Innovative Solutions and Support F4Q07(Qtr End 09/30/07) Earnings Call Transcript

Innovative Solutions and Support (ISSC)

F4Q07 Earnings Call

December 6, 2007 9:30 am ET

Executives

Ray Wilson – CEO

Jim Reilly – CFO

Analysts

Paul Kaump - Northland Securities

Tyler Hojo - Sidoti & Co.

Jeff [Sarvis] - Janney Montgomery Scott

Kevin Wenck - Polynous Capital

Greg Fujii - Coghill

John Marconi – Ryerson Capital

Ajama Amelio – DGHM

David Campbell - Thompson Davis

Michael Kimuli - Boenning & Scatter

Luke Williams - Dark Cove Associates

Tamara Manoukian - Greenwood Investments

Ashok Ahuja – ICOR

Presentation

Operator

I would like to welcome everyone to the Innovative Solutions and Support fourth quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Ray Wilson, Chief Executive Officer. Sir, you may begin your conference.

Ray Wilson

Good morning. This is Ray Wilson, Chief Executive of Innovative Solutions & Support. I welcome you to our conference call this morning where in a few minutes we will discuss the results of the fourth quarter and the fiscal year ending September 30, 2007. In addition, we will discus the current business climate and outlook.

Joining me today in our corporate office is Jim Reilly, our Chief Financial Officer. Due to a death in the family Roman Ptakowski unfortunately is unable to join us today. He, of course, is our President.

Before we get started, I would like to say that I’m extremely pleased with the progress achieved over the past year; a very tough year for the company and its employees. When we first introduced our flat panel display system we essentially had no market. Today, through the relationships with some of the world’s most respected commercial, military and business aviation operators, we have created a very healthy, increasing demand for our Cockpit/IP.

We are now using the in-depth knowledge gained from working with these world-class operators to expand and improve our product to not only respond to existing needs, but to build in new functionality in anticipation of new uses brought about by increasing concerns regarding safety due to runway incursions, air space congestion and other emerging challenges precipitated by growth in air travel.

Our investments have been rewarded. We have grown our flat panel display system backlog to $63 million in fiscal 2007. That’s an increase of $45 million, up 250% from September ‘06. In addition, not considered in backlog is significant additional revenue that our contracts with Cessna, Eclipse, and FedEx will be generating over the next several years.

In a very short period of time, we have created many solid relationships and established a stream of future revenues that will serve as an excellent foundation from which we can leverage additional growth. I’m also very pleased to reiterate the fact that we received a favorable jury verdict in our trade secret misappropriation case. In addition, the jury found that the company has suffered damages approximating $6 million. The jury also found in favor of the company’s claim for breach of duty and contract, and on fair competition. The judge presiding over the case will hear the company’s claims for a permanent injunction, as well as punitive and exemplary damages in future proceedings.

None of the numbers shown here or on the attached financial statements reflect the $6 million in damages awarded by the jury, nor do they reflect any anticipated punitive or exemplary damages to be determined in future proceedings.

Now I would like to turn over the call to Jim Reilly, our CFO.

Jim Reilly

Thanks, Ray and thank you all for being on the call with us this morning. Certain matters discussed in this conference call today, 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 -- either better or worse -- from those discussed including other risks and uncertainties reflected in the company’s 10-K which is on file with the SEC.

I’d now like to take a few moments after that statement to address last night’s press release. Revenue in the fourth quarter was about $5.1 million and was marginally ahead of last year’s $4.6 million fourth quarter number. On a sequential basis, revenue in the fourth quarter this year was down slightly from the third quarter by about 12%.

Revenue in the fourth quarter results are slightly lower than what we expected and what we discussed with you on the conference call about three months ago. At that time, we expected the fourth quarter revenue to be between $6 million and $10 million and we were hoping to come in the middle of that range.

The shortfall in revenue was essentially due to a delay in achieving software certification on the Eclipse 500 flat panel display system. As a result, we were unable to recognize any Eclipse production hardware revenue in the quarter. Completion of the clutch software has since been achieved and we’re working to establish a production hardware delivery schedule that will meet their needs.

