Innovative Solutions and Support Inc (ISSC) 2009 Q4 法說會逐字稿

Good day, and welcome to the Innovative Solutions and Support fourth quarter 2009 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Geoffrey Hedrick. Please go ahead, sir.

Good morning. This is Geoff Hedrick, Chairman and CEO of Innovative Solutions and Support. I would like to welcome you this morning to our conference call to discuss the fourth quarter and fiscal year-end 2009 results, current business outlooks and conditions. Joining me today at our Exton headquarters are Roman Ptakowski, our President, and John Long, our CFO.

Before I begin, I'd like to ask John to read or 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 and 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 will be filed with the SEC, we anticipate this Friday.

It's now my pleasure to turn the call over to Mr. Hedrick, Chairman and CEO.

The fourth quarter was a fitting conclusion to a good year in which we accomplished all of our objectives that we set forth a year ago, to grow revenues, restore profitability and generate positive cash flow. We grew revenue. We entered 2009 with the loss of our largest customer, Eclipse, and in the second half, customer scheduling changes delaying shipments resulted in a $15 million loss of planned 2009 revenue.

In spite of these setbacks, we grew the top line by 20%. We grew revenue and we made major progress diversifying our sources of business. We made significant achievements, signing new contracts and developing new products, which will serve as a foundation for our future growth.

We had four profitable quarters. Profitability improved to $5 million for fiscal 2009 compared to a loss of nearly $8 million in the prior year. Both research and development expenses, and selling, general and administrative expenses were consistent with our historical percentage of revenue. We have brought these costs under control without losing any momentum in our new product development investment.

We generated cash. We translated our profit into cash. We understand it is important not only to be profitable, but to match that profitability with cash. This provides us with the capability to make the investments that will carry us forward. We were able to accomplish this during very difficult economic conditions, especially in the aviation market.

Our balance sheet is extremely strong. In the fourth quarter, we repaid the balance of our IDA bond, and still have over $35 million in cash. Stockholders' equity grew by more than 10%.

The Cessna program is well under way with the STC awarded some months ago. The first certified aircraft is touring North America, demonstrating the cockpit upgrade to Citation owners. Cessna is currently offering the AdViz flat panel display upgrade through their nine Cessna-owned Citation service centers. Cessna's plan to roll out the flat panel display retrofit program to the entire network of 35 centers worldwide, which will provide us a global market opportunity estimated to be over 4,000 aircraft.

We recently announced another significant win in our business and general aviation market. The agreement with Dassault to develop a cockpit upgrade for their Falcon 2000 and 2000EX aircraft. Both Cessna and Dassault programs utilize our innovative Vantage Cockpit IP technology, which provides a common platform that is easily adapted to a wide variety of applications. This utilizes an open architecture ideal for both retrofit and new aircraft OEM programs.

We have made significant progress penetrating the military market, where budgets remain somewhat more robust than the commercial air transport and business aviation markets. Most encouraging, we have a growing number of opportunities on which we are working. Currently there are over $110 million in total proposals outstanding.

So despite very challenging market conditions, our strategy to develop products that can be used in these three separate end markets, commercial air transport, military and business and general aviation, has enabled us to shift resources to capitalize on opportunities across a very diversified market. The market for GA and commercial air transport continues to be depressed. The impact of the economy on these two business segments has been more severe than anticipated.

First quarter performance will be affected by these elements. We are still anticipating a possible release of orders, even late in this quarter. Nevertheless, the quarter will be weak.

We do have cause for cautious optimism in the second half of fiscal 2010. The programs that have been deferred have reschedules that will allow shipments in the second half. The restart of the new Eclipse Aerospace is an opportunity to provide critical functionality to the aircraft to enhance the performance of the aircraft, such as XM satellite weather and electronic charts. Additionally, further enhancements to functionality will become available in the second quarter of fiscal 2010.

At Cessna, we will be providing additional functionality to increase the value and appeal of the AdViz flat panel upgrade for the Citation owner/operator. We plan to start delivering product for Dassault Falcon Jet in the second half. This product was very well received at NBAA and afterwards.

These programs and others provide encouragement and momentum heading into 2010. The inherent cost performance advantage of our systems gives us a strong competitive advantage. These factors lead us to believe that we will, again, achieve our objectives of profitability, cash generation and revenue growth for fiscal 2010.

I would now like to turn it over to John Long to go through the results for the quarter and the year in more detail.

