Innovative Solutions and Support Inc (ISSC) 2008 Q4 法說會逐字稿

Good morning. My name is Phoenicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Innovative Solutions and Support fourth quarter earnings 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) Thank you.

Mr. Hedrick, Chairman and CEO, you may begin your conference.

Good morning. I'm Geoffrey Hedrick, I'm Chairman and CEO of Innovation Solutions and Support, and I'd like to welcome you this morning to our conference call to discuss year end results for fiscal year 2008 and the forward looking 2009. Joining me today is Roman Ptakowski, our President; and our Chief Financial Officer, John Long. I would like to turn it over to John this morning to read our Safe Harbor message. John?

Thanks, Geoff. Good morning.

I would like to remind our listeners that certain matters discussed in this conference call today including operational financial results for future periods are forward-looking statements that are subject to the risks and uncertainties that could cause actual results to differ materially, either better or worse, from those discussed including 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 to Geoff Hedrick, Chairman and CEO. Geoff?

Thanks, John. Fiscal year 2008 was a challenging year with our major OEM business program, the largest and most accelerated engineering development program in the Company history. In addition, the program on the C-130 and TriStar flight decks with the European customer required very high resources especially in engineering.

The resource demand of these programs exceeded previous efforts by more than 50% and staffing of these programs required us to double the size of the engineering department during that year, adding program specific contract labor and working as much as 20% overtime. In the inherent inefficiency of large staff increases and delivery pressures resulted in very high spend rates and less than optimal productivity.

As we completed these efforts, we reviewed both the tasks and the process to see how we could improve them in the future. These were lessons learned that will prove most helpful in the future. The engineering department has instituted a number of improvements in processes and tools that profoundly improve productivity, changes in these processes that define scope accurately and minimize reward.

In the beginning of September, management submitted a budget to the board of directors. The board found this unacceptable as it seemed to have an unclear forward growth plan and unacceptable margins. And the management was requested to review and resubmit a revised budget which was also found to be unacceptable for the similar reasons.

The board then decided to change -- that a management change was required as well as a revised forward strategy. I returned to assume responsibility as CEO and Chairman of the Board and in the ensuing weeks repeated analysis of personnel quality and staff levels and an analysis of forward programs and revenues resulted in the reduction in work force weighted primarily in the engineering department.

As two major programs requiring large efforts were completed and the force ranking of all individuals in the Company resulted in the selection of the most talented and most productive employees. Right sizing the engineering department to earlier levels prior to peak demands of the VLG OEM and TriStar resulted in our present fiscal year 2009 budget which reflects an approximate 33% growth in revenue, profitability in all four quarters with positive cash flow.

This is achieved while still investing over 13% of the revenue in product development. Our active efforts to solicit partnering with our customers and their contribution to modifications of our designs allow us to keep a strong productive right-sized engineering department cost effectively. Going forward, there is much to be optimistic about despite the very serious worldwide economic conditions and the impact broadly on manufacturing, the Company's core mission will serve us well.

As many of you are aware, the Company has a central focus on retrofits, specifically modification to existing aircraft and fleets of aircraft to update their performance, to comply with changes in regulation, and/or improve operating efficiency and safety. We are engaged in two large programs in air transport market with American Airlines and Federal Express to update their formidable 757 and 767 fleets of aircraft.

In difficult economic conditions it is often prudent to update existing assets, to increase their productivity and to serve a reduced market demand. Both crew efficiency and aircraft performance improvements drive the business case for the retrofits in progress. Our equipment is designed and especially suited for this market, and not only in the air transport world, but in the military and general aviation marketplaces.

Our contract with Cessna to develop a flight deck to upgrade their fleet of Cessna aircraft will give existing Cessna customers a very cost effective modernization path. Similarly, C-130 programs with Homeland Security and other major military customers improve the performance and reduce the workload of C-130 and C-130 fleets worldwide. These fleets are almost 1,600 aircraft that are available for our system.

We developed the system for the Royal Netherlands Air Force which is now presently being applied for the Homeland Security fleet of C-130s. Our business is growing in all three segments. As of today, our 2009 backlog is substantially larger than last year's sales. When I say backlog, I mean released -- firm, released backlog.

In fact, it is the largest percentage backlog, the largest backlog in position in the history of the Company and our 2009 budget reflects growth of one-third over last year with virtually no revenue from the VLJ OEM. Comparing 2008 to 2009 and taking out revenues for the VLJ OEM, our first quarter is double the revenue of our previous quarter.

