Innovative Solutions and Support Inc (ISSC) 2003 Q4 法說會逐字稿

Welcome to Innovative Solutions and Support fourth quarter conference call. At this time all participants have been placed on a listen-only mode, and the floor will be opened for questions following the presentation. I would now like to turn the floor over to your host Mr. Geoffrey Hedrick, sir the floor is yours.

Good morning. This is Geoff Hedrick. I am Chairman and Chief Executive of Innovative Solutions and Support. And I welcome you to the conference call this morning where in just a few minutes we will discuss the fourth quarter and fiscal year results for the period ending September 30, 2003. Joining me at our corporate offices here in Exton, Pennsylvania is Roman Ptakowski, our President and Jim Reilly our CFO. Before we begin, I want Jim to read into the conference call our Safe Harbor message. Jim, go ahead.

Thanks Geoff and thank you all for being on the call this morning. Certain matters discussed in this conference call, including operational and financial results for future periods are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially be it better or worse than those discussed including other risks and uncertainties reflected in the company's prospectus and 10-K on file with the SEC. Jeff, back to you.

Thanks, Jim. We, as I guess most of you understand, we have had an excellent fourth quarter with sales of over 10 million and that is about 40 percent better than last year; remarkable gross margins. Our net income of 2.8 million roughly 28 percent on sales, and earnings per share of 23 cents, about 90 percent more than last year. And perhaps most importantly a very strong backlog, a record backlog of 24.1 million released compared to 11 million last year. This strong backlog gives us some confidence that we will see a strong growth for this coming year. As you know we don't provide guidance, but I think if you look at the backlog you will have a good sense of where the business is going. Perhaps the strongest component of our results is an indication of results is a couple years ago we invested in a new facility and prepared ourselves to accommodate rapid growth.

This last quarter showed a growth of about 40 percent quarter-over-quarter revenue growth. And that was accommodated substantially in the back end of the quarter in response to a military contract that was awarded to us, among other things, based on not only our price and previous performance, but on our ability to step up and deliver in a very short time cycle the products which we actually delivered the entire contract in about a month period. That represented over $2 million worth of revenue.

The important issue I believe is that we have taken the business and prepared it to accommodate demands, rapid demands, rapidly growing demands in the future both to accommodate RVSM, which as I believe you have heard has now been made mandatory by the FAA effective the beginning of 2005. And there are substantial number of aircraft that have yet to be equipped. Summarizing the numbers, we have sales of 28.2 million, gross margins of over 60 percent, net income was in total terms 5.5 million and that was up from last year. And because we've had an aggressive stock buyback program, we have substantially increased earnings per share by about 7 percent.

The money that we have invested, we purchased approximately 1.4 million shares of stock this year for 9.4 million or an average of $6 odd dollars and they are held in treasury. Having spent over 9 million in to repurchase, we still maintain a substantial cash balance of close to 50 million, actually 48 million, slightly down from last year. Assets were 69.9, and that is after subtracting the $10 million in treasury stock. So the business remains very strong.

Every portion of the balance sheet is a strong component. And it's easy. We had a lot of cash and you make a profit the numbers are easy to come by. We expect, looking into the future because I notice this is a question that everybody is going to ask, we expect to show good double-digit growth in revenue and earnings. The estimate out on the street now for next year we are very comfortable with, and the strongest indication of our growth will be based on how our backlog develops over the year. I am cautiously very optimistic but still cautious because we want to see an economy that continues to stabilize and grow and I think that is going to be essential for us to realize the total potential that we think is out there both in our RVSM and our flat-panel programs which have moved along well.

At this point I would be happy to turn it over to questions and answers. Please go ahead. Operator, can you do that?

(OPERATOR INSTRUCTIONS) Brendan Fact (ph) with FBR.

Just a couple questions for you. I was wondering what were the factors aside from volumes for the increasing gross margins, and are these going to be sustainable throughout the next year at least?

