base of commercial aircraft. We will increase the use of our recently deployed manufacturing technologies, as well as continue to prioritize our continuous improvement programs that together are expected to increase capacity and lower unit cost to improve margins on current products and to better position CPI Aero a Tier 1 manufacturer. Slide 22 reinforces this point. As many of our production programs move from low rate production to full rate, we are focusing on program execution to drive out inefficiencies and waste. We believe that our dedication to continuous improvement and lean manufacturing principles will provide the competitive advantage we need to sustain our success into the future. Just a couple of examples regarding our recent efforts in this area. We have began utilizing the automatic riveting machine we acquired in late 2014 on one assembly while we wait approval from other customers. We have reduced labor time by approximately 40% versus manual operation for a total projected savings of around $173,000 per year at the current build rate. We recently completed a lean manufacturing activity called the Kaizen event on one of our highest production rate programs. Kaizen brings together a multi-discipline team for manufacturing, quality, procurement, and planning to map the current value stream, identify waste in the process, and then develop and improved process. The event identified process improvements that would reduce production time for this program by 23%, representing annual savings of $532,000 per year at current production rates. The process improvement suggestions are expected to be fully implemented by the end of 2016. Moving to slide 23, our efforts have well positioned CPI Aero for even greater success in the future. Our belief is supported by our large and diversified backlog of approximately $422 million, our growing bid pipeline, with new opportunities for both the defense and commercial markets, the ability to perform on larger and more complex programs, due to investments and advanced technologies and growth opportunities arising from developments in both commercial aerospace and the military and defense sector from domestic and international markets. Before opening the lines for questions, I would like to mention that we will be attending the UBS Aerospace Supply Conference later today and tomorrow in Naples, Florida and we will be presenting at the D.A. Davidson Conference on December 8 in Boston. Vince and I hope to see some of you there. This concludes our prepared remarks. At this point, I would like to open the floor to questions. Christine, please allow the callers to place questions.

[Operator:]

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mark Jordan with Noble Financial, please proceed with your question.

[Mark Jordan:]

Thank you good morning and Doug and Vince.

[Vince Palazzolo:]

Hi Mark.

[Mark Jordan:]

There was details relative to the paragraph you had in your press release relative to new bid opportunities that you expect, you stayed in the release that you believe you will be successful at least one sizable new contract in the coming months, it’s rather definitive statement so does that mean that you got a hand to shake and that the paperwork needs to catch up with that, is that a fair read of that sentence?

[Doug McCrosson:]

That's a fair read of that sentence. And the reason we don't currently know the full extent of what this particular customer wants us to do. So that’s why the contract hasn't been finalized yet, but we expect that we will be able to work through those issues in the coming months.

[Mark Jordan:]

All right. Also at the end of the paragraph you talked about the government making awards on solicitations that are out in 2015, Vince mentioned in his presentation and expected for military sales pods awards over the very near term, is that included in the business you expect to see from the government or is that in addition to that?

[Doug McCrosson:]

That is in addition to the, the pod business is through government sub contracts with prime and the ones I mentioned where specifically to the U.S. Air Force, directly.

[Mark Jordan:]

Okay. And then also on your presentation you showed for full year non-A-10 revenue gross margin being between 22% and 23% in the preceding page you had for the nine months non-A-10 gross margin of 23.4%. So, the implied decline in non-A-10 gross margin in the fourth quarter, is that tied to initial production on new, on some of the newer programs that you’re ramping up and that those ramps are a little less efficient than what you should do over the longer term?

[Doug McCrosson:]

Exactly right, Mark. We are in flow now with the beginning of the T-38 program and the F-16, while that’s not generating revenue quite yet, but there are others as well that are in fairly low, particularly Honda is coming up to pace, but not quite there yet.

[Mark Jordan:]

Final question from me, are two questions, one on page 19 when you talk about your bid pipeline in that pie-chart when do you expect to see decisions on that, are there definitive times that all of that, all of those bids should be adjudicated in the next 6 months to 12 months.

[Doug McCrosson:]

I would say that’s a fair timeline for the current cycle. We periodically go through, I will say stale bids, bids that maybe have been with the customer for a while and which they have not been either able to tell us when they are going to place the award or tell us that it’s got to be on hold for a little while. So, the ones that are in there are active and the customers are - and we are engaged in some kind of give and take. So we know that it is actively being worked by the customer. Some could be as early as three months and some could probably, the outside would be a year, but probably nothing in their much more than that.

[Mark Jordan:]

Okay. Final question. A-10, you are still performing on that, what happens if that program runs in or continues to be in operation into 2016, what would be the P&L impact for an extension of production beyond what you would have originally thought?