Let me provide our expectations for the first quarter of 2009. Based on current conditions, we expect to generate revenue of $9.5 million to $10.5 million. EPS for that quarter is expected to be in the range of $0.03 to $0.06 profit with positive cash flow. This year's fiscal revenue 2009 is supported on programs pursued almost two years ago which give us some sense of the length of time between winning major programs and starting into production, and these programs are expected to run for the next two years.

The margins on these programs are proving to be just as expected and with new disciplines implemented in the manufacturing organization, we expect to dramatically reduce the inventory levels and we expect cash flow to be consistent with our historical cash flow. This is why we were able to issue the dividend at the end of last year.

As we looked at our business going forward, we had more than adequate cash in place to execute not only our business plan, but keep our operation going for many years under the most adverse conditions. The $17 million received in the legal settlement could be distributed directly to our stockholders allowing them to make decisions on how best to invest this one-time income. You will remember that over the last two and a half years we have spent and expensed substantial sums in pursuit of defending our intellectual property.

This has profoundly impacted our profitability, or lack thereof, which in turn has impacted our stockholder interests. This money distributed directly to the shareholders allows them to use their discretion on how to best invest these proceeds.

The board of directors is presently pursuing a replacement for Mr. Wilson, who resigned from the board at the beginning of the month. We have several excellent candidates with extensive senior management and director experience. The nominating and corporate government committee is pursuing this replacement.

As you are aware, I have assumed the role of CEO and I am committed to stay on until an appropriate replacement has been selected by the board of directors. I'm fortunate to have Roman Ptakowski, our President, with me and back from service in defending our intellectual property. As many of you are aware, Roman led the internal legal defense efforts which were highly successful. Happily, a reasonable and settlement was achieved with the defendant's senior management.

We are pleased they chose to revolve this issue in a most fair and balanced way. With Roman back fulltime, we have a strong, predictable plan for the future. I would like to turn it over to John Long for details on last year's performance and a quick look at next year.

Thanks, Geoff. Thank you for joining our call this morning. As you have already seen in our press release, there were a number of unusual or non-recurring items that affected both the fourth quarter and full year results. In our release, we provided a reconciliation of their effect on our GAAP and adjusted net income.

As I go through our results this morning, I will try to give a more granular description of these various items and how they affected our margins and overhead. Our goal is to help investors develop a better understanding of our normalized results as well as to provide perspective on the future level of gross margins and fixed overhead expenses.

Revenues in the fourth quarter were $10.2 million, up 100% from $5.1 million a year ago and consistent with the revised guidance that was issued on August 20. Revenues were up sequentially for the third consecutive quarter as we continue to ramp up growth. Revenue growth is being driven by the performance of our flat panel display systems which delivered approximately $6.9 million of the quarter's total revenue from a well diversified mix of solid customers in each of our three markets.

For instance, commercial air transport revenues this quarter included work for Federal Express and American Airlines. General aviation included a significant increase in the Pilatus revenue and we also continue to generate steady performance in our military sector. Air data product shipments in the quarter were approximately $1.8 million with approximately $1.6 million in engineering modification and development revenue.

Revenues in the quarter included $2.2 million from our large general aviation OEM customer which represent shipments prior to receiving notice to reduce production as discussed on our conference call on August 20. Looking at our performance excluding this large general aviation OEM customer revenues in the balance of the business have been consistently trending higher.

For the fourth quarter, exclusive of the large aviation OEM revenues were $8 million including the previously mentioned Federal Express, American Airlines, Pilatus and military contracts among many other smaller projects. That's up considerably from $4.9 million in the third quarter exclusive of this large general aviation OEM customer.

On a GAAP basis, gross margins in the fourth quarter were 16.5%. Margins were impacted by a number of one-time items in the quarter primarily related to the suspension of production for this large general aviation OEM customer. In the schedules I really tried to lay that out in a way that is hopefully easy for individuals to understand the normalized run.

In the quarter, gross profits were reduced by $1.9 million to establish a reserve for obsolete inventory. You can see the charge in the press release tables 3 and 4. Excluding these costs, the adjusted gross margins were 35.5% in the fourth quarter while product-only gross margins were 39%. As we leverage our fixed fixed manufacturing overhead, we believe we can continue to achieve margins at or above these levels into the mid-40s to high 40s.