The volume is the principal reason for the improvement of gross margins; you can see that over the last several years. When the revenue goes up the gross margin goes up. Because we have a relatively fixed expense in manufacturing, so if you increase the volume the cost per unit goes down. Are they sustainable? I've said for the last three years that I don't think they are sustainable, and generally are not margins that we would try to maintain. I think as I said in the past if we try to maintain those kinds of margins we will sacrifice business volume. I think I've said for three years mid '50s is a reasonable, in fact an exceptional margin certainly in this industry. So in summary to answer your question, the increasing gross margins was due almost entirely to the volume. Some of it may have been product related, different products have higher margins, and no, I don't believe we will sustain it. It is probably sustainable, but I don't -- our direction is to look toward a 55 percent gross margin. Which still in the end with reasonable volume will still give us close to 20 percent net after-tax which by the way, we did 19 7 (ph) this year.

Okay, in terms of the revenue growth, what percentage of that was driven by your military business during the quarter?

It is hard to say because you don't really differentiate that. I mean, the mix of military to commercial in that quarter was about 30 odd percent, 35 percent military and about obviously 65 percent commercial, which is in line with the rest of it, so it wasn't like it was a big boost. But it still had a substantial military component in it, and we were able to maintain the margins.

I guess historically there has been somewhat of a seasonal decline in the March quarter, should we expect to see that going forward or do you think that will be somewhat subsided by the RVSM date being put out there?

If the RVSM market materializes like we hope it would, we should see reasonably uniform growth rate over the year. As you know, we usually start out with a smaller number in the first quarter and tends to build in a crescendo into the last. As you know, last year was an unusual quarter in that we had very low sales this past quarter and recovered those lower sales in the fourth quarter of this year. But that is part of running a business. You are supposed to do that. So I don't believe -- I don't believe there is any seasonal macro that influences our business, that is just it drops out of the backlog, I think.

You continue to generate cash. Do you have any plans for the cash balance going forward?

We sure do. We continue to be aggressively looking at companies that will not just simply build the fluff, but solidly contribute to the business. The overused word synergy is certainly applicable. We would look for businesses that enhance our distribution capability because we have a broader and a strong product line that I believe has huge opportunities that have to be addressed and certainly an acquisition that would aid that would be helpful. And certainly an acquisition that continues to add breadth to our product line. We have interest in expanding our product line into other components in the flight deck so that we can provide a complete flight deck from soup to nuts. So those are the directions we are taking. I think our recent stock performance which I truly believe properly reflects the business, the strength of the business.

I think in the past we've had discussions of why the stock was low and I consistently said it was massively undervalued and I think the street finally understood that and has happily reflected that in the value of our business. That helps us in our search for businesses because the businesses we would want to acquire would provide a lot of cash, but to make sure that there was a commitment on the business -- that's the people, et cetera to our success, we would expect to provide stock. So having a strong stock enhances the people that we might want to acquire as perspective of our business.

Just in the release when you discussed backlog you talked about an additional 16 million in follow on options. Can you give a little more color on that and maybe discuss the timing of when that could be recognized?

That is spread out on multiyear contracts. I would prefer not to discuss those contracts in detail. But it goes on to say that in some cases we have taken programs where the initial release would be a few early deliveries and with the majority of the equipment to be delivered later. Some of that is military, and some of it is commercial, principally military, though, on the longer-term multiyear contracts.

Thank you, I will let somebody else get on.

Jerry Gallant (ph) with Hubberman (ph) Financial.

Since the FAA finally issued its RVSM mandate in late October, have you seen any detectable uptick or change in the marked demand for RVSM upgrades?

We haven't seen sort of an instantaneous growth in demand. In fact, our backlog numbers don't necessarily reflect a great reaction to the announcement. And I guess in thinking about it I guess I would not expect it. It kind of has to trickle through the supply chain. We deliver to installers, not to end-users. So they have some equipment in stock, and they will be following up. Learjet has been buying accelerated quantities, and they have been picking up like crazy. But there is a 1000 airplanes to do. So the answer is no, and in fact the backlog that you see doesn't represent that sort of reaction to the announcement at all. It was substantially there before the announcement. So hopefully we will see some, and that is why I am cautiously optimistic. I believe we will see demand and recognize that I don't I think it is going to be essentially impossible -- I think everybody generally can see it is going to be impossible to do more than about half of the remaining aircraft between now and the mandatory date. So there are going to be a lot of airplanes flying low, all of which will continue to be done in the following year and two years. In fact, there are people that fly across the Atlantic and still fly underneath that RVSM altitude. Crazy, but they do.

