Innovative Solutions and Support Inc (ISSC) 2007 Q2 法說會逐字稿

Good morning. My name is Selina, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2007 earnings conference call. [Operator Instructions]

Thank you. Mr. Hedrick, you may begin your conference.

Yes. Good morning. This is Geoffrey Hedrick. I'm Chairman and Chief Executive of Innovation Solutions and Support, and I welcome you to our conference call this morning, where in a few minutes we'll discuss the results for second quarter and the first six months of fiscal 2007, current business activity, climate, and our business outlook, strategy, and plans.

Before we get started, I would like to comment on a few new developments in the company. As you may be aware, we have been, for the last 18 months, actively involved in succession planning for the job -- for multiple jobs, including the CEO of IS&S.

We are fortunate, and I am pleased to announce, that we have found the perfect choice. You may recall that six months ago, Ray Wilson, the former Executive Vice President of Airbus Industry, joined the Board, and has served well and actively contributed in the Board.

After discussions with him, Ray will be on special assignment for the next three months from the Board to assist in the management of the business. And as we have applied for an 01 visa for Ray, when the 01 visa is granted, he will assume the responsibility as Chief Executive Officer for the company. I will remain with the company as Chairman of the Board.

Ray brings a remarkable background and ideally -- and an ideal fit for the company. Ray's work at Airbus Industries has given him a unique international perspective of the business, and he will bring that unique perspective to IS&S. His experience at British Aerospace and Westland Helicopter in operational roles further strengthens his background for this job.

I'm delighted that he's chosen to accept the opportunity, and I look forward to welcoming him in that new position.

A second item that I'd like to talk about is that we have been selected to provide the IS&S cockpit display system, our cockpit IP, for a major carrier of 100 757 aircraft. This I had mentioned I think in the last conference call. We have roughly $100 million in bids out. And so far, we have been awarded half of that business, with the Eclipse orders and now this latest order for 100 ship sets of cockpit upgrade.

In addition, we are in negotiations for 200 and some odd more 757/67 systems. We expect to have that decision within the next few days. And we're reasonably optimistic for success in that area.

To date, we believe we will get 100% of that $100 million business. We expect our backlog to be $75 million to $100 million by the end of the quarter that we're in.

Joining me today in the corporate offices are Roman Ptakowski, our President, and Jim Reilly, our CFO. I'd like to turn it over to Jim for our safe harbor message. Go ahead, Jim.

Thanks, Geoff, and thank you all for being on the call this morning. Certain matters discussed in this conference call today, including operational 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 10K on file with the SEC.

I'll now take a few moments to address last night's press release. Revenues in the second quarter were $4 million, compared with revenues of $3.7 million last year. About $1.3 million of the revenues in the current quarter was for flat panel display systems, and the balance related to our air data product line, and the majority of that was for the US Air Force SSBAs, or solid-state barometric altimeters.

Gross margins were 24% this year, and 41% in last year's quarter. The lower margins this year were the result of unabsorbed overhead coupled with additional cost to complete a paid for development program. I will talk more about this in the R&D comments that follow.

As we go forward, we expect gross margins to exhibit a strong upside, consistent with increases in revenue. We continue here at the company to look at R&D spending as an investment in the company's future, and as a result have continued strong R&D spending in the second quarter of 2007 for both current and new product development, as well as certification efforts.

The second quarter R&D spending amounted to $1.5 million. However, that amount was after $800,000 was transferred or allocated to cost of sales. This type of allocation is made when the company is paid and records revenue for a specific development, modification, or engineering effort. This reclass provides the appropriate matching of revenues and costs. And in these cases, it is also not unusual to spend more than what the customer has agreed to pay, as we leverage what we are being paid for with attempts to achieve added technology.

Without this reclassification of costs, R&D spending in the quarter would have been $2.3 million, slightly higher than the prior year. The reclass of R&D cost to cost of sales also impacted gross margins in the period that we talked about earlier. But higher volumes of this type of reclass would essentially go unnoticed.

