Innovative Solutions and Support Inc (ISSC) 2004 Q2 法說會逐字稿

Welcome to your Innovative Solutions & Support second quarter earnings release conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the floor over to the Chief Financial Officer, Mr. Reilly. Sir, the floor is yours.

We are having a problem here. Good morning everyone. This is Jim Riley, the Chief Executive -- the Chief Financial Officer -- I've given myself a promotion already -- of Innovative Solutions. I want to welcome you to our conference call this morning where in just a few minutes we will discuss our second quarter and first half results for the period ending March 31st, 2004.

Joining us on the call from our corporate offices here in Exton, Pennsylvania is Geoffrey Hedrick, the Chairman and Chief Executive Officer of the Company, and Roman Ptakowski, our President.

Before we get started, I will read into the conference call our Safe Harbor message as follows. Certain matters discussed in this conference call, including operating 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 prospectus and Form 10-K on file with the SEC.

It is now my pleasure to turn the meeting over to Geoffrey Hedrick, our Chairman and Chief Executive Officer.

Welcome to our conference call it's been a great quarter and a great half. Our record sales this quarter -- that is record in our history -- produced remarkable profits as well. As you can see our revenues are up a 50 plus percent and our margins are -- our gross margins continue to expand and our net income has almost doubled than a year ago.

So as you can see in the numbers the business is very strong. And we see a very strong and positive future as well. I am particularly pleased that we achieved these earnings even in the face of a 77 percent increase in product development. We are reinvesting our profits and cash back into the business, because we see a very strong future for our product line.

The backlog kept growing. We're actually realizing the anticipated growth of RVSM market. It's followed very much as we expected it to, and happily we are prepared properly to service that market. Our backlog is up now 27 million and as of the end of the quarter, and it continues to grow. A substantial portion of that backlog, almost 90 percent of it, is commercial, and the balance, military. But we expect that military and commercial balance to even out. Actually if you look on a longer level, which is a $44 million total backlog, that includes both released and unreleased, the military and commercial are almost equal.

So we are seeing growth in all the right places. Our CapEx was about 500,000, which is roughly what we expect. It's not going to go up appreciably. We continue to generate a lot of cash, and we're happy. Cash is now about 53 million, or almost $4.50 a share. We intend to use that to make acquisitions when we find the right acquisition. In the meantime our organic growth is keeping us plenty busy driving the business at a (technical difficulty) rate.

Looking forward in the future, we continue to look at a strong double-digit growth in the future, and this year should close out as the analysts expected strongly. We continue to be very confident and comfortable with our now three people covering of our stock. We are pleased to have a new analyst covering our stock. And they all seem to be in reasonable accord, and we're come comfortable with their assumptions.

That is my opening remarks. I would like to open it up to questions.

(OPERATOR INSTRUCTIONS) Chris Versace.

Congratulations on the quarter. Just a couple of questions. The first would be the numbers were pretty solid it appears. Can you just talk about the strengthening market and was that reflected at all in your quarter? Meaning did it continue to build throughout the quarter? And has it, from what you've seen so far in the month of April, has it continued to strengthen?

It continues to remain strong. As you can see, it has been strong for probably through the entire second quarter. And it continues to remain strong, and we continue to book in a lot of RVSM business. I think our market penetration if anything is expanding. Our product seems to be perfect for the market. I don't know that it's getting stronger, but we definitely see a general improvement in the economy as reflected in our product demand.

And then just a second question would be on your product development. In your comments you said you are spending a tremendous amount of money there. Can you just give us some insight as to what either end-markets you're looking to attack, or is it just new incremental products into the cockpit, or is it something related to flat panel that you guys are working on? Can you kind of describe what you are kind of working on there?