I would now like to go through the R&D and SG&A for the quarter and provide a bridge between our historical performance and future expected performance. R&D was $3.8 million, total R&D for the quarter, $3.8 million. However, as a result of the completion of several major projects, as Geoff mentioned, organizational changes and work force reductions we expect total R&D, that is both internally and externally funded, of about $1.8 million to $2 million in the first quarter of fiscal '09. That level of R&D investment will be closer to our historical levels.

SG&A spending totaled $8.4 million in the fourth quarter of 2008. SG&A in the fourth quarter includes a $4.1 million reserve for doubtful accounts with a general aviation OEM customer. Again, this allowance for doubtful accounts is shown in the press release in tables 3 and 5.

In addition, the fourth quarter SG&A includes approximately $900,000 of cost associated with the reduction in work force including the Company's September termination of its CEO, as well as $307,000 of legal fees and other expenses associated with the trade secret matter. Excluding these charges, adjusted selling, general and administrative expenses in the quarter were $3.1 million and you can see table 5 for the breakout.

Based upon our work force reduction and other cost savings initiatives that we have already implemented going into this fiscal year we expect SG&A of approximately $2.5 million to $2.7 million for the first quarter of fiscal 2009. The settlement of our trade secret lawsuit resulted in other income of $17 million in the quarter. The settlement was included in our press release table 3 in order to reconcile to adjusted net income.

As a result of the settlement, our pre-tax income for the quarter was approximately $8 million. Due to the availability of the accumulated net operating losses taxes in the quarter were only $418,000. As a result, we reported fourth quarter 2008 net income of $7.6 million or $0.45 per fully diluted share. Our financial position remains strong. At September 30, 2008 we had $35 million in cash, $4.3 million in debt related to our facility and shareholder equity of approximately $46.8 million, or $2.80 per share.

In the quarter, as mentioned, we received $17 million in proceeds from the trade secret settlement case and paid out approximately $16.7 million in dividends. The Company repurchased 166,000 shares of our common stock during the quarter under the previously announced share repurchase plan at an average price of $5.95 per share.

Let me summarize the various one-time items in the quarter and how they affected the various income statement accounts. Severance and other costs associated with our reduction in force and other severance of $900,000 which is in SG&A; $307,000 of legal fees and other expenses associated with the closure of the trade secret matter, which again, is in SG&A; and the $17 million legal settlement is included in other non-operating income.

And just to conclude here, as it pertains to our large general aviation OEM customer contract the total direct charges associated with the suspension of this contract were $6 million in the quarter. This does not consider any indirect collateral impact such as a reduction in force, severance and other costs. Based upon our assessment of the risk associated with this customer we took the following action. We established a reserve for obsolete inventory of $1.9 million which is reflected in cost of goods sold.

We established a reserve for doubtful accounts of $4.1 million, which is in SG&A, and we also incurred research and development expense of approximately $170,000 directly related to this OEM customer pursuant to an NRE agreement which is in research and development. I'd now like to turn the call over to Roman.

Thank you, John. I would like to tell you about the progress we are making in each of our market segments, that is commercial air transport, military and business from general aviation. In commercial air transport our flat panel display systems are in revenue service at both American Airlines and Federal Express.

We continue to ship product to their installation service providers to support the ongoing upgrades of their fleets. We have a number of outstanding proposals at both domestic and international carriers for their retrofit of Boeing 757 and 767 aircraft with our flat panel systems. IS&S has received amended STCs for the Boeing 757, 767 platform from the FAA adding increased functionality to the COCKPIT/IP flat panel display system giving it even more utility for the operators.

In the military segment, the Company's COCKPIT/IP solutions continue racking up flight hours, both domestically and internationally, for the C-130 and KDC-10 military air transport. The operators are upgrading additional aircraft. We have increased the work we are conducting for Homeland Security. Our previous efforts on both the Pilatus PC-12 and Lockheed Martin C-130 aircraft are expanding the application of our products on these fleets.

The Company successfully concluded all testing of its newly introduced large format mission displays for military aircraft. These are high resolution 20-inch diagonal displays. We commenced shipping during the fourth quarter. These displays interface with a variety of video formats providing the on-aircraft tactical officer with the readability needed for successful mission completion.

In the general aviation segment, a number of innovations were introduced at the recent NBAA trade show. IS&S announced an addition to the COCKPIT/IP product line the IS&S Vantage capable of interfacing with most third party avionics. Designed specifically for business aircraft, the Vantage system is available in two or three 10-inch flat panel display unit architectures. The Vantage system allows operators to upgrade their aircraft to a new flat panel display system while leaving existing third party avionics installed in the aircraft, thus 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. You can select from the best-of-breed from all the major vendors. The Vantage system provides versatility and selection unmatched by any other supplier. The Vantage system accommodates options such as Class 3E charts provided by Jefferson, enhanced vision systems and XM satellite weather.

