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

Thank you, Brandon. Good morning, everyone, and welcome to CPI Aerostructures' 2018 First Quarter Financial Results Conference Call. A copy of the Company's earnings press release issued earlier today and the PowerPoint presentation accompanying this call are available for download on the Investor Relations section of the CPI Aero website. With us today are Douglas McCrosson, President and Chief Executive Officer; and Vincent Palazzolo, Chief Financial Officer. At the conclusion of their prepared remarks, they will hold a question-and-answer session. As a reminder, this conference call will contain forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. Including in these risks are the government's ability to terminate their contracts with the company at any time, the government's ability to reduce or modify its contracts if its requirements 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 due to budgetary constraints. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements made during this conference call. Additional information concerning these and other risks can be found in the Company's filings in the SEC. Before turning the call over to Management, I have a couple of additional notices. First, management is available for follow-up calls with its institutional investors following the conclusion of this call. Please contact Elise [ph] to schedule a follow-up call. Second, management will present at the B. Riley FBR Annual Institutional Investor Conference on May 23 at 4:00 pm Pacific Time and hold one-on-one meetings with investors during the day. To schedule a one-on-one meeting with management, please contact the B. Riley FBR representative. With those housekeeping items out of way, I would now like to turn the call over to Doug McCrosson, President and Chief Executive Officer. Good morning, Doug.

Good morning, Jody, and thank you, everyone, joining us on our call. I will begin this morning with a brief update on our planned acquisition of Welding Metallurgy Inc. or WMI before reviewing our performance for the quarter. Vince will then provide you with greater detail on our financial results and I will conclude the call with some thoughts on the balance of the year. We announced a definitive agreement in late March to acquire WMI, a provider of specialty welded products and assemblies, large diameter tube bending and integrated electronic assemblies among other capabilities to a variety of customers, predominantly within the defense and aerospace markets. The acquisition of WMI enables us to expand our capabilities, enhance our competitive position in the defense market, and build a larger defense portfolio. Since announcing the acquisition, we have made excellent progress in working through the customary closing conditions. As we reported in our press release, we have received a commitment of debt financing from our senior lender, BankUnited. We plan to transition WMI staff and equipment and programs to our headquarters by the beginning of the fourth quarter. Over the past several weeks, I have personally spoken with WMI's key customers that collectively account for the majority of its sales. I've been encouraged by these conversations as it has become quite clear that WMI's capabilities are very much in demand by the defense industry. Welding, in particular, is a very specialized process that requires the supplier to be certified by the customer to certain process specifications. WMI holds these valuable certifications from Lockheed, Boeing, Northrop Grumman, Raytheon, Sikorsky, and others. And while the company name implies a core focus on welding, WMI also manufactures other niche products like wiring harnesses, cable assemblies, tubing and ducting that will enable CPI Aero to…

Thank you, Doug. For our review of first quarter results, I want to bring to your attention a change in our accounting policies. Effective January 1, 2018, we adapted a new revenue recognition standard known as ASC Topic 606. For those of you who aren't familiar with ASC 606, it requires sales and gross profit to be recognized over the contract period as work is performed based on the relationship between actual cost incurred and total estimated cost at the completion of the contract. Following the adaption of ASC 606, our revenue recognition on all of our contracts has not changed materially for both first quarter and over the life of those contracts. The one change to point out are the names of two related balance sheet line items. The asset previously cost an estimated earnings in excess of billings on completed contracts is now under ASC 606 called Contract Assets and the liability previously called Billings and Excessive Cost and Estimated Earnings on Completed Contract is now under ASC 606 called Contract Liabilities. To start on Slide 7, revenue for the first quarter of 2018 was $18.2 million compared to $20.0 million for the first quarter 2017. As Doug mentioned in his opening remarks, we recognized lower revenue for our F-16 and E-2D programs that offset higher revenue from our Next Generation Jammer Pod program and our T-38 Pacer Classic III Prime contract. Specifically, lower F-16 revenue is attributable to a timing issue as high value components that shipped in the year-ago period are today shipped in lower quantities and on a more regular schedule. Decline in E-2D revenue reflects the lower rate of activities near the end of the current multi-year contract. Gross profit was $4.0 million compared to $4.5 million for the first quarter of 2017. Gross…

