Innovative Solutions and Support Inc (IA) 2009 Q3 法說會逐字稿

Good morning my name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the Innovative Solutions and Support third-quarter financial results 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Mr. Hedrick, you may begin your conference.

Good morning. This is Geoff Hedrick. I'm Chairman and CEO of Innovative Solutions and Support and I would like to welcome you this morning to our conference call to discuss the third quarter 2009 results, current business conditions and outlook. Joining me today in our Exton headquarters are Roman Ptakowski, our President; and John long, our CFO.

Before I begin, I would like to ask John to read our Safe Harbor statement. John?

Thanks Geoff. Good morning.

I would like to remind our listeners that certain matters discussed in the conference call today, including operational and financial results for future periods, are forward-looking statements and are subject to the risks and uncertainties that could cause actual results to differ materially either better or worse than those discussed including those other risks and uncertainties reflected in our company's 10-K which is on file with the SEC. I will now turn the call back over to Geoff Hedrick, CEO. Geoff?

Thanks John. We again reported another profitable quarter for the period ending June 30, 2009. So we have extended our sequential profitable quarters this fiscal year. For the quarter, we reported a net income of $1.3 million or $0.07 per fully diluted share, an encouraging improvement over the comparable year earlier especially in a most difficult economy.

Over the past three profitable quarters this year, we have increased revenue by more than 40%. We have also once again achieved our cash flow goal by generating $1.8 million in cash flow in the third quarter, another quarter that is consistent with our objectives for the year.

We remarked last quarter how deteriorating conditions are going to pose a challenge to sustaining the revenue levels that we had achieved for the first half of the year. The decrease in revenues to $7.8 million in the third quarter was anticipated.

In addition to industry conditions, revenue in the quarter were impacted by a customer initiated production schedule change at the end of this quarter. In light of both industry conditions and the loss of plant revenues due to customer deferral, we believe our results are indicative of the strength of our business and the resolve of our management and employees alike.

Gross margins were 53.3% and operating margin of 13% for the third quarter. So despite the top line increase, we're able to adapt quickly to the changed conditions and generate margins consistent with if not better than the first half.

Cash flow was also strong this quarter at $1.8 million as we continue to reduce inventory, closely monitor receivable levels and make other changes to better manage our working capital. Cash at the end of the quarter was at a recent high of $39.3 million. Our credible financial performance and solid balance sheet are on track to meet our financial performance objectives for the year.

Our products are all manufactured and tested to the most [rigorous] standards and are all qualified for application into all three of the markets we serve. This provides flexibility in our production to meet variable demand in each market segment.

Lately we have been having success in the military market both home and abroad. For the immediate term, it appears that the military market has managed to remain rather resilient. In the third quarter we booked a number of new military contracts and we were optimistic we will see more of our proposals transition into firm orders.

Though the overall general aviation market has suffered, we were nearly at an inflection point with the Cessna relationship. The company flight testing has successfully completed and Cessna plans to start FAA ground and flight tests for the [STC] of our flat-panel display system this week. With the slowdown in new aircraft demand, this very cost-effective upgrade program is expected to expand quickly.

Though the (inaudible) has not materially increased, many of our new programs are shifting away from traditional long-term contracts to book and ship and similar contractual relations. This year we have de-booked $6 million of G-8 orders impacted by slow certification and the industry slowdown.

This was done in the December quarter. Under new agreements, including Cessna, the work never enters backlog and although the relationship may ultimately result in sales that could reach millions. Our bid pipeline is also strong with over $100 million in outstanding proposals are being worked, including a letter of intent from an international airline for a retrofit of their fleet. I would like to turn it over to John Long now to review the financial results before we wrap up.

Thanks Geoff and thanks again for joining our call this morning. Revenues in the third quarter were $7.8 million, down 11.3% from $8.8 million a year ago. However, in 2008, third-quarter revenues included $3.2 million of shipments of product to an OEM customer that was subsequently discontinued.

Excluding the revenues from that one product, revenues from our core products were up in the quarter. Also as indicated in our earnings release, one of our larger customers changed their delivery schedule during the quarter which will defer the production that we had originally planned for both the third and fourth quarter. Our guidance in the earnings release considers the effect of these changes or this change.

