Innovative Solutions and Support, Inc. (ISSC)

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Innovative Solutions & Support Inc. (ISSC)

F4Q 2008 Earnings Call

November 20, 2008 9:30 am ET


Geoffrey S. M. Hedrick – Chairman, Chief Executive Officer

Roman G. Ptakowski – President

John C. Long – Chief Financial Officer


Steve Denault – Northland Securities

David Campbell – Thompson, Davis & Co.

Alex Hamilton – Jesup & Lamont Securities Corp.

[Hyler Hilgo] – Fidelity and Co.

[Chad Treviso] – Aviation International News

Michael Ciarmoli – Boenning & Scattergood Inc.



Good morning. My name is [Damechis] and I will be your conference operator today. At this time I would like to welcome everyone to the Innovation Solution and Support fourth quarter earnings conference call. (Operator Instructions) Mr. Hendrick, Chairman and CEO, you may begin your conference.

Geoffrey S. M. Hedrick

Good morning. I’m Geoffrey Hedrick. I’m Chairman and CEO of Innovative 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 a forward look in 2009. Joining me today is Roman Ptakowski, our President and our Chief Financial Officer, John Long. I’d like to turn it over to John this morning to read our safe harbor message. John.

John C. Long

Thanks Geoff. Good morning. I’d 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.

Geoffrey S. M. Hedrick

Thanks John. Fiscal year 2008 was a challenging year with one with our major OEM business check 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 a 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% over time.

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 and 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 has defined scope accurately and minimized rework.

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. The management was requested to resubmit the – to review and resubmit a revised budget, which was also found to be unacceptable for the similar reasons. The board then decided to change manage – 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.

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 workforce, 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 VLJ 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’s 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 up-to-date their formidable 757, 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 [fab].

Similarly, C-130 programs with Homeland Security and other major military customers improve the performance and reduce workload of C-130 and C-130 fleets worldwide. These fleets are almost 1,600 aircraft and we have – 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.

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