Innovative Solutions and Support Inc (ISSC) 2006 Q3 法說會逐字稿

Good day and welcome, everyone, to Innovative Solutions & Support quarterly earnings results conference call. This call is being recorded. At this time, I would like to turn the call over to the Chairman of the Board, Mr. Geoffrey Hedrick. Please go ahead.

Good morning. This is Geoff Hedrick of Innovative Solutions & Support and I welcome you to our conference call this morning where in just a few minutes we will discuss the results of our third-quarter and year-to-date periods ending June 30, 2006, the current business activity and climate, and our business outlook, strategy, and plans. Joining me on this call at our corporate offices in Exton, Pennsylvania are Roman Ptakowski, our President and Jim Reilly, our CFO. Jim and Roman will now cover the quarter and the nine-month period and I will be available with them later to answer any questions after the call. Jim, over to you.

Thanks, Geoff. Thank you all for being on the call this morning. Before we get started, I want to read into our conference call our Safe Harbor message. 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 10-K on file with the SEC.

With that behind us, I will now address the third-quarter and year-to-date results. Our revenue in Q3 this year was $3 million. Last year revenue in the third quarter was $17 million, reflecting one of the peak quarterly demands driven by the RVSM mandate. This year's third quarter however included about $1.2 million of Flat Panel System revenue as opposed to only $0.5 million last year. On a year-to-date basis in fiscal '06, we had $12.1 million, of which $5.3 million was for Flat Panel Display Systems. In contrast, FY '05's Flat Panel revenues were only about $900,000. That reflects an increase of about $4.4 million or almost 500% year-over-year in Flat Panel sales.

Total sales for the nine months ending June 30, 2005 were $55 million, reflecting three back-to-back quarters of peak demand for the RVSM equipment. As you remember, the FAA mandate at that time called for RVSM implementation by January 20 and there was a scramble to become compliant by a lot of latecomers.

In the third quarter of this year, new orders for Flat Panel Display Systems were $7 million, up almost tenfold from a year ago. Flat Panel Display System new orders in the first nine months totaled almost $22 million and exceeded the prior year's nine-month total by $17 million or 400%. Flat Panel Display Systems backlog was a record $22.1 million at the end of the third quarter. This represents the fourth consecutive record quarter for Flat Panel Display Systems backlog. The Company's total backlog at the end of the third quarter was $34.3 million, up from $28.3 million just three months ago and up $16.3 million or more than 300% from a year ago. About two-thirds of the increase was for Flat Panel Display Systems and about one-third for Air Data products.

The gross margins in the quarter about 44% versus 66% a year ago, the gross profit margin was 46% in the first nine months versus 68% a year ago. The lower margin percentages relate specifically to the lower volume absorbing fixed operating costs over the same periods of time. The variable portion of our cost of goods sold as we have talked many times, the material and labor are very consistent between our product lines and very predictable in terms of the future.

The period costs in the period, specifically engineering, research and development, which we refer to as ER&D, the ER&D spending is viewed as an investment in our future and accordingly, the Company continues a strong spending pattern in this area for both current and new product development as well as for certification efforts. ER&D spending was about $1.7 million in the quarter and $5.1 million year-to-date. These amounts were ahead of last year by 12% in the quarter and 19% in the year-to-date period.

Our SG&A or selling, general, and administrative spending is down about 3% year-over-year and that's after absorbing stock option expenses. This is the 123(R) requirement of about $350,000 year-to-date and some higher professional fees in the period.

Net interest income was $800,000 in the quarter and $2.3 million for the nine-month period. This is more than double what it was last year essentially because of rising interest rates, which are now closely approximating 5% on our invested cash.

We experienced a loss in the quarter of $1.2 million or $0.07 per fully diluted share and for nine months we experienced a loss of $1.9 million or $0.11 per fully diluted share. These numbers reflect the bumpy ride we have had this year as we go about implementing a product transition from mostly Air Data products to mostly Flat Panel Display Systems. We believe the worst is over and profitability will resume in the near future and we will have those discussions a little later on.