We are working on all of those. One of the things we see, as we have discussed before RVSM, we believe that the RVSM market will now be -- will not be nearly as peaky as we had originally anticipated a couple of years ago. We actually see it being serviced over a 2 or 2.5 years rather than it all being in this time frame now. Although as you can see, our revenues have gone up significantly. Our profits are up. But we expect this to continue on for a broader period than previously expected.

In addition, we think that we have established a very strong basic air date of product market. Understand that even though many aircraft may be being -- may be serviced or accommodated for RVSM by recalibration, much of that equipment is 20 to 25 years old and has serious obsolescence issues and reliability issues. And we expect -- we see that now as an ongoing market well beyond the RVSM. And actually made a stronger market simply by the amount of attention on that older equipment's performance based on ongoing tests that have to be done to assure compliance with RVSM.

In other words, they are going to continued to test for the performance and accuracy, and that older equipment is just not going to be able to hold up. So we see a continual -- a much longer continuation of that of what we thought was a narrower spike in the RVSM market.

And then just two quick follow-ups and then I will jump out. The level of R&D that you guys posted in the quarter, is that the level we should be thinking for the balance of the year as well, or should we see it increasing throughout the year?

I don't think it will increase. We expect, as I have said before, a 12 percent number has always been one that we -- 12, 13 percent and sometimes it will spike up. Part of the spiking sometimes is lower revenue and a constant investment in R&D. At 12 percent is about what you can expect. The heavy investment was investment in the verification software verification of flat panel and other programs. And happily that is done. So finally we're happy to say that we have completed our V&V on the flat panel software.

And just an additional last quick question. Of the revenue you posted in the quarter, how much was RVSM?

About 85 percent of it.

Selman Akyol.

Alright, first of all, your gross margins were those record gross margins for the Company?

Probably.

And given the fact that you guys are having higher volumes which is driving your gross margins, and we expect to continue to see historically third quarter be stronger than second and fourth quarter be stronger than third. Those numbers look sustainable then?

The gross margins, you said?

Yes.

No, I keep saying that we're not -- our gross margins go up, but we believe that that we are very high now. And in fact if anything, I would be concerned if they got any higher, because I think again we don't want to lose our competitive posture.

A lot of this is -- you're talking about the warranty aspect. Understand that we have -- our warranty expenses are very low. Our warranty expenses, as you know, we have very long warranties, three to five years. We're happy that the performance of our equipment and its reliability -- it has really proven to be exceptional. And we actually reduced the rate of reserve on our warranty by direction, or by recommendation of our auditors, because they believed that we were over reserving. So some of that -- that warranty is about 2 cents -- 2 points of it, yes. Two points in the gross margin was that warranty reverse.

And that was a one time thing?

Yes that is a one time thing.

And that would've been for your prior years. And now you are accruing at a lower rates on a go forward basis. So some of that would also be -- okay.

Some of it, but a relatively small amount.

Number of shares outstanding at the end of the quarter?

Just under 12 million.

Do you have an exact number by any chance?

Yes, I could give you an exact number. It is 11 million 566.

Good enough. And then during the quarter how much did you ship out of your backlog from the end of Q1?

At the end of Q1?

Yes, just so I can roll the numbers.

I think a substantial portion from the end of Q1 where we had 26 million of backlog.

So most of everything that got shipped this quarter came out of backlog?

I won't say everything, but pretty much everything.

Virtually everything. At the higher rates, there is going to be less booking and ship in the quarter, because your rates are running higher. And you can see a continual increase -- you can anticipate an increase in sales for the next two quarters. So you will see more coming out of backlog and less book and ship.

But then would you also expect to be replacing that backlog?

Oh, yes. I mean if you just look at the backlog number, it continues to grow, and we are continuing to ship. So something is happening right?

No one has mentioned it on the call yet, Selman. But I hope you guys sought the announcement we put out yesterday afternoon where we booked in another $5.8 million.

And that would be in addition to the numbers for today?

Yes, we are only talking about the quarter numbers today.

The quarter numbers today, 5.8 was (multiple speakers).