In the quarter, flat panel display related revenues were $5.4 million while air data product revenues were approximately $2.4 million. From an end market perspective, the military was our biggest customer indirectly with revenue of $3.4 million or 44% of our quarterly total. Gross margins in the quarter were 53.3%, the highest margins achieved this year even though revenues were sequentially down.

For the year to date, we have sustained production levels that have enabled us to achieve gross margins of roughly 51% which is well above our mid to high 40% target range. Over the long-term, quarterly consolidated margins will vary with changes in volume and product mix but should remain within that target range.

Total operating expenses for the quarter were $3.1 million. Of that, research and development expense was $1.3 million or approximately 16.6% of revenue for the quarter which is relatively consistent with the first half of the year and is tracking with our long-term historical average.

Year-to-date R&D is running at approximately 14.5% of revenues. Selling, general and administrative spending in the quarter totaled $1.8 million compared to about $3.7 million in the year ago quarter.

Last year, the G&A included about $0.5 million in the quarter of legal expense. SG&A this quarter is again below the quarterly run rate we had anticipated for this year and is also down from the $2.3 million in the second quarter and $2.4 million in the first quarter.

For the quarter, SG&A was 23.7% of revenue and for year-to-date 22.5%. We reported third-quarter 2009 net income of $1.3 million or $0.07 per fully diluted share and net income represents about a 16.1% return on revenues.

For the quarter we had a tax credit of approximately $200,000 which was primarily the result of an update to the anticipated annual effective tax rate as required under APB 28. We anticipate an effective tax rate of 0% for the year and that is driven primarily by the current year tax deduction that we are obtaining related to the Eclipse bad debt.

Our financial position remains strong. At June 30 we had over $39 million in cash and shareholder equity of over $51 million or approximately $3.08 per share.

And we are also generating substantial cash from operations and focused on continuing improvement in the management of our working capital. Sequentially both the inventory and accounts receivable were further reduced which again helped drive that operating cash flow.

We are in the process of redeeming the $4.3 million of industrial revenue bond debt that we currently have outstanding. The elimination or payoff of this debt in this fourth quarter will improve our net interest income and more importantly remove a restrictive covenant that will improve our overall financial flexibility.

Now I would like to turn the call over to Roman for some comments on the current market conditions and new product and business development. Roman?

Thank you John. Let me first address activity from the most recent quarter.

The quarter's revenues were generated across a diverse customer base from each of our three market segments. In the commercial air transport market segment, we continue to ship flat panel display systems through both cargo carriers and through revenue passenger airlines.

General aviation revenue this quarter included shipments for Pilatus PC 12 applications and additional shipments to support Cessna. In our military sector, the company's revenues were generated from C-130, KDC-10, P-3 and Homeland Security applications.

Included in our military segment were shipments of our high resolution 20 inch diagonal displays and air data products as well as flat panel display systems for cockpit upgrades. The Cessna Aircraft Company has successfully completed its initial flight testing of the IS&S flat panel display.

The test aircraft, the Citation 5, is now scheduled for final FAA testing. The cockpit has been upgraded with the IS&S flat panel display system. The aircraft interior has been refreshed. The exterior has been repainted and is offered for sale featuring the AdViz glass cockpit.

The AdViz cockpit upgrade is being certified for the Cessna Citation 500, 501, 550, 551, the the S-550, the 560 and the 650. Cessna has 34 centers around the world that will offer the AdViz cockpit upgrade.

There are -- as we said before, there are 4500 eligible aircraft for the Cessna AdViz upgrade program. The success of the Cessna program has spawned new opportunities for the company.

We have already introduced our Vantage Cockpit/IP solution for broader general aviation applications. We are now in discussions with a number of additional OEMs that would like to offer their own version of a flat panel display system upgrade for their aircraft models.

The Vantage Cockpit/IP allows operators to retrofit their aircraft with a new flat panel display system while leaving existing third-party avionics installed in the aircraft, minimizing the cost of the upgrade. It also provides the owner the opportunity to upgrade to new radios, transponders, GPS or other third generation avionics.