Before I get into the balance sheet, I just want to comment on the new Flat Panel Display orders that we have received. The business has come from a diversified customer base and an ever-increasing array of platforms. For example in the nine-month period that we talked about earlier, we booked almost $22 million of Flat Panel business. About $10 million came from the general aviation market for Lear, Citation, Jets and Pilatus PC-12s; $2 million on 747s; $1.5 million from Marshall's over in Europe for C-130s; close to $1 million from Boeing on K DC-10s; and most recently $7 million on Boeing 737s, which is a joint venture with Jet Partners that we have just recently put out a press release on.

We continue to have an extremely solid balance sheet. Cash was $66 million at June 30 or about $3.92 a share. It is important to note that the Company purchased approximately 1.3 million shares of its common stock during the second and third quarters of the year at a cost of about $18.1 million or at an average price of $14.21 a share. Had we not purchased the stock, our cash balance would have been about $85 million and that would have represented a positive cash flow in the nine months of $1.6 million. That is not bad when you consider that we lost $1.9 million in the same period.

Assets approximate $88 million and cash represents 75% of that amount. Our shareholders equity at $79 million and of course this has been reduced by the $18.1 million of treasury stock that's now on the balance sheet.

At this point, I'd like to turn the call over to Roman to continue with our conference. Roman?

Thank you, Jim. Last week's participation by IS&S at the Farnborough International Airshow in the United Kingdom is a good way to illustrate what your company is doing in the marketplace. We showcased upgrades aimed at each of the three major market segments, commercial, military, and corporate general aviation. We had active displays promoting our cockpit IP, the cockpit information portal line of Flat Panel Display Systems including products for the Boeing 747 and 767 airliners; the Lockheed Martin C-130 military transport, and the Pilatus PC-12 business aviation aircraft.

At the show, we made a joint announcement with Jet Partners LLC releasing more details about their selection of IS&S to install the cockpit IP Flat Panel Display Systems in their fleet of classic B737 aircraft. The agreement is for 30 firm aircraft upgrades with an option for an additional 30 systems. The Flat Panel Display System can be utilized on the -300, -400, and -500 models of the B737, a fleet that totals over 3500 aircraft worldwide.

We are installing an all-glass cockpit providing primary flight, navigation, and engine instrument LCD displays. The cockpit suite eliminates 65 traditional components and replaces them with five display units, two control panels, and three data concentrator units. With the addition of the IS&S cockpit IP to their B737 aircraft, Jet Partner's customers will benefit from being able to configure their aircraft with highly desirable options suited to their individual operating needs and preferences. Customization options include a built-in Class 3 electronic flight bag with functionalities such as the Jeppesen certified database, satellite weather radar services, and advanced synthetic vision systems.

Our Flat Panel Display Systems also provide fuel savings to the operator by reducing equipment weight by 150 pounds using convection cooling and lowering power consumption. The B737 upgrade offers the additional benefits of standardizing pilot training, utilizing industry recognized primary flight display and navigation display formats, providing health monitoring and exceedance reporting for engines, and eliminating the complexity and support of analog instruments and CRTs.

Jet Partners recognize that our cockpit IP retrofit solution offers significant benefits from every perspective, critical to safe, efficient aircraft operations such as situational awareness, performance capability and safety features. Further changing requirements are accommodated by flexible graphic displays formats certifiable by the FAA and again extending aircraft life. We are in the STC process with the FAA and deliveries will occur after the October 1 start of our next fiscal year.

This program is based on our thriving 767 program and our successful partnership with ADX Air to retrofit the 767. In the ADX Air program, we have a complete flat-panel cockpit installation that sells for $275,000 and involves less than four days downtime for the airplane. Alternative approaches take anywhere from four to eight weeks. These retrofits use flat panels to replace the pilot's and copilot's primary flight and navigation displays and also make it possible to equip the aircraft with newer systems such as electronic flight bags and satellite weather radar services. So far ADX has equipped six of its own airplanes and has started doing third-party installations.

At the Farnborough International Airshow, Marshall's Aerospace of Cambridge in the United Kingdom and IS&S jointly demonstrated a C-130 simulator showcasing the capabilities of the cockpit IP as it will be operated by the royal Netherlands Air Force in their fleet. Several of the Dutch pilots flew the plane and it was very evident they were pleased with what they are getting.