Let me switch to the flat panel. Can you update us on where you stand with respect to its application in the commercial environment? And let me ask you also Boeing is putting out a lot of information about their new 7E7 aircraft, and of course most of the publicity has to do with what the customer sees, the interior of the aircraft, et cetera. Is your flat panel display a candidate for the cockpit on the 7E7?

The quick answer is no. The 7E7 will be that will probably be supplied by one of the two big guys. Boeing has their supply chain, either Honeywell or Collins because they will supply a significant amount of additional equipment, including flight management systems and many, many other components. So the quick answer is no, it won't be. But however successful the 7E7 is going to be the retrofit potential is in order of magnitude larger than any of the potential for the 7E7. So we would love to be on the aircraft but the quick answer is no, we won't be.

Back to my initial question, where do you stand in your efforts to become certified and gain a commercial entry with your flat panel display?

I have said in the past that I expected it to have submittal by the end of December. That looks like it's probably slipped two to four weeks into January, but not because of any technical difficulty other than our commitment to do a very complete job on our submittal, which is causing us to put an extra effort into the program, and then it has caused a slip of a couple of weeks, in light of the size of the programs not too good. People who know me will tell you that I am clearly not happy that we ever slipped, and our President knows that. But I think we have a solid program. We expect a submittal in January. The product has grown, and the basic product has grown both in its capability and its interest in the marketplace. There is a great deal of interest. We are in discussions with a number of significant potential opportunities. But importantly, our costs continue to go down through a series of technical breakthroughs. So if I had to summarize the state of the program, it is a remarkable program, and I think it is going to be a very strong player in our future over the next five to ten years. So I'm very, very pleased, very optimistic on that program.

Just help us understand, you have a submittal. What happens next and what is the timeframe?

The submittal consists of -- a submittal for a TSO the FAA is required to respond in 30 days, but we've been working with the FAA and they've been extremely cooperative, so I'm very pleased with that. We would expect to have a TSO and simultaneously supplemental type certificate on the airplane that we actually do a flight test on, within probably 45 days after submittal.

So that's fairly rapid.

(indiscernible) FAA and they've got a whole bunch of things going on. But the good news is that they have been heavily involved in the program for the past year, so they will not be getting a piece of paper that is a surprise. So that's the good news.

Final question on flat panel, the 767 tanker, it looks like the front of it worked out, how that is going to be acquired? And your flat panel, your flat panel is on that plane is that right?

We have two of them on there, and it is a very successful program. Boeing appears to be very pleased with it. Our L-pack (ph) has been, the production delivery we have had has been very good. We have the process under control and I might add that we have recently been issued a number of patents, and there is probably a half a dozen more that will be issued over the next six months protecting our position with the flat panel unique architecture.

Just so we do not get too excited, that Boeing, the Air Force --.

It is a long time out, it is out, way out.

It is quite several years out.

But understand, we are pleased with the program because it provides us a basis for -- we are talking to other people who are involved in tankers, and they would be very interested in products that we make for the 767, so it's applicable to other products. They are not identical, but derivative products from it. It was a good program. We are very pleased to be working with Boeing on it. It's been a very excellent cooperative effort.

Thank you. Just a final question. Jim, what kind of tax rates should we expect for next year?

This year as you can see, Jerry, we're probably in a 31 percent category. It is going to be probably between 31 and 34 percent depending on what we do with our R&D tax credits which continue to roll along.

I would like to just comment. Obviously you are trying to look at the earnings at the end. The thing that's going to most profoundly affect earnings is not going to be our gross margins or our tax rate. It is our ability to generate and ship revenue. And if our revenue goes up -- what happens is if a lot of fixed expenses that fall away and margins increase enormously with revenues, as you've seen in the fourth quarter. So if the revenues are there, the profits are going to be there in a very big way. And I hope over the past since we've gone public have shown that when we ship, we make lots of money.