A recap of Q4 sales reflects the revenue split between product and EMD sales, which we call engineering, development and modification. Product revenue was about $4.8 million in the quarter and we recorded a gross profit of $1.8 million, for a gross profit margin of 38%. The EMD revenue was about $400,000 in the quarter and recorded a gross loss of $2.2 million.

The product gross margin is expected to increase as volume picks up and approach levels that have been experienced in the past. EMD margins are expected to be in the breakeven range. The current quarter loss on the Eclipse program is unusual and reflective of the complexities and added scope and functionality associated with this development phase of this contract.

The company recorded the future cost of completing the development phase in the fourth quarter and we will begin negotiations with Eclipse to recoup out of scope efforts as well as formulate further EMD requirements with Eclipse.

In the fourth quarter, research and development expense on a period cost level was $1.3 million. However, when we combine that amount with the EMD cost of sales, we actually incurred about $3.8 million in research and development during the quarter, as approximately $2.5 million of our total R&D spending was for specific development modification work on the Eclipse program and some other NRE work as well. That investment is included in cost of goods sold and as I previously mentioned, produced a gross margin loss in the period.

SG&A spending totaled $4.7 million in the fourth quarter; an increase of $1.5 million from the $3.2 million spent in the fourth quarter of ’06. The increase was principally the result of $2.1 million in legal fees incurred in the quarter to protect our intellectual property from infringement. The recent favorable jury verdict lends support to the decision to proceed along these lines.

Net interest income was about $650,000 in the fourth quarter compared to $780,000 last year. This decline of about 16% is mostly the result of lower cash balances this year. For the quarter, we had a net loss of $4 million at $0.24 per fully diluted share. This compares to a net loss of about $900,000 or $0.06 per fully diluted share in the fourth quarter last year. If we exclude the non-recurring legal cost that we incurred to enforce our intellectual property rights, the net loss in the quarter would had been about $0.15 per fully diluted share.

We continue going forward with a very strong financial position and enter the new year with the current ratio at about 7.6:1; $49 million in cash or almost $3 a share; virtually no debt; assets at $85 million, 58% of which is cash; and shareholder equity of $71 million or a little over $4 a share. Clearly, our balance sheet reflects the financial flexibility and capacity that we need to ramp up for future production levels.

Quickly reviewing the results for fiscal 2007, revenue rose about 10% to $18.3 million compared to $16.7 million in ‘06. We incurred a net loss of $8.8 million or $0.52 per fully diluted share in the fiscal year, of which about $4.2 million or $0.25 of that was related to the intellectual property legal fees that we have talked about previously.

I would like to quickly summarize the new business for the year. New flat panel display system orders in the year amounted to $55 million and other new business orders were about $6 million for a total of $61 million in the year. As a result, backlog at September 30th was a near record $70.4 million. This was an increase of $42 million or 150% over the September 30, 2006 backlog of $28 million. The flat panel portion of backlog was $63 million this year, an increase of $45 million or 245% higher than the $18 million recorded at September 30, 2006.

Thank you for the opportunity to address you. I would like now to turn the call back over to Ray Wilson.

Ray Wilson

Thank you, Jim. To follow up on what Jim just discussed, our results for both the quarter and the full year continue to demonstrate growing demand for our flat panel display systems and preparations in our manufacturing facilities for the ramp up in production as orders head onto the factory floor. These are strong indicators of the long-term health of the business.

In the short term, obviously we are disappointed with the slippage in shipments to Eclipse that were originally anticipated during the fourth quarter. Unfortunately, software development took longer and cost more than originally anticipated, in part due to the normal evolution in production specifications and requirements commonly associated with the development of a completely new cockpit system.

However, with our software completed in November, we shipped hardware to Eclipse. They have provided us with production schedules that will require us to ship 60 more flat panel display systems before the end of this calendar year and we have these in various stages of completion at our factory today. As these systems are delivered, you will see the next set of production schedules roll forward, consistent with the terms of our contract.

Over the past year we have continued business development in each of our main market segments including commercial, air transport, military, business and general aviation. These efforts are yielding laudable results, with IS&S signing a significant new contract in each quarter of 2007 with high profile, well-respected operators such as Cessna and American Airlines; and most recently in the quarter just ended, FedEx, the international cargo carrier.