Thanks, Geoff. Thank you for joining us on our call this morning. Revenues in the fourth quarter were $7.9 million, and this is marginally above both the third quarter this year as well as the fourth quarter a year ago, excluding about $2.2 million of Eclipse revenue from that prior year quarter. Flat panel display systems were approximately $4.9 million or 63% of the quarter's total revenue, while air data product shipments in the quarter were about $3 million.

On a GAAP basis, gross margins in the fourth quarter were 52.1%. Margins were impacted by a product upgrade reserve, totaling approximately $338,000. This reserve impacted our gross margin by about 4.2%. And we have been and will continue to drive efficiency and productivity improvements in margin.

Total operating expenses for the quarter were $3.3 million, and included in this total is about $200,000 of bad debt expense related to a funded shared development effort. The fourth quarter total research and development expense, both shared development efforts and internally funded, were $1.5 million or 19.5% of sales.

Internally funded expense was $1.1 million or about 14% of sales, marginally less than our quarterly run rate of about 1.3 to 1.4 in the year, but right in line with historical levels. SG&A expenses in the quarter were $2.2 million, consistent with spending over the balance of the year, prior quarters.

Pre-tax income for the quarter was about $851,000. And over the course of this year, we did recognize minimal tax expense due to the availability of prior bad debt reserves primarily that became tax deductible in fiscal 2009. Consequently for the fourth quarter, we recorded tax expense of about $266,000 to true up our tax expense for the year as required under FAS 109.

The Company does continue to maintain the previously established full valuation allowance of $4,561,000, effectively reducing the net book value of our deferred tax assets to zero. We'll continue to evaluate the need for that allowance in future quarters, and at some point anticipate reversing that reserve. Beginning with the first quarter of 2010, we expect to accrue taxes at a rate of about 34% from a GAAP perspective.

The bottom line, we reported fourth quarter 2009 net income of $585,000 or $0.03 per fully diluted share. Product upgrade and bad debt reserves previously mentioned amounted to about $538,000 or about $0.04 per diluted share.

Our cash flow and financial position remain strong. Cash flow from operating activities in the fourth quarter was about $683,000. And at September 30, 2009, we had about $35.6 million in cash. And as previously disclosed and mentioned by Geoff, in the fourth quarter we did repay our only outstanding long-term debt $4.3 million industrial revenue bond. We did not repurchase any shares of common stock under the share repurchase program during the fourth quarter.

And I would like to now provide commentary regarding fiscal 2010. The current economic uncertainties continue to impact the entire aerospace industry. This makes it difficult to forecast, with certainty, orders and timing of sales. We have budgeted marginal growth for fiscal year 2010. And this growth, as Geoff mentioned, is heavily weighted towards the second half of fiscal 2010, at which time we anticipate deliveries to our commercial air transport customer to resume, and revenues from new business in the military market and in the Cessna and Falcon programs will start.

I would like to now turn the call over to Roman for further comments.

Okay. Thank you, John. Recapping fiscal year 2009, we were dealt some challenges, both at the start and during the year. We had to offset the loss of revenues from the bankruptcy of our largest customer in fiscal year 2008. And then, again, the impact of revenue deferral from the rescheduling of aircraft upgrades in the second half by another large customer. We not only overcame these hurdles, we grew by 20%.

As we have reported before, the Company's business development efforts are focused on the commercial air transport, military and business and general aviation segments, to allow us to better capitalize on the unique opportunities in each of these markets. Our commercial air transport efforts continue to be centered on delivery of our flat panel display systems to the major airlines and package carriers. We expect to, again, begin shipping product to existing customers in the second half, as they complete aircraft retrofits and need to replenish their inventory.

We believe commercial air transport to be a very large market opportunity for IS&S, and so we continue to enhance our product through the introduction of additional capabilities and functionality, such as RNP, required navigation performance, and ADSB, automatic dependant surveillance broadcast. These allow pilots and air traffic controllers to see and control aircraft with more precision and over a far larger percentage of the earth's surface. As commercial air transport operators implement these functions, it is expected to generate additional business for the Company.

We have growing demand in the military market. Presently we have approximately $51 million of outstanding proposals pending with various military and defense agencies. As one example of opportunities in the military segment, we recently announced that our engine instrument display system has been selected by BAE systems for integration and installation on the United States Navy's C-130T fleet. Initial integration and installation is scheduled to begin in early 2010. This will be followed by a series of flight tests and subsequent installation of the engine instrument display system on the balance of the aircraft.