Geof, I am going to try something here that's been very difficult and very frustrating, but I am going to quote to you. "Flat panel will be coming to market at the end of calendar 2004." I understand end of calendar 2004 to be December 31. So I think --.

It's not December 31, it's end of the calendar year. You probably didn't hear me, but I can tell you that we just finished the V&V efforts for the flat panel software.

And V&V stands for -- what does that mean?

That means that the testing of the software and submittal to the FAA DER. That was a huge accomplishment.

So you now have submitted?

We have submitted the software. And I think the hardware tests are going within a day or two.

To start up the testing or --?

No, done.

Okay so the hardware is done too and so you are submitting that also.

Hardware, I think there may be a test to go, but to put it in perspective the test documentation, all the data for this testing is on a pallet. I mean there are literally tens of thousands of pages.

So essentially tests documentation is done. And so then when would you expect -- is the next step approval?

The next step we expect approval in about 45 days.

Okay, and then literally so then you think you have orders than by the end of the year?

We expect to have orders well before the end of year.

Great.

When we say to market we are hoping to ship by the end -- ship product out the door by the end of the calendar year, maybe very small, but we are on track.

Okay.

Selman, to clarify, that is in addition to product -- flat panel product that we are already shipping to the military.

And then any more color just on acquisition updates -- is my last question -- in terms of have you guys got three or four in your sights that you're talking with?

I can tell you broadly that, yes, in the last month a half I've had meetings with a couple of different people. But other than that, I don't want to comment, if you don't mind. It's a pretty sensitive subject.

Mark Rosen (ph).

Hey guys, congratulations on the quarter. Along with a question asked earlier about R&D, SG&A has also historically decreased as a percentage of sales over the fiscal year. Is this something you see being a trend in the second half of this year?

I don't know. Typically the reason that SG&A declines typically as a percentage is because the revenues go up. But I would hope that we would have put more salespeople on. And therefore, it will probably go down only because the revenues will go up. And the revenues will probably -- to meet your expectations, you can speculate on what the revenues have to be. And that would cause us -- that would force us to hire a whole hell of a lot of people in hurry to keep pace with that. So the answer to your question is probably they will go down, but the total amount only as a percentage of sales.

The 17 million in follow-on backlog, is that mainly due to limited installation capacity?

No that's programs like the Canker (ph) program, other programs in which we have long-term orders and in the subsequent years have not been released. It's not a capacity limitation.

The orders that we can get right now, our backlog for our RVSM, whether it's -- the capacity limitation limits the orders. So our -- what we see is basically what the installation's capability is, but we actually, as we have noted I think in our release, (technical difficulty) going to be a significant amount of RVSM business over the next couple of years.

One more question. Could you explain the increase in cash from operations over the quarter?

Mark, it's a pleasure to talk (technical difficulty). Of course we had profits of almost $2.6 million in the quarter, Mark. And that's principally drove it. One of the things that offset that a little bit is the fact that our inventories have gone up, and they have gone up in anticipation of pent-up demand. So we will be producing more going out in time. And also our receivables have increased a little bit mainly because of the sales at the last part of the quarter.

But receivables are in great shape in terms of days outstanding. There probably under 30 days. I think Geoff mentioned earlier, we generated almost up to $4.50 a share in cash now. And we generated about $4.3 million of net cash year-to-date.

David Campbell.

Can you explain again the R&D? You mentioned that you thought it hit at peak in this last quarter because of the final testing on the RVSM -- rather the flat panels. Does that means that from now on that percentage will go down as a percentage of sales?

No, our intention is to invest in engineering at the rate of approximately 12 percent of sales. And it will go up and down depending on a specific project. But we would intend to do that. We think it's money extremely well invested and well spent. If we had something to invest in we might invest -- we may raise that to 15 percent, but we would have to have a reason. Traditionally, we run around 12 to 13 percent except when we may have a specific spike, or if our revenues are down than its relative percentage goes up. But it could go as high as maybe 13 percent, but it will be the 12 to 13 percent range.