[Doug McCrosson:]

The original change in estimate we did during this, after the second quarter, during the second quarter results last year, we anticipated a certain quantity of aircraft and that quantity will be finally delivered in accordance with our current build plan, somewhere into the first quarter of 2016. So, it’s not necessarily a time-based estimate, so much as it was a quantity-based estimate. So, it is very likely that we will continue production for this fourth quarter and into some period in the first quarter. If it goes beyond that and this is what we’ve talked about in the past, if it goes to the full conclusion then at that time we would re-estimate the job and look at what the cost would be and the income would be to complete the program, which would take it then basically for the full period of 2016 at what would be the anticipated rate. So, there really will, it is really too early to say what will happen because we’re still probably five months away from having to make that kind of decision.

[Mark Jordan:]

Okay, thank you.

[Operator:]

Our quest next question comes from the line of Ken Herbert with Canaccord Genuity, please proceed with your question.

[Ken Herbert:]

Hi good morning, Doug and Vince and congratulations on the aviation week award.

[Doug McCrosson:]

Thank you very much.

[Vince Palazzolo:]

Thanks Ken.

[Doug McCrosson:]

Where you there last night?

[Ken Herbert:]

Yes I was in fact, so that was a pretty impressive, a pretty good audience.

[Doug McCrosson:]

Great, thank you.

[Ken Herbert:]

I just want to follow-up on the bid pipeline commentary if I could, I mean it seems pretty impressive, would you say the sign seems to be that maybe things are loosening up a little bit on the government side in particular on the military side with some contracts and maybe some of your customers or the government directly looking to make some decisions and put some things in place even with still obviously some of the uncertainty around the budget, would you say that’s a fair statement or how would you characterize sort of bid activity proposal activity now with the government, or with government contractors?

[Doug McCrosson:]

When we bid directly to the government, it is almost always a spares activity or a repair activity and directly with the depots and clearly we see that breaking free a little bit and we've been actually very successful as indicated by our recent T-38 and F-16, Vince, would say within the last 12 months. And so we are actually, we're seeing larger opportunities from the government and we’re seeing opportunities again for aircraft that we’ve had a history with. Some of the ones includes the C-5 aircraft, which was one of our most important aircraft programs going back to the early days of CPI. So, yes we definitely clearly see that as a trend. We see things like the F-16 service life extension program that the Air Force is showing interest in and I think we will continue to see a trend of repair and overhaul activities that may have been performed by the U.S. government that will now be transitioned to private sector. And I think that we, that our experience in some of these aircrafts will bode well for us getting good opportunities directly from there. On the other militaries new business pipeline, particularly in our Aerosystems Group, which consist of all of the pod programs that we do for companies like United Technologies and Northrop Grumman. We see two or three new opportunities in that space this year that we’re working and developing with customers and I would say the caution to that is these programs are long in nature, the design time is quite long and while these are relationships that will bring some revenue in 2016, we’re really - on some of the newer pursuits in the electronic pod business, these are 2017, 2018 type revenues, but the exacting thing is that we are considered among the very first names when it comes to building these types of structure for these airborne pod systems.

[Ken Herbert:]

Okay that's very helpful. And if I could Vince on the free cash flow tax benefit this year can you provide an update of where you think free cash flow ends for 2015?

[Vince Palazzolo:]

The fourth quarter cash flow actually would be, our expectation is that it will be quite good, significantly better than we've had up to this point and that takes into account the fact that we got that big tax refund in the first nine months or the first six months of the year. We have some arrangements with our customers on progress payments that should bolster our cash flow nicely in the fourth quarter. So, I would expect that we would be, I mean we don't give exact guidance, but I would expect that we would be as positive cash flow in the three-month period as we've been at least through the nine-month period up to now. Is that close enough and vague enough at the same time, Ken.

[Ken Herbert:]

Yes, no that’s helpful, that's good.

[Vince Palazzolo:]

Yeah.

[Ken Herbert:]

And then just finally, I mean I know you’ve had a heart of, with the Triumph folks and re-wrok this year, but it sounds like that program is pretty much back on track and maybe ramping a little next year, can you just provide any more color on specifics, as you’ve taken that program on and where it stands today and maybe some of the opportunities to see some cost savings into 2016 there?

[Doug McCrosson:]

You're talking about Gulfstream G650 line?

[Ken Herbert:]

Exactly.

[Doug McCrosson:]

They get, our customer and Gulfstream get nervous when I talk about build rates, so I can't really talk about the build rates there, or if they’re up or down. We are very, very pleased with the build rate currently and the amount of product that we will be delivering continuing from now and through what looks like well into 2017 at a fairly, very fairly robust rate. So, we’re extremely pleased with that program. When I mentioned the Kaizen event and the annualized direct cost reductions that were achievable, this was a very - that exercise is representative of what we could expect to pull out of that program as we have a highly visible backlog on that program and so we are continually finding ways to pull cost and efficiency out of that program because it’s one of the longest, sometimes it’s hard to continue to drive cost out of the program that's been running a long time, but through these types of events, we can take a step function down and breakthrough that curve if you will and achieve even better performance and that’s what we’re doing and a similar exercise we will be doing on that program, again with the goal of in the 2017, 2018, 2019 that we achieved those types of annual savings in direct cost.

[Ken Herbert:]

Okay, great, thank you very much. That's helpful. Thank you.