Keep on doing that. Thank you.

(inaudible)

Congratulations on a nice quarter. A couple questions for you. First of all, I know you are talking about fixed expenses, but do you consider G&A and R&D kind of fixed within these dollar terms, or would you expect them to be moving up as revenues ramp?

We consciously will increase our R&D as a function of sales. I think that is a cost of business. And the SG&A to some extent will track at the same way, because we would probably like to load up and as you've seen we've increased our selling expenses. So in general, I would say they are going to track. The thing that happens here is that when we have a burst like we did in this last quarter, we obviously weren't able to increase the IR&D fast enough to accommodate the 45 percent growth in revenue. So what happens is that you end of getting these, but not only high gross margins because the manufacturing overheads are better absorbed by a broader base, but after you crack the nut, you are something in the order of 70 percent drops to the bottom line.

We can't run a business -- I don't think you can practically run a business that way. The thing that enables us to get the margins we do, its all in the engineering. It isn't in our production of overheads as you well know. So we would invest, consciously invest in adding people in the engineering and sales area. Administratively there are going to be some components, but we have a pretty good handle on that. Obviously one or two people in accounting to accommodate the higher volumes and that kind of thing. But no mass of investment, not even CAPEX of any substance to accommodate the growth that we are looking at over the next year.

CAPEX will continue to be minimal going into '04?

I'm actually pushing the (indiscernible), it's a new role for me. I'm actually pushing to invest in equipment. I think we can solidly do that and then if it enhances our ability to accommodate changes in demand, rapid changes in demand, we're going to do it. And it helps us to get better efficiencies out of our engineering, but there will still be at the function of sales a relatively small component. I think with the schedule for next year less than half $1 million for production, which is nothing. So it is going to be generally low. If we think we need it, obviously we've got the cash and that is a good place to put it. Our hurdle rates aren't necessarily very high, we set our hurdle rates, opportunity cost to capital high, and there is nothing purchased in this place that doesn't go through discounted cash flow analysis and a follow-up, which is rarely done to actually find out if we met what we expected to.

In terms of this quarter in your revenues, how much of it came out of backlog as you said the beginning of the quarter versus the order came in during the quarter and so you booked and shipped it during the quarter?

I don't actually -- do you know if -- let me tell you that about -- I would say about $2.5 million. If it did not come in the quarter, it was very close to coming in the quarter. At least 2.5 to 3 million. In other words, we didn't sandbag you guys.

Well, no, no that's not where I'm going with this.

We actually are able to do that. That was the exciting thing. In fact, we had this military program where they needed the equipment to support aircraft and we were able to deliver 850 systems, believe it or not, in about three weeks. That three weeks start to finish, but three weeks into production.

(multiple speakers) Are you saying everything but like 2.5 to 3 million came out of backlog?

That is pretty close, I think we went into the quarter with roughly 7 million, between 6.5 and 7.5. And I don't have the exact number.

That is fine, I mean ballpark was all I --.

And it was either in the quarter or virtually in the front end of the quarter that the balance of that business came in.

Got you. Now if you could just walk me through the math on this. I think I've got this somewhat understood, but in the press release you guys talk about the FAA estimates, the hardware component is going to be 870 million or --.

That's a total installation charge.

Okay, total installation as I was, of which half is going to be --.

That's our estimate, which is (indiscernible)roughly half is going to be hardware.

Right, okay and then roughly half again given a 50 percent market share is roughly $200 million for your piece?

We would like to believe we can do that.

How much do you think of that $200 million has been delivered so far?

I think maybe one-third of it.

Okay.

What we are in a process of doing and I can follow this up, we are in a process of getting two outfits independently to assess our market. We have our own internal guys, but we are getting Frost & Sullivan and another outfit to look at the market segment, each individual aircraft by tail number, what they need, so that we can accurately assess the opportunity to obviously aggressively approach them. So, and that number is not finished yet. We haven't gotten that. Our broad number says that if we get half of that -- and understand of the 400 million, there could still be a fair number of just equipment upgrades that we wouldn't be part of. But unlike in the past, which was if I remember 3700 airplanes that have been done? Yes, 3700 airplanes have been done. Of those 3700 airplanes our assessment is that about 80 percent of them or 70 percent of them were just equipment upgrades. The equipment that, or the aircraft that are going to be done now will have a much higher percentage of requiring new equipment. That is why we are going through this effort now. Anyway we cut it its a very big market.

