Innovative Solutions and Support Inc (ISSC) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Innovative Solutions 4th quarter and year to date earnings release conference call. All participants have been placed on a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to Mr. Geoffrey Hedrick. Sir, the floor is yours.

Good morning. I'm Geoffrey Hedrick. I'm Chairman and Chief Executive Officer of Innovative Solutions & Support and I'm delighted to welcome you to our conference call this morning. In a few minutes I will discuss both the 4th quarter of 2004 and the year-end results. But before we get started, we have joining me Jim Reilly, our CFO, and Roman Ptakowski, our President. I'd like to have Jim read our Safe Harbor message. Go ahead.

Thanks, Geoff. And thank you all for being on the call this morning. 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 Securities and Exchange Commission. Thank you. Geoff, back to you.

Thank you, Jim. I'm delighted to announce the remarkable results, truly remarkable results, both for the 4th quarter and year end. Sales were up to a record 14.4 million. Our net income was up 59%, to a record of 4.5 million. Earnings per share fully diluted were up 61% to 37 cents per share, and significantly with that remarkable sales our released backlog is up at year end by 47% to 35 and a half million, 35.4. Cash flow from operations is 7 million. And I comment on that, it shows the discipline that we've put in place over the last several years work, typically with very rapid growth in sales and profitability, things get a little loose. We were able to keep things tight and keep our cash flow moving. Cash flow for the quarter was 59 cents a share. For the fiscal year ending September 30th of 2004, our sales were up 64% to a record of 46.1 million, net income up 115%, to a record of 11.9 million. Earnings per share fully diluted up 127% to $1 a share. Exceeding even the expectations of the street. Cash flow from operations an incredible 16.1 million. It shows that disciplines really are in place, and the total cash flow, because we're now getting some interest income and stock option and warrant execution, of 17.1 million, or $1.41 per share in cash. The business is strong. We're executing well. Significantly one of the reasons the cash flow is up, you might note, is that we have leveled the shipment rates.

In fact, in Q -- the last quarter of 2004, we shipped substantial volumes in the 1st and 2nd months of the quarter, which resulted in payments actually being received before the year end. And we've started off this Q1 of this year with the same kind of level performance. The manufacturing operation is doing a remarkable job. On the side, we supply equipment to three individual divisions of Boeing, and they have a quality system called gold supplier. We have, for 22 consecutive months, been a gold supplier at three independent divisions of Boeing. In order to be a gold supplier, we've had to maintain 100% on-time delivery and 100% defect-free. I'm not aware of anybody that's done that. It's remarkable, especially in a company that has been growing at the rates we have been growing. As you are -- as you are aware, we have avoided providing guidance, forward guidance, because we've had the good fortune of having very, very smart analysts following our stock and have done an outstanding job of tracking the company and looking at its growth and very remarkably projecting that growth. Historically, the 1st quarter of the year is about 25% lower in revenue and profits than Q4 of the previous year. And that's because, as you can imagine, we get bookings in throughout the year, and they end up being -- bulking up near the end of the 4th quarter at the end of shipping that out, and at the natural occurrence in most businesses, especially businesses that have experienced very high growth as we have over the last few years. This year, we will be providing guidance because we no longer fall in that mold. Our backlog and bookings have been substantial.