Their fleet upgrade includes installation of the primary flight navigation display and Engine Instrument Display System, as well as providing them with the capability of integrating with uniquely military requirements for display of tactical information, secure communications, and digital maps.

At the Farnborough International Airshow, we exhibited the PC-12 cockpit upgrade. It uses 15 inch diagonal screens to replace the primary flight navigation and multifunction displays. A number of European fixed based operators have asked us to submit proposals for their aircraft. At the last Pilatus Owners and Pilots Association convention held in June, the first PC-12 aircraft equipped with the upgrade was voted Queen of the Fleet. We understand this to be a highly coveted designation in the PC-12 community and we are pleased to be part of that achievement.

Installing the IS&S cockpit IP Flat Panel Display System is the most cost-effective way to retrofit aircraft with modern navigation technology. Our flat panels replaced 20 plus-year-old virtually unsupportable technology with liquid crystal displays that offer a 10 to 1 improvement in reliability as well as a platform for growth. Existing instrumentation is increasingly difficult to support as the products are no longer in production and parts acquisition and repair becomes increasingly more expensive. But with the IS&S cockpit IP, modern design technology and processes offers significant reliability improvements with MTBFs in excess of 24,000 hours.

There is only so much real estate in the cockpit and an increasing demand for information to be presented. Customers can achieve further functionality and configuration growth from the cockpit IP's capability to support data related to upcoming requirements such as required navigation performance, also called RNP, and automatic dependent surveillance broadcast, ADSB, and other cockpit displays of traffic information that can display charts, satellite weather graphics, and infrared images generated by enhanced vision systems.

For additional benefits, improved dispatch reliability is provided by the cockpit IP's triply redundant engine instrument data concentrator units and the dual redundant primary flight navigation data concentrator units provided in each of the pilot's and copilot's positions.

We operate a very cost-effective solution with minimum downtime. Our approach involves using as much existing wiring as possible and an architecture based on three components, a display unit with an integrated symbol generator, a control panel, and a data concentrator unit which acts as the input/output processor for onboard information.

The Flat Panel Display System market demand is relatively new. As we have said before, we are creating the demand with FAA certified products that come to market at a price point substantially less than our competition. In the near term we have been focused on generating orders and building backlog. Revenue will follow. We can quickly integrate the new instruments needed to meet these new higher standards using our flat-panel technology. And as you can see, there are a number of forces that are driving the need for more of this technology to be placed in the cockpit and we are well positioned to be successful in accomplishing that.

I would now like to turn the call back to Geoff.

Thank you, Roman. At this point we're going to take some questions and will the operator turn it over to any questions open?

(OPERATOR INSTRUCTIONS) David Campbell, Thompson, Davis & Co.

Sometime ago, I guess it was a couple of weeks ago, you forecast revenues for the September quarter and hoped for growth in backlog between the end of June and September. Is that still in your works? Can you give us a status of those forecasts?

David, yes, we do expect to support our most recent forecasts. We are anticipating some positive news from the marketplace. I would not like to comment on that any further at this point, but we do expect to return to profitability in the fourth quarter, as we mentioned earlier in the call.

Right and so -- I think you're forecasting -- you give us a range of $4 million to $6 million is that correct, for September quarterly revenues?

That's correct.

Okay, and does -- presumably would include an increase in flat-panel revenues primarily from the PC-12 deliveries?

Yes, flat-panel revenues will continue to increase and it's not related solely to the PC-12 but to the other programs as we continue to get customers, as we continue to get STC releases. So PC-12, 767, 747 revenues will be generated in the fourth quarter.

Okay, and what were -- in the June quarter were there any RVSM sales or was it all the rest of the sales Air Data?

David, it's difficult to differentiate between RVSM and Air Data. They are essentially the same thing. Keep in mind RVSM is an intangible. We don't sell that. We sell Air Data products that meet RVSM specifications. In the quarter we had $1.8 million of Air Data revenue and $1.2 million of Flat Panel revenue.

Okay. Can you tell us anything about in the September quarter what is the level of SG&A going forward? You seem to be relatively optimistic about your being profitable in the fourth quarter. It seemed that would require some decrease in R&D and SG&A to get there. Is that correct?