And it looks like it's got what, primarily you'll probably do 70 percent to 80 percent within the next two years in that market?

I think 70 percent of that market will be done in the next two years.

Got you.

And I'm not being rude, I think to get a good sense -- and I don't want to be evasive either, until I have accurate numbers I am not prepared to put them out, but it is important just to track our backlog. And we will keep a very current -- we intend to keep announcements current to keep our backlog magnitude current which will give investors a sense of what we are going to do in the future. And we intend to continue to do that. You can count on the fact that we will be -- because it is a very rapidly emerging demand and can materially change our business, we will keep our investors abreast of how we are doing.

Great and I appreciate that. Likewise, Geoff, you could have a lot of business that books and ships in the same quarter and never hits backlog.

That's true, but I won't do it on a quarterly basis. What we intend to do, is when we get an order in or significant order in, we started doing it already, do a press release on it and we've done it. Not to hype interest but to actually keep our present investors aware of what is going on with the business. Because we really can't discuss it in phone calls, as you know. So what we intend to do is when we get changes we will make these announcements and we may be able to maybe twice a month, twice a month give you an idea of our backlog. And we will try to keep book-to-bill ratios up. Sounds like the old semiconductor business I was in, God help me.

Thanks a lot, and again congratulations.

Thank you very much and I will commit to you that because of the very rapid changes we anticipate and demand in our growth we will, we have discussed a concerted effort to keep an awareness out in the field of what is going on with the business so we don't have to wait to quarterly announcements.

Thanks again.

Brian Jacobs (ph) with Forte Capital.

Great quarter. I was wondering if you could give me a little bit more on the $2 million military order, that 850 shipments that you shipped into you built into the last three weeks of the quarter. Just to follow up on the prior caller's question, was that in backlog prior to the--.

It was not in backlog. We had bid the program. Again, that was the pace that topped almost 2.5 million roughly. I think the contract was for roughly $2.5 million. It was not in the backlog. It came in, it was released as a production release program somewhere in the beginning of it, around the beginning of the fourth quarter, the end of the third quarter. I don't know exactly. We had to build and qualify the units, which we did. We then had to wait almost a month or three weeks to get flight test confirmation. And then we built 850 of these things in three weeks on the production floor, and by the way managed to still ship probably almost 6 million of the 10, 6 plus million of the 10 in the last month. We've actually -- it wasn't an accident. We actually planned to accommodate that kind of growth.

This isn't new certainly to me or this business to have very rapid demands on a monthly basis, doubling shipments from month to month is very common, we have done it many times. And it is there, our labor content is designed by design is very low, although we build everything in house. The boards we have automated pick and place surface mount machines of $1 million worth of surface mount operation, not to save money in the building of the boards, but to maintain a very high level of quality and to respond to exactly this kind of thing. If those boards were done outside, we wouldn't have been able to accommodate the program to be very blunt with you. We couldn't do it. So we actually planned it in there and hopefully it is going to serve us well as the RVSM market materializes.

Okay. I think most of my other questions have been answered. Thank you very much.

Thanks for your interest.

Jim Leonard (ph) with Haywood (ph) Partners.

Congratulations on a broad quarter, guys.

Thank you very much. We have a very good team.

It's quite obvious. I was wondering regarding the government order, did you say that contributed 2 million late into the quarter?

Third quarter, yes. (multiple speakers)

2.3 million.

2.3 million.

Do you think that going forward there could be some more on the government side, some more revenues coming in --.