RVSM bookings have exceeded even our estimates and although the 1st quarter is typically 25% lower in both sales and profit, this year we expect Q1 to actually be 25% higher in profits and higher in revenue than the previous -- than Q4, meaning that we're talking roughly 18 million in sales in Q1 of 2005, and net income will be up about 25%, or 45-plus cents per share, close to 50 cents, between 45 and 48 cents a share in Q1. This is a result of a huge demand for RVSM products. We have in backlog and -- a combination of backlog and shipped, our backlog and shipped is larger than our revenue of last year, meaning that we have more than 46 million in backlog and shipped product. For 2005. For those of you who have followed us for awhile, you'll remember that very typically we'll have 30 to 50% of the year's expectation in backlog at the beginning of the year. We now have larger than last year already. This is substantially due to the demand for RVSM products. And I have to say we've done a remarkable job in getting that business and delivering it in very high volumes. We've stepped up month-over-month shipment levels as much as 100% month over month increase in shipments, and maintained the quality defect-free, and it's very, very gratifying to see the system working as well as it has. You are aware, and in our posting we see that the demand for RVSM products by themselves will go substantially through this quarter and into next quarter and into the 3rd quarter. We have not a lot of backlog in the 3rd and 4th quarters, but a significant amount of backlog in Q1 and Q2. Most of the backlog that we see is in Q1 and Q2, as you would expect, in support of the RVSM.

But we have and we see a continual increase in basic air data systems. Not RVSM related, not that subset of high accuracy system, but the significant volume and demand that this company has experienced over the past couple of years in establishing itself as the leading supplier of retrofit systems has exposed us in an accelerated way to the marketplace and given us an excellent reputation but most significantly it has enabled us to significantly reduce the manufacturing cost of our basic air data products, so that it increases our competitive posture in the marketplace for a broad range of air data products. And we believe that that strengthens us in the future. Our backlog now is starting to -- we are expecting to increase our backlog in areas that may be non-RVSM related, just basic air data computer related. So we have a very optimistic future. Again, from the guidance standpoint, we see an 18 million in sales for Q1, and we're looking at about 48 cents a share in earnings. At this point, I'll turn it over for questions.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touch-tone phone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. And we do ask that while posing your question to please pick up the handset to provide optimum sound quality. Your first question is coming from Mark Rosa of Thompson Davis.

Good morning, guys.

Good morning.

Good morning, Mark.

You were just speaking about your manufacturing costs and being able to lower them. Is there anything else that you attribute to your rising gross margins in the quarter?

Well, I think -- I mean, it's a basic -- the gross margins, you have manufacturing overhead which doesn't go up when we increase the sales, so that the gross margin goes up accordingly. The higher volumes, that's -- that's -- it actually closes to the point where you have material and direct labor, but the overhead is being now absorbed by a much larger sales base.

And what about on the flat panels and the core -- your core businesses there? Is there a difference in gross margins there?

In the flat panel, we don't see any -- I mean, we see a very similar situation, but the volume in the product has not approached the kind of volumes that we're seeing in our air data product. Remember the kinds of improvements are going to be applicable not only to just the RVSM equipment but a broad line of air data products. It's allowed to us become significantly more competitive in the marketplace.

And are you seeing more flat panel business in your backlog?

We are seeing a lot more potential business in our backlog. We do not have hard bookings, but as I suggested before the end of the year, I expect to be able to announce something.

Okay.

I'm going to avoid speculating, because, you know, a slip of a week or two creates questions that really are unfounded. I don't want to dance around the question, I guess is what I'm saying.

Okay. What made the share count rise slightly?

People exercising options.

Okay. Could you tell us what CapEx was?

CapEx was about $700,000 for the year, Mark, and it was almost equal to our depreciation. So if you look at the balance sheet, the assets on that line virtually don't change at all. Most of the spending, Mark, was for manufacturing and engineering equipment plus some -- just infrastructure things, we needed to hire new employees, and our employee count has gone up. Pretty basic equipment.

Just a comment, we would expect some increase in the CapEx as we start to generate some volumes in flat panel, because we're going to do some assembly operations and specialized operations in-house to maintain the proprietary nature of the process. And additional test equipment as well. But it's still insignificant. Our CapEx expenses as a function of sales are pretty small. We don't see -- we may see a minor rise, but very small.

Okay. Those are all the questions I have.