The net result is a steady increase in backlog and an even greater increase in our visibility as a result of the credibility and the company’s success with leading operators in a wide variety of markets. Successful implementation of these orders and potential regulatory changes are expected to stimulate market growth as operators expand retrofit programs to meet their entire fleet’s needs of similar aircraft, in line with new standards. The bottom line is we think we are getting people’s attention.

As a result, as of today the company has $73 million in released backlog, as well as the opportunity for significant additional revenue for more than 3,000 flat panel display installations potentially available to ISS over the next few years between Cessna and Eclipse. Also, only a small proportion of the FedEx order is in backlog.

We are making significant progress not only in the market, but also in improving the capabilities and versatility of our products. In the last few years, we’ve invested almost $20 million to add new features and functionality that make our products even more compelling. For example, in the third quarter we received a supplemental [display] certificate, SDC, from the FAA for our Class 3 electronic flight deck; eCharts full color, high quality electronic display flight deck product consisting of electronic navigation charts powered by Jeffersons and applications such as take-off, enroute, approach, landing, missed approach, and go-around information. Since the electronic flight deck features improve the pilot’s ability to operate the aircraft and consequently enhance safety, there is a significant market for this feature.

Current challenges in the airline industry have resulted in the FAA increasing its attention on air traffic control and safety. The difficult job of improving coordination and safety in the skies can best be accomplished by automating and enhancing information flow to pilots and controllers. Consequently, we are constantly improving the ability of Cockpit/IP portals to present more information in a cohesive, user-friendly fashion to improve performance and safety.

As the FAA increases the pace of new regulations in response to growing air traffic, operators are recognizing the benefits of solutions such as our FPD systems that reduce the time, cost and complexity needed to comply. This is an additional updraft that we think will move more and more operators off the sidelines and into the market.

We continue to enter into partnerships and other alliances that will more rapidly get us into large, private markets. Our contract with Marshall Aerospace in the United Kingdom is an example of our strategy to open new markets through alliances, joint ventures and partnerships. Our relationship with this integrator provides access to the large European military tanker and military transport market.

We announced that we have slashed the installation downtime for Boeing 767 Cockpit/IP flat panel upgrade to 48 hours, consistent with our commitment to team with authorized distributors and installers to minimize aircraft downtime.

We have just completed an aircraft for TAG Aviation, replacing 22 instruments, removing 252 pounds of weight and completed it in 48 hours. We are now aggressively marketing to owners of more than 1,700 Boeing 767 aircraft worldwide.

We are also offering general aviation operators a compelling value proposition with combined RVSM flat panel upgrade. This allows an operator a much better return on their investment as they get the added, immediate tangible benefits of RVSM upgrades at a cost that is not much more than the basic FPD installation.

As with our price and performance leadership, we are raising the bar with the speed of cockpit upgrades and installations. By dramatically cutting aircraft downtime, we are providing operators with a more compelling reason to invest in FPD. Now by achieving the installation in 48 hours, we are well on our way to our next milestone to ultimately offer overnight training and retrofit packages to restore our state-of-the-art glass cockpit system. We are doing a cost analysis of what it would take to achieve a one-year payback on FPD investment, which although it is often difficult, it appears to be feasible; at least possible.

Increasing awareness has also opened the door to some exciting opportunities with the U.S. military. At their invitation, we now have our nose in the tent on the entire military aircraft market. In all of these opportunities, it does not hurt to show them how our products also lower the cost of operations, offer logistics savings and provide them with a platform for growth and adaptability to emerging needs such as state-of-the-art highways in the skies and satellite weather radar features. At the same time, it is very competitively priced.

To quickly summarize, we accomplished significant progress in broad-based flat panel market growth during 2007. We are shipping to all the major customers in each quarter of this financial year. Consequently, a $50 million revenue line is achievable, which should bring about profit in the second half of the year.

I thank you for this opportunity and would now like to open the session for questions.

Question-and-Answer Session

Operator

Our first question comes from Paul Kaump - Northland Securities.

Paul Kaump - Northland Securities

Jim, do you have the breakdown of air data revenue versus flat panel in Q4?

