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DATE

Dec. 19, 2024 at 12 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Shahram Askarpour
  • Chief Financial Officer — Jeffrey DiGiovanni
  • Operator

TAKEAWAYS

  • Net Revenue -- $15.4 million, representing an 18% increase, primarily driven by new military programs and Honeywell (NASDAQ: HON) product line acquisitions.
  • Net Income -- $3.2 million ($0.18 per diluted share), up from $2.6 million ($0.15 per diluted share) in the prior fiscal fourth quarter.
  • Adjusted EBITDA -- $5.6 million, compared to $4.8 million in the comparable quarter, attributed to revenue growth and operating leverage.
  • Product Sales -- $9.8 million, with commercial air transport cited as the primary contributor.
  • Customer Service Revenue -- $5.5 million, mostly from newly acquired Honeywell product lines, and includes a $1.7 million true-up payment for third-party performed services.
  • Gross Profit -- $8.5 million, higher than last year’s $8.1 million, mainly from revenue growth, partly offset by increased depreciation/amortization from acquisitions.
  • Gross Margins Outlook -- Management expects consolidated gross margins to “trend closer toward the mid‑50% range” on a normalized, intermediate-term basis due to acquisition mix shifts and higher depreciation/amortization.
  • Research and Development Expense -- $1.1 million, up from approximately $740,000, reflecting expansion in product development initiatives.
  • Selling, General and Administrative Expense -- $3.1 million, down by $3.7 million, due to the absence of prior year one-time items, partly offset by Honeywell-related amortization.
  • Annual Net Income -- $7 million for the year, a 16% increase over the prior year.
  • Annual EBITDA -- $12 million, an increase of 36% from the previous year.
  • Annual Revenue and Adjusted EBITDA Growth -- Management stated, “2024 represented over 30% growth in revenue and adjusted EBITDA” for the period.
  • Backlog -- Fourth-quarter new orders totaled $95.4 million, including $74.3 million of backlog attributed to the September 2024 Honeywell acquisition; quarter-end backlog was $89.2 million.
  • Backlog Duration -- Management indicated that the $74 million Honeywell-related backlog “is going to bleed off over probably a three- to four-year period,” with deliveries across production contracts.
  • Debt and Liquidity -- Net debt increased to $27.5 million (from $16.4 million), mainly from Honeywell acquisitions; total cash plus credit line availability was $7.5 million at quarter end, and net leverage was 2 times.
  • Facility Expansion -- Announced a $6 million capital investment to double manufacturing capacity through a 40,000 sq. ft. addition and a second sub-assemblies line, with construction expected to complete by June 2025 if on schedule.
  • Honeywell Acquisition Details -- July 2024: Communication and navigation product lines for $4 million; September 2024: Military display generators and flight control computers for $14 million, representing the bulk of current backlog addition.
  • Major Military Contract Wins -- U.S. Army selected ThrustSense Autothrottle for C-12 aircraft, with additional new foreign military and OEM platform contracts realized during the quarter.
  • Product Development Progress -- Flight testing for next-generation Utility Management System (UMS) on Pilatus PC-24 is slated for early 2025, and launch of AI-capable UMS II expected in 2025 with platform-agnostic design for expanded market reach.

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RISKS

  • Chief Financial Officer DiGiovanni stated, “gross margins will likely trend closer toward the mid‑50% range on a normalized basis over the intermediate term, which is below historical levels,” due to ongoing acquisition-driven amortization and a higher mix of lower-margin military sales.
  • Significant portion of new backlog relates to military contracts, which “sales carry a lower average gross margin versus commercial contracts,” as explicitly cited.
  • Transition risk was referenced by Chief Executive Officer Askarpour, citing a temporary dip in revenue expected in Q3 due to the operational transition of acquired Honeywell product lines, noting, “Q3 probably would be the transition quarter, it will get a dip and it will hopefully recover by Q4.”
  • Elevated net debt of $27.5 million and a rise in net leverage to 2 times at quarter-end, directly linked to the timing and financing of Honeywell acquisitions.