There is a huge market there, and I am pleased to announce that a new member of the Board will be joining us who has extensive expertise in the Navy's requirements. He is very much of an expert, a retired Admiral, brings a great deal of hands-on expertise. And he will help us mold our business so that we can better serve the military segment. But the business out there is enormous. For our product it is enormous. Literally I would off the top of my head that there is an annual revenue potential that is double what we are doing now just in the military. It is very strong. So yes, you are preaching to the choir, importantly we have, we've maintained some really remarkable performance. It is not just -- I'm very proud of our ability to deliver profit, but by the way, we delivered to three different Boeing military sites, and we've had five quarters of 100 percent on-time delivery, and 100 percent quality. That is absolutely unheard of. And that is the most remarkable aspect of our business because we've been able to grow the business, produce the profit and produce the quality. And the military are smart people. They want to buy equipment from people who do a good job. And I think we are proving we can do that.

Regarding the potential acquisitions, would they be focused in such a manner to better exploit the government market you were just referring to?

Absolutely. But we are looking for expansion, looking at a couple of people, and the issue is understand one of our limitations I would say is that we are unwilling to, we are limited in the size of the acquisition we make. Our powers in the industry the very large businesses have the facility to buy $7 million business and $700 million or $7 billion businesses. We can do neither. We will not, we tend to eschew the smaller businesses simply because we don't want to divert the management talent within the organization. And we are limited in the upper sides because we do not want to saddle ourselves with unreasonable debt and so it limits our perspective. And by the way, it is hard to -- we work so we can't make an accretive acquisition because, our margins are so high.

Now as our stock price has come up stronger, recognize that as you look back based on the enterprise value of our business that is the profits from the ongoing operation and the revenues, we are talking about PE's of 16 trailing, 17 trailing, very modest and a substantial amount of cash. But that is only recently. As you can tell, we were half that. We were marginally above the cash value of the business. I think people understand that we are here for the long-term, and we actually have a strong business. Yes, we are focused very strongly toward the military, and we have a lot to offer in that area because we have very competitive pricing and exceptional performance and reliability, and have been acknowledged by the military as providing both of those things. So we are in good shape. It would be a natural thing to find a company with a substantial strength in military, and we may get a home run by getting somebody that has distribution product and product that augments our existing product line. That is we see those out there and we are trying to get them.

Great, I have one other quick question, this is for Jim. Do you have the cash flow from operations for the quarter and the CAPEX?

Yes, the cash flow we did about a half dollar a share for the year, and the CAPEX was very light as we talked about. We only spent about $150,000 in CAPEX for the whole year and as you can see, the net assets actually decreased because our depreciation is running way ahead of actual expenditures. And in the quarter itself, cash from operations was about $2.3 million and it was a little over $6 million for the year.

Thank you very much.

(indiscernible)

Actually my questions have been answered.

(indiscernible)

Just as it goes back to backlog real quick and you guys talked about putting out press releases. You put out a press release on the 21st for a $4 million from Bombardier and you had another one on the 14th for a $1 million contract, are those in the backlog?

Yes, we put an announcement out on them, they definitely would be in the backlog, those 2.

Okay, because those announcements hit in October (multiple speakers) and not in last year's--.

Yes.

Okay, thanks.

Brian Jacobs.

I thought all my questions were answered but the more we discuss the military programs, am I mistaken, but aren't some of those programs for domestic businesses limited to 15 percent operating margins? Or do I have that mistaken with the systems integrators limits?

Yes, you have them mistaken. The operating margins are limited for direct procurements. In other words, if you have a non-competitive procurement commonly a negotiated procurement, you are limited in your profit. On a competitive basis, the government doesn't limit that because they say we are going to limit the profit margins based on competition. The reason we got big profit margins is because we have better designs. Our material cost is very low on our labor; we're just a lot more efficient than our competitors, and that is why we are able to sell a product at the lower cost at better performance and reliability and still maintain very good margins.

(OPERATOR INSTRUCTIONS)

Sounds like we don't have anymore questions and we're getting close to wrapping up anyway. I'm happy to take one or two more questions. I appreciate, very much appreciate your interest. We are very enthusiastic, and I feel very fortunate to have a remarkable team that continues to get better and evolve into a strong machine to perform. I continue to be very optimistic. I was very optimistic last quarter. Happily we were able to deliver on some of that optimism. I think the business will continue to grow, and as it grows it continues to get stronger and more predictable results. So if there are any more questions I am happy to answer it, otherwise I'll say goodbye.