Jim Reilly

Yes I do, Paul. The air data revenue in the quarter was approximately $1.2 million.

Paul Kaump - Northland Securities

All the rest is flat panel?

Jim Reilly

That’s correct.

Paul Kaump - Northland Securities

Cash flow from operations during the quarter, what was the use there?

Jim Reilly

The cash in the quarter was principally to drive the operations. Obviously we had the net loss in the quarter which sucked up cash. We grew our inventory a little bit. The accounts receivable were up in the quarter. They have since come right down, but basically a lot of the revenues that we had in the fourth quarter came in the last month, unfortunately, and as a result are showing on the balance sheet as of the end of the year as outstanding receivables. Those have since been collected. We had some additional expenses that we put through at the end of the year in terms of some of the legal bills and things like that.

Paul Kaump - Northland Securities

Do you actually have the cash flow from operations number for Q4?

Jim Reilly

Cash flow from operations for Q4 I don’t have right here, but I can give you the cash flow from operations for the year, that’s a lot easier. The year was a loss of $10 million; $8.8 million of that, of course, was the net income loss. The other pieces of that were principally accounts receivable, inventories and prepaid expenses. Those things actually added up to a little bit more than that and then we had some offsetting amounts; accounts payable and things like that.

Paul Kaump - Northland Securities

Switching gears, can you talk about the status of the timing of some of the STCs for the 737, 747 and Cessna Citation? If I’m not mistaken, the 737 and 747 are more than a year old at this point from when you got the initial orders. The Citation we are coming up on the year here, so I’m just curious about the status on those things.

Ray Wilson

The 747 engine displays that we are working on, we should have an SDC in the next quarter on that, first calendar year quarter of 2008. On Cessna, it’s probably going to be into the third quarter of 2008, the fourth quarter of this fiscal year. On the 737, quite frankly I think it’s going to drift out to the beginning of the next fiscal year. We are probably 12 months away from that.

Paul Kaump - Northland Securities

Have any customers pulled or reduced their orders for any of those airplanes? I know on the 747 I think it may have been Kalitta was in there with some orders and it was Jet Partners for the 737 -- correct me if I’m wrong on any of those. Have any of them reduced or canceled orders or anything like that?

Ray Wilson

Kalitta was still working on it, it is their aircraft that we have specific work being done on; Jet Partners is still hanging in there. Still got orders on the order book.

Paul Kaump - Northland Securities

How much of the FedEx order went into the backlog? Was that $6.8 million?

Ray Wilson

No, it is a much smaller number. This is an interesting feature of the way people are contracting; it is rather similar to the Eclipse where we only get a lead time of coverage. So it is a much smaller number than $6 million.

Paul Kaump - Northland Securities

I’m trying to reconcile flat panel display backlog from last quarter to this quarter. It looks like it went down by much more than it should have. Did anybody reduce an order? Did something fall out of backlog? Anything of that sort?

Ray Wilson

No, nothing fell out of backlog, Paul. The shipments in the quarter, we shipped almost $4 million worth of flat panel in the quarter.

Paul Kaump - Northland Securities

Which was in backlog, right?

Ray Wilson

Which was in backlog.

Paul Kaump - Northland Securities

That’s taking care of it. Did I hear you correctly in your prepared remarks? You are looking to recoup some of the added expenses or cost overruns with the Eclipse program?

Ray Wilson

We are having discussions with them.

Paul Kaump - Northland Securities

How much could that be, do you think?

Ray Wilson

It will be small numbers, I mean, it will get washed into whatever opportunities we have for providing future functionality, I’m sure.

Operator

Your next question comes from Tyler Hojo - Sidoti & Co.

Tyler Hojo - Sidoti & Co.

How should we think about some of these expenses as we move through the new fiscal year? Specifically, these Eclipse cost overruns and some of this legal expense? I know you guys want a nice settlement there but it seems like you could see some additional expense, at least in the near term. I’m just trying to contemplate that in terms of what you said with a $50 million run rate. I think Ray you said it would be profitable in the back half of the year? Was that correct?

Ray Wilson

Yes, that’s what I said.

Tyler Hojo - Sidoti & Co.

So how does that all mesh together?