So this spending is for refining and improving the technology (multiple speakers) instrument data?

To grow the business -- let's look at the business. Revenues are up 53 percent. Profits are up 100 percent. And that is specifically due to product development, products that yield really good profit margins. So we continue to grow this business and continue to grow it at the double-digit rates that we're talking about -- we continue to have to invest in product development. And that's why it's as high as it is.

These are your products -- besides flat panels and besides RVSM these are just some other new things that you really not just talking about.

It could be flat panels. I mean flat panel is pretty generic. There could be 250 different versions of a flat panel. Each might require some engineering. So we're talking about addressing billions dollar markets. And what happens is that you're going to expand engineering to address the specifics of an application. So that can be applied to our data projects, existing markets that we presently serve, but adapting our basic designs to specific requirements in the airplane. Each airplane might have a different configuration of a flat panel, let's say. So we need engineering to invest it to do that.

Thanks, you mentioned that you are satisfied with the estimates out there for the fiscal '04 year? This despite what seems to be a higher level of gross margins than what we had expected before the second quarter report?

The gross margins are high. Remember two points of the gross margins are as a result of reducing our warranty reserves. So we take 2 points of that margin right there from out of the warranty. And a lot of it is that we -- you know we had a big burst in sales. And you have a big burst in sales if you don't put on a lot of additional people in manufacturing to do it. And we've been very good at not having to do that. Our gross margins are going to stay high. We are happy. I find it interesting. If anything I would want them -- I think they've gotten to be remarkably high, but they are a result of just running the business well.

So you are satisfied that this 64 percent, call it, may be somewhat sustainable for the rest of the year?

I think 60 percent is what we would intend to sustain it. If we got higher than that, it would probably be a result of having sales higher than we expected. Rather than -- look, I find it -- just from 35 years of experience I have got to tell you when the gross margins in the aerospace industry go to 60 percent, we all kind of look at them in disbelief when you realize that our competitors are all half of that or less.

We do well. It is a good signal that says that we can remain extremely competitive in this marketplace. We will continue to be very competitive, and that is probably the best thing you can derive out of very good gross margins.

The 5.8 million of orders you announced yesterday, were those military orders for flat panels or RVSM, or a combination?

A variety of different sources of orders. And a lot of it is RVSM, as you would imagine.

Right, so once you get the FAA approval for the flat panels you figure you're pretty well ready to go with some commercial business?

I expect commercial business and military business. The approval cycle is probably just about on target. I suspect if we had gotten approval two years ago we would have had approval, but nobody to sell it to, because the last two years have been pretty difficult especially in the commercial sector. So whether it was out of design, accommodation or just good luck, I believe we have clearly benefited from the additional efforts put into the product development over the last couple of years.

We have profoundly improved both its performance and reduced its cost. So as the product now goes into the market and into sales we have an extremely -- a remarkably high performing product with very, very low cost base that has significantly been improved over the last two years. And now we actually think that there are people that have money to buy it, as opposed to the last two years were nobody had any money.

Yes, I may have misread or misheard your comments about CapEx. You said 500,000 in the quarter, or is that the annual rate.

500,000 in the first half.

That was the first half, so it is really running at $1 million rate?

It won't get that high, Dan. Again, we talked earlier I think Geoff mentioned that if we see any additional CapEx between now and the end of the year it will be a shadow of what it was in the first half.

We have traditionally had the CapEx (indiscernible) following depreciation.

Now, we have been able to equip a brand new facility. We will invest in capital expense, and we will expand our CapEx appropriately to make sure that we can meet our demand. And we don't anticipate any real individually high expense.

This is machinery -- just basically the CapEx is for machinery?