Like all COCKPIT/IP systems manufactured by IS&S, the Vantage system provides users with enhanced situational awareness and increased functionality, enables reduced crew workload and lowers aircraft weight. We are in discussion with a number of fixed based operators that provide installation services to retrofit the Vantage system into a variety of air frames such as Falcon, Hawker, King Air and Learjet aircraft.

Also at the NBAA trade show, IS&S launched a wide area augmentation system, also known as WAAS, with lateral and vertical precision performance with a fully coupled autopilot for its PC-12 flat panel display system. 3-D approaches have been successfully flown on a number of occasions with this added functionality. What is significant about this is that WAAS capability allows PC-12 operators to fly precision approaches at smaller airports.

There are more than 1,000 WAAS approaches in use and we expect that number to grow by about 600 each year moving forward. In coupling the autopilot with LPV approaches, we offer PC-12 pilots the ability to fly precision approaches which will open up even more airfields for their use. This capability is available on other platforms as well.

In mid-December, Cessna will initiate formal flight testing for the plat panel display system upgrade. We expect they will receive an [SPC] in the first half of calendar year 2009. We continue to receive orders for Pilatus PC-12 retrofit applications from both general aviation and Homeland Security.

We are in a business period where operators transition their spending from new aircraft procurement to a focus on retrofitting existing aircraft. We believe this is good for the Company. Backlog, system enhancements and broadened aircraft platforms using IS&S products support our expectations of increasing revenues and profits in the current fiscal year.

I would like now to turn the call back to Geoff. Thank you.

Thanks, Roman. In a few minutes, we will start a Q&A session that will run about 35 to 45 minutes at which time you can present your individual questions. I would like to summarize on a couple of things.

We have instituted two new developments, both we expect to be covered by patents. A new head-up display system will be initiated this year as well as a patented approach to a proprietary runway intrusion program, both of which are critical safety features for all aircraft and it will have applicability to all of our present aircraft. These, coupled with the substantial developments we have made and the breadth of our product offering especially with the new Vantage system, I believe positions us for a significant long-term growth as we long expected.

Again, we are fortunate that our mission and our fundamental core strategy for the business has centered on retrofit programs which seem to be perfect for today's environment. I would like to now turn it over to the Q&A session. Go ahead, please. First question?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Steve Denault from Northland Securities.

Good morning, everyone. The first question is the -- when you back out some of the one-time items in the quarter, the product gross margins were 38%, I believe -- almost 39%. But then, John, you made reference to some inefficiencies in terms of indirect costs associated with your OEM contract. What would be a true pro forma product gross margin in the quarter, if you could provide that direction?

There were, at year end we took a hard look at the inventory and looked at obsolescence across the board. What we would anticipate for the first quarter would be into the mid-40s, on the low end for product margins net of the one-time events that occurred in this fourth quarter.

Okay, and then it sounds like R&D and SG&A for the first quarter, you made reference to $1.9 million on R&D and SG&A of about $2.6 million. Is that a normalized number going forward? Is it possible that it goes lower into the second quarter?

Couple points there, Steve. I want to be careful, that is total R&D, meaning both funded, and internally and externally funded, and again in splitting that out, probably about $1 million to $1.2 million is what we would anticipate as internally funded for Q1.

Beyond that, we want to be very careful with the whole environment in going out and speaking in any kind of granular detail about run rates in Q2 and forward because we intend to adjust and adapt to the environment as best we can to hit the profit targets that Geoff laid out earlier and the sales targets he laid out earlier. I'm trying to avoid going beyond Q1 in any way, shape or form here at this point given the environment.

Okay, but when you reference Q1, internally funded of $1 million to $1.2 million that's the R&D line item with the balance of the $1.9 million you talked about being up in engineering -- modification development?

We only get confused in engineering when we talk about internally funded. We don't sell engineering as a commodity. We do accept and try to get some of our customers' participation in the product. To differentiate, the engineering is on a common product. It is identical engineering. We are just getting some funding externally for the funding. There is no differentiation between the two engineering.

The accounting forces us to break it and Geoff's point is it is $1.8 million to $2 million in total spend for research and development is what we are spending. The accounting, Steve, I can get with you separate on. But that is the spend.