I think if anything, I would tell you that I have expressed concern both to Roman and to the team that we should be consciously thinking about getting the proper equipment to improve the performance and efficiency of our work. And the reason we want to do that is, I mean our sales per employee are quite remarkable. I was doing some -- depending at the time, we're working up some -- some numbers. The little -- in a business that's growing as quickly as ours, it's difficult to make a snapshot in time, but we're talking in terms of doing last year about 46 million, and if you do an integral, you can come up with a headcount of about 120 people. So 120 people on 46 million is about $400,000 per employee, and we actually see that going up. The reason that's important is, to respond, as we have, in sales growth of 60, 70, 80%, that kind of sales growth, usually puts a terrible strain on the organization, because we've developed the efficiencies and automation inside the organization, we're able to accommodate that growth without trying to scramble and find another 500 people. So it's worked out well.

Okay.

I'm sorry to -- did I answer your questions at the same time? Besides giving you a commentary?

Yeah, did you. Thanks.

Thanks.

That's all I have for now. Thank you guys.

Thank you. Thank you, by the way, for being as perceptive as you have. We've avoided giving our analysts much support because of our Sox buddies, but they've done an amazing job, and it would be unfair to them to ask them to be carnack, and try to speculate what we were going to do this year, so that's why we've chosen to try to give some guidance, especially for this quarter. Go ahead.

Thank you. Your next question is coming from Robert Sussman from Bentley

Can you give us an idea in this 1st quarter how much of that 18 million would be RVSM, number one. Number two, are the margins there -- you may have answered this earlier -- are the margins there at this point considerably higher than the rest of the business? The third part is, will the 1st quarter be the high level revenues for the year on a quarterly basis? Can you tell yet?

Let's go back to your first question. You said is it substantially RVSM what percentage did you say?

I'm asking, of the 18 million in the 1st quarter, about how much of that would be RVSM?

A very high percentage. Probably, you know, 80%, roughly 80%.

Okay. So, then, how sharp will the drop-off be as we go through the year in RVSM? Can you tell?

Again, RVSM is a subset of a basic air data product. We've been projecting for a quite awhile that the curve will look more gaussian than a very sharp cut-off, so we, again, are expecting sales, and we forecasted sales to pick up with other products being flat panel products, fuel measurement systems products. We have a new product that we're about to announce to provide compliance. We have a broad range of new products that are coming along, which we believe, as we've been saying for over a year, will pick up from when RVSM lags off. The surprise to us is that the demand for our products has been even higher than we expected. And we've been able to accommodate it all, by the way. With very short lead times. So we don't expect it to be sharp especially. We see a very -- for the 1st half, a kind of reasonably level, falling off a little bit, but you would expect that, and we still believe that there's going to be substantial bookings for RVSM for another two or three quarters beyond that. Not of this level, but substantial. It still looks like, and I haven't looked at the exact numbers, I'm doing this off the top of my head, but there's got to be a couple thousand aircraft that are going to find it very unpleasant flying out of RVSM airspace, because it's going to be so congested, as I've said repeatedly, it's going to be a difficult flight to go from New York to Boston via Detroit. So we see it being relatively flat. Now, you asked - the second part of your question was what?

The margins, margins at this point much higher.

As we've said a number of time, our margins, and historically, have always maintained roughly the same kind of margins independent of the product.

Or the segment.

Both the mix -- that was Roman saying the mix and the segment. Relative. I mean, it's a few points, but, you know, as a percent, it's a very small percentage. A very small percentage of the actual profit. And the third question was, I'm sorry?

So, is it possible your 2nd half volume will only show a small decline versus the 1st half volume?

We hope so, but we don't -- we are speculating. We are -- we have year end -- we're still saying on general guidance, 58 to 60. As you can see, we're talking about roughly 60 million in revenue for 2005.

Thank you very much.

Thank you. Your next question is coming from Don Littlewood from Littlewood Burke.

This has to do with flat panel. Back in July the FAA gave you a TSO certification. Are there any other certifications required now to sell this product?

No. I mean, there are installation certifications for specific aircraft, and we're in the process of obtaining those as we speak, and I would prefer not to address the specifics right now because it puts us at a competitive disadvantage but I can tell you that the plan for flat panel and the performance of flat panel is very much on track to what we expect.