Our SG&A spending totaled $3.9 million in the second quarter. It was an increase of $1.7 million from the $2.2 million in G&A spending in the second quarter of 2006. The increase was principally the result of $1.8 million in legal fees in the quarter that the company incurred defending its intellectual property from infringement.

Net interest income was $741,000 this year, and $776,000 last year. These amounts are similar, and reflect higher interest rates this year, offsetting a slightly lower average cash balance in the period. The lower cash was mostly the result of last year's stock buyback program, where the company purchased about $1.3 million shares of stock at a cost of $18.1 million.

For the quarter, we had a net loss of $2.4 million, or $0.14 per fully diluted share. This compared to a net loss of $800,000, or $0.04 per fully diluted share in the second quarter last year. Excluding the exceptional, non-recurring legal costs to enforce our intellectual property rights, which are included in the SG&A spending, net loss for the quarter would have been about $0.07 per fully diluted share, or about one half of the reported loss.

We continue, going forward, in a strong financial position, and enter the second half of the year with a current ratio of almost 13 to 1 cash on the -- just under $61 million, or $3.60 a share. Note that with the exception of our industrial [filament bonds] we're about $4.3 million. Assets of $86 million, of which cash is 70% of that. Shareholder equity equaling almost $76 million, or $4.50 a share.

It's important to note that shareholder equity is net of approximately $18.1 million in Treasury stock. Had we not purchased the stock, our cash balance would have been close to $80 million at the end of the second quarter.

Clearly, our balance sheet reflects the financial flexibility and capacity that we need to ramp up to the production levels that Roman will talk about in a short time.

To summarize quickly, new flat panel orders for the second quarter were $11.2 million, and other new business orders were $3.2 million, for a total of $14.4 million in the quarter. As a result, the backlog at March 31st was an all-time record $42.7 million. This was an increase of $14.4 million, or 51% over the March 31st 2006 backlog. The flat panel portion of backlog was $33.5 million this year, and an increase of $17.2 million, or 105% higher than the $16.3 million recorded at March 31st.

Six month reviews. Revenues for the six months were $7.4 million, down from $9.2 million last year. Year to date margins were 32%, and 46% in the same period last year. Some of the same comments from the quarter apply here, and we expect these margins to increase as does our revenue in future periods.

R&D spending in the six month period was $2.8 million. This amount was also after reclassifying $800,000 to cost of sales. Without the reclass, R&D spending in the six months would have approximated last year's numbers, as well.

SG&A spending in the six months ending with March 31st was almost $7 million. Of this amount, almost $3 million was spent in defending our IP from infringement.

We reported a net loss of $3.5 million or $0.21 per fully diluted share in the six month period. And about $0.11 of that $0.21 was also related to the IP legal fees discussed earlier.

At this point, I'd like to turn the call over to Roman to talk about the operations and the future of the company. Roman?

Thank you, Jim. As previously reported, the company continues to invest a significant amount of time and resources developing and marketing flat panel display systems, and positioning the product as more than just another option for the replacement of obsolete displays.

Each quarter, we have seen increasingly encouraging signs of acceptance and recognition by the market of the many advantages of the IS&S flat panel display system. This past quarter was no exception. The IS&S cockpit IP flat panel display system for the B757, B767 fleet, has been selected by major ATA, Air Transport Association, carriers, as the solution that best meets their needs to present additional information to their plane crews, to comply with current and future regulatory requirements, such as ADS-B, to improve dispatch reliability, obtain weight and fuel savings, and to reduce the cost of aging equipment maintenance, repair, and obsolescence.

You will hear more about these programs during this current quarter. The company's success in upgrading legacy aircraft also positioned us to be selected by Eclipse Aviation to be their [inaudible] OEM supplier of the highly integrated Avio NG cockpit display system for the Eclipse 500 Very Light Jet.

Eclipse Aviation has announced their plans to deliver 400 jets in calendar year 2007, and 1,000 jets in calendar year 2008. Each of these will be equipped with the Avio NG cockpit.