We think that the R&D and SG&A, David, will probably continue around the levels they have been at. Keep in mind that if we get -- if we go from $3 million to let's say, $5 million in the fourth quarter, almost 75% of that falls to the bottomline because we're observing all of our fixed manufacturing costs up front. So we think that as you can see from our past performance as our volume increases, the gross margins increase significantly. And that is where we think that we will get the benefit, immediate benefit.

Okay, right. I will let someone else take over. Thank you.

Michael Ciarmoli, Boenning & Scattergood.

If you could just go over the current, like a recap of the planes you currently have STCs for. And I heard you mention the Citation and Lear. Just give us a status on where those projects stand and if we can expect any STCs on those airplanes and also what the fleet size of the Citation and Lear would be?

Our STCs currently on hand are on 767s, PC-12s. We have others in works with the FAA. I don't want to predict when they will release them, because that is their call, but we do expect to make some STC announcements in this quarter. I'm anticipating that the 747 will be our next STC announcement. Again subject to FAA review and scrutiny, but we are in late stages of that STC process with the FAA on that particular platform.

On the others, depending on types of flight testing, ground testing, and so on that they might encourage us to do, we'll have to deal with that in particular. Citations are as a market segment are over 2000 aircraft and -- I'm sorry, you'd asked the other was the Lears?

The Lears.

Lears are over 1500 aircraft.

Okay, and the 747, is that about 1000 aircrafts?

Well the 747 we are looking at would be -- 747 aircraft are not 1000. It is more like 350 because you're talking the older ones, the -200s and -300s, not some of the newer. -400s at this point however they also become candidates and that would add another 600 aircraft. Each year as the aircraft age they obviously become candidates for upgrades also.

Okay, perfect. In the backlog, I know you expected to close fiscal year '06 with about $50 million in backlog. Are you still on track for that and how soon can you work through that backlog? I know you have said it is about 12 to 15 months. How much of that can we recognize in the 2007 year?

I'd prefer not comment on that in particular. The backlog will be what it becomes. We again, we are subject to the FAA on the releases. We have got programs that are scheduled and depending on the timing of those releases from the FAA, that will go. We continue to have other business that we pursue in Air Data products as well as on the Flat Panel Display Systems. Those are fully certified and as the customers come on board as they provide their funding, we anticipate revenues from those products. But I don't really want to comment specifically where our backlog numbers will be.

Okay. As far as the new orders, new programs in place, will you need to get any additional partners or modification centers on board to handle the additional fleets and aircraft you're going to be retrofitting? I know you've got ABXs primarily doing the 767s. Are they going to be able to handle the capacity for the 737s?

We'd expect this to have a number of partners. Illustrating that is the PC-12 for instance we already have two authorized dealers, installers, Western Aircraft in Boise, Idaho, Epps Aviation in Atlanta. ABX is doing 767 installations. If the market demand requires it, which we do expect to keep ramping up, by IS&S owning the STCs, we have the ability to authorize additional dealers, installers, and we do want fixed base operators to take advantage of it.

With our minimum downtimes, with our approach to that market, one, existing facilities can handle more throughput; and then secondly, because it also translates into a relatively simple installation because of the approach to it, that people can do this and it is very attractive to them. So we do expect to announce additional partnerships, additional installers over time as we get the STCs and as people begin to place orders for the equipment.

Okay, great. I will jump back in the queue here and let someone else have a chance.

Clint Coghill, Coghill Capital Management.

Can you just walk us through the competitive layout and who you see as the principal competitors with I guess the all-glass cockpits?

Well, we have the traditional competitors, Rockwell Collins, Honeywell who make full systems. Certainly another one in our business arena is Universal Avionics. But although they certainly offer quality products, they have highly integrated suites which makes it difficult for them to participate very successfully in the retrofit market. As we have noted, we're selling our cockpit upgrades at anywhere from 50% to 75% less than our competition.

In traditional thinking, you'd say why would you leave that much money on the table? The answer is at the price points that our competition are asking for $1 million, $1.5 million plus four to eight weeks downtime, they are not getting any business. It is not a price point that the marketplace has responded to. With our ability to reduce the costs, give the customer the flexibility and the options they want, we are continuing to see an increase in our backlog and that each success leads to the next success. So we believe we are at a price point that is very competitive to what the marketplace needs, not competitive in a traditional sense to what other vendors are providing.