So that the product at this point can be installed in virtually any aircraft?

That's correct.

Okay. Good. Thank you. You've done a fantastic job, by the way. With the increase in shipments and maintaining your profit margin the way you have and the quality, your organization is to be commended for that.

Thank you very much. It is -- it is an amazing team. They are amazing. Everybody is remarkable. Thank you very much.

Thank you.

Thank you. Your next question is coming from Selman Akyol from Stifel Nicholaus.

Thank you. Congratulations on a very nice quarter. I guess I just want to touch base real quick on your gross margins. So those can continue to move higher from here?

I keep saying no, and, I mean, I can't go into too much detail, because at some point I think it becomes -- puts it at somewhat of a competitive disadvantage and you've been kind to appreciate that. Where our focus has to be entirely is the top line. Build the top line. Our margins, our gross margins, are amazing. Only Heidi Fleiss can improve on those. Our margins are remarkable. Our team is as good as it gets. I mean you can -- as we talked about the growth, we are totally focused on the top line, and we are confident that if we can keep -- if we can grow the top line, that the earnings per share, which is what I've always focused on, I've always said our focus is earnings per share, period. Cash and earnings per share. And we will continue to do that. I think our gross margins -- I keep saying, you know, I'll be comfortable if they drop from where they are by 5 or 8%. If we grow the top line we will still grow the bottom line enormously.

Okay. Well, I wouldn't recommend that.

You wouldn't recommend?

Dropping your gross margins by five percentage points, no, I would not.

Let me tell you something. If somebody came along with a $25 million program and I had -- and said, look this is the price, because I need a 67% gross margin, and we lost the program, they ought to fire me. So the only way I know how to run a business, and the business that I focused on and I continue to say this, the object is to increase the baseline, and our gross margins are amazing. It would be -- it is -- we're very fortunate. We may find products where we can have huge volumes in products with some sacrifice in gross margins, and we've talked about that since we went public, Selman, you know that.

We've had these discussions before. You know where I stand.

You want me to get 80% gross margins. I have to change the business.

Geoff --.

I understand.

Okay. Okay. Then on your SG&A and R&D with the flat panel behind you would we expect to see the R&D percentages come down next year?

No.

Okay. Any meaningful increase in SG&A when you look out?

I'm sorry. What did you say?

Any meaningful increase in SG&A when you look out?

No. There's two focuses that we're going to do. Sales are growing so the percentage probably will not grow. I believe, and I've said this before, I think there's a nominal number, and that may be 12%, 11 to 12% of engineering investment that will allow the business to continue a significant growth pattern, and that has varied historically and will vary a bit from that 12% number, but our target number is around 12% for engineering, 11 to 12%, and SG&A. We would like to -- we would like to double our sales. So it would -- hopefully not much in G&A. But a lot in S.

Gotcha.

So, I mean, that's -- you know, S is -- the sales guys pay for themselves, you know, so that's always a good investment, and engineering is the heart of the business. That's varied a lot, and you guys have been -- you guys have understood that very much. We may find a new product line where we need to run the engineering up to 17 to 20%. But if we do our job right it will be a product that will return the investment strongly.

Gotcha. And then last question. With all the cash on the balance sheet, you still looking to do acquisitions, or what are your plans?

Absolutely. We continue to look for acquisitions and tend to get closer to ones that really will make a strong difference in our business. That's what we continue to look for. Really strong strategic acquisitions. We don't need the acquisitions to grow, we need the acquisitions to, I mean to broaden our base, and that's what we're looking to do. And we have an active and aggressive program. I know it may not look that way, but, you know, we have pretty high -- high requirements for our targets. It's not just profitability. It has to match very closely the demands of our strategy.

Gotcha. And I apologize. This really will be my last question. On your backlog how much of that is commercial versus military?

Commercial right now, Selman, is about 80%.