The same system has been installed on various C-130 aircraft operated by international customers in New Zealand, Canada, the Netherlands and Pakistan. In 2007, IS&S's engine instrument display system was installed by BAE systems on the United States coast guard HC-130H aircraft. This latter program is now being expanded to retrofit the entire cockpit, and not just the engine instrumentation.

Following two years of development and extensive testing, Cessna has been granted the STC for the IS&S developed AdViz flat panel display system. The AdViz system is certified for the Cessna Citation 500, 501, 550, S550 and 560, and is available in 2 or 3 10.4-inch display unit architectures. These provide enhanced situational awareness, increased functionality, reduced crew workload and weight savings.

Options include e-charts, XM satellite weather, and the display of enhanced vision systems, and WAAS, wide area augmentation system displays. The AdViz system is initially available for purchase through the nine Cessna-owned Citation service centers with availability through the entire worldwide Cessna authorized network rolling out through the year.

Cessna's service center's sales personnel have been trained to market this program and are key to start installation. They are promoting the upgrade with visits by the FCC to demonstration aircraft to their service centers, and are advertising the program on their own websites and other venues.

AdViz is based on the Company's Vantage Cockpit IP open architecture flat panel display system. The Vantage is our fully integrated common cockpit display created specifically for most business aircraft. Its competitive cost is even more advantageous in this difficult economic climate.

The Vantage platform has recently been selected by Dassault as the exclusive flat panel display system they will offer as part of an upgrade program for the Falcon 2000 and 2000EX aircraft. These are premium prestige corporate aircraft selling at over $20 million. This upgrade will benefit Falcon 2000 and Falcon 2000EX (inaudible) operators by giving them a new suite of features that substantially increase functionality and situational awareness.

These include Class III e-charts and satellite weather. Fuel usage savings are achieved through a 45-pound weight reduction and lower power consumption. Original aircraft wiring is retained as the display's interface with the existing control panel, resulting in a minimum of downtime for the retrofit.

We continue to grow sales for our Pilatus PC-12 program by now offering WAAS LPV approaches and RVSM certification. These benefit the operator by respectively further ensuring on-time arrivals, even at secondary airports, and the use of optimal in transit air space. We are in late stage discussions with Eclipse Aerospace about providing additional functionality, such as XM satellite weather and e-charts for the E500 very light jet.

We're seeing increasing leverage from our research and development investment, where we are now able to offer a family of products. As both Geoff and John mentioned, we're also improving the efficiency of our investment, with the cost and the time to design and test both software and hardware having been significantly reduced. Continued productivity, and research and development, is one of the keys to our success, as our growth is based on our ability to generate new products.

Backlog at the end of the fourth quarter was $34 million. Not significantly different from the level we have maintained throughout the year. There are $51 million of military and $62 million of general aviation and commercial air transport proposals outstanding.

So in spite of the difficult overall economic climate, our outlook is for improving performance throughout the year, as deferred shipments start up again, as our business and general aviation programs accelerate, and our offerings to the Government and military are increasingly accepted.

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

Thank you, Roman. Just a few brief concluding remarks before we take questions. As Roman commented, we have enhanced our products. With the certification of our new flat panel systems, we have now focused our engineering into additional functional and, therefore, value of their retrofits. Earlier, the market was satisfied with the sheer attractiveness of colorful display systems to replace standard steam gauges, and provide improvement in reliability and situational awareness.

This past year, we have focused much of our technical resource on the development of functional features such as integrated radio management with remote tuning of both OEM equipment and existing radios, electronic charts and flight (inaudible), development of an integrated flight management system that will allow group planning, vertical, lateral guidance and performance management, and will help speed operations with reduced fuel burns.

Synthetic vision systems to provide a pilot with a realistic, fully animated view of terrain in the front of the aircraft. This feature will enhance both situational awareness and be integrated with FLIR or forward-looking infrared radar imaging.

You heard this morning results of the fourth quarter and the year that were consistent with our goals and objectives. Revenues, margins, cash flow for the year, were all up, despite the continual deterioration of our markets throughout the year. We delivered another quarter of profits and positive cash flow exiting the year.

More importantly, with our Cessna program, increasing penetration of the military markets, and new agreements with Dassault, we have established a foundation for additional growth in 2010.