They can select from the best of breed from all the major vendors. The Vantage product provides service centers with improved statistics. The service center needs to make a minimal inventory investment because this single product can be retrofitted into a number of different airframes.

In the third quarter, we were awarded $5 million in military orders. As we said before, these contracts from the Department of Defense and Homeland Security represent a bridge into the world's largest aircraft market.

Our successful flat-panel display system implementations on foreign and military aircraft, on the B757 and the B767 and on Homeland Security projects has solidified our reputation within the military and won us the credibility we need to take the next big step into their broader retrofit programs. As an example, IS&S has just been awarded a contract to provide flat-panel display systems to be used by the U.S. Navy on their C-130 aircraft to replace their aging engine instrumentation.

Currently we have $40 million of military proposals outstanding. We are optimistic about our growth opportunities in the military and defense industry.

We also remain optimistic about our prospects in our other market segments. Proposals for the commercial and general aviation segments now total over $62 million. Combined, we have outstanding proposals valued at over $110 million.

Backlog at the end of the third quarter was $39 million, essentially unchanged from March 31 with the approximately $7 million of new business booked in the quarter about equal to quarterly shipments. So in spite of the overall difficult economic climate, our outlook both near and intermediate term is to be able to make profitable sales, generate cash and increase our footprint in all three of our market segments -- commercial, general aviation and military. I would now like to turn the call back to Geoff. Thank you.

Thanks Roman. Before concluding our call for today, I would like to make a couple summary comments. We've discussed the backlog and its erosion. Erosion has been stemmed as you can see by new and strong orders in the military especially.

The year that we have looked at has accommodated a cancellation of a very large OEM customer last year which took 50% of our revenues away. We made that up.

The economy at the same time collapsed and despite all of that, we have managed to grow our business by almost 40% this year so far. I think it's a remarkable, incredible accomplishment. I'm very proud of the team.

We operate very efficiently and we are investing heavily in engineering. New product development, almost 16% of revenues. And we're doing that in an effective way by having our customers share in the cost of modifications of our equipment for their specific application, so that we are able to leverage a lot more of our engineering dollar than we have in the past.

This has allowed us to accomplish significant new business with both -- in the military and the general aviation marketplace. Finally people across the board are finding that upgrading existing fleets is far more cost effective especially in an economy that is difficult as we are in today.

New purchases of aircraft are being deferred and upgrading their existing aircraft is essential. This is a market that we serve and are leaders in. This is true in the military especially where as we are all aware, major programs are being cut.

These are major new aircraft programs and the modification of existing aircraft like the C-130 are now on a top burner because they provide the same [lift] capability at a fraction of the cost. Let me provide you with expectations for 2009.

We finally are looking at 35 to $37 million range with a 15% growth rate compared to 2008. This performance I'm very enthusiastic is a [confident] one that we can readily achieve and look forward to real growth next year. I would like to turn it over to questions.

(Operator Instructions) Alex Hamilton, Jesup and Lamont.

You talked about backlog and how it's sort of eroding. It's no longer really relevant going forward and I know especially on the long-term that's sort of hard to gauge.

Us in the investment community, what do you think would be a better thing to focus on? Would it be exactly these STC's and the bidding proposals? Can you help put our arms around that a little bit and how we gauge the company going forward?

Well if I could, I think backlog has some relevance but only to the extent that it shows, in my opinion, roughly a year at present rate has always been a pretty solid backlog. Much more than that; implies only very, very long term contracts which as you know we don't probably book.

So it is relevant to the extent that it shows that we have at least a solid base that we can leverage off of. Yes, and I think it's going to be watching us develop the marketplaces over the next year or so in general aviation as we did with Cessna and several other manufacturers have talked to us as well. And in the military, the cuts in military are huge, I mean massive cuts. And it leaves only the existing fleets and new aircraft not going to be replacing the existing fleets.

So they have to do upgrades which they put off for many years and now are going to have to do. So we see that as a growing market.