SUMMARY

Management launched the “Innovative Aerosystems, Inc. Next” strategy, emphasizing targeted commercial growth, enhanced operating leverage, and disciplined capital allocation, with frequent future reporting promised for investors. The $74.3 million Honeywell-related backlog will transition over three to four years and includes a near-term “big bump” in revenue for Q2, followed by a projected Q3 dip as test equipment is relocated, potentially causing sequential volatility. The company is prioritizing rapid expansion in AI-driven avionics, with UMS II bringing platform-agnostic, certifiable AI capabilities to both military and commercial markets by 2025. Ongoing facility investment of $6 million is set to double manufacturing capacity and support insourcing, a strategic step intended to stabilize gross margins and support long-term EBITDA growth despite near-term margin pressure. Management views retrofit and aftermarket activity, especially amid constrained new aircraft production at OEMs such as Boeing (NYSE: BA), as a catalyst for increased parts and service demand benefitting the company’s revenues.

  • “adjusted EBITDA margin and expansion will be a comparably better measure of our relative performance over time than gross margins,” per DiGiovanni, shifting management’s key profitability benchmark.
  • Honeywell acquisition integration may lead to “chunky” quarter-to-quarter revenue recognition, and managing manufacturing transfer is considered a critical near-term operational priority.
  • Management aims for a longer-term business mix targeting equal shares for military, business aviation, and air transport, reflecting a strategic aspiration for balanced segment exposure.
  • Direct cross-selling synergies from the Honeywell deals are driving both near-term growth and expansion of the company’s addressable customer base.
  • Management is advancing security and compliance investments—including facility upgrades and a new MRP system—to qualify for “secret” program work and rigorous U.S. government audits.

INDUSTRY GLOSSARY

  • UMS (Utility Management System): Centralized avionics module responsible for guiding, controlling, and powering critical aircraft subsystems, sometimes described as an aircraft’s “CPU.”

Full Conference Call Transcript

Shahram Askarpour: Thank you, Paul. And good afternoon to everyone joining us on the call today. Let us begin with a high-level overview of our fourth quarter and full year financial performance. This was a transformative year for Innovative Aerosystems, Inc., one in which we delivered significant year-over-year growth in revenue, net income, EBITDA and free cash flow. We generated net income of $7 million, which was up 16% from the prior year. In addition, total EBITDA was approximately $12 million, which was up 36% from the prior year and is up nearly threefold from just three years ago.

During the fourth quarter, we delivered more than 18% year-over-year growth in revenue, driven by momentum from new military programs and recently acquired platforms. In recent quarters, demand across our military end markets has increased, supported by orders from both the U.S. Department of Defense and allied foreign militaries. As a higher volume of backlog converts to revenue, we have realized improved operating leverage, a dynamic we expect to continue into the coming year. At a strategic level, we continue to build a growth platform centered exclusively on advanced avionics solutions for both commercial and military markets.

Over time, our systems integration expertise has positioned Innovative Aerosystems, Inc. as a preferred partner in the fleet modernization and retrofit markets, one whose in-house design, manufacturing, installation and support capabilities provide customers with safe, compliant and cost‑effective solutions that enhance aircraft safety, compliance and mission readiness. We have built a strong reputation in the market that positions us to further scale our business moving forward. Today, we are introducing Innovative Aerosystems, Inc. Next, a long-term value creation strategy. We consider this strategy the guiding framework for our next chapter of growth as we will outline over the coming quarters.

At a high level, our strategy centers on a combination of targeted commercial growth within high-value markets, improving operating leverage and a disciplined, returns-driven approach to capital allocation. While many of these elements are already at work in our existing business, we intend to provide more transparency around our progress under the strategy each quarter moving forward. The first pillar of our growth strategy centers on targeted commercial growth within our core advanced avionics market verticals. Looking ahead, we expect commercial growth will come from several key areas, including the expansion of existing platforms, new original equipment manufacturer or OEM and retrofit programs, new product development and strategic product line acquisitions.