In our military segment, we continue to receive follow-on orders, particularly for the Lockheed C-130 military air transport.

To better capitalize on the opportunities in each of these segments, we have further structured our business development efforts of the military, commercial air, transport, and business and general aviation pursuits. As we ramp up the volume in each of these areas, the company will move to a strengthened product line management structure to better address the unique needs of these three segments.

In the military segment, we now provide cockpit IP solutions, both domestically and internationally, for the C-130, [KC2], KC767A, and the L-1011.

In the commercial segment, we now have broad acceptance of the IS&S B757, B767 retrofit flat panel display system, as well as providing B737 and Boeing 747 product offerings.

Now business in general aviation segment, in addition to the Eclipse OEM offering, we supply Cessna Citation and Pilatus PC-12 solutions, and have additional ones in the offing. Let me discuss the Cessna, which we did talk about before, but I'd like significantly to point out that this agreement with Cessna Aircraft Company to provide flat panel display systems on their legacy Cessna Citation aircraft is a very good, strong win for the company. Our flat panel display systems replace existing dials and displays, and will be distributed and installed through Cessna's service centers, of which there are 34 worldwide.

The company's flat panel display system product line or cockpit IP is the most timely and cost effective way to upgrade legacy Citation aircraft with state of the art technology offered in our systems. Based on unit sales, the Cessna Aircraft Company is the world's largest manufacturer of general aviation airplanes. The global fleet of more than 4,500 Citations is the largest fleet of business jets in the world. We believe that more than half of this fleet is addressable with the company's flat panel display system.

We continue to expand our market by getting our products certified for an increasing variety of aircraft; continuing to drive down price, thus putting our cockpit information portal technology within the reach of more operators; developing partnerships and other alliances that provide access to more markets; and offering product line expansions.

In this latter category, IS&S optionally offers Class 3 electronic flight bag capabilities that consist of electronic navigation charts powered by Jeppesen, and applications such as takeoff, en route, approach, landing, missed approach, and go-around information. IS&S e-charts will be installed in the forward view of the pilot on the aircraft's multifunction display and include critical zoom features, making the Class 3 e-charts larger and easier to read, and improving the pilot's ability to operate the aircraft.

Notably, Class 3 e-charts from IS&S will display own-ship position to pilots through a digital representation of the aircraft's exact, real-time position on the runway or in the air. Runway awareness is of increasing concern to the FAA. The [inaudible] IP provides this capability increase safety for passengers and crews alike. This will be a driver for further increase of sales.

The NTSB has issued recent information -- that's the National Transportation Safety Board -- increasing guidance to the industry about the criticality of improving runway awareness. Your company is optimally positioned to take advantage and offer this kind of feature to the operators.

To summarize, we continue to make significant progress in broad-based flat panel market acceptance. We continue to cultivate the market for the company's cockpit IP product line, and we are confident of continued growth.

I'll now turn the call back to Geoff for concluding comments.

Thanks, Roman. I would like to make a couple more comments with respect to the business. We have recently -- have hired and he is in place, a new Vice President of Operations for the company. [Inaudible] brings a rare mix of background, having worked at GE, at their engine fab plant, and more recently at Amitech, manufacturing flat plan displays and cockpit instruments. He brings a unique talent set, including being a 6 Sigma master black belt.

He will take over and provide additional talent and energy for our expected and anticipated very rapid ramp up to accommodate the production demands for the future. I'd like to turn the -- at this point, I'd like to turn it over for questions for the next roughly an hour.

[Operator Instructions] Your first question comes from Ashok Ahuja.

Hi. This is Ashok Ahuja. Congratulations. It looks like things are going well, and congratulations on the new CEO.

Could you give us any update on whether you're seeing anything from an acquisition point of view? What the market looks like, etcetera?

We continue to -- we had discussions this morning, and we continue to look at, as you know, strategic acquisitions. And we continue to have discussions. And this point, we're very focused at what we believe will be an accelerated ramp up on some rapidly increasing backlog. There is no specific acquisition in the future. We continue to look at strategic opportunities that will broaden the reach of our existing product line in the cockpits, both at OEM level and retrofit.