I guess a good measure is going to be seeing how we do bookings for new business. And hopefully we can -- you'll see that develop.

The disciplines that we have gone through which is trying to get the business back into an efficient and productive state which I think we have proven that we have and some predictability in the outcome and results was essential for us as a foundation going forward. Now we are going to look at the bookings and see how we do in the bookings.

Great, thank you. Yes, and you guys have done a fantastic job of cost control. And I guess to that question, how much more cost can you strip out? How much more efficiencies do you think you can garner? Or is that just sort of a crazy question because as you're running the company, you always have your eye to that?

Well, the fact is it's not -- it's a good question. But I don't think -- we're not going to cut costs anymore.

I think what we're looking at doing is -- we may have talked about it in the past. But as we go now, we have a review -- everybody gets a performance review every three months. That's actually a Jack Welsh idea and it's been very effective because it provides guidance to every employee on what's going on and where they can contribute and frankly tell people who are not performing well that they can -- either how they can improve themselves or where they should follow maybe a different career path.

So we don't look at cutting or stripping. We actually look at trying to get more, continually improve the efficiencies. And I use the term efficiencies in my write-up as opposed to productivity.

And I know it's a subtle difference but I see productivity as typical. As an example in manufacturing plants where overseas they expect workers to work on their own time to get the job done if they don't complete it during the workday, you get productivity that way but it's not an efficient way of doing it.

Efficiency I look at as finding both the tools and the guidance to get a more effective output. We're doing a perfect job in engineering. The cost and the time to design and test both software and hardware has literally been cut in half.

It's amazing change and I give them all a huge amount of credit. I think that is going to be the key to our success because our growth is based on our ability to generate new products. So I think the question was a valid one.

(Operator Instructions) David Campbell, Thompson Davis.

Just a couple of things here. John, for the taxes for the year, I assume zero, so I haven't added it up. That would clearly be included in your forecast, $0.01 profit at the fourth quarter?

Actually $0.02 David. But, yes, a 0% effective tax rate for the year as a whole. That is incorporated into the range we put in the earnings release.

David, if I remember, the tax consequences for this quarter improved the quarter by about $0.02. So without the 0 tax consequence, we would have paid about -- we would've made still about a nickel which is pretty remarkable.

That's (multiple speakers) my estimate. $0.05 was my estimate.

We're doing alright.

So we're doing fine (multiple speakers)

We had to do some scrambling.

Well I can count on you for scrambling. You've always been a scrambler, Geoff. $1.8 million of cash from operations in the third quarter. Did I hear that right?

Yes, right around 1.8, near 1.9 actually. Yes, that's correct.

Okay and the schedule change at the end of the quarter for the flat panels (inaudible) to the passenger airline, I assume that means that the fourth quarter will take a brunt of that schedule change if they have all these ships that they are not using yet.

It will impact it. We are sitting and discussing rescheduling them now. They expect to put a number of lines in place to accelerate the consumption of these units and they want units on the shelf and they have agreed to work with us.

They have been very cooperative and very enthusiastic about the program. But they're running an airline and running an airline requires you to adapt to a whole bunch of other issues when you have a large fleet like they did. So, yes, the fourth quarter is going to be a real challenge but that's what we get paid to do, to be blunt with you.

So should we expect any revenues from that program in the quarter?

We don't expect -- we're not planning them. We're assuming we're going to get none but at the same time, we're negotiating with them to see if we can't get some.

They just add to their inventory of unused ships (inaudible).

Actually not necessarily. Because they are actually installing them. It's not like they have stopped installing them.

They're installing them but not at the rate they anticipated. So they have this large backlog. So if we were to deliver a modest amount of equipment which still would significantly impact our top line, they would likely use them in the quarter so that their [back there] inventory wouldn't grow, it would probably go down anyway.

But it wouldn't -- it won't be until the beginning of next year that they actually start the high rate installations. They're talking about upwards to five or six lines running simultaneously. They want to get this in place. They want to put it in because it actually saves them money as you can probably guess. It's actually an extra seat on the airplane.

I can't wait for them to get rid of the MD80s. So this will help.