In 2024, we delivered significant commercial growth through an expansion of our military business, continued growth in existing platforms and realized synergies resulting from our recent Honeywell product line acquisitions. Our military end markets were very strong last year. And given our leadership in cockpit automation, we anticipate a continuation of this trend into 2025. Earlier this year, we announced a new foreign military platform with a major aerospace OEM to supply multi-function displays with an integrated mission computer. We have already begun executing under this contract and realized revenues in 2024. We also recently announced that our ThrustSense Autothrottle system was selected by the U.S. Army to be installed on their C-12 aircraft.

This advanced technology will provide full flight envelope protection from takeoff to landing, including go-around, enabling pilots to automatically control engine power settings for enhanced safety and efficiency. Entering 2025, we are seeing several other similar opportunities with commercial customers entering our pipeline and anticipate our work with both the U.S. DoD and allied foreign militaries will remain a significant growth engine for us in the year ahead. Within our commercial end markets, we continue to experience solid growth across existing platforms and OEM contracts. This includes Pilatus for our utility management system, Textron for our standby instrument and our autothrottle and on the military side, Boeing on KC-46A, KC-767 and the T-7 platforms.

On the heels of our recent Honeywell product line acquisitions, cross-selling synergies have increased as expected. These acquisitions have brought us the opportunity to cross-sell our existing products into new customer relationships acquired in the transactions while also selling new product lines to our legacy customers. New product development remains integral to our long-term growth. We continue to expand the sophistication of our cockpit automation technology through functionalities that enhance safety and reduce pilot workloads. The integration of AI functionality to enhance cockpit automation remains a major area of focus for our industry over the coming years. In early 2025, we will begin flight testing our new generation utility management system or UMS on the PC-24 platform with Pilatus.

In layman's terms, the UMS is to an aircraft what a CPU is to a laptop computer. It guides, controls and powers the most critical operating systems. Additionally, in 2025, we plan to launch our UMS II, which is a cutting-edge, certifiable flight monitoring and control system. UMS II is an AI-capable system, one whose integrated neural network processing capabilities significantly enhance crew efficiency by enabling additional cockpit automation. As our UMS II is platform-agnostic, we see significant growth potential for this product line over the next several years, particularly within the military and business aviation markets. The second key pillar of our value creation strategy focuses on driving increased operating leverage across the organization.

As we layer on a higher base of revenue within our business, we anticipate improved fixed cost absorption and ultimately a higher sustained run rate of EBITDA dollars. During 2025, we intend to increase the volume of maintenance, repair and overhaul work we handle at our Exton facility while also increasing the volume of sub-assemblies that are being manufactured internally. More on this shortly. The final pillar of our value creation strategy focuses on a returns-driven approach towards capital allocation. We demonstrated our ability to successfully allocate capital during 2024, including both investments in our organic growth initiatives, as well as the deployment of capital for product line acquisitions.

Our organic growth investments included the addition of R&D staff and increased manufacturing headcount as we prepare to capitalize on higher sales volumes across our business. In 2025, we intend to increase our manufacturing capacity by more than 100% through a $6 million facility expansion. This investment will add a second sub-assemblies line as part of the 40 thousand square foot addition. Subsequently, we anticipate this will provide us with the opportunity to acquire other strategic product lines in the future, further to my point earlier on increased operational efficiency. The highlight of our capital allocation strategy during 2024 was clearly the additional acquisitions from Honeywell.

We invested nearly $20 million in the two additional acquisitions during the year, positioning us to expand our capabilities, add new customers and open the door to significant cross-selling synergies entering 2025. In July 2024, we acquired additional key assets for certain communication and navigation product lines from Honeywell for roughly $4 million in consideration. This was followed in September 2024 with the acquisition of various generations of military display generators and flight control computers from Honeywell for $14 million in cash.

As we have discussed, these acquisitions provide us with several unique opportunities to drive profit uplift through the insourcing of certain components, the potential to bring more maintenance and repair work in house, as well as attractive revenue synergy opportunities. In conclusion, 2024 represented over 30% growth in revenue and adjusted EBITDA and we expect similar growth in 2025 exclusive of any future acquisition opportunities. We intend to remain an opportunistic acquirer of complementary product lines that expand our capabilities in advanced avionics.