No, it is not machinery, but it will be typically test equipment. It may be benches on the production floor. We may put in a new air-conditioning system for $100,000. We buy some machinery, but not a lot. But it may be 100 or $200,000. For instance, we thought -- I think we bought $100,000 worth of EMI testing equipment, that kind of thing. Stuff that usually has about an eight or ten year life factor, by the way.

Right.

What that does and what it has done -- as an example, when we did the surface mount facility, which probably ran close to $1 million, 750,000 plus, not only did it paid itself back in less than 18 months, but it has given us a responsiveness where we can take a design and go from design to an operating circuit board with all of the components on it in roughly 10 days. And that was a result of bringing this equipment in-house. It gives us huge flexibility not only to service our sales demand but our engineering development.

And so barring any acquisitions, cash should continue to build significantly by the end of the year, end of the fiscal year.

We would expect it to continue to build until we make an acquisition.

And you are continuing to look at that, I take it.

We absolutely are.

Jerry Gallant.

I don't think there's any question that you're going to have an excellent couple of years. Your assessment of the RVSM market being a little less peaky, and the retrofit process taking well beyond the FAA deadline, I think is very accurate. I guess I would like you to do is to maybe take a minute or two and give us a vision of where you think the Company is going to be in 24 months from now.

I am not going to ask you for a specific revenue guidance or anything like that. But the question that I get from investors is, great, RVSM is a wonderful opportunity. These guys are capitalizing on it beautifully. What they do for an encore? Now you have alluded to that with some of the other questions about your R&D, but if you could just take two or three minutes and give your vision of what does Innovative Solutions look, excluding acquisitions, let's say 24 to 36 months from now.

I think we have talked about it before, but I will touch upon it again. Clearly we have invested over the last three and a half years heavily in flat panel programs and equipment associated with flat panels. Not only have -- flat panels means basically a broad range of display systems that are going to be required to support the 20 odd thousand aircraft that are out there with equipment that is fundamentally in a serious obsolescent mode where the equipment can't be repaired. Changes are occurring in technology where parts that were used 20 years ago are just physically not available, and there is no replacement for them.

So besides the fact that new equipment is required to meet the continuing addition of FAA standards and operational changes, you also have maintenance issue on the existing aircraft, and the reliability, the so-called dispatcher -- of product -- of reliability of the equipment itself. I'm talking about the airplanes and the equipment. We see a huge market there.

Where is the business in 24 months from now? I believe that we will have a strong basic Air Data product line. We are one of the leading Air Data suppliers in the world, not just RVSM, but Air Data systems for airplanes. As an example, the A-10 is not an RVSM program; that is a military. And there are a lot of other programs like that that are not RVSM related, they are simply -- as in the case of the A-10 the equipment was unserviceable. And that same thing has happened to a number of other airplanes where the equipment is unserviceable, and we have replaced that. Now fleet-wide and on an ongoing basis we're providing it to OEMs.

So we see that as a strong base. We think flat panel display systems and things like engine display and control systems, fuel gauging and management systems and primary guidance display systems in the cockpit, we see all of those and things like -- as an example, the paperless cockpit where no more manuals, no more paper jet charts. That will all be in electronic filing. That kind of product is the kind of product that we will be servicing in 24 months, and will represent a significant part of our revenue.

The Air Data product line will be a substantial percentage of -- 24 months from now will still represent a substantial percentage of what we are doing today. In other words, the revenues that we anticipate this year I would expect 24 months from now that a large percentage of that volume -- that level will continue 24 months from now.

Do you see the flat panel future as -- what do you see as the mix between general aviation, commercial and military?

I do cannot have an answer to that question. I think you could guess a third, a third and a third. It is what it will be. I would clearly not turn down business from any in that segment to keep that balance. The market demand in all three areas, especially the military is a huge market demand. It's 1 billion or plus kind of market demand. And the commercial air transport is the same kind of thing. And the business in general aviation is a huge demand.