There's a lot of them.

This will help. And the new contracts in the third quarter, the fourth quarter may include some -- this proposal for international airline. Is that a possibility?

Sure is. (multiple speakers) we're going to try to do something there.

Is that a potentially bigger contract --

Pardon me?

Than the American contract?

I'm sorry, what did you say?

Is it potentially bigger than the American contract?

No. American has got I guess the second-largest fleet of 5767's in the world. The only carrier that's got bigger especially now that it's merged with Northwest is Delta.

Right and that's not the --

You know, we're showing some real promise [and packaged] in the commercial application, the weight savings literally provides an extra seat in the airplane.

Okay, it's not as big as American but it's still a big one.

It's business. Whatever it is, it's business. What we're pleased to see is the diversity of customers. You know it would be nice to get four or five or six customers, maybe much smaller, but each one looking for product. So we're happy to take any customer. We are pleased.

Right, right, right.

As long as they pay, we are happy.

Roman mentioned $110 million of total new proposals out there including 38 military. So the balance of the proposals is commercial aircraft?

Roman will comment on that. It's $48 million.

$48 million of military and so the balance is in the general aviation and commercial air transport.

Out of 110, yes.

Right.

And obviously the way the company seems to be headed at least in the short run, probably going to get increasing military business and decreasing commercial business. Is that one way to look at it?

Yes.

Of course that's not bad. I mean that's good because you can always get additional commercial business that you don't (multiple speakers)

But we continue to look -- that our business is going to come in nominally one-third, one-third, one-third from each of the three segments.

It's an ideal situation. It rarely actually ends up a third, a third and third but you at least hope and drive for that because it gives you some stability in revenues if you have a falloff in one area. Importantly, the downturn in the economy has literally put pressure on the retrofits.

I mean it makes a huge difference, this upgrading of Cessna Citation. You end up almost with a new looking aircraft with a completely new flight deck for well under $3 million. That's quite remarkable.

The Cessna program will have revenues this fiscal year but it should have more in fiscal 2010, right?

You betcha. We expect it will be a very good, very strong program.

What about the PC-12? I see you've got some new Asia and Europe which is Rhineland Air Service.

PC-12 continues to actually -- we've done a fair amount of work in the military as well for PC-12. So it's turning out to be a good program.

And we have now an ability to offer some additional features to PC-12 customers, including satellite, weather radar. And as I noted in my program here, we're actually in flight test development for our flight management system which can be integrated in with the flight deck which is quite remarkable and will be available -- we hope to eclipse [owners] in another six months or so.

But is this PC-12 contract with Germany, the Rhineland Air Service, is there any in the backlog? Are there any orders or is it just a new agreement?

We have already shipped against the agreement with them and the next step is we have applied to (inaudible) for the foreign certification and that's in works and they have a number of customers that they've lined up and we intend to be servicing them very quickly.

Right, right, right. Okay, good. And I wanted to ask something else here, a question about what you talked about, Roman, the AdViz program for -- I guess that's for Cessna. What is the full description of that program? It's not the Vantage system, right?

It's similar to Vantage but it's what Cessna has branded their own marketing campaign, AdViz for advanced vision, utilizing our cockpit display system. So those are primary flight displays, mmultifunction displays and with opportunities for the owner-operator to choose options such as electronic charts, satellite weather, these enhanced vision systems, flare type cameras (multiple speakers) radio tuning, and so on. So that has a lot of flexibility and as Cessna notes in their literature, is it's primed for easy adaptation for future requirements such as ADSB and other things that are on the horizon.

So AdViz is just their name for it?

That's correct.

They have unique features for the Cessna Citation aircraft, the way they display the fuel gauging system and things like that and those are all unique to that Cessna but it's built around the basic Vantage cockpit system.

You mentioned $5 million of military orders in the third quarter and $7 million overall. So I guess the other two were in miscellaneous or commercial and aviation?

General aviation, that's correct.

Right. Okay, well sounds like you're really doing well, especially the military. Congratulations. That's a big help in this downturn.

Thank you David.

Michael Ciarmoli, Boenning Scattergood.