We believe our collective focus on commercial growth, operational efficiency and disciplined capital allocation positions Innovative Aerosystems, Inc. for sustained value creation in the year ahead, and we look forward to having you join us on that journey. With that, I will turn the call over to Jeff for his prepared remarks.

Jeffrey DiGiovanni: Thank you, Shahram. And good afternoon to all those joining us. Today, I will provide a high-level overview of our fourth quarter performance, including a discussion of our working capital, balance sheet and liquidity profile at quarter end. We generated net revenues of $15.4 million in the fourth quarter, up 18% when compared to the fourth quarter last year. The increase was driven by contribution from the recently acquired Honeywell product lines, growing momentum in new military programs, as well as revenue synergies from the Honeywell platforms acquired last year. It is worth noting that our fourth quarter 2024 revenues were impacted by a $1.7 million true-up payment for services performed by third parties.

Additionally, we were pleased to see continued stabilization in the air transport market and we saw sequential growth in this market when compared to the first half of the year. Product sales increased to $9.8 million during the fourth quarter, driven by contribution from our commercial air transport programs. Customer service revenue was $5.5 million owing largely to the customer service sales from the product lines acquired from Honeywell. Gross profit was $8.5 million during the fourth quarter, up from $8.1 million in the same period last year, driven by strong revenue growth, partially offset by the higher depreciation and amortization expense resulting from the Honeywell acquisitions and continued investments in growth initiatives.

On that note, I think it is important to recalibrate expectations around our recent gross margin performance and our anticipated margin outlook entering 2025. There are two primary factors that have impacted gross margin capture in recent quarters. The first factor is related to the incremental depreciation and amortization that has resulted from recent product line acquisitions. As we continue to complete product line acquisitions in the future, we expect that this will be an ongoing margin headwind. The second factor involves the forward shift in our sales mix. Historically, military sales represent less than a third of sales while 2025, due to the recent acquisition, will be a higher percent of sales.

Generally, military sales carry a lower average gross margin versus commercial contracts. However, given the significant potential we see for absolute EBITDA dollar growth in military, we believe this is good for us and work that we will continue to pursue advances our focus on improved operating leverage. Given these factors, we expect our consolidated gross margins will likely trend closer toward the mid‑50% range on a normalized basis over the intermediate term, which is below historical levels. However, we anticipate that with our improved top-line growth profile we will be able to drive increased adjusted EBITDA margin realization and profitability over time.

Consequently, we believe adjusted EBITDA margin and expansion will be a comparably better measure of our relative performance over time than gross margins. Research and development expense during the fourth quarter of 2024 was $1.1 million, an increase from approximately $740 thousand in the comparable period last year. This increase was driven by growth in our product development efforts in support of our long-term growth strategy. Fourth quarter 2024 selling, general and administrative expenses were $3.1 million, a decrease of $3.7 million from last year. The decrease in SG&A expense in the quarter was primarily the result of some one-time expenses included in the prior year results, partially offset by incremental amortization expense related to the acquired Honeywell product lines.

Fourth quarter net income was $3.2 million or $0.18 per diluted share compared to net income of $2.6 million or $0.15 per diluted share a year ago. Adjusted EBITDA was $5.6 million during the fourth quarter, up from $4.8 million last year due to our strong revenue growth and operating expense leverage. Moving on to backlog. New orders in the fourth quarter of fiscal 2024 were $95.4 million, which includes $74.3 million of backlog acquired as part of the product line acquisition announced on September 27, 2024, and backlog as of September 30, 2024 was $89.2 million.

This backlog includes only purchase orders in hand and excludes orders from the company's OEM customers under long-term programs, including Pilatus PC-24, Textron King Air, Boeing T-7, the Boeing KC-46A and Lockheed Martin. We expect these programs to remain in production for several years and anticipate that they will continue to generate future sales, further due to the nature the product lines from Honeywell do not typically enter backlog. Now turning to cash flow. During fiscal 2024, cash flow from operations was $5.8 million, up $2.1 million in the year-ago comparable period. The improvement was driven by higher cash earnings and improved working capital efficiency.