80%?

Yeah. And it -- last year, the commercial was about 90%, so it's gotten -- shifted a little bit to military but you know how our business is. You go back a couple years and we were 80% military. The truth is that we can seamlessly, as Geoff has said before, we can move in and out of the commercial versus military without any impact on margins.

That's amazing, and that I guess, is the thing maybe we're the proudest of. We have developed a product line that universally moves across the spectrum of business general aviation, air transport, and military, and is equipped, and durable, and salable as the same product in all three market places. Five years ago I wouldn't have believed you could even do that. We've proven we can do that, and I think that's going to be the real strength of this business going forward.

Thank you very much.

Thank you, Selman.

Thank you. Your next question is coming from Jason Allen from Atlanta Equity Research.

Thanks. I wanted to ask a question about sales cycle with the flat panel display product. Is that kind of about what you expected in terms of, you know, the length of time it's taking to get significant traction there, and also, are you getting attention, or are you having discussions with commercial as well as military customers for the flat panel display product, and if, so what's sort of the mix between those two potential markets?

I guess the answer is, the first two parts of your question, yes, yes. Yes, it's taking roughly what we anticipated would be to get traction. Remember, part of getting traction in the marketplace, two things. The technology is matured enormously over the last three years. I'll tell you that. Not only of our product but broadly. The cost, even our costs to do flat panel work have come down significantly, which broadens the base -- the market basis. And I think, third, 9/11 was a hell of a lot more of an impact to the industry than I think anybody has appreciated. It was -- that and the general economy was devastating to all areas of aviation. Now, business and general aviation is coming back. Air transport is a necessity. It is such a fundamental cog in our economy that I can't -- our economy cannot operate without a commercial air transport business, and, you know, it doesn't make any money, but it's needed. Like our roads. So, yes, it's taken -- it always seems to take a little longer, but I think it's pretty much on track, and I'm very comfortable with us being on track. I think as much as we would have liked to had some business earlier, I'm not sure that we're not much stronger and better equipped having -- having not been required to focus our energies toward a fixed design. We were able to implement some huge improvements in our design of manufacturing capability prior to volume production and I think that will pay off in the long run very strongly. And finally, distribution, I'm going to still tell you that it's 33/33/33. We strive for a distribution of our products, a third business in general, a third air transport, and a third military. Since the military tends to be the largest of the product demands, it's, you know, that -- it may get shifted a bit that way, toward the military, but going forward that will be generally what it will look like, but that is really a five-year average. You're going to see in any given year, and certainly in any given half year, a strong emphasis for one of the other, but, by the way, the margins are roughly the same and the product is basically the same.

Okay. Thanks. And then, I guess, just to follow up, I think you said earlier -- just want to make sure I heard it correctly, that you expect that before the end of the year you will be able to say something I guess about some progress you're making with respect to actual customers for the flat panel product.

We'll announce customers when we get public -- we are -- we're in a very competitive environment. I'm trying to be careful. But we will be -- obviously anything that would become public knowledge we would get out on the street for the investors. And I will be happy, when it's appropriate, to have a conference call to clarify what that means to our strategy.

Okay. Great. Thanks a lot.

Thank you.

Thank you. Your next question is coming from Ken Grossman from SG Capital Management.

Good morning, guys. Great job. Great job. Most of my questions have been answered. Just one quick question on the flat panel. Are you still the only manufacturer that's TSO'd for part 25?

I don't know. I believe that's the case. I'm not aware of anybody else that has a TSO for that kind of panel for part 25. I actually don't know of anybody. And by the way, that doesn't mean that they can't, although I'm not sure that that -- I would tell you that I believe that's still the case and may continue to be the case, because of our unique architecture.

And is that something that, like people like Honeywell just are not inclined to get into, or --.