I know your -- sounds like you're de-emphasizing the backlog. Did you actually give the backlog number in the quarter? I might have missed that.

The backlog number is $39 million.

$39 million. Okay, what were the bookings in the quarter?

$7 million.

$7 million.

About an $800,000 gap.

What are -- do you guys have initial shipment expectations for Cessna? Do you know what there going to -- what their first kind of ship set take will be or is that still kind of being determined?

We do have it. I'm not going to give you specifics only because it's covered by contract. But we have been already shipping production volumes into their service centers as they're teeing up for the program.

They have trained their service center people to market the program. They have started advertising the program on their own websites and in other venues that they use. So we do have that but I just can't give you those numbers because we are covered contractually.

That's fair. And then just on the proposals you talked about, I guess there were $105 million outstanding last quarter. Now there's $110 million.

Can you give us an update in terms of how those are progressing? Is it taking longer to convert these proposals into final sales given the economic challenges? How much of those proposals do you anticipate to close within the next three months, six months, 12 months if you can give us some kind of context around that?

We would expect to be closing some 10 to 15% of those in each quarter as we look forward, possibly even more if we -- some of these people get the funding. With the military programs there's a number of these funding requests are out there.

If they get the -- there's some short-term funding available yet before the end of this fiscal year and then there's funding for fiscal year 2010 which starts -- government funding starts October 1. And that would break the logjam loose.

What funding bucket are the dollars coming from?

They come from both capital and from maintenance budgets out of the government. From commercial, it obviously comes out of their same type of thing and then general aviation, some funding comes out of the individual owner-operator who decides to upgrade their aircraft.

So in the government, is there -- for the C-130, is there line item funding there that we can look up? Or is it more of a broad-based bucket where the dollars are coming from?

It's more the latter although (multiple speakers) the program offices for the different fleets request their own numbers. And what we have seen, some of the very well-publicized new aircraft programs are getting struck by the Defense Department.

So that puts, as you can imagine, even more pressure on maintenance, support, upgrade of the existing aircraft as they are going through life extension programs. So we see again in the military as in the overall economy that people are spending money to maintain what they have as opposed to buying new aircraft which costs you multiple times as much as an upgrade program and can get the same functionality, can get the performance that they need.

Just to give you some sense, we have one customer, one service customer who will go unnamed, but they came in and they said that when they thought they had their budget pretty well settled, they were informed -- and this is within a week or so -- that they just lost $800 million out of their budget.

That kind of pressure puts -- is huge and where it all goes to is it goes to new equipment because they've got to keep their existing equipment and then they have to keep their existing equipment going. So it's show -- what we are seeing is a reaction to this and strengthening of orders from that operation. In fact, we got some new orders from that operation despite the cut.

Okay, that's helpful. And just one final question regarding the backlog. Is it fair to say the same amount as last quarter is shippable in the next 12 months? I think last quarter you were looking at roughly 16 million being shippable in kind of six months with the balance being longer-term. Is that still kind of the mix there?

You're right. In the same kind of a mix number, correct.

(Operator Instructions) Alex Hamilton, Jesup and Lamont.

Actually everything's been answered. Thank you.

David Campbell, Thompson Davis.

Just another follow-up question regarding the Cessna program. In my notes, I had that you were going to flight test in May for the aircraft and now it's next week. What has caused the delay?

No, we flight tested. We completed the company flight tests and then they sent it [to alpha] painting for 3.5 weeks. So it just came back from painting and now it's going into FAA flight tests.

You go through company flight testing, making sure the systems work, is a massive amount of change to the aircraft as you can imagine. There's a huge amount of equipment removed and they did all the successful integration, working with the radar and the ground (inaudible) and air data system and all of the engines and fuel gauging systems.

All of those systems are integrated and working perfectly and tested by Cessna. And then Cessna has to have a company flight test which they did and we made -- I don't think -- we may have made one or two minor modifications to the display to make it better for them for the aircraft and it's all done and now the FAA I think today starts the ground test, a couple of days of ground tests and then we will start final flight test for the STC. So it's FAA week this week.