I don't know how to divide it up, but I don't think it makes any difference. Our product -- the same product -- the products that we make is priced competitive with the low end of general aviation, and is performance competitive with the highest level of military and air transport. It's a remarkable product. And it is a huge market. And along with it, remember what replaces is virtually all 20 odd different instruments in an instrument panel.

Rights, okay. Well, that is helpful. I think that kind of gives us a sense of what you think is going to sustain the Company beyond the current RVSM replacement wave.

It will do more than sustain that. It will allow it to grow at a double-digit compound growth rate for five to ten years. We think it's a very strong -- and by the way historically we have done exactly that. If you go back, we had a relatively level, as you well know, the last two years but most companies didn't stay level, they went down significantly. We're now growing back and over a five-year period still have a very high compound growth rate, and we expect that to continue.

Ashok Awood (ph).

Hi, congratulations, Geof. A couple of questions, one an add-on to the last question. At what point would you expect the flat panel ramp up to be such that it could represent maybe 10 percent of your revenues? Over what kind of a period of time?

It will be in the near future, but I can't put a date on it. The problem is, and you understand, it is difficult to predict that exact point. There are a lot of things that are involved that could come sooner or later. But in the process of running the business, our responsibility of running the businesses is try to keep our growth and revenues relatively in an upward trend. And we do that by putting whatever business we can find in there. We continue to push that marketplace. But since we have no specific orders that we can tell you that is coming, I can't tell you when that 10 percent will come.

Geof, let me ask the question a little bit differently. Would you be disappointed if 2005 10 percent of the revenues don't come from this area?

I doubt know how to answer that. I am not sure. I would have to think about that a lot. I would think that a significant percentage of our growth will be in the flat panel arena. So the majority of what we consider add-on growth from where we will this year will probably come from flat panel.

Next question was in terms of acquisitions. Let's say that you were to do an acquisition today, could you refresh my memory in terms of what some of the parameters may be in terms of possibly size, cash, stock compensation or one of the other, or how long it would be to accretion?

In general terms I can tell you that we would -- we have a fair amount of cash, so we would like to do a lot of the acquisition in cash, because the numbers would tell you that is a good way to do it. We, however, would like the ongoing interest of the people involved in the business, and have them share in our overall growth. So we would want some percentage of that to be stock, and not an insignificant percentage. Simply to keep their interest and involvement in the success of the acquisition. That is sort of a general statement.

I guess that helps define size also. About how long would you like to move toward accretion, if you will. Is it something you would like to see accretion within a year or what are your thoughts?

Accretive, if we take cash we will tend to be pretty accretive pretty quickly, because we get little credit, as you know, for the cash. The cash has been generating a lot of revenue. So if we converted our cash into an acquisition, it would tend to be accretive even with modest profitability of the acquisition.

The size clearly we don't want to get something that's four times the size of our business, because we would be preoccupied with the acquisition as opposed to this core business. So it would be nice if we acquired something in the range of our business. We wouldn't want to get something too small. And it would depend enormously on whether it was a distribution, whether it was satisfying our requirement for additional distribution, whether it was satisfying some technological need, advancing a product area that we need, additional product (technical difficulty) business to sell. So a guess would be, we would love to get something around the size of our business today.

Last thing, I guess it appears as though everything has been going very well. If you were to think of some of your disappointments, what might that be?

You know, we would always like to get things done a little sooner. There was a time -- I have to say I think that it looks like the panel's timing is about perfect. I believe that the delays in bringing it to market have proven to be a godsend in a way in that the cost of our -- our manufacturing costs of the product in the last 18 months has gone down by almost a factor of four.

So had that been released 18 months ago, our cost base for the same product would have been almost four times as much. Now we still would've been very competitive with the existing people in the marketplace, but we wouldn't have found any customers 18 months ago.