Thank you. Congratulations again, and all the best.

I appreciate your --

Your next question comes from Alex Hamilton.

Hi. Good morning. A few questions here. We're talking about incredible backlog by the end of next quarter. I think you said $75 million to $100 million. We also saw a big improvement in the backlog this quarter. What I'd like to see, or what I'd like to ask you -- I'm sorry -- is how do we expect this to flow through over the next couple of quarters into the revenue line?

A large percentage of that backlog, the good news is that it'll be distributed over about a three and a half year delivery period, primarily in the backlog that we will see, primarily in the air transport cockpit upgrades. And that will provide us a wonderfully stable basis for three to four years to give us a very strong foundation.

In addition, there's going to be additional releases on the Eclipse orders, which are not on the books now, which will fill -- substantively fill the production for the next three or four quarters. In addition to that, the Cessna, which we have right now on order for I think 50 ship sets, we expect that to be a very rapid growth as well.

So we think that -- we hope and expect that that growth will be at a 25%, and I've mentioned this before, a 25% per quarter compound growth rate, and maybe accelerate from there. We'll need to fill what will be our existing backlog. Again, what you will see as a backlog at the end of the quarter will be probably -- about 50% or 70% will be long term backlog -- a firm, I might add, but long term on the schedule -- for about three years.

And the good news of that is it provides a foundation, so we won't have these dips in sales that we've had in the past.

How much of the increase in backlog now was I guess ABX Air and/or Eclipse?

The increasing -- not that the -- ABX Air --

But not ABX.

Not ABX Air. Eclipse -- it was $20 million for Eclipse. No. $9.5 million for Eclipse. That's -- and 757/67 is not in the increase in the backlog. You don't see that. And that portion will be reflected in next quarter's backlog.

Okay. And that's the 100 aircraft?

One hundred aircraft. That's correct. And we expect some more beyond that. We're in negotiations with a couple of people with fleets of 57/67s.

So that means you can't comment as to what airline?

I can't comment. I'm sorry.

Okay. I figured. And --

Again, we only book and we only put in backlog when we have firm -- what we have is firm released backlog. And we don't have that at this point.

And two more questions. Is there any update on the STC announcements that were expected?

The update on what?

The further STCs?

No.

737/747?

737 STC is about -- was it two and a half months or three months away? To be honest with you, we have -- I think that slipped about a month and a half because of the huge demand in some of our other products, and efforts in that area, and trying to get support out of the FAA.

As you may recall, we're certifying the electronic flight bag system, and Eclipse and Cessna products. So the FAA can only properly digest so much at a given time. But we have done virtually all of the design work for the 737, and we'll be following up with an STC in the near future.

And then just lastly, I've been reading in some trade mags that I guess for the 2008 Olympics in China, that they're thinking, due to all the air traffic, they're going to have [inaudible] requirements. A, have you heard that, and B, would there any opportunities for you there?

I'm sure there'd be opportunity, and no, I haven't heard it directly.

Great. Okay.

I've heard rumors about it. [Inaudible] rumors, but I don't know on a firsthand basis.

Perfect. Thank you very much.

Thank you.

Your next question comes from Michael Ciarmoli.

Hey, guys. Congratulations on the orders.

Hello, Michael. How are you?

Good. How are you doing?

Excellent.

A couple of things. On the order with the major air carrier, can you give us an indication if that's a passenger carrier, cargo carrier?

I'd like not to comment. We'll come up out with a [quick] release in the very near future, a couple -- within a week or two.

Okay. What about pricing on the product for the 100 planes?

Consistent with what we expected.

Okay.

The margins are consistent.

Okay.

Seeing as we've all planned this 57/67 market. It always takes longer than I guess everybody expects. And now it's all coming to fruition, and we're very optimistic about our solution, and especially we're seeing more and more -- as we expected, more and more indications that the features of our system will be mandated for safety reasons and things like ADS-B.