You have consistently seen in 2009, both margins and expense levels have been returned to historic levels. Those levels that have enabled IS&S to generate attractive returns for the shareholders. And we have a solid balance sheet with no debt. We expect to maintain these trends in the upcoming years, and we believe that we will deliver additional growth and increased profitability and cash flow.

This is going to be a challenge in a very difficult market. But I believe the Company and its people are up to that challenge.

Customer requested adjustments to delivery schedule and production ramps on the new programs may cause the quarters to be lumpy. But over the long-term, we are confident we can build on our success of this past year.

And with that, we would like to take questions.

Thank you very much, sir. (Operator Instructions). And we'll go first to Jim Foung with Gabelli and Company.

Jim, good morning.

Good morning, Geoff. I guess I want to ask you regarding the first half of 2010 being challenging. When you compare that to the fourth quarter that just passed, what is it that is going to be different in the fourth quarter -- what is different in the first quarter that happened in the fourth quarter that you see continued deterioration? I mean, it seems like in the fourth quarter you had very little Cessna business and the Dassault business is not there, and then you had that deferral commercial aircraft business. It seems to me the first quarter should be marginally better than the fourth quarter.

It really is a lead time on orders. Essentially what happens is that the economy put a lot of pressure on our customers, and they were reluctant to place orders during the year. So we had orders in place that we executed throughout the year.

There is -- the impact of the downturn had a lag effect, and it sort of carried into the first half of next year where we see opportunities coming very quickly. But they're all delayed by about four to six months. And so we see that sort of gap in the middle, before the real business from Cessna picks up and some of the military programs, as well as our commercial air transport customer.

So it's a timing issue, once again. And it's impacting certainly the first quarter and potentially -- and will impact the first half to some degree. Which means, as we suggested, that the back end of fiscal 2010 is heavily weighted.

I see. Okay. That makes a lot of sense. Okay.

Jim, just as a note , it's been really hard to forecast anything, as I'm sure you've heard many times. But what we try to do is we -- as the Marines will say, adapt, and we've been able to do that. And quite frankly, pull the fourth quarter out of the fire in the fourth quarter, and we did that. And we keep working on that on each of the quarters. The good news is the back end of 2010, we see some real business starting to stack up and backlog and shippable backlog in the back end of the year. So that's the big

I see all of those programs that you've kind of gotten in late 2009 coming into 2010. So that's more of a second half impact.

Right. Exactly.

Is there any pent up demand for the Cessna -- from Cessna owners for your new product? I am just trying to understand the ramp up of the flat-panel display for the Cessna aircraft.

We think so. And especially as we add additional features. One of the big improvements, which we expect this year, goes to my comment earlier about, until recently we provided a very attractive flat panel display system. But to get real value and justify investment, which becomes more important today than ever because of the general economy, a number of functional features that actually bring value to the, value besides simple attractiveness, are being incorporated. And that, I think, is really going to spur the demand in, especially in the Cessna program. And, frankly, in the Dassault.

And generally in our AdViz system. Just to let you know, we're talking to people now about a number of other different aircraft direct application of our AdViz system. It was designed to do exactly what it's doing, and that is easy application into a broad number of different aircraft systems.

Okay. And then, lastly, on the American Airline, I guess, installation of the flat panel screens, could you just give us a progress on how that is moving along.

Jim, this is Roman. Yes, they're installing. They have a number of installation lines going now, so they're doing multiple aircraft each month. To my best knowledge right now they already have eight in service and full service inducted.

Please bear in mind that, in addition to doing a flat panel display, they're doing other upgrades to the aircraft beyond what we're doing. Like, for instance, those aircraft that don't have winglet's are having winglets added, and they're making other enhancements, so we're a portion of a much larger American Airlines upgrade. But the product's in service, it's flying, they've been training their pilots through the simulators . We have been told they have had over 500 people trained on the system, so they're fully committed. And as they deplete what they already have in, we expect releases in the second half of the

So they're coming in line with your expectations then?

Right. Just sower than we had thought. And I think certainly slower than they had anticipated, because they see other benefits that they were not able to obtain until they get these things into service.

Okay. Terrific. Great quarter, guys.

Thank you for the comments, Jim.

Thank you very much, Jim.

And our next question will come from Michael Ciarmoli with Boenning & Scattergood.

Hi, guys, good morning. Thanks for taking my questions.

Thank you.

Good morning, Mike.