Honeywell has the advantage as being a -- they make excellent equipment, as you know, but they also provide a large package to the OEMs, so they get what's called a TC, a type certificate. I shipped equipment to Boeing for 25 years that had no TSO's. We never TSO'd, but it went on every 737 as a primary flight instrument. So there's two routes to putting it on the airplane. You can put it on as a type certificate by the OEM, and Honeywell has chosen that path, our TSO is a broader range which allows us to more readily apply to a broad range of opportunities more suited for retrofit.

Will you be -- excuse me. Will you be announcing when you get approval on specific aircraft types?

Yeah. Yeah, we will.

Okay.

We'll absolutely will. And we have -- I mean, as we get -- we will even -- we'll try to keep you as up to date as possible. Happily, I'm not sure that we could have -- with the demands that we're talking about now, we would have been hard-pressed to ship an awful lot of flat panels in the next couple of quarters anyway.

Okay.

Not that we wouldn't take the business. The last time I said no, I didn't understand the question.

Right. Well, I appreciate it. Thanks, guys. Great job.

Thank you very much. Appreciate that. How's your watch working?

Good.

Thank you. Your next question is coming from Kevin Wang from Polinus [ph] Capital Management.

Great quarter. Thank you for the guidance. Couple of questions. The cash flow performance, as you know, is fabulous this past year, but with the increase in revenues in the current year, you know, what are your thoughts on what you can do on the cash flow side?

I think this cash flow will be similar. I mean, you know, the guys have done -- manufacturing -- the traditional problem you run into when you do big steps in manufacturing flow is that you build huge inventories, and everybody in manufacturing says, listen, I've got to do that. If you want me to grow by 25%, that's the standard answer. I've heard that for years. These guys have done an amazing job. If you look at the year-end results on inventory, this inventory has gone up but not as a percentage on sales. It's really been remarkable. My CFO is going, it's gone up, and, damn it, we've squeezed them, but the truth is they've actually done a pretty good job and it gives me confidence that we'll keep that under control. We don't have large demands in CapEx, so we think -- and the people are paying. So we think the cash flow will continue to track the profit pretty well.

Okay. When we met during the summer, my dim memory was that I think you had five sales people at that point, and your comments during the call is that you're going to probably put some more resources into sales. So what are reasonable expectations?

Well, we've added people since I saw you. If I remember, we got there about 4:30, 5:00 in the afternoon, and you told me what Polinus meant --.

Many thoughts.

Yes, right. Too many thoughts. Anyway, for me. Yeah, we are. We have a very aggressive program to put sales people on.

This is Roman Ptakowski. We've added some sales personnel and also signed some agreements with other marketing channels to expand our reach.

Okay.

I mean, we're going to continue to do it. We have an aggressive plan. I think we've been advertising almost every week in ad week and other places for sales people.

Adding three to five is a 60% increase, but three in itself isn't that much. So is there anything you can help us out with? Also, Roman, a little bit more color as to expanding channels.

Well, we're taking advantage of trying to get more face time locally, so some key agreements with manufacturer's reps and distributors. We can do these things quickly while we bring on board our own dedicated sales personnel. Again, we expect SG&A to stay comparable as revenue -- I'm not sure where else you're going with the question. I mean, we are going after the market segments because of the broadened product line. We have more opportunities, so we are adding people wherever we can.

Okay. And on R&D, with your plans to keep that growing, really in line with the sales, are there any new areas that are -- you know, that you feel like describing to us that you may be addressing?

I'd prefer not to. But as we announce specific product, we will be happy to discuss them.

Great. Thanks for your help.

And, you know, it's an ongoing effort. I can tell you that we need to grow -- we have a constant demand to grow our engineering department, we've got a constant demand to grow our sales department, and it's a full-time job to do that. We need to put really good people, like Marines or something. Thanks. Good talking to you.

Great.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your touch-tone phone at this time. Your next question is coming from David Campbell from Thompson Davis.

Yes, thanks very much. I had question on the tax rate. Do you expect tax rate to be the same in '05 as was in '04?