Thank you, Vince. With an efficient infrastructure in place to drive consistent profitability, together with strengthening long-term industry fundamentals and near-term spending certainty because of the Omnibus bill, we are focused on driving top line growth from the defense sector in the current fiscal year and beyond. Our initiatives spend several fronts. While WMI represents growth through M&A, we're also driving organic growth opportunities. Let me spend a few minutes on what we are doing to materially change our growth profile. I noted on our year-end investment call in March that we brought on board Jay Mulhall as Senior Director of Business Development and Strategy for Defense Markets. Jay leads our business development efforts in areas that stand to benefit from increased DOD spend particularly in the areas of electronic warfare, intelligence, surveillance and reconnaissance and autonomous systems -- all areas where we enjoy significant competitive advantage. Jay brings deep industry experience that is integral to our strategy of pursuing the emerging growth opportunities and expanding our aerosystems business. I'll speak more on this in a moment. Turning to Slide 11, you can see that Kitting and aerosystems, two growth segments for us comprised 80% of our bid pipeline. In these areas we believe we are well-positioned to take increasing shared work on any platform with the Department of Defense, our prime contractor is looking to improve supply chain efficiency. On the left side of the slide, the pie chart underscores our ongoing sales emphasis on multi-year opportunities in the defense market. On Slide 12, you will see some of the opportunities in our big pipeline. On today's call, I want to spend some time talking about aerosystems and specifically our ability to manufacture sophisticated pod structures for electronic warfare and ISR applications. Over the past several years, our structural…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ken Herbert with Canaccord. Please go ahead.

Doug, I just wanted to first ask on the backlog. I mean, it sounds encouraging and you’re expected to be above one, sort of or up year-over-year by the end of the year. Are you comfortable seeing backlog growth year-over-year starting in the second or third quarter or how should we think about timing of when you start to see a real sort of inflection on the backlog?

I'd say by the end of the third quarter and certainly more so in the fourth quarter. But the second quarter in terms of new bookings was better than the first quarter. So while it's not going to reverse the first quarter negative trend by the full year, it will -- both the defense business backlog and the total backlog should be over where it was at the beginning of the year.

Just how would you characterize conversations with customers now that we have a budget? It sounds like maybe the time from netting contracts is taking a little longer than people have expected. Just what would be your thoughts now from your customers on the defense side in particular, with the budget in place, and what should be more certainty, timing, and maybe the nature of those conversations?

Yes, I'd have to say that right now, all of the customer conversations have been, I'll say, very optimistic in terms of -- and frequent. So, if you measure future delivery orders by the amount of activity and calls and communication, I would say we're in for a period of good backlog growth, like I said going beyond this quarter into the fourth quarter. Timing, as you know, particularly with our customer base being large bureaucratic customers that have a lot of rules and regulations upon them before they award contracts, the timing is sometimes hard to predict, but I would say that the optimism and the level of activity is as high as I can remember, actually.

Just finally, I wanted to follow up on your comments on sort of the autonomous opportunity. It sounds like it is an area you are starting to put some resources in, you're starting to invest in, is it too early or can you start to talk about how you view this market in terms of maybe the total opportunity or importance down the road or relative to maybe on the aerosystems or the Kitting side, and how you see this evolving and is this something that we should maybe look for, maybe something as early as this year or the evolution of this opportunity for you?

So, this journey began many years ago with the beginning of work on our Aerosystems segment before we even had a system called aerosystems, and all along, the belief has been that we need to demonstrate a capability and an aptitude for quality work, on time, at a highly complex level and over a long period of time. And I think that we have gotten to the point where we can begin to start talking about what is next beyond these integrated structures, and we look at the autonomous market as everybody does, and I know it's that scenario for growth. There's a lot of activity both in air, under sea, some are in the early development program, some a little further, and it continues to be our belief that the model that a lot of the prime contractors followed back in the day that created a need for CPI in the first place in terms of outsourced production work, I think we're going to see the same thing from the OEMs for that segment of the market, particularly where cost, affordability, and lead times are going to be differentiators in that market. So while I think it is too early to talk about specific opportunities, and I can say that the interest in CPI for products that would fit that bill is high, and we're pursuing them fairly aggressively and I'm not going to rule out that such an award could happen in 2018.