John, I guess, can you help us out maybe, and I know you might not want to state too much, just about the revenue ramp for 2010. So it's going to be back-end loaded. Can you give us a sense of where we should be thinking for full-year revenues. Are we thinking north of 10% growth, below that, or is it just too lumpy to tell where I guess the timing of some orders can really impact that back half of the year to kind of put you over the hump and really account for some good growth.

Yes. Mike, let me do my best here. Again, I think you've heard clearly in the commentary that it is a difficult environment, we're trying our best to see clear, and we do want to stick to an annual perspective or annual type of guidance here.

The base in our mind is fiscal 2009 we had a good year, we want to build on that base and continue to grow. Clearly, as Geoff said, the first quarter, which we're good way through here, two-thirds through, is going to be challenged. And Q2 is again, our belief at this point is we're going to begin to see some uptake there. I can't give you a specific percentage at this point relative to the current year, but I can tell you we're very desirous of growing, as Geoff said. That's our objective. 2009 is our base.

And I can tell you, in January, which is not that far away, we'll be speaking to you again. And my belief will be that we'll have more clarity at that point. So, again, Q1 clearly challenged, Mike. That's about the best I can tell you right now. And, again, we do not want to fall backwards from a total revenue standpoint in 2010 relative to '09.

Michael, just to give you a sense, unfortunately with the way things are going, it's almost a day-to-day kind of situation, as I'm sure you can imagine. So we're going to really endeavor to provide as much visibility on each quarterly result as we move through. So then the next quarter we'll have a much clearer view of the year. And we will address it in as much detail as we possibly can.

Okay.

So you can get a more comprehensive discussion every single quarter.

Okay. And then just on the Cessna program, do you guys have an idea of how you're going to deliver product to the distribution centers? I mean, will you start to see those first nine centers, do they have inventory on hand, or is this going to be more of a direct ship model where the orders come in through the centers and you'll ship product out there?

That's the way the arrangement is on that program with Cessna. We deliver it to Cessna in Wichita. They then distribute our product into the different authorized service centers, along with, if you will, installation kits on their part, which include things like panel modifications, wiring harnesses and so on. So that they take care of the distribution. They see the product into their service centers.

Okay.

What they have been doing to stir the interest, one, there was a nice article in the December, 2009 business commercial aviation trade magazine. The article is called, glass class. And it really features Cessna and the AdViz, and gives us a lot of play as being the people who developed it. And they talk about how they plan to roll that out.

Their demonstration aircraft has been flying -- excuse me, been put on tour to the service centers, and they have users coming to see it and they're creating a lot of interest. And now we will replenish Cessna inventory in Wichita, and they'll take care of distributing it out further.

Okay. And do you anticipate several near term large orders so they have inventory on hand, or is it going to be kind of -- are they going to try and hold enough inventory? I'm trying to get a sense, are you going to be getting some near term revenue just to sort of build out their channel.

Michael, we've already delivered product. We are delivering more product to them in this month, this December. So we're on their schedule. We're supporting it. And they have the seat stock out there, if you will, and they're going through lining up the customers, now that the STC is in hand.

Okay. And then last question I have and I'll get out of the way, you guys have talked about the orders or proposals that are out there north of $100 million for, I guess, the last couple quarters. Any progress there? Are things sliding to the right? Are you converting some of those proposals and kind of seemingly backfilling them, which would indicate that level kind of stays at a constant $100 million. Can you just give us some color around that?

Actually there have been some puts and takes in there. It's coincidental that the numbers are kind of the same. But we do have a number of programs in works. We do expect to get releases and convert these.

So, for instance, we've had successes, as we mentioned, on the US Navy C-130T program. So that has come out of there. On those programs that do close, our hit rate is about 90% in our favor. We have just seen customer deferrals as they're making their budgets last as long as they can in this economic environment. But when they close, we tend to hit. And we're very, anticipating that that kind of level of success continues in the future, both in the general aviation commercial world as well as the military.

Okay. Fair enough. Thanks, guys.

Thanks, Mike.

We take our next question from Ali Motamed with Boston Partners.

Hi, guys. I was wondering if you could talk a little bit about R&D. How you think about it. If we look back at last year, it was an extraordinary high level at $10 million. We've cut it now but it's sort of in line with our historical levels. As you evaluate that spend, what are the criteria and what are we looking at going forward?

As you probably know, we've established a target investment of nominally 12%, and most recently it's been significantly above that. But one of the things we've tried to do is to get our customers to share in some of that development. And that's been very successful. We've had some partial -- not entirely sponsored, but shared sponsored development. And, therefore, our total, John?