Jim Reilly

First of all, I don’t think Ray said a $50 million run rate. I think he said $50 million for the year.

Tyler Hojo - Sidoti & Co.

In revenue. I apologize.

Jim Reilly

Because the run rate hopefully will be substantially different. Having said that, we do expect legal expenses to continue but at a significantly reduced rate into the current quarter and perhaps even into the next quarter because as you see by the press release we put out, there will be some proceedings that are going to take place, probably in the January timeframe, but we don’t believe that this is going to be anything of any significance at that point.

The cost on the Eclipse program, the EMD portion, there should be no further overruns on that. We’ve taken a very close look at the program. We’re almost done with it and we’ve written off costs yet to be incurred in the fourth quarter to bring that thing totally clean.

Tyler Hojo - Sidoti & Co.

How much did you write-off?

Jim Reilly

We’re not really going to talk about specifically what we wrote off, but the numbers are very clear in the financials that we put out. In the quarter, we incurred revenue of $352,000 and we had $2.5 million of costs. You can impute that difference yourself, I am sure.

Tyler Hojo - Sidoti & Co.

Good to know. I think earlier in this fiscal year you gave a range of backlog in terms of the goal; I think it was $75 million to $100 million. I was wondering if you could provide another goal for next fiscal year?

Ray Wilson

I’ll take this one, because we’ve been having some interesting discussions internally about this whole concept of people looking at the backlog and trying to determine where the business is going. The concern is that the contracting style and practice for some of this stuff is actually different from what we’ve all been used to and that’s why we keep talking about the unreleased backlog. We don’t actually know that people are going to come along and give us a firm, irrevocable contract for the full volume of their upgrades because it will depend on where they are and in their own aircraft programs and their own fiscal disciplines.

So it is difficult to see what the backlog is going to be, but we are working with a good number of operators to try and get them under contract now. That’s all I can say, I think.

Tyler Hojo - Sidoti & Co.

In terms of the backlog as it sits currently, I think it is $70 million; how much of that is long term? How much do you expect to be delivered within the next 12 months or shorter?

Jim Reilly

Well in that backlog you are absolutely right, the backlog is about $70 million. We anticipate liquidating it by about $15 million in the current fiscal ’08; but keep in mind what Ray had mentioned earlier, a substantial amount of the so-called unreleased backlog will be contributing to revenue as well and that is the type of a backlog, for example from Eclipse and FedEx and companies like that, they will give us a release in a given month that might roll out for the next two or three months.

So in some respects, it hardly will ever hit backlog just because of the nature of the way they are contracting. Does that make sense to you?

Operator

Your next question comes from Jeff [Sarvis] - Janney Montgomery Scott.

Jeff Sarvis - Janney Montgomery Scott

I just want to go back to the backlog a minute. I think at the end of the third quarter your backlog was roughly $72 million and now we are down to about $70 million. I guess I would have thought even with some deliveries for the quarter and with some new contracts your backlog would have been ahead of what you stated in your third quarter.

Jim Reilly

Jeff, it is strictly a matter of timing. I am not going to stand up and shout about the revenues in the fourth quarter; they are only $5 million and the order book in the quarter was a little lower because of the fact that some of the programs that have the continual turn on didn’t get turned on. Part of that was perhaps our fault, and part of it was perhaps the customer’s fault in terms of releasing new business.

But nonetheless, the backlog is substantial. The timing of it can be a little bit problematic but the numbers stand on their own. The increase has been remarkable.

Ray Wilson

Perhaps I could jump in. The water has been muddied in this period by the fact that we reschedule some Eclipse that we had expected to deliver in the quarter and move them into this financial year. That doesn’t make it absolutely clear what’s coming and gone out of backlog, to be honest.

Operator

Your next question comes from Kevin Wenck - Polynous Capital.

Kevin Wenck - Polynous Capital

On inventories, the growth from June to the end of September from 7.6 to 9.3. How much was from not shipping what you originally might have anticipated shipping in the September quarter, and how much is a build for supporting whatever the revenue plan might be for the December quarter?