Because of the nature of our product, we have customers who want modifications so that -- in some case symbology and in some case interface characteristics and they contribute to some of those modifications and changes.

But they don't -- we don't provide unique and separate engineering product or services to them out of the Company. They are all directly related to product.

Right, okay. So said another way you expect to get reimbursement to the tune of $600,000 or $700,000?

Yes, it was a smart idea to get our customers to help us fund the necessary modifications that they would require, and it allows us to keep a significantly larger staff of engineering than would normally be supported by the Company's revenues.

Right, absolutely. How should we think about air data in fiscal '09 in terms of similar to levels we recognized in fiscal '08?

Again, we are staying to Q1, Steve. I would say it would be very much a parallel sequential universe here, $1.8 million to $1.9 million, I believe, is what we would anticipate for Q1.

The only comment on air data, since the lawsuit has been resolved we no longer have to compete with our own technology and we are pleased that that's resolved and it is now starting to open up additional businesses that we wanted to -- additional businesses in air data. So it is unclear.

To be blunt with you, looking forward and projecting a book and build at this point is difficult because we still don't know what is happening to the world economy and how it may indirectly or directly impact us. We are being, I guess, cautious and providing only a look at this coming quarter.

Sure. That's fair. Thank you.

Thank you.

Your next question comes from the line of Alex -- from David Campbell from Thompson, Davis and Company.

Good morning, David.

John, do you have an EPS number for the fourth quarter excluding the special items?

Yes, David, I believe if you go to table 3 there is a normalized calculation there and it comes to a loss of $0.13 per that table.

Okay . The backlog has gone down since June from 71 to 57 as of the end of September. The revenues weren't down that much. What is out of the backlog that was in there in June?

The factors, the Eclipse any and all Eclipse that we had in our backlog is removed and basically the sales that occurred in the quarter reduced the backlog somewhat, David.

Right. Of course, you said the 10-K has been filed so we can check that for how the cash went down from --

Actually --

Most of these charges are non-cash. I was surprised the cash went down that much.

Yes, David, we will be filing the 10-K, the early part of December. That is still a work in progress. I mentioned as part of the forward-looking statements to refer to the 10-K that is on file currently, which is last year's. We are working to finish that up now. And, yes, the cash flow statement will be in there. If you like separately I can walk you through the cash flow as soon as we complete that, what the changes in cash were for the quarter.

I was surprised to see the cash go down since a lot of these charges are non-cash.

Again, inventory, we are working to basically bring the inventory down and turn our inventory more effectively, drive the accounts receivable more rapidly. To your point, I will go through the cash with you separately.

John, I think it is notable that the inventory has climbed to record levels and we have to get that down. Remember, including the large VLJ inventory that was obsolete or unusable, the levels had grown over $13 million. That, in part, consumed a fair amount of cash. The differences between the two cash numbers aren't as significant --

Not as significant --

As they may seem. I don't think there is a lot of significance in there, but we are happy to provide you that data when we get the detail on it.

We are finishing that up, David, and I will come back around and work through that with you.

Okay. How much of this inventory do you think will go down in the first quarter or is it a longer term project?

I think it is going to be a full year project. You can imagine I'm inspiring the guys to work the problem and try to get it under -- we think we can get it down to less than half of what it was at the peak and still sustain a very large business. If you look at our historical data, that would suggest that we can do that.

Right.

There has been significant changes in the department since that inventory grew to that level.

Right, right, right. I see you bought stock back, you mentioned 166,000 shares in the first quarter.

Yes, that's $5.95 per share average.

Right. Is that going to continue or is that a special program? What is the idea here?

Well, as I had mentioned before on one of the calls, there is a committee of the board of directors that regularly reviews the position of the Company as well as the equity markets and I look to that committee and to Geoff for guidance as to whether or not we will be in the market actively. It is a work in progress as we go.

But there hasn't been any further purchases since the September quarter?

No, but we distributed $17 million so that was probably focused our attention a little bit.

Right. I understand that. Okay. In terms of new programs, it sounds like a lot of them will be in private aircraft. Is that correct?

No, a lot of them are going to be in the same markets that we define. Military, commercial air transport and general aviation. I think there will be a significant number in both military and commercial air transport. We have really almost an ideal segmentation of our backlog and our business.

We have, as I have always said, you focus and struggle to get a third, a third and a third and once in a while you actually get there. But we are happy that we are seeing strong demand and we have an excellent backlog in the commercial air transport area.