What is the ballpark price range for your product?

It depends on the aircraft and what options, but for instance PC-12, the business jet aviation market, those upgrades turnkey, fully installed including installation, labor, installation kits, paperwork is being sold by the dealers at about $170,000 per ship set. On the 767, you're looking at about $275,000 for full turnkey installation. And on the 737 because of added functionality and some of the things that are being done on that program, that is at a price point that we will keep a little confidential but let's say it's substantially below $400,000.

Okay, then where do you guys see Garmin in the overall competitive layout?

Garmin certainly is a very good manufacturer. Garmin has concentrated so far as the low-end of the market. Garmin does not have the software levels of certification that we believe are required in the marketplace. They cannot for instance participate in terms of glass cockpits. In the Part 25, that's the commercial aircraft marketplace in the military segment because their products are not qualified for those higher standards, Garmin certainly is a very good provider of radio systems and so on and we do interface with them. So we are very much aware of them. But Garmin today certainly is not a direct competitor.

Got you. I just saw some announcements that they recently made about like an all-glass technology to replace retrofit cockpits and they were talking about -- was just trying to understand the press release -- they were talking about getting STCs on 400 different [aircraft] models. I was just comparing their level of R&D spend which is about $25 million a quarter, to your Company's, which is roughly $25 million over the past three years. I would assume that Garmin over time is going to look to grow -- grow from the low-end to the high-end and then balance a number of the other products. And I just wanted to try to understand what will prevent them from doing that?

If you can, I'd like to see that announcement if you send that over to us. I am not familiar with that. It sounds very interesting. To get 400 aircraft type STC, something sounds a little out of context. Before I comment further on that, I'd like to see what that information is.

It says the [G600] will be available in mid 2007 at a suggested retail price of $29,772 and it is for a digital air computer triaxle (indiscernible) temperature probe, display control unit and a number of other things. So I'm just trying to understand how this would or would not affect your business?

I'm not familiar with that. We will certainly take a look at it.

Okay, thanks.

Steve Riccio, Landmark Capital.

A couple of questions here. First off I was off on part of the call, so please forgive me if you already answered this, but it was my understanding that at the end of June when you guys issued guidance I guess going forward that you expected your backlog to be $32 million, is that correct?

That was the number we predicted for the June quarter, yes.

So you came in at $34 million, so a little bit better than expected. In that number, the recent announcement with Jet Partners, is that -- is any of that included?

That was included. Yes, it was.

That is included, okay. So going forward your $50 million backlog estimate, obviously you are expecting as you mentioned earlier, you anticipate announcing more partnerships and installers that will be purchasing from you guys. Is that correct?

Yes, but not necessarily linked to the $50 million. They are mutually exclusive statements.

Okay. Moving to I guess the balance sheet, it looks your inventories are up about $1.5 million from the previous quarter.

That's correct. They are up about actually they are up about $2 million year-to-date this year. It is probably broken down about one-half attributable to increased parts for the Flat Panel Display Systems and some work in progress that is going on there and the balance is due to Air Data requirements that we anticipate coming in in the not too distant future.

Okay, good. Let me just see here. You also mentioned that in the quarter you had $1.7 million in engineering, research and development spending. Of that, I guess part of that is also certification efforts. Is that a normalized figure we should factor into our thinking? Or are there sort of one-timers in particular for the certification process that maybe will be little bit lower going forward?

No, what we tried to do if you look at us over time, we try to manage ER&D spending in the range of 12% to sales. Historically we found and Geoff Hedrick, his experience has found and we certainly find that if you spend about 12% of your sales on engineering, research and development, it is a very manageable effort that you can really retain control over. If it gets too far out of that, either higher or lower, you are either getting less utility or you're losing control. Right now the rates are extremely high as a percent of sales, but that is only a temporary thing. We continue to fund at what we believe would be a normal rate and we are expecting the revenues to get back up in place where the same level of spending will equate to something like 12%, 13%, 14%

Okay. Just getting back to a question someone had asked earlier regarding the expected backlog at the end of the year of about $50 million. Now I understand that it is wholly dependent on or largely dependent upon timing of approvals from the FAA, but could you maybe just sort of give us maybe a broader range as to what you would expect of that $50 million sort of potentially what you could realize in 2007?