So we see not only the drive of updating aircraft to provide enhancements to the flight crews' situational awareness, but actually to respond to what we believe will become mandates that will further accelerate our growth in that area.

Right. Do you have the status of the STCs for the 757?

It's done.

That one's done. So the 757/67 are done and ready to go?

Right.

Okay.

There's planes flying with the equipment, Mike. This is Roman.

Okay. Great. Thanks, Roman. Can you go into a little more detail on the hiring of Ray Wilson? It's news to me, so I'm just wondering a little more as to what the thought process was, and some more color on that.

Well, just as background, Ray and I have known each other for roughly five years. And when Ray retired from his position at Airbus, I asked him if he would consider consulting with us, and ultimately joining our Board of Directors about six months ago. And Ray agreed to join the Board of Directors.

And at the time, I commented that he would bring a unique background and skill set to the company, with his international perspective. And that has proven to be exactly as I suggested.

Ray and I got talking several weeks ago, and we have been addressing the succession planning that we've talked about for 18 months. And I asked him would he be interested in taking over as CEO, and then I would stay on as Chairman and focus my energies toward some of the strategy of the business and product development and where we're going.

And I said that the company would be growing at a very rapid rate, and could hopefully use both of us very effectively. And Ray seemed excited about the opportunity of joining. He brings a -- he's a rare guy in that he's had enormous experience in large organizations. Clearly Airbus and Westland are both very large organizations. He has a unique true sensitivity for the challenges of a small organization.

I think his comment had said that a small business is actually more difficult to run than a larger business, because you have to deal with a smaller resource set. That sensitivity I think is going to be critical in his ability to drive this business to what I think is a remarkable future.

Sure. Definitely. Is there any way to leverage his previous relationships with Airbus and translate that into future either retrofit or OEM opportunities?

Yes. I don't -- you want to know the truth? The Board of Directors in the past has always had excellent contacts in the industry.

Right.

But I have consciously avoided exploiting those contacts. I believe that at some point, it's -- I frankly think it's a little unseemly and unfair to the directors. But more importantly, I think the business, well run with a good product, is what sells the product, and not the individuals.

Nobody ever won a program, in my experience, at a company, because you knew senior management. You did it because you did your homework with the guys in the decision making process, the guys down in the trenches, and you made sure that your business was adequately run to pass the test in the senior management's perspective, that you had an ongoing business.

So we don't -- we don't need it, and that -- we wouldn't pursue it that way. We had some good working opportunities with Airbus in the past. Airbus, as you probably know, has had -- been a little preoccupied with some other issues.

Sure.

And we think there's a great opportunity, and our product has evolved to a point where we think Airbus aircraft are candidates for our equipment. But you only get on those airplanes because you make a better product.

Got you. Two more quick questions, and I'll jump off here. The agreement with Cessna. Now you said they've already taken I guess 50 ship sets. How is that --

They've given us an order for 50 ship sets. And we are developing -- or we are modifying our equipment for their specific application, to minimize installation time and maximize performance that we've -- since we've got the order, we've actually had some opportunity to significantly enhance the performance of the equipment, and we're implementing some of those changes now.

Okay. Who is -- how is that -- the sales being driven there? Are those, the 34 service centers, kind of just pushing that product on customers who come in? Or are they waiting for Citation owners to come in and ask for the retrofits?

I think both. They have 30 -- they're going to push it out of the 34 service centers worldwide. There is enormous interest from the owners and operators. Remember, it's a wonderfully -- wonderful airplane. It's a hell of a fine performer, and at this point, because there are so many of them out there, they're at a very reasonable price. You get an enormous performance for the buck.

And upgrading the cockpit is mandatory at this point. The equipment is 20-odd years old. When you get 20 years older, you feel it, I guess is a good answer.

Got you. Last question. The charge in the quarter and the expense related to patent litigation, how critical is that? I was looking at the complaint. It looks like it's for your module altimeter -- modular altimeter. Is that a critical component of flat panel? Should we be worried about this? Or how should we look at expenses going forward?