The military backlog is growing and we see further significant growth in that area and general aviation is the -- has a strong backlog and we expect that to grow as well. It isn't any specific area and happily that makes it a little less economy sensitive.

Right. Thank you very much.

Thank you.

Your next question comes from the line of Alex Hamilton from Jesup & Lamont.

Good morning, everyone. First question for John in terms of -- this is just a modeling question, so I apologize -- the tax rate in the first quarter, are we still burning through NOLs or should there be a different expectation?

Different expectation, Alex, since we spoke last with the trade secret proceeds, the settlement of the trade secret in Q4, that $17 million did pretty much utilize or use up the NOLs that were coming over and I would assume a 34% to 35% tax rate in Q1.

Great. That helps. And, I guess lastly, I wanted to clarify or have you clarify if you could, is the Eclipse completely written off or is there still some liability associated with it?

Geoff, Roman, you want --

We have -- Alex, we have no expectations from the suspended situation we have with that VLJ OEM.

We wouldn't have any expectations until it is clear, we took a conservative and prudent approach especially in the existing economic conditions of saying, okay, when we have a clear understanding of what goes forward, we will be able to re-establish what we believe are our --

Great. I would agree. That was a great move. Just a last, kind of more of a macro question.

You are talking about pursuing some opportunities with the commercial airlines and I guess some of the general aviation airlines. Can you talk about what their appetite has been as of late or has it changed, has it improved since oil has come down? Are you basically keeping your heads down and pursuing those opportunities?

Remember, what we do is retrofit and think about probably the hottest sale item right now in the commercial air transport industry is winglets which are all being retrofitted. A huge amount of winglets being done. Some of the things that our air transport package does is take over 200 pounds out of the airplane. I remind you that one airline in specifically no longer provides any in-flight movies because they took out all of the equipment just to remove a few hundred pounds.

There is a real demand for our equipment. There is a significant restructuring of the fleets from older aircraft like old 737s and old 727s which are late 1950s and early 1960s aircraft, especially in [prater] applications and replacing it with the more, far more fuel efficient 757. And by the way, what we do is we build retrofit equipment that saves 200 pounds in the 757.

What we are seeing is application for our -- if anything, an increasing demand for our equipment in that area because it pays for itself. It is a strong business case for the equipment.

Great. Thank you very much.

Thanks, Alex.

Your next question comes from the line of Tyler Hojo from Sidoti and Company.

Good morning, guys. Just going back to the backlog question before, I guess I'm a little bit surprised -- maybe my understanding on this is a little incorrect -- I thought the Eclipse business was all kind of book and ship. I thought how you guys previously characterized the backlog was basically it didn't really hit the actual backlog numbers.

Tyler, we can't comment on Eclipse. We will comment on backlog, though.

Fine.

With the -- as we have spoken about in the past, we have not beyond firm, fixed scheduled shipments and deliveries included items in backlog. With respect to one of our OEM customers, we did have both product for a short window as well as some NRE in the backlog and we took that out and your point is exactly on point. It was nothing beyond what was scheduled for, I believe, it is an eight-week forward-looking period.

However, there was an NRE agreement which, again, had to be also de-booked associated with that large OEM customer. In reconciling the backlog from Q3 to Q4 the sales we make, which were pretty significant, very significant, $10.3 million in the quarter also reduced the backlog a bit. There are a couple moving parts to think about. Your point is right on point and that's exactly how we have been treating the backlog.

In the fourth quarter about 20% odd of the shipments in the fourth quarter were on that OEM program as well. It would have reduced the backlog through that. I think your understanding is correct. I don't know how you work the numbers. You may not have included the NRE and a few other things.

A couple of the commercial air transport customers it is a big part of our quarter and it's going to be a big part of our foreseeable future here. They are beginning to come out of backlog and translate into real sales and cash flow.

Okay. That makes sense. I guess a follow-on to that, what is your expectation for the backlog? I mean, going forward over the next four quarters, do you expect to see that backlog trend down or do you see some pretty decent bookings opportunities going forward that could potentially drive that higher?

Well, our shipment rates are up, as you well know, over 30%. We have lost a revenue source that provided over $12 million last year and extracting $12 million out of last year's revenue our year-over-year growth is 100%. So what we would expect is, having said all of that, we still have well over a year of released backlog which in these times is pretty good. In fact, in any time is very good.

How it will grow -- I can't imagine having -- we don't expect to have two or three years worth of backlog. I don't think anybody in this business community, especially now, where most of us are happy if we have three months and in this case we are very, very fortunate to have a year and a half's worth of backlog released. So we are not -- to be blunt with you, we are not sure how it will go.