Jim Reilly

A lot of it Kevin, obviously, is tied into the anticipated volumes that we plan on getting to. The inventory increase, without being program-specific, obviously a lot of that was for Eclipse. We are ready and able to deliver Eclipse hardware. We are in the position to do that. Essentially, that’s what the inventory build up relates to.

Kevin Wenck - Polynous Capital

As you’ve been discussing on this call, the changing dynamics of how you are starting to receive orders from customers, where instead of coming out of backlog it’s more as the customer now decides they need it. Do you have to have somewhat more inventory on hand or are they still giving you reasonable visibility as to when you are going to get those spot orders?

Ray Wilson

Yes, we do have visibility. We have a forward schedule that is not fully committed by them, but we do understand what their requirements are. That’s the first thing; we have a picture ahead of us and production orders for an aircraft producer, we have the same view as they have for the next 18 months.

In the case of a flat panel display retrofit contract that we have on our books, we know what their total requirements are, we know what their expectation is for aircraft availability, but their actual commitment comes only in the lead time for the product. So we are able, within that lead time, to provision the materials and ship and build the product.

Kevin Wenck - Polynous Capital

So in any case, you are not having to lay in new --

Ray Wilson

We are not having to pile up inventory to support short orders, no.

Kevin Wenck - Polynous Capital

That’s very helpful. I was a little bit distracted by something else going on in the market when expenses were being discussed, but the growth in SG&A expenses sequentially, was that mainly from the additional legal expenses?

Jim Reilly

Yes it was. The legal expenses, obviously we’ve talked about over the last several calls Kevin, they have been significant.

Kevin Wenck - Polynous Capital

Absent legal expenses, what’s a core level of SG&A expenses at this point for the company?

Jim Reilly

We would like to target, if you were building a model, we would like to target the G&A at around 16% of sales. That’s the long-term goal for us and something we have achieved in the past.

Kevin Wenck - Polynous Capital

Assuming if $50 million of sales were reached in this fiscal year, you are talking roughly $2 million a quarter of SG&A?

Jim Reilly

Round numbers, I guess you could say that. We don’t want to get pegged down to anything right now. We are truly going through a renaissance here from the small company we used to be to a very large company in terms of being able to generate significant revenues. We have put the infrastructure in place to get there.

Kevin Wenck - Polynous Capital

One last question. $50 million is kind of a round number. What would cause it to be reasonably higher than that and what could cause it to be somewhat below that?

Ray Wilson

Well, obviously a significant demand increase from any of our current major customers could increase that, because for all of those who we are delivering today, given that the year is only a few months old, a couple of months old, we could increase their shipments certainly in the second half. So, if suddenly American, for example, said we are going to increase our pace from “x” aircraft a month to “x” multiplied by four, we could meet the demand and the revenue line will go up. You can apply that to any of our existing customers.

In terms of new contracts, I think on the military side, there are probably some opportunities which we are working at that we hadn’t anticipated in this year’s planning, but we have them on our radar screens and they could come in earlier. On the other hand, I must say customers can make up their mind to go in either direction.

Kevin Wenck - Polynous Capital

This morning there was a new revenue estimate for the company of $36 million. Is that something that has a 10% chance of happening or a 25% chance of happening? What are your thoughts on that?

Ray Wilson

That wasn’t our estimate and we hadn’t heard it or hadn’t seen it. You are the first guy to mention that to me.

Kevin Wenck - Polynous Capital

Wasn’t my estimate either.

Ray Wilson

Okay, well that’s good. I don’t want to talk about it.

Operator

Your next question comes from Greg Fujii - Coghill.

Greg Fujii - Coghill

I had a couple of questions around the Eclipse business. I know that you had invested a little over $2 million in some different engineering for the company and I wouldn’t expect you to comment on the state of affairs over there, but I guess from your perspective internally, how do you view further investment in Eclipse? Are there any concerns?

Ray Wilson

There are no concerns. I mean, you know as much about Eclipse as we do. We think they have got a winning product and we are talking to them about future enhancements that they may be looking for. So no, there are no particulars concerns in that respect.

Greg Fujii - Coghill

When looking at the $50 million number as being achievable next year or your next fiscal year, can you give us a sense for how much Eclipse is baked into that? I am guessing Eclipse is mostly a turns business as well?