It was about 19.5% for the quarter, about 18% for the year.

Which is incredibly high. Our traditional target has been 12%. So we're probably about 50% above target. And we're able to do that in part because of the shared expense with our customer.

Going forward, we would intend to continue that because we think this is an ideal time to invest in the future. Because when the industry recovers, and it will recover, we want to be in a position to deliver.

But most importantly, the thing that we've accomplished this year, and it's evident, is our efficiency in our research and development. Simply spending money isn't the answer. The answer is to get productivity out of it.

And we have literally increased our productivity by almost two to one. I mean, by a whole bunch of merits we have looked at that and saw good development, and we've used metrics and analyzed it. So we're getting enormous improvement in productivity, so that the 18% to 20% of revenues that we're putting in now is getting twice the hit factor that we used to. So we're able to accomplish actually more, significantly more than we did in the past, and with a hell of a lot less investment.

So we're very positive going forward. The model is working. The effectiveness of our engineering department is evident by the accomplishment of our product.

The Dassault program alone within a matter of weeks, we were able to actually take hardware down to the airplane, plug it into the airplane with no modification at all, and have it fully operational. It was unbelievable. And it's that kind of resource that we're further applying to the items that we talked about earlier. And that is going to bring us real value to our product. And that product, therefore, I think is going to be far more attractive to our end customer.

And now as we look at that, though, going forward, I mean, you say you expect growth, just taking this expense level that we're at now with all of the cost cutting and sort of the efficiency that you've generated, we're at a break even of sub $25 million in annual revenue and you expect growth. As we look at that R&D spend and the SG&A line items going into next year, would you expect them to sort of stay on these same levels?

Probably they're going to maintain percentage-wise at the same level. Going forward, as we grow further and we start in a recovery, you'll probably find that as we see real sales growth, top line growth, large top line growth in a more stable market, that percentage of R&D investment, certainly for what we call red money, our investment money, will stabilize closer to 12%. And as much as we can get our customers to help us in the development, the percentage of sales, total investment may stay as high as it is right now, maybe even potentially grow as we get partnership with our customers.

So, I mean, is it fair to say that if we look at the model the way you're presenting it right now, that if revenues come in a little bit higher than this year's, and you hold your growth margin, and I know we even had some charges in there, but if you just hold it on a regular level here, we're looking at maybe almost $20 million in gross profit and $13 million in SG&A next year, which is pretty substantial earnings. Even in this depressed environment. Is there anything that -- besides revenues, obviously, which is the big factor, anything that would affect that?

Right now the focus is totally on the top line.

Yep.

We have the model working. We're going to keep the percentages about where they are. The effort is, we've talked about in the past, has always been essentially total earnings for the corporation. That's what we look at at the bottom line. Whatever it takes to do that, that's what we focus on.

I'll just add, the operating leverage is I think you're picking out a key point. It's enormous. Once we cross that break even and you've mentioned a number, I won't say yes or no on that, but once we cross that line, we did a lot of capacity here and a significant capability of leveraging that operating line forward. And, again, to the extent we do not push it through the SG&A or R&D line, it's clearly going to fall to the bottom. But the real issue is, to Geoff's point, achieving that top. Getting the top.

And so just one last clarification, if we were to take your operating expense spend for the quarter and basically multiply it by four, would that be a reasonable proxy of what you're thinking?

I can't answer that question.

But operating expenses are so much in line with really what you -- you set that basically, right? That's into your discretion.

When I referred to, I believe when Mike Ciarmoli asked the question, 2009 is clearly our base, and we intend to work from that base and grow from that base. And you can imagine we're not desirous of growing expenses unless there's some sort of a commensurate return or positive hits to the operating income line.

I can only refer to you historically. If you look -- once we get a stable economy and we know that we have some real growth, and when we achieve, there's some targets that we have from a technical achievement standpoint.

To be specific, we want to become more of a systems integrator. Assume more of a broader responsibility of delivering to an OEM or any of our customers, a more complete package. So we want to -- that is a target we're working on now. So we are actively working on programs now where we take total system responsibility, all the way into the control of the aircraft itself. That will give us a much broader market to go after.

One of the things that we've done significantly recently is we've virtually doubled our efforts in business development and salesmen, and we will continue to invest even more heavily in the next quarter. We think we have the engineering -- the technical part of our business honed and operating efficiently and very effectively. Now we need to focus on getting the sales department and the business development group stronger and better organized.