We think -- we would be happy if we can maintain a year or a year and a half's worth of released backlog going forward and that automatically presumes that next year as we further grow, we would expect the backlog to necessarily grow with it.

Sure. But I guess you are saying that of the $57.3 million backlog today, kind of stretches you out for a year and a half? Did I catch that right?

Certainly, if you take last year's revenues and you look at it, it is almost two years. It is somewhere between two years and a year in that area. I'm trying to avoid being very specific about -- we are not giving full accurate forecast but that's pretty close. It is about a year and a quarter or so, in that general range.

And please understand that many of our contracts, especially when you do 200 aircraft, can be in some cases a single, very large contract. So you don't -- when we watch the backlog, unlike book and ship or consumer products where you are getting an order that gets shipped out within a month or two so that you have this constant trickle of orders of supplementing your backlog as you ship it, the backlog will go down and when you get a large order, it will jump back up. There will be a fairly course granularity potential in that backlog.

Okay, I understand that. Thanks.

It, obviously, varies, but that's an approximation.

In summary, from my vantage point, operational vantage point, we feel very good that we have tremendous coverage against our internal forecasts. We feel good about bookings opportunities. We are not prepared to discuss what those are at this point but we are very optimistic about what will happen for the Company.

We have had some very strong years where we went into the beginning of the year with about 15% to 20% coverage. That tends to be uncomfortable.

We are very pleased with what we have, but most importantly, it allows us to invest in the future and show some really strategic perspectives in our decision making. It is an enviable situation to be in and we are focusing on disciplines within the business to make sure it is operating efficiently and effectively and aggressively and actively pursuing both product development and new business.

It is a nice place to be right now.

Keep in mind, we will make money and we will be cash positive and we will grow. I think that's three points that we are not -- we are not over emphasizing but we think it is very important to the business, to the shareholders.

You bet.

One quick follow-on, since you have given guidance for the first quarter of fiscal '09, how much coverage do you think you have in terms of the revenue guidance that you provided within the backlog that you have there?

Tyler, I'll just say that we are extremely comfortable. We won't get into percentages specifically. We are extremely comfortable with the first quarter, and I'll just leave it at that.

We wouldn't be giving a number if we weren't very comfortable. One of the reasons we were able to give you a number is recognize we are halfway through the quarter. We have some decent visibility. Traditionally in the other quarters, you are only three weeks into the quarter when we are giving our quarterly conference call.

This is clearly year end and we are halfway into the quarter, and if we don't know what we are going to ship, we have a bigger problem than any of us want.

Great. Thanks.

Thank you very much, Tyler.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Chad Trautvetter from Aviation International News.

Good morning, guys. How are you?

Good morning.

I want to get some clarification on the suspension of production for Eclipse. Is this a termination of the contract, or is the contract still in play?

Chad, as we mentioned, we are not able to comment on Eclipse. There is no comment from us to that question. Anything dealing with Eclipse, we recommend you speak directly with the company.

We've had no terminations of any significant contract broadly. So we'll leave it at that. It would be inappropriate and by contractual obligation we are not able to discuss these.

Okay. Also in regards to the Cessna R&D retrofit program you are talking about, is this for the piston, turboprop or jet line?

Jet.

Jet. This was for the Citation 5 and 6 series of aircraft.

2,500 aircraft opportunity, Cessna plans on doing it in their 34 worldwide centers. We are ready to go. We are waiting for an airplane out of Cessna. It is not being held up by us, and clearly they are not interested in holding it up. They see it as an excellent opportunity to serve their customers and provide them immediate performance enhancement and keep them as a customer for them next step to buy a new aircraft. It is good for them and it is obviously good for the customer to have this significant upgrade ability.

As you are aware, it is unique to have the kind of open architecture that we have in that we can -- we operate with a three or four or five different radio, transponder, other system autopilot manufacturers, and that capability goes back to the old days of the aerospace industry when people used to be asked what kind of radios and what kind of radar do they want in their airplanes and the aircraft manufacturers would do that. That stops about 20 years ago.

But now in a retrofit format, you can literally put and choose when you retrofit, you can put remotely two radios that [tune] right on the display panels and obviate the need for things like radio management units because that is integrated into the system. It is quite spectacular.

When do you expect to do the first installation and when do you expect the [STC] for that?