You mean in terms of revenues we would derive off of that?

Correct.

Our expectation is that our backlog would be substantially shippable in the upcoming fiscal year.

So substantial meaning can I assume greater than 50%?

Yes.

Okay, good. Thank you very much, guys.

(OPERATOR INSTRUCTIONS) John Morosani, Warrington Capital.

Two questions.

We haven't spoke in a long time, John.

Thanks, Jim. I apologize for bothering you this morning. Two questions here. The first one is assuming that you get the 737 STC and the 747, does that kind of fill you up for awhile? I mean you've got a lot of aircraft going. Or are there still a number of -- maybe if there are of aircraft that you think would be highly amenable to getting an STC and getting more upgrades?

I will answer that. No, it does not fill us up. We continue to have known projects that we want to pursue that give us a lot of opportunity. So the STC process will continue. As we mentioned, we are in the commercial military and the business corporate general aviation segments. The STC process certainly applies to the commercial and to the business aviation, but because we try to offer the same product across the three segments even as we get different military programs, the engineering effort continues as if it were under that type of regulatory process.

There is value to have these military platforms certified by civilian authorities particularly in the international market segments. They won't carry STCs, but there are other similar type designations that would qualify too.

You gave us the number of the fleet numbers that were sort of addressable except I don't think you gave the 737s. Could you --?

737s, there are more than 3500 aircraft worldwide in the classic segment of the -300s, -400s and -500s.

Last question, Geoff, have you gotten any farther -- I know we almost had a day up in New York where you were your going to come up and show your product and whatever. Anything on the agenda here now that you really got some news to talk about where you can kind of get out and talk to analysts?

Not really.

We would like to invite you though to join us certainly at the different trade shows where we do showcase products. Our next big show that is kind of a large one is the NBAA in Orlando, Florida later this year. We will be participating there again showing our products. That is aimed mostly at the business and general aviation markets, but certainly commercial aircraft types are on exhibit there also and we would certainly welcome you and any other investors to come join us down there.

Any reason why you wouldn't do something at your own place? I mean, many of my brethren are nice guys and don't bite and might even be friendly.

We will consider that. Thank you for the thought.

Michael Ciarmoli, Boenning & Scattergood.

I think, Jim, this question is probably for you. You mentioned stock compensation for the year, I think $350,000. So that would put it for the quarter about $150,000?

Yes, that's about right.

Okay. What are the plans? Are you going to continue to buy back stock?

I can't answer that question. Only the Board of Directors can do that, Michael, but I'm sure the Board is discussing this with our Chairman, but I don't think it would be prudent to talk about it in advance.

Okay. Then lastly you had mentioned the 737 having the additional features like the electronic flight bag. Talk about what that can do to pricing and margins, that additional software.

First, Michael, it is not limited to just the 737. We just used that to illustrate as to what the customers, the owner operators are looking for. When you talk about some of these additional options, depending on what combinations people pick, but you're looking at $50,000 to $100,000 additional from a pricing standpoint on the different aircraft types if they pick up functionalities such as being able to display the Jeppesen certified databases, the satellite weather radar services, if you want to do video imaging with infrared cameras, cabin surveillance, our productline is well-suited to each of those. Each operator has their own unique requirements and needs that they deal with. And one of the things that we offer is the flexibility to be able to do it on our displays without making major changes to the aircraft. So these are upgrades that are available to these customers and we are going to let them choose how they wish to customize it.

Okay. Are there any additional STCs required for those flight bag? Or is it --?

It depends on what functionality is being required. Our product requires certainly FAA regulatory approvals and then these different services depending on how they are used, they get their own certifications and then we put them on our certified products. So it is not solely limited to us getting STCs but also to the vendors of these different services. Things like Jep charts are provided by Jeppesen. They have monthly subscriptions, monthly updates. They have subscription services. We certainly have to get it certified on our productline, but they take care of that going forward.

Okay. And then if you were just providing this as an add-on, what would the margin be on this product?

We would expect our margins certainly to be in line with our historic performance.