Yeah, David, they're going to probably -- they're probably going to increase marginally. We have, as you know, the more money you make, the more the government wants. We have actually jumped a couple of tax brackets. We do have also the ability to recognize research and development tax credits going forward, David, and we will. So I would anticipate that the tax rate, it's obviously not going to be as high as it was in the 4th quarter but more closely inline with what the year rate is.

Okay. And can you give us -- you gave us some idea what the RVSM sales were, or would be in, I think you said the 1st quarter. Do you have any -- can you give us any approximation what they amounted to in fiscal '04?

In the 1st quarter of fiscal '04?

No, just the whole fiscal year.

For the whole year, we had sales of about 93% commercial, and of that, we probably had about 60%, 68% went to the general aviation community, which most of that would have been RVSM.

So RVSM was roughly --.

60%, so obviously it was a sizable number, but not unsurprising to us.

So roughly 70% of revenue is in RVSM?

No, 60. 60%.

About 60%. Okay. Great. And will you announce any specific other new products as you get significant orders in them? Is that your plan, or are they -- I'm talking about other air data systems besides flat panels.

As we get new product, and it's going to be broader than just air data and flat panels, we will announce product as we announce them to the industry. Typically we will announce them when we come out broadly in our industry announcement and or when we get an order. But we will continue to do that as an ongoing process.

Okay. And finally, do you have any thoughts on the problems of the commercial airlines having an impact on your company?

There's good and bad, as we've talked about the business model. What this company does is provide cost-effective solutions for aircraft to keep them updated to meet the latest standards and FAA requirements, whether it's RVSM or terrain avoidance warning systems or ground proximity warning systems or whatever the system may be, we provide that, and the aircraft, there are many aircraft that fly now 20, 25 years old, and one of the things you find when airlines are not doing well, is they don't want to buy new airplanes. They like to operate their old airplanes. And if they can take a 757 or a 767 or a 737 and upgrade the cockpit and increase dispatch reliability and reduce maintenance costs significantly they can find return on investments of a year, year and a half. That's something that they will do in preference to spending $50 to $100 million for a new airplane. So the good news is that we think that some of the financial difficulty that the airlines are in, the products that we provide ameliorate some of the product costs and demands. The bad news is we hate to see the industry in trouble, but the industry isn't going to go away, because as we all know, the economy -- the world economy, the domestic economy, it would be like saying we don't have any more roads or we're not going to use trucks or cars or something. So I think, the happy news is we like to think that the products we supply help the airlines survive in very difficult times, and when the demand gets very -- when they're doing really well, which is rarely, they prudently buy new equipment, but inevitably they can't buy new equipment fast enough to keep pace with the demand. So they keep upgrading their old equipment. So we think that we continue to see an expansion in that demand, general economy, the macro is getting much better. I think we -- everybody is seeing improvement in it. So we're reasonably optimistic that the airline industry will continue to be a good market for us as will the military and business and general aviation.

Thanks, Geoff. Thanks very much for doing such a good job managing the company.

We appreciate that.

Thank you. Your next question is coming from Peter Lerner from Federated Kauffman.

Do you have any products that compete with Garman?

Yes.

Could you tell me which ones?

Some of the flat panel work we do will compete with Garman, but until recently, we never saw the lower end of that marketplace as being a strong area to expand. It turns out our product can compete very strongly in that marketplace. Garman is a very good company, with a very close focus on what they do. We don't believe that we need to expand -- we think there's more lucrative areas to expand in than that part of the marketplace. But we have some directly competitive products.

Thank you.

Thank you. And as a final reminder, ladies and gentlemen, for any questions, that's star 1 on your touch-tone phone. Please hold while I poll for further questions. Gentlemen, there appear to be no other questions.

Thank you very much. We appreciate your time and interest. We're delighted to be able to give you some good results and everybody in the company is focused on continuing that, and the future looks pretty good, pretty optimistic. We'll talk to you in three months if not sooner. Thank you very much. Bye-bye.

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