As you know, Cessna has to make the plane available for us, at the beginning of next month and they start doing the installation in that aircraft and they expect an STC sometime next year, hopefully, the earlier the better. We are ready to go because it is a derivative product. This is a product that we originally developed the system called the Vantage system.

It wasn't called Vantage until someone in-house got creative. It was a system that would have some of the features that we invested heavily into developing for some OEM programs and now we have used some of the best of those features into this new retrofit package.

Most significantly it will be the same display part number for things like Cessnas and Learjets and Hawkers and Falcons. Same part number which means that the FBOs will be able to inventory spares and support a broad range of aircraft, probably 20 or 30 different kinds of aircraft.

That will be good. Thank you guys.

Your final question comes from the line of Michael Ciarmoli from Boenning & Scattergood.

Thanks for taking my call. Just, again, on the backlog. Did you actually define how much of that is shippable in the next 12 months? I know you have the FedEx and American in there which are longer term in nature. Do you have a number that is a 12-month out of the $57 million?

No, what we said was we had 80% coverage for the year. That is -- of backlog we have 80% of our expected shipments for this coming year are covered by backlog.

So -- earlier you said you are going to grow revenues 33% in '08. So you have $24 million of that is 12-month backlog?

No, that's not correct. It is more than that. I said that we expect to grow 33% over last year which is --

So you --

We have 80% of that covered in backlog.

So you got $32 million in backlog?

I also said we had more in covered backlog than we shipped last year.

Michael, it is not that easy to make those calculations. Remember, we are halfway through this quarter and everything.

Right. Do you expect that backlog number to go down below $50 million next quarter?

I'm not going to comment on that.

Earlier, I think, someone had asked that exact question.

When we know what the price of oil is, we will let you know. The only thing we absolutely know is we were able to settle our lawsuit without a protracted litigation and happily that worked out well for us.

Okay.

That's one thing that we got under our belt and it is a very optimistic view.

Now, on the Cessna opportunity, you guys sound pretty excited about that. Are there any mandatory commitments yet from Cessna? Obviously, they are struggling, they have announced layoffs. They are going to start their holiday shutdown earlier than usual in December.

Is there any concern about that program being delayed or the amount of uptake being slower than anticipated given that obviously most of their customers will be feeling an economic pinch and might not be aggressively in the market to upgrade or retrofit their aircraft?

Au contraire. The people they are laying off don't retrofit anything. The people they lay off are building new aircraft. What it means specifically is that people who are building new aircraft are finding the demand for aircraft may be slowing, which is not unusual.

It is historically relevant that when you don't buy new aircraft, you probably want to fix the aircraft that you are flying and that's why historically in this business for over 20 years has done -- been so successful in that it has focused on retrofits. When business is slow, you end up doing retrofits.

I think if anything, Cessna would probably be -- I can't speak for them -- probably would be more than interested in putting as much attention on this retrofit program as possible.

Okay. That's fair enough, and then just last question on American and FedEx, do you have any numbers in terms of how many planes you have installed the product on and how many planes are remaining?

There is a lot of planes remaining, probably 80% or 90% of the fleet and a fair number have been installed. They have taken delivery on a fair number of kits to stage. I think American will try to put five lines in place and do a fair number of aircraft so -- we don't have any specific numbers that we are prepared to release because we don't know from day-to-day.

Fair enough. Thanks, guys.

There is a significant number still to be delivered.

All right. Thank you.

Thanks.

We do have a follow-up question from the line of David Campbell with Thompson, Davis and Company.

Back to the Cessna situation, it sounds like because the STC has not been awarded yet and the program is just getting under way, you don't have that in your backlogs or in your revenue plan for '09, but could give you some upside in your revenue plan. Is that the way to look at it?

David, we have Cessna in our backlog. We have a contract with them. We also expect to be delivering product as soon as they receive the STC. That's accounted for in our FY 2009 outlook.

It is obviously toward the end of the year, not in the beginning of the year.

Okay. That answers my question.

Thank you very much.

There are no further questions at this time. I would like to turn the call back over to Mr. Hedrick for closing remarks.

Mr. [Hendrick] isn't available, but Mr. Hedrick is and I'm happy to respond. Gentlemen, I appreciate your attending the meeting today. I hope we were able to provide a clearer picture on the Company and its business and where we are going.

We have a very strong and an optimistic future and I'm pleased to help to contribute to that. I'm also pleased to have a really competent team of people to work the problem with me. We appreciate your interest and we are going to go back to work. So thank you and good-bye.

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