And so in the meantime, they wanted to have the plane painted?

Yes.

Doesn't that sound a little ridiculous? To delay the whole thing by three weeks to get it painted?

It's a hell of a question.

The FAA didn't need to have it painted did they?

They had reasons to do that, I'm sure. And it looks terrific, by the way. And the airplane is really -- we will send you some pictures. It's really remarkable. The flight deck is a huge, huge -- it's amazing. It looks incredible.

This is the Citation right?

Yes, the Citation.

And it will work for all the other models that you mentioned?

Yes, they're all Citations. They're Citation twos and threes and fours and fives etc. with various -- they use the 500, 550, 560 designations. And there's I guess 4000 of them or something. And so it is applicable to all of them and the centers are all keyed up to start installation as soon as we are ready to go.

You don't need to flight test all those other?

No, no. They flight tested the most advanced model and (inaudible) especially since the manufacturer is flight testing it. It makes it that -- facilitates the STC.

And the economy is not affecting the potential for the Cessna program?

Let me ask you a question. If you were a corporate executive and had an airplane, which would you rather do? Go to stockholders and say guys I need a new airplane because I want a new flight deck or would you rather fix the one you have for a 10th of the cost? Which do you think you would do?

I would rather go for a Gulfstream International (inaudible)

And you better get a steel collar because they're going to hang you when you do it.

I count on you, Geoff, to support it.

No, I think it's really very good, cost effective solution and it expands -- enormously expands the capability of the aircraft and really provides some real safety features to the airplane. Cessna has done an outstanding job of implementing this that kept it on schedule and on price it's terrific. They have done a great job. Very pleased to be part of the program.

Okay and then I guess you're going to focus on this debt redemption before you buy any stock back. Is that the current thought?

We have had the building loan out for I guess (multiple speakers) seven, eight or nine years and it's costing us a premium to maintain this industrial development bond which is a hell of a lot higher than any interest savings we might have made. So we end up saving 50,000 or $100,000 a year by redeeming the bond and we have the cash. It make sense to do it.

As I said at the beginning of the year, we're going to generate cash this year. So I'm pleased we're doing that. And oh by the way, we actually see an upturn in the backlog. The backlog is now on an upswing. We've dramatically reduced its reduction and we hope to start growing it.

What about cash flow in the fourth quarter?

Fourth-quarter, David, as you know we're driving hard to manage that working capital, drive the inventory down a bit further than we have and get the turns moving. Day sales again were on the credit front doing very well. Our AR and cash flow I can tell you this month to date so far has been strong. So we're going to keep driving that positive cash flow.

(multiple speakers) so we expect to be positive again in the fourth quarter.

(multiple speakers) another $1.8 million.

(multiple speakers) I'm not going to get into the numbers.

I'm not sure of that (multiple speakers) but look. We've tried very hard to stay on a protectable result and that is make a profit, try to keep positive cash flow and keep a sound structured business as a foundation so that we can grow on that and that's where we are. So far, so good.

Alright well let me know when you need a room at the Penn Club.

That's a bad neighborhood. I keep telling you that. I want to be on 44th St. on the east side.

I'm going to call off the questions and sort of summarize where we stand. The company was established and focused on upgrading existing fleets of aircraft. We felt that was a sound market to be in because when the economy was strong and people were expanding their fleets, it was always a demand for more lift than they could satisfy with new aircraft and the customers upgraded the existing aircraft.

In a downturn like we have had, exactly the same thing happens. This is a time when people own an aircraft, they can significantly improve it by updating the flight deck and if appropriate, retaining the aircraft and even modifying the interior for a fraction of the cost of a new airplane so that they -- it's an effective solution.

So Cessna has done a remarkable thing in supporting its customers and has initiated this AdViz program which supports the customer base that they have and will be around to give them new aircraft when they're ready. And the people that have upgraded their airplanes will have a far more marketable and a far more valuable aircraft.

We think we are in the right place. We have got to run the business well. I think we have a good team in place to do that. So I'm optimistic about the future and we appreciate your interest and support. Thank you.

This concludes today's conference. You may now disconnect.