Well, again, you will understand that I really have to be very circumspect about commenting on this. But no, we don't believe that this litigation has anything but a positive effect going forward. You do understand that our intellectual property is a major asset to the business. And we protect that very actively and very aggressively, and that's what we're doing in this case. And I can't comment any further on that, because it's pending, as you probably know.

Right. Okay. I will jump off. If I have some more, I'll jump back on. Again, congratulations on the order, guys.

Thank you very much.

Your next question comes from David Campbell.

Good morning, David. How are you?

Geoff, I'm doing fine, but I can't believe you're retiring, or is that a bad word to say, retire?

I hope I'm not retiring. I'm actually going to hopefully be able to do some of the things that I haven't been able to accomplish while I was in -- serving both roles. So for me, this is a wonderful opportunity to pursue some of the product area, some exceptional opportunities, and more aggressively look at the acquisition end of our business as well.

So this is, for me, a wonderful opportunity. And no, I'm not ready to retire. Those of you who know me will probably figure that out. I'm not ready quite yet to do that. Although you never know. Ray may tell me to go pound sand. I had somebody remind me that the only thing a chairman can do is -- he has no authority in the company, but he can fire the chief executive.

Well, Geoff, now you've done a great job.

[Inaudible] and the Board can fire me.

You've done a great job of creating these products, engineering them, designing them, and finding buyers for them. What did you need more time for?

Yes. I'm delighted. The wonderful -- the great satisfaction is frankly I'm thrilled to death that I found somebody who I admire personally as much as I do Ray. And he's a perfect fit for the business. The guy's an exceptional pro. So I'm very comforted to have him. I continued to be comforted at having Roman, who's done an incredible job for me, and I still rely on him strongly, as you can imagine.

But the exciting thing is that we've been talking about the flat panels. You might recall that we took the company public in 2000, saying that the flat panels were going to become a necessity in the future. And by the way, the 15 inch panel was going to be the next generation.

Well, guess what? Seven years later, all of that is true, including the 787 with 15 inch panels. So we're delighted. I think we believe we helped create a market, and are now prepared to service it in a unique way, with a remarkable price point.

Well, you mentioned that you -- getting close to an order for 100 767s. Did I hear that right?

For 200 [inaudible].

No. I said an order for our cockpit upgrade -- I'm being very careful what I say -- for our 757/67 cockpit solution.

So it's a -- I'm getting --

The 57s or 67s. It's obvious -- is the obvious conclusion.

Or both.

Or both.

Could be both, right?

Yes. I'm avoiding answering your direct question.

But eventually, it could be as many as 200 total aircraft?

No. This -- the program we're talking about is specifically for roughly 100. We are in negotiations and discussions with two other major bids -- or actually, three other major bids -- for fleets upwards of 200 aircraft, of either 57s or 67s.

Right. So the 100 was the 757s. The three other bids are for 757s or 767s or both.

Let's be careful not to -- it doesn't actually matter. They're exactly the same [inaudible]. They replace the same equipment. It doesn't matter. It's the same product. And whether it's 57 or 67, it's academic.

But we're servicing both. We have STCs for both. And there's 1,700 of them out there, and we think they're all going to be required -- as you know, people are investing $0.5 million to $0.75 million on both of those airplanes, to put wing [weights] on them and investing to have those operational for 20-odd years. Trust me. The equipment that's on board would look very old when it's 45 years old, if they don't do something about it.

David, that's also one of our unique advantages. The fact that the product is the same on both types reduces logistics costs and savings from a performance standpoint. Training savings, etcetera.

That's why you don't need an STC specifically for the 757?

No. We have an STC for the 757. We have an STC for the 767.

Both of them.

Okay. I didn't realize that you even had one on the 757.

That's right. And the aircraft is flying around as we speak, with an STC [RSC].

Okay. And I know there's a lot of other people with questions. Just one last one for me. Now Jim, could you repeat the revenue mix in the first quarter?