Our next question comes from Mike Crawford with B. Riley FBR. Please go ahead.

Can you provide your updated thoughts on the A-10 wing replacement given this favorable HASC markup we saw last week with $65 million plus up recommendation for the base budget?

Yes. I mean that still has to be matched by the Senate, and we're certainly going to try to make that happen. But yes, the A-10 has been -- I think the uncertainty surrounding the A-10 has largely gone if not entirely gone. I think that with the increased spending really across the board in defense, there is no longer a zero-sum game, and a lot of programs are going to get funding that were among the margins, and I think that the A-10 and the strength of the funding behind it is one such program. The timing is still unchanged from when we spoke last. We are responding to RFPs right now, and so I can't really talk too much about where we are in that progress, but the endgame is still early next Spring in the first quarter to have a prime contract awarded to one of the competitors on that procurement.

Which would then put potential contract from that time [ph] to you in the Fall of '19 time frame?

I would put it more on the second quarter of '19.

And then given the reiterated revenue guidance for this year, is there any E-2D timing risk related to when you get your new multi-year? Is that one of the bigger gating factors on that $4 million revenue range?

Well, there's two gating factors. That certainly is one, but I view the E-2D multi-year 2, which is what they're calling it as low-risk and I would expect soon to be able to talk about that. The timing risk more, I will say back when we did it, the timing of the WMI close, we're projecting it to close in the second quarter. I think we left some room in there in case it does not, but we fully expect that it will.

Okay.

Probably when we do get the closing certainly by the next conference call, we will tighten up that guidance range.

Is that WMI something that you expect that you're trying to time like on the very last day of the month of the quarter? Or it could be any day?

No. When it happens, it happens.

The last question is when you were talking about WMI, possibly getting on to the F-35, did you say re-certified as in they were certified and then they are not certified now? Or would this be an initial certification?

Early on they did have some welding work on the program in its early days and they are now inactive. We're discussing with Lockheed as part of this closing process, their willingness to come back in and re-certify the process.

Our next question comes from Ben Cleave with Noble Capital Markets. Please go ahead.

First, a quick follow-up from Mike's question and your comments, Doug, on the E-2D. In your prepared remarks plus-plus and your follow-up to Mike, you seem pretty optimistic that that contract closures can be pretty imminent. Do you believe that on this call next quarter, that we're going to have a lot more visibility here? Is this something that you think could be pushed out to the second half of the year?

No. We should have it by the time we talk again.

And then one question I have -- a program-specific here is regarding the F-16 extension. I'm wondering if you can discuss how you view the potential from this program today versus before the passage of the budget at the start of the year. And how has that program evolved both in terms of the near term potential and the longer term potential for you guys?

For F-16 program currently has what I would describe as a healthy backlog. We are seeing an increased level of activity in terms of what could be delivered in 2018. So I think we have a, I'll say, more visibility into what we can actually sell for that particular program in coming year 2018. Unlike many of our other programs, that revenue is booked as we ship product. We feel that we're going to have a strong second half with regard to F-16 because of recent orders that we received.

Just one more for me. If I remember correctly, the WMI acquisition you had from contingent consideration, variables that you expected to have news on really soon and during this quarter. Is there any update on the contingent consideration payments to WMI? If there's going to be a plus up from the $9 million that wasn't up last quarter?

I can tell you as of today, neither contingent program win has been booked by Welding Met. I can't talk to that, I mean when it will. But as of right now, there is no contingent payment to be made.

[Operator Instructions] At this time I'm seeing no further questions. I would like to turn the conference back over to Doug McCrosson for any closing remarks.