Capital expenditures were $700 thousand during fiscal 2024 versus $300 thousand in the same period last year. As a result of these factors, free cash flow for the full year 2024 was $5.1 million, up from $1.8 million last year. Total net debt as of September 30, 2024 was $27.5 million, up from $16.4 million at the end of 2023, reflecting the incremental debt to fund the recent Honeywell transactions. This was partially offset by our strong free cash flow generation during the year. Our net leverage at the end of the fourth quarter was 2 times. We recently amended our credit agreement with PNC Bank to expand the facility to $35 million.

Our total cash and availability under our credit lines was $7.5 million at the end of the fourth quarter, which provides us financial flexibility to support our ongoing operations and facility expansion. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of the call.

Operator: We will now open the call for questions. We will now begin the question and answer session. The first question comes from Andrew Rem with Odinson Partners.

Andrew Rem: Maybe if I could start, I am going to call it the Honeywell acquisition number three, the one you announced in early October. Can you give us a perspective on the revenue and EBITDA contribution, or just give us some sense of what that acquisition looks like and impact on FY25?

Shahram Askarpour: Well, first of all, Andrew, yes, we did the acquisition in September. There is — are we going to be putting our backlog information?

Jeffrey DiGiovanni: Yes. So Andrew, a couple of things on that one. Under that acquisition, the backlog came on around $74 million. So in our backlog, you include about $74 million of backlog acquired on that acquisition, and which is production. So that is going to bleed off over probably a three- to four-year period. And military has lower margins than commercial.

Shahram Askarpour: In terms of EBITDA, the margins we believe are going to be similar to our EBITDA margins…

Andrew Rem: Just to clarify, you are saying that, I think you said it in your prepared remarks as well, gross margin is lower. But were you saying EBITDA margins are closer to being similar or those also are a little lower?

Shahram Askarpour: Comparable to what we have, because the way we look at it is that it is an addition. It does not significantly increase our SG&A or engineering. So in a lot of ways when you look at it, the gross margins fall into EBITDA.

Andrew Rem: And on the backlog, should we — does it necessarily burn off linearly or can it be more chunky over from one year…

Shahram Askarpour: Yes. I mean, part of the backlog being what it is, was that there was an obsolescence issue that Honeywell resolved a few months ago. And because of that obsolescence issue, the deliveries over the prior year or so were very limited. So there is a catch-up that is going to be done in 2025.

And it is still a little bit too early for us to be able to accurately say how much of that is going to be done in 2025, because Honeywell is going to continue operating this product line at least for another three, four months before it comes to us and there is going to be a shutdown period as we experienced before while all the test equipment gets transferred here. So if I was to be a guessing man, I would say our Q2 is going to see a big bump in revenue from this. Q3 probably would be the transition quarter, it will get a dip and it will hopefully recover by Q4.

But I think some of the backlog, it is clear that performance is over four years and some of this is just behind the eight ball that we have to ship as soon as we can.

Andrew Rem: And then Jeff, you mentioned the $1.7 million true-up payment. Which segment does that fall in?

Jeffrey DiGiovanni: That will fall in the customer service segment.

Andrew Rem: And then on CapEx, I think you guys said $6 million. Is that all in FY25?

Shahram Askarpour: Some of it we already spent in FY24, yes…

Jeffrey DiGiovanni: So some in 2024 but the majority — all that is going to be fiscal 2025…

Shahram Askarpour: All the architectural work and all the design work and preliminary to get timing permissions and all of that, I think we paid for all that in 2024.

Jeffrey DiGiovanni: So now we are moving forward with the construction in fiscal 2025, so you will see that in the CapEx going in 2025.

Andrew Rem: And when do you expect to complete all that work in fiscal 2024?

Shahram Askarpour: By June, if any construction is completed on time.

Operator: The next question comes from Doug Ruth with Lenox Financial Services.