Okay. All right, thank you.

David Campbell, Thompson, Davis & Co.

Jim, why is SG&A up from $1.9 million in the first quarter to roughly $2.5 million in the third quarter?

A couple of reasons, David. We have had some professional fees that have been running a little bit in that period of time that has -- that we have expensed. In addition to that we have had some added work with the corporate governance tied in with the Sarbanes-Oxley SOX stuff. That is primarily what has driven it, David. We don't expect it to continually go up at that rate, but there is -- also in there, which you don't see, is that the commissions are down a little bit which makes the rise even a little bit higher. However as I mentioned earlier that year-to-date the spending this year in SG&A over last year has actually gone down. And it has gone down a lot more when you back out the $350,000 worth of stock expense that we have in there. So it is a number that we would anticipate continuing in that 2.5, 2.4 level per quarter into the fourth quarter, David.

But into 2007 as well even if the revenues are --?

Hopefully in 2007 revenues are going to pick up and commissions will pick up and there'll be a lot of other things. The dynamics are significant and we are looking at that as we speak, but historically we would like to keep the G&A numbers as we talked in the past somewhere in the 14%, 15%, 16% of sales. We think that is a very, very manageable given our business climate here.

When you're talking about commissions, what are you referring to?

Well, we have as you know, David, we not only have internal salespeople but we have outside sales representatives and consultants and things like that that work strictly on a commission basis as opposed to a salary. Those are the commissions I'm referring to when we compensate those outside people for sales that they are responsible for.

Okay. In the backlog, Roman and Geoff, in the backlog, $34 million, was any of that military?

Yes. We have a mix of military, commercial, and civil. Not quite at our one-third, one-third, one-third, but it is approaching those types of numbers as we are getting success in each of the market segments.

I guess those are primarily the C-130s and that KC-10s, right?

That is correct.

The last question I had is you mentioned in response to a question earlier that the 747 process, STC process was probably the next one to get FAA approval from. So I take it that is ahead of the status of the 737 STC?

That is correct.

That's because you have got 747 orders or the order for the 747 way back in --

Right, we received it earlier. We have been working on it. We are satisfying the testing needs and so on and that hopefully occurs very close, very much in the near term.

Geoff, you have not had much to say at this conference. Do you have any additional comments?

Not at this time.

Thanks. I appreciate your help.

John Morosani, Warrington Capital.

Jim, just a quick thing. I'm looking at the guidance for the fourth quarter. When you say you expect to be profitable, is that at the operating income level or the pretax level?

We are talking about being profitable at the pretax level.

Okay, because I can't make it work out the other way unless you really just your cost of sales just goes absolutely flat which doesn't sound to me like if your revenues doubled and got you to the top end of the range, and the other things stayed equal you would barely be in the black on the operating side. Is that --?

That is pretty close. Given if you double the number, if you go from $3 million to $6 million, I believe that we will be able to generate profit on the bottomline. Not a whole lot but we will go to the black.

Well, I wish you well to do that. Thank you.

[Tamera Manachian], [Greenwood Investment].

Just a quick question. I wanted to make sure that I understood it correctly. Is order of the 737 by Jet Partners included in the $34 million backlog?

Yes, it is. The Jet Partners order is included in the backlog that we have announced.

Okay, and one more question. You mentioned that there might be some Air Data requirements testing through in the near future. Could you elaborate on that?

Without any specifics, but that is an ongoing requirement as aging equipment gets replaced, as some of the people who have not yet purchased equipment for RVSM upgrades, new purchase equipment as we replenish the shelves of a number of our installers for their equipment needs. So Air Data continues to be an ongoing productline for us. And is a good productline for us.

Okay, so it is mostly still RVSM requirements year-over-year, right?

Not necessarily, no.

Not necessarily. Okay. So there might be something else coming up?

That's correct.

Okay, great. Thank you.

That concludes the question-and-answer session today. And this time, Mr. Hedrick, I'd like to turn the call back over to you for any additional or closing remarks.

We appreciate your interest today and I think we summarized pretty clearly what we need to do. Hopefully we will go and do and perform as we expected. We appreciate your interest today and in general thanks for your support. Goodbye.

That concludes today's conference. Thank you for your participation.