We've recently, as you may know, hired a new head of our general aviation group, a Vice President of Business Development in that area, and we continue to expand in the air transport market. So in all areas, we expect to further double our business development guys and bring in business because we now have good certified products. And we continue to get more and more certified products.

And then this last question is sort of a terminology, trying to understand. When we had RVSM there was the mandate that eventually came down. Now, my understanding is that a lot of the stuff we're working for could eventually lead to Government mandates for certain airports. What technical name is that under? Is there a technical?

Next Gen. It's called Next Gen. Nothing unique. There is a lot of Next Gens, as I'm sure you know.

Yes, there is too many for me to search about it.

They refer to it as the Next Gen air traffic control system. Next Gen. And what they're going to attempt to do and what it's involved in, is getting very accurate end route controls, how long departure and arrival schedules to get them through a tightly control and new navigation systems centered around global positioning system. And we are very deeply involved in all aspects of that.

And now, although it may be a little while for a Government mandate, is there any sort of timetable you have or anticipations? I mean, this is probably years, but still.

You see some early adopters already positioning their aircraft to have the capabilities, and we have product that support that for them.

I think you're going to see a demand for it before the mandate.

Right.

To rely on a mandate is usually not a good thing because traditionally those mandates have slipped by a large amount. Now, RVSM actually didn't slip. It was an unusual program which they more or less stayed on schedule. The Next Gen system, as it evolves, and it's speculation, it would be good if it held its existing timetable. All we can do is -- and it's quite -- .

And what is that timetable?

Pardon me.

What is that timetable?

I think implementation starts in I think 2013.

14. 2014.

2014. But I think the mature implementation ends up in 2017 or something like that.

2017, right.

Okay.

So we're positioned to do it. And the things that we're working on now are things like flight management systems, which are effectively navigation and control systems for next generation.

Thank you, Ali.

Thank you.

We'll take our next question from Abbott Keller with Kestrel Investment Management.

Hi. I was wondering what your thoughts are on share repurchase at this point?

Say that again.

What are your thoughts on share repurchase at this point?

Yes. We have the program approved by our Board of Directors last February, and we're basically continuing to monitor the share price in the market. And as I mentioned in my part of the script, we have not made any purchases during Q4. But again, I would say the word I would use is opportunistic. We continue to be opportunistic and we'll continue to monitor the share price and work closely with our Board to make sure we're moving in the right direction on that front.

Is the $35 million you have in cash kind of the minimal level you feel comfortable with?

Not necessarily. But we may have other uses for that $35 million or parts of it. I don't think 35 is a minimum. But clearly this year we were able to accomplish a fair amount, pay off some debt and still maintain a reasonable cash reserve. We're going to evaluate the share repurchase, as well as other applications of that cash. But notably, probably not in CapEx. We're not -- we don't anticipate any significant change in our CapEx expenditures. So it would be directed at strategic initiatives.

But does that mean acquisitions?

I can't comment on that.

Okay. Thank you.

Thank you very much.

Thank you.

And our final question will come from Ted [Vady] with Cannell Capital.

Hi. I just have two quick questions. One being the opportunities you spoke about in the call. Does it seem like the Q4 backlog, that is pretty much trough going forward?

We would hope so. But that's obviously dependent on our customers, but we do expect to be growing on the backlog.

We would like to keep that as a nominal -- a backlog. But in these times, it's still very nice to have that magnitude of backlog. If you look at it, it represents, based on this year's performance, roughly a 12-month backlog. That is, much more than that is probably, would suggest that you're going to be delinquent with your customers. But we think we can grow it from here. And as we grow the backlog, we expect to grow our production at the same rate.

Okay. And then just kind of based on a prior caller's question, so things like Q1 should be revenue-wise below Q4? Am I reading that wrong?

That is correct. We've said that the quarter will be weak. We're working very hard to fill out the quarter. But it is a challenge.

It's a challenging quarter.

Okay.

So we're working hard as we speak--.

We don't know what that is going to look like. We're working on some opportunities as we speak.

Okay. Thank you.

And Mr. Hedrick, there are no questions in the cue, sir. I would like to turn the conference back over to you for any additional or closing remarks.

My only closing remark is, it's the end of the conference and thank you very much for listening in. Bye bye.

Ladies and gentlemen, that does conclude today's call. Once again, thank you for your participation.