So we don't think we've lost any business. We believe that we have a much higher performing, a much more salable product, and much more producible, a lot less expensive. So that's worked out very well. The only disappointment is that we weren't able to -- I mean make the acquisition. I would've love to have made an acquisition by now, but we haven't found the right one. And the organic growth of the business is so compelling, we're not obligated. We don't feel obligated to run out and make an acquisition to put on meat on the bone, as it were.

Don Littlewood (ph).

A couple of questions. The RVSM, back in October there was a projection made by you that indicated somewhere in the range of $200 million worth of business that would come to the Company. Is that still an accurate projection?

I believe what we said was the market was 200 million.

The market was 870 million (multiple speakers).

But that included installation.

50 percent of which is in the retrofit market, and you get half of that business.

No, it was 50 percent of it was installation. And then what was going to happen -- I mean are we talking about the total market for the next five years? It's probably pretty close to that 200 million.

That you would expect to get out of it?

We hope to get a substantial portion of that.

You said in the press release this morning --.

Just by the way, of that market we have already got 71 million on KC-135, so we've gotten a substantial portion of some of that business. We already party shipped of that October prediction that we talked about. So there is still about 200 million.

Talking about the general aviation segment, that is what was in your press release.

No, I think that was the total RVSM market and included air transport and it included all RVSM, not just -- I think it was 4,700 aircraft, if I remember right. But I will be glad to look at the press release. But do we still think it's 200 million, sure.

You mentioned in the press release this morning significant increase in non RVSM related equipment as well. What kind of equipment is that?

That's equipment having to do like A-10 is non RVSM, Air Data Systems that are non RVSM, instrument panels which are RVSM -- are not RVSM, engine instrument and flat panel displays.

With regard to the flat panel display business, how are you anticipating marketing that? That is to say, is this going to go to cockpit OEM manufacturers, the dashboard essentially manufacturer where you're going to sell into it as a supplier? I mean, somebody has to design a dashboard to place the place the control panel in -- the flat panel in.

No, that's the way it works. The way works is this equipment goes into the instrument panel and supplies virtually every piece of that instrument panel. We would sell it to end-users, to mod centers, to military aircraft, both the manufacturers and the supporters. Nobody designs the instrument panel. The instrument panel is designed by the aircraft manufacturer, and we put this panel in there, and we design the installation.

So there isn't a dashboard designer as it were. There isn't, other than the original equipment manufacturer would -- an Airbus or somebody would conceivably design the dashboard, as you put it.

Right. But if you're talking about retrofit, in other words replacing gauges and all that are in there. Somebody has to reconfigure the dashboard?

Well, it's the instrument panel, and we do that. We define what equipment comes out of the aircraft and where our equipment goes. But there's not a lot of -- there's not a lot of options. Our equipment probably is -- its location in the instrument panel is probably by operational use is required to be positioned within probably half an inch of a specific location in the instrument panel.

Well, I am trying to understand how it's installed. In other words, you have to cut out of piece of the instrument panel and put it in there.

You put a whole new panel -- yes, you do that.

And you offer that as part of your product or somebody else --?

That's a trivial part of the product. There is a large -- are you familiar with an aircraft cockpit panel?

Sure.

Okay, that panel has a lot of instruments on it. That whole piece of metal comes out of the airplane, because it's got lots of holes in it for a whole bunch of different instruments. And we supply the new piece of sheet metal. And that piece of sheet metal is a very simple design. I mean that is a very straightforward two cut out --m rectangular cutouts and half a dozen or a dozen holes for switches, and that's it.

And it's just a flat sheet of metal typically. And it fastens in the same location. But it's a very straightforward installation of. That is the simple part. We've done that on a number of installations already. And in fact, in our airplane our machine shop actually machine the panel. We would -- potentially we would probably not machine the panel, we would have somebody produce it for us. But in the typical application probably half of the time or more the installer, that would be whoever is doing the installation, would design the modified instrument panel. It's pretty simple. That is the simple part.

That's what I was getting to though.