Doug Ruth: I also want to congratulate you on the strong quarter. You really gave us a lot of information. Is there any way that you can give us any kind of projection, what Q1 might look like as far as revenue…

Shahram Askarpour: For the quarter that we are in right now…

Jeffrey DiGiovanni: Unfortunately, we do not provide forward-looking guidance…

Shahram Askarpour: Yes, I think I will wait until February for that.

Doug Ruth: And is this the norm in your business to say that the backlog could take up to four years to earn out?

Shahram Askarpour: It depends on — I mean, some of these are military contracts and they are production contracts. I mean, typically for Innovative Aerosystems, Inc. when we have production contracts, we get releases, maybe 18 months releases or a year releases. This is — our backlog is usually not of this magnitude. These are military contracts and some of them are with Lockheed. They are on production contracts. And Lockheed had — for some of these, they have gone out and issued purchase orders over the next four years. But for us, it is not typical, but this is new.

Doug Ruth: And then can you — you mentioned that you thought that the Q2 was, you called it a big bump. Could you explain that a little bit more, what you see happening in that quarter?

Shahram Askarpour: So I mean, if you remember when we did the acquisition from the first acquisition from Honeywell, the first quarter for it was our Q4 of 2023 where we got like $6 million revenue that came from Honeywell. And that was because the next quarter they were planning on packing all the test equipment and shipping it to us. So they typically do as much pull-in as they can in the prior quarter before shipping their equipment to make sure the customer has enough equipment to support them while we go through this transition phase. That quarter where that is going to happen looks like it is going to be Q2 of our fiscal 2025.

So between January to March, we anticipate Honeywell is going to ship a lot of this equipment to Lockheed before they tear down the equipment to send it to us.

Doug Ruth: And my final question, could you tell us what the three highest priorities are for fiscal 2025?

Shahram Askarpour: So there is — yes, I mean, there is — I thought we outlined that in our speech. But we have got product development where we are looking at launching our latest generation, which has a lot of artificial intelligence capabilities. It is certifiable artificial intelligence, which is unique in our industry at this point. So that product we are going to be launching — we are going to finish the flight test with Pilatus for the PC-24 version of that utility management system. Another priority for us is insourcing a lot of the sub-assemblies and that would allow us to hopefully increase our gross margins.

I think our gross margins gradually hit a low in the low 50% range in the middle of last year. And as we have kind of gained some efficiency and learning curve of our technicians, we have built it up to the mid‑50s. We would like to be able to maintain that long term. And one way to do that, because as long as we are doing acquisitions, there are always going to be inefficiencies and you are going to be training new technicians while other technicians are doing the work. So the way we can maintain that mid‑50% range is by increasing the insourcing of the sub-assembly. So that is a big focus for us.

And then the final is continuing with our capital allocation of opportunistically identifying products that fit our profile and acquiring them. And those are the three things that are priorities for us.

Operator: The next question comes from Gowshihan Sriharan with Singular Research.

Gowshihan Sriharan: The first question is with the recent wins on the military side, the U.S. Army simply, could you give us color on what you are excited about in the military space and what you are doing that is helping you win market share and what is making you competitive in this space and how do you build momentum in that space?

Shahram Askarpour: So I mean, essentially what we have done was a shift in strategy. I will go back to a few years ago where they put a sequestration of dollars and the military budget got cut significantly. At the time, the strategy of our company became to shift our focus from military more towards the commercial side of things, which is what we did three years ago. When I took over, I started building our military business development team and focused on getting more military business. It takes a while for these things to start paying off. So what we have seen so far, we have seen positive results. I think the autothrottle for the U.S.

Army — autothrottle is a product that we developed many years ago and we had not been successful in marketing it to the military. We have been selling it to Textron as a forward fit on their King Air. But the U.S. Army, the U.S. Air Force, Navy, they have a number of these King Air C-12s and they could use the autothrottle. But just over a year ago, we were selected by METS, which is the Multi-Engine Training System for the U.S. Navy. And now the U.S. Army selected us for their C-12 platforms and we continue marketing that into the military side. We won this other program for a mission computer and a display.