[Doug McCrosson:]

Thanks Ken.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Mike Crawford with B. Riley, please proceed with your question.

[Mike Crawford:]

Thank you, your fourth quarter guidance implies, I believe $27 million to $29 million revenue, yet you also might begin F-16 deliveries before year end where the revenue is recognized upon delivery of structural linked products, so is that, if the F-16 comes in, does that just get you towards the high end of would that be outside of the model?

[Vince Palazzolo:]

That would get us to the high end. When we say we are going to have a record revenue quarter, my guess is, it’s going to be closer to what it was now, a little higher than what it was in the third quarter. So, our record was something like I have a number here somewhere, but it was around $28 million versus the fourth quarter 2012. So, we are looking to be on the high end of that range. With the revenue recognition being percentage of completion and some of it is function of material receipts from our subcontractors, we always kind of put a little bit of hedge in there in case the subcontractors don't deliver perfectly, so there is some of that built into that range as well.

[Mike Crawford:]

Okay. And then further regarding your MRO business, you are seeking new sales channels to find a better balance Doug can you just elaborate on that a little bit police?

[Doug McCrosson:]

Right now probably 95% or more of our revenue is depended on new aircraft production and not aircraft flying hours and the repair business and the aftermarket spares business is largely not hours right now. We feel that particularly on the military side both commercial flying hours, as well are going to increase over the coming years and right now we have very limited offerings for people in that market. So, one of the things that we can do is on the military side where we don't need an FAA repair license as we can go after these major overhaul and repair bids that are coming out from the government. To that I mentioned that are in bid right now and examples of which are to that we won, the F-16 and the T-38, and then on the commercial side, particularly the business jet world we want it to become an FAA repair station so that we can actually repair leading edges of Gulfstream product, or Honda or Embraer inlets. Currently without that repair license, we can sell new, but we can’t repair. So, we're looking to be able to gain access to that market as well.

[Mike Crawford:]

Okay. Great and then regarding the A-10, are there any productive conversations with your customer about what retribution you might get down the road for discontinued production in the early curtailment of the program?

[Doug McCrosson:]

I’m sorry. I just didn't hear that fully, could you repeat that?

[Mike Crawford:]

Right, so given the early termination of the program that should - there is a chance for you to get some kind of recovery payment at the end, correct?

[Doug McCrosson:]

You're talking the A-10?

[Mike Crawford:]

Yes.

[Doug McCrosson:]

Okay, I missed the program you were talking about. Okay, yes certainly if the government terminates its program with Boeing who in-turn will terminate its contract with us, we would be entitled to the customary things that contractors are entitled to when the government terminates for convenience. If that number frankly gets smaller every month, after we ship product and liquidate more of that contract, but yes there would be, we would have legitimate claims for inventory on amortized tolling and actually even to the extent that there will be any wind down expenses like removing the tooling from the floor and winding the contract down. So, yes.

[Mike Crawford:]

Okay, great. And then you’ve also been fairly confident, you lay in the first kind of large commercial aircraft program, does that sentiment remains the same, as it has been?

[Doug McCrosson:]

I’m more confident in our business jet market than I am in the large commercial, the Boeing/Airbus type market. Honestly, in the last few months we've been unable to I guess to obtain some work from as an alternate source to our customer, an off load work because we just simply can't reach some of the aggressive targets that our Tier 1 customers have accepted with Boeing and Airbus. So, we’re getting increasingly, I would say disillusioned as to, is at the right entry point for a CPI in the large commercial airline market. It’s a huge financial risk to undertake when there’s a lot of tooling and it’s a lot of upfront investment and I’m looking around the industry seeing some margin problems with some of these other, I’d say the Boeing partner for success Tier 1 people that make me a little nervous about that market. So, I’m not overly optimistic in the near-term on a Boeing type program, but on the regional jet market and the business jet market where we have established performance, particularly with Embraer and Honda and Cessna and Gulfstream to some extent, I feel good about those, but I’m very cautious about some of the bids that we have in for the large commercial and our ability to close them given the - what I would view as unrealistic pricing expectations from our customers.

[Mike Crawford:]

Okay great, thanks and then last question just relates to the new two-year budget that just passed, I know a lot of your defense work is funded for a long time, but do you see any opportunities breaking open from that or any other benefit from that most certain longer-term budget?

[Doug McCrosson:]

You know, I’d to answer really no, because as you mentioned all of our programs have really have been funded and pretty strongly supported in the budgets. I think what it does though Mike, is it kind of lifts this cloud over the whole segment, I guess and the perception of is the defense market a good market to invest in. And so I think, while our business had been kind of secured either way, I think it’s a good thing for all of us who make the majority of our living selling product to the military.

[Mike Crawford:]

Okay, great. Thank you.

[Doug McCrosson:]

Thank you, Mike.

[Operator:]

[Operator Instructions] Mr. McCrosson it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Doug McCrosson:]

Thank you. And I like to thank all of you for participating in this call. Look forward to speaking to you again in early March when we announce our 2015 full year results. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference; you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.