Ray Wilson

The Eclipse numbers, if I were prepared to give you them, would actually muddy the water because you have to remember that we have replaced another supplier on that airplane and we are new to it; therefore, we haven’t really got production numbers, we have got spares being laid down and retrofits for the displays that are on the 100-knob aircraft today. We haven’t worked that program in detail yet with Eclipse, but it would only confuse matters for me to give you numbers.

Greg Fujii - Coghill

The previous caller said that $50 million is a little bit of a round number. Eclipse it sounds like could have a relatively meaningful impact on that number in your fiscal 2008. Can you at least confirm that you are expecting meaningful revenues from Eclipse on a turns basis in 2008?

Ray Wilson

I don’t understand what meaningful revenues mean. Can you explain a little bit more?

Greg Fujii - Coghill

Say 10% to 15% or more of your revenue next year.

Ray Wilson

Yes easily that sort of order, yes.

Greg Fujii - Coghill

That makes sense. Thank you very much.

Operator

Your next question comes from Dan Rodgers – Titan Capital.

Dan Rodgers – Titan Capital

A follow up on Eclipse as far as the payments that you have received from them. I heard they have had difficult in making timely payments to one of their suppliers.

Ray Wilson

Given that we have only just shipped product, there is no production payments due. I probably won’t let you know, because I don’t really want to talk about our business with customers in that detail. But right now there are no production payments overdue. They haven’t identified to me that there is any problem with paying the bill. I know that isn’t the answer you are looking for, but those are the facts.

Operator

Your next question comes from [John Marconi] – Ryerson Capital.

John Marconi – Ryerson Capital

Can you discuss what the next steps are in the lawsuit with Kollsman and when it might be reasonable to actually realize the settlement that you received?

Ray Wilson

Jim already mentioned that there might be some legal expense that goes on into the early part of next calendar year and we would anticipate that this thing gets done early next year.

John Marconi – Ryerson Capital

Early in the next fiscal year?

Ray Wilson

Sorry, next calendar year.

John Marconi – Ryerson Capital

Next calendar year?

Ray Wilson

Yes, 2008.

Operator

Your next question comes from [Ajama Amelio] – DGHM.

Ajama Amelio – DGHM

Hi, gentlemen. I’m wondering about something here on the balance sheet. I see in the press release that the receivables went to $6.3 million in this latest quarter. In previous quarters your receivables were considerably lower than that. That is a $4.5 million increase sequentially from last quarter.

Jim Reilly

But if you ask me what my receivables were today I would tell you they are probably down about $1.5 million to under $2 million. In the fourth quarter, as I mentioned, a lot of the revenues for many and diverse reasons went out in the last month of the quarter and obviously they were current, but significant. The real test of receivables is the days outstanding and the days outstanding, even as of the September quarter, were probably 35 days. We have no problem at all with receivables and when we do the Q for the first quarter you will see that.

Ajama Amelio – DGHM

The sequential increase in receivables is pretty much equal to revenues so it is a little bit alarming. The other thing I noticed too is on that same line item you actually had a zero allowance for doubtful accounts in this quarter. How can receivables go up so much and the allowance go down? Is there a mix issue here?

Jim Reilly

No, that speaks to the quality of our receivables. The allowance has gone down because our outside accountants, Deloitte & Touche, told us we couldn’t carry an allowance for doubtful accounts because we never have doubtful accounts.

Ajama Amelio – DGHM

Okay. I guess that makes sense.

Ray Wilson

Can we start to limit, perhaps you can ask a supplementary, but from now on I think we are running against the time clock and one question for each person in the queue. Okay?

Ajama Amelio – DGHM

All right. Well, I have heard enough. Thank you.

Operator

Your next question comes from David Campbell - Thompson Davis.

David Campbell - Thompson Davis

I assume that you can’t disclose or talk about the value of the Eclipse revenues in the December quarter. You mentioned that you delivered some in November and you were delivering, I think you said 60 more by the end of December. You can’t talk about the value of that I suppose?

Ray Wilson

You are absolutely right, David.

Operator

Your next question comes from Michael Kimuli - Boenning & Scatter.

Michael Kimuli - Boenning & Scatter

I was wondering if you can give us a composition of the backlog in terms of customers?