And we actually have several other opportunities on the mission computer side of things that we are looking to explore. The acquisition we did from Honeywell for the F-16 flight control computer and the mission computer is going to open a lot of doors for us in terms of being at the table with Lockheed and taking opportunity of other product lines that they are looking to acquire.

Gowshihan Sriharan: Given the increasing military presence, what are the potential challenges in a longer sales cycle with a more complex procurement process? Can you give us some color on how you manage that, all-state responses in your R&D and product development space?

Shahram Askarpour: I mean, the sales cycles are longer. But like I said, we started down that line about three years ago and we are beginning to see fruits of those efforts and we are going to continue down that path. I mean, some of the things we are doing now in our organization in anticipation of some of the new contracts we are getting is making our facility more secure. We are putting a lot of controls in place so we can take on secret programs from our military, as well as putting in systems that can withstand government accounting, audits and all of that. So we have changed our MRP system, which is going to go live early 2025.

We have been working on it for about a year now. And because our ERP system is kind of old and antiquated, that will allow us to be able to easily show costs to the government and be able to categorize expenses differently the way the government wants to see. So we have put in a lot of efforts into the infrastructure that would get us to a point that we can become a serious defense contractor.

Gowshihan Sriharan: And given your strategy that you mentioned, the Next strategy, what percentage of revenue ideally would you think in one to three years would be in the military sector?

Shahram Askarpour: So I think on average, just about less than a third of our business used to be military. I guess last year that went down because of the acquisitions we did with Honeywell that were mainly focused towards the commercial side. I think this year, military is going to be pretty large because of that new acquisition we did from Honeywell on the F-16. I think long term, we like the idea of having a third military, a third business aviation and a third air transport. That formula has worked for us for over 35 years and we like to see it that way. But you know as you grow you have to grow every sector.

And when you say I am going to grow my military fivefold because I am going to grow the business fivefold, then that becomes significant enough that you need to put some controls in place.

Gowshihan Sriharan: And I think you mentioned this about your UMS II but with the COGS space. How do you see the interplay between military and commercial technologies evolving? Are there any other specific — I think you mentioned the UMS II is agnostic, but are there any specific synergies or cross-pollination opportunities that you are targeting?

Shahram Askarpour: Well, I think our — again, our product development strategy from day one was that we made one product and we sold that product to the military, to commercial aviation, as well as air transport. Now, there are variations of it that go into the military. For example, we make the same display that we put in the 757/767; we put them in the C-130s. But the one that goes in the C-130 has night vision capability. So it has two sets of lighting for nightlight sensing. But the backbone of the technology is the same. And going forward, we continue developing our products. For example, the UMS that we made for Pilatus was very much a one-platform product.

We developed it specifically for Pilatus. When we came, they wanted to do a more capable UMS, which we have been developing with them and that is the one that is going to go into flight test. I think it is scheduled for March or April. When we did that, we started taking into account how do we now make this more universal so that we can put it in military aircraft as well as put it in other business aircraft. And one of the things that became apparent is that if you are putting a flight control computer in the military aircraft today, they want to see artificial intelligence capabilities in it.

So we added the artificial intelligence core to this product line so we can cross-sell it in the military as well as in the business aviation side and utilize it for more cockpit automation.

Gowshihan Sriharan: And my last question is, given the issues at Boeing, do you see any kind of potential lift in terms of retrofit opportunities, or how do you see that playing out, if there is any?

Jeffrey DiGiovanni: So I think your question is saying, the Boeing issues they are having, how does that affect Innovative Aerosystems, Inc.…

Shahram Askarpour: No, it is very good for Innovative Aerosystems, Inc. It is not that we want them to have issues. But as long as they cannot make new airplanes, people are going to fix their old airplanes.

Jeffrey DiGiovanni: So you are going to see that with aging airframes — still a lot of repairs and maintenance, parts sales, spare sales in the market overall going up in aerospace because of that.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Shahram Askarpour for any closing remarks. Please go ahead.

Shahram Askarpour: Thank you, operator. And thank you all for your time and interest in Innovative Aerosystems, Inc. Have good holidays and a good day. Thank you.

Operator: This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.