Okay, we could do it. It's a very simple -- and typically what would happen is that panel might be supplied as a kit with our parts. In other words the wiring harnesses and the panel would be supplied to a customer. And that panel would typically cost us 150 to $200 to have it made by somebody.

Okay. That clears it up for me. Thank you.

Chris Versace.

Just a couple of quick follow ups. You mentioned -- in just getting back to R&D. Can you kind of quantify the number of new products that you -- that has accounted for your revenue stream that weren't shipping 12 months ago, either the quarter or the last couple of quarters?

I would have to think about that. I don't think I can give you off the top of my head. I'm sorry, Chris. But I will be happy to kind of have -- we will have somebody look at that and we will get back to you on that. I don't know off the top of my head. Because about -- I can't give it to you off the top of my head.

Not a problem, Geof, not a problem. And then just one other quick R&D question here. How much of it is for, say, brand new products versus modifications or tweaks that allow you to continue to drive down your cost structure?

In the flat panel, as an example, we did a number of major redesigns that significantly reduced cost, increased performance and made the think a lot smaller. And so there was a fair amount of effort in that area, and a lot of software development, which is now becoming the dominant cost in engineering development.

We tend not to do pure R&D, although we have done a number of -- we are working on a number of programs now which are sort of leading-edge technology. The reason we don't use pure R&D is we tend to like to fine and define a product and focus it to our product development as opposed to abstract enabling technology R&D. We do some of that with certain products.

The specific number of new design kind of things. I would say about -- I would characterize it by saying 25 to 30 percent of our engineering effort is related to completely new efforts as opposed to tweaks. And I've got to be a little careful because, you know, if you do an Air Data System you can make the case that anything that measures altitude or air speed is a derivative. And to some extent that is true, but I am saying that if you come up with a completely different Air Data computer that's a new design.

The last couple of quarters you guys have been building cash, like you commented $4.50 a share. And it sounds like the RVSM market is poised to take off. You guys are getting traction in the flat panel market. I kind of want to flip the question around a little bit and say, while you guys are looking for acquisitions, has anybody come knocking at your door to beef up their position in either RVSM or the eventual flat panel market?

You could speculate that would be true, but we believe -- obviously people have been interested in teaming with us. If we had a real acquisition, somebody that was really interested in acquiring us, obviously that would be a disclosable event and we would tell you about it.

But, yes, people -- a number of our major competitors or colleagues in the industry are talking to us as we speak about potentially teaming in certain activities. And that is a little bit, you know, dealing with that is like dealing with a black widow spider. But you kind of touch the ground gently on both sides. So that we get something productive out of it, but don't give away the store, as it were.

Let me ask you a quick follow-up to that. If you were to look at maybe teaming as opposed to being taken up by somebody, is it potentially possible that a strategy for the flat panels is for you guys to supply them and have somebody else stamp their name on them and sell them out in the marketplace?

That is something that we talk about, yes. And that is clearly an opportunity. And there are other teaming arrangements that are opportunities. And we are talking about all of them. And I'm sorry to be evasive, but I'm doing it intentionally because it's a pretty sensitive subject. But I think your thoughts in that area are certainly well founded. By the way, Chris, you didn't comment on the fact that we finally finished the software on our flat panel.

I wasn't going to -- I don't want to -- there was no reason to comment on that. That's the way I look at it. Thanks, Geoff.

We are happy. Thanks.

Sir, there appear to be no further questions at this time.

Thank you very much, gentleman. Look, we are pleased with our results. We think we can maintain this level of performance and grow the business. Our product development hopper is strong and we are bringing a lot of new products along. We will be prepared to discuss them when they are done, is probably a more practical strategy.

We hope to make a sound acquisition. And to Chris's comment, we believe there are great opportunities to team with people who have strong positions in the marketplace, where we can both exploit that marketplace more effectively as a team. I appreciate your interest. Thanks. It was -- we will do a better job next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.