We have a question coming from Herb Schaefer (ph).

Congratulations on a great quarter. Most of my questions have been answered, but I will just comment it appears that the street likes your numbers, the stock is selling at 14.27. Looks like over 400,000 shares have traded. So that looks like good news.

I'm pleased. I think the last year has been a very -- and the previous year -- have been years that have reacted to the general economic malaise, and we stayed at a fairly flat revenue. I'm happy to say that even -- I think at least from my perspective, the test of a business isn't that you can make a profit in boom times, I mean anybody can make a profit in boom times, or almost anybody. The test of the business and the strength of the business is can you make a profit and generate cash when business is lousy. And I think we did and I am very fortunate to have a team of people that have a commitment to the business. And by the way, it does not hurt to have them a 100 percent of your people stockholders, it is good and they deserve it, by the way.

That is good, now keep up the quality and on-time delivery.

I have a Board that makes a habit out of that. Thank you very much for your interest.

Steve Stephens (ph).

Just had a quick question regarding your capacities. You built this new plant and presumably you are being able to build everything that you have orders for, but if you do get a substantial increase in orders whether it be on the RVSM or other things, do you bump up against your capacity limits and what happens with that? And connected to that, is their a chance that bigger competitors can take some of this business from you in the near-term or even in the next two years?

Let's talk first on capacity; I have a production floor right now that's running one ship and is probably heavily weighted toward the back end of the quarter. So if you practically looked at it, I think we probably use about one-third of our existing production capacity. Our board capacity I could probably do the boards for General Motors. I have an enormous capacity there. As you know, I got that not from just for responsiveness. So internally I would say about 40 percent of single shift capacity are our present rates, which is roughly 7 to 10 million a quarter. Without making any changes in this facility, although it was designed to be expanded, I can triple my volume of existing production floor and if I run two shifts probably four times the volume. So, do we believe that we will lose business to our competitors because we can't deliver? Hell, no.

And who do you see as your primary competitors?

The biggies, the good guys. Probably the biggest competitor maybe our only real -- the biggest and strongest competitor is Honeywell. They are very good at what they do, they are very strong in the sales; they have an excellent reputation. They are a formidable competitor. But we had them since day one. So that is not a surprise.

What about for the flat panel?

It is Collins, Honeywell and a drift of maybe 10 other (indiscernible) suppliers. What we have though is a very unique product; it is not the glass and it is not the pretty picture, it is the system. And we have fundamental patents on our revolutionary system architecture that reduces our costs profoundly and increases our ability to adapt to change. And that is -- and we've had initial releases of initial awards of patents and we expect a few more, I think positions us strongly. It doesn't mean Honeywell is done. Honeywell and Collins have spent hundreds of millions of dollars to position themselves where they are, and they produce an outstanding product. But that's true with everything. You've got to -- it is simple, you have got to make a better product for less money, not a little bit less, typically we don't go into a marketplace if we can't produce a product that is 40 percent less expensive with our full margins in place, than our competition. Because if we believe that if we planned on it costing us any more than that or our ability to sell it to be any higher than that, that we don't have a strong entry into the market.

I appreciate that, and again after 2005 or once most of this volume for the RVSM is through, is there ongoing business for RVSM in terms of retrofits?

There will continue to be businesses -- an example, we've got a contract for the A-10 for an air data computer that has really nothing to do with RVSM but the equipment on board was through generations old and they couldn't keep reasonable the deployment of their aircraft. To give you some example, GE sees it, now Marconi, now British Aerospace built about $400 million worth of air data computers, standard air data computer for the Air Force and Navy. Those are all 25 years old, and probably three or four generations old and almost impossible if not impossible to maintain. So there is this constant flow of business beyond the RVSM requirement.

Understood. Thank you.

There are no further questions at this time.

Thank you very much. I appreciate your interest, and we will do what we try to do each week -- put foot in front of the other and do a decent job of it. Thank you very much for your interest and to the street generally, thanks for doing well by our stock. Have a good day.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.