Jim Reilly

Customers in backlog we have roughly 20 to 25 customers.

Michael Kimuli - Boenning & Scatter

Can you give us values on some of the bigger ones?

Jim Reilly

Michael, you know we don’t do that. We announce the big orders when they come in but we try to stay away from articulating by elements of the backlog.

Michael Kimuli - Boenning & Scatter

On the margin structure, it looks like you have incurred a lot of development cost with Eclipse; I understand that’s a unique project. What kind of cost do you foresee going forward on the American Airlines programs, FedEx, any other major customers you might get that might bring your overall gross margins down or make you not able to achieve those historical levels? I just want to make sure going forward I have got an accurate representation.

Jim Reilly

We have studied that pretty carefully here, Mike, and the programs that you have mentioned are the programs that are really almost legacy programs for us now. We have been doing the flat panels for a couple of years and as long as the customer wants something that is relatively basic, there is really no new added engineering and development work associated with it. That means that they should gravitate to the normal gross margins that we have had in the past.

The gross margin in the quarter that we are talking about here today is about 38%, which is lower than our historical margins. It’s interesting though, we’ve talked about what volume will do to the margins here -- you’ve seen it in the past. If you were to take the current quarter, Mike, and just increase it by 50% -- now 50% sounds like a lot but the numbers are very small -- the margins would go from 38% to over 50%. That speaks volumes for our ability to transform profitability with volume here in the company.

Operator

Your next question comes from Luke Williams - Dark Cove Associates.

Luke Williams - Dark Cove Associates

I wonder if you are spending much time at this stage in talking directly with the FAA or high level military people? It seems to me as though you offer such a solution in many of the congestion problems of the whole FAA system that you would want to spend some time talking with them to acquaint all of their people with what you have available, which can alleviate many of the problems.

Ray Wilson

Well to be quite honest, we are not actually doing that. The FAA have a program and discussion going on with some people which we are watching very closely, but what we offer is the platform for the visibility. There are other things to be done by other people to enable, for example, all the aircraft in the vicinity of the known aircraft to be visualized on the screen. We can’t do that unless there is some equipment on board other airplanes and that’s what the FAA are talking to some other major vendors in the industry about. We can’t jump in on that act, I am afraid, at the moment but we are watching it carefully.

Luke Williams - Dark Cove Associates

So there might be a time when you would have greater need to work with the FAA directly?

Ray Wilson

There might be, yes.

Luke Williams - Dark Cove Associates

What about high level military?

Ray Wilson

Well, we haven’t pursued that avenue, I must say, but it’s a good idea and I’ll give that some thought. Thanks very much.

Operator

Your next question comes from Tamara Manoukian - Greenwood Investments.

Tamara Manoukian - Greenwood Investments

What portion of backlog is on airplanes with no FPC right now?

Ray Wilson

I am not sure we know the answer to that off the top of our heads. Just let Jim take a few seconds to do some arithmetic. It is very small. If I were to guess, I would say its between 10% and 15%.

Jim Reilly

About 15%.

Operator

Your next question comes from Ashok Ahuja – ICOR.

Ashok Ahuja – ICOR

Based upon your statement, it appears as though at least 10% to 15% of backlog and expected revenues out of the $50 million will probably come from Eclipse. Based upon the questions that were asked about Eclipse, it seems that the underlying concern that the people who are asking the questions had was do you have a question in terms of viability of Eclipse long term? I guess that is really the question.

Ray Wilson

The deduction is flawed. There is no STC on Eclipse, so the answer regarding STCs in terms of percentage, and the backlog not covered by STC has nothing to do with Eclipse.

As far as the viability of Eclipse is concerned, that’s something we are very aware of where they sit at the moment, but I’m not going to discuss it with anyone in the open marketplace for sure.

Operator

Our final question is coming Greg Fujii - Coghill.

Greg Fujii - Coghill

Sorry guys. I’m in the queue too many times here. No questions, thank you.

Operator

At this time, there are no further questions. I will turn the floor back over to management for any closing remarks.

Ray Wilson

I think that has been a very worthwhile call and we would like to wish you all a very good day. Thanks.

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