Yes. The mix in the first quarter, David, out of the $4 million, $1.3 of it was for flat panels, and $2.7 was for air data. And most of that air data was with the US Air Force, our solid-state barometric altimeters.

David, just to be sure, that's our second fiscal quarter. I assume you're referencing the first calendar quarter?

I meant the March quarter.

Yes. It is our second quarter.

Yes. Yes. And -- but then you've got this $800,000. How does that get allocated?

Well, that $800,000 is -- what we're trying to do here now, David, is we're going into a new aspect of our business, where we're going to be getting a lot of flat panel orders, and there'll be modification work, as Jim talked about earlier. So we're going to break out what we call engineering modification and development work. Most of that was in the flat panel area, probably a mix between Eclipse Aviation and ABX, which we're still delivering on.

Okay.

Basically, it's a way of trying to -- when you apply flat panel to different aircraft, you may have some non-recurring engineering costs and/or services to do that. And we're just -- because it's become a significant -- certainly in that quarter, we decided to break it out.

Okay.

As opposed to traditional production revenue.

Okay. Great. Thanks. I'll let other people have questions. Thank you.

Thank you.

Our next question comes from [John Morsani].

Good morning. Can you just maybe elaborate a little bit on the legal issue? Has that been settled? Or can we expect ongoing charges of about the same nature of the last quarter? Or where does that sit?

It has not been settled. We would like it to settle, but we are actively and aggressively protecting our intellectual property. So we will pursue that until it's concluded to our satisfaction. It could continue on for a couple of quarters. But we believe it's essential to protect the future of the business.

Have you disclosed who the -- or will you disclose in the K who the -- sorry -- in the Q who the litigant is?

I don't believe -- we will not disclose. Right now, we're not disclosing it, and I think it's based on court order. We see no interest in disclosing it until it's concluded. And that'll be a function of what the court order -- but I think there's a restraining order right now on any disclosure. So we've avoided any discussion on it.

Okay. Thank you.

We actually don't believe in the long term that it's a significant cost. We'd like to look at the supply side, get the revenue up, and it will become small by comparison.

Got you. Thank you very much.

Your next question comes from [Christina Whitehead].

Good morning, Jim and Geoff.

Good morning.

Congratulations on the quarter. I had a question, but David actually took it. So that's all that I had.

All right. Thank you.

Thanks.

Your next question is from Michael Ciarmoli.

Hey, guys, just a couple of more questions. In terms of certifications for the Eclipse, I know you guys were waiting on I guess FAA production certification of your facility. Where does that stand?

That's a production certification of Eclipse, not us.

Okay.

And we think they're doing extremely well on that, and we would hope and expect that they will announce soon that they've gotten their production certificate. If they do, it'll be remarkable, because I think it'll be the first one awarded to a VLJ, as a matter of fact.

So they're breaking new ground. They're doing a remarkable job. And I mean it. I am -- we already have the [inaudible]. I'm delighted to be part of that program. It is a remarkable program. They're doing a great job.

If you had to handicap that program or assign some probability, their goal is 400 shipments for this year. Do you think -- is that the high end? What do you think the worst case scenario is there?

I'm not going to second guess their production.

Okay.

[And for sure], but I can tell you that they have focused on volume production from day one as a design and implementation. Invested heavily in that, and as you probably know better than I do, they've recently gotten a new Vice President of Operations out of Ford. So they're thinking in the volume production, and from our standpoint, their demand -- and they're leaning on that demand -- says that they can ship 400 aircraft.

Okay. And --

[Inaudible] up to do that. That's all I can tell you.

Got you. Just a clarification on the other two or three bids out there, for the fleet sizes of 200 aircraft. Are those fleet sizes each 200 planes, or is that 200 planes total?

We have bids out for and unbooked orders for almost 500 airplanes.

Five hundred planes.

Total.

Total. Perfect.

And they're not in our backlog, so you'll see that. And we're extremely excited. We think a lot more are going to come in. We believe that we're going to get a significant penetration.

I don't want to discuss it until, as they say, the check clears in the bank. That's just not good -- but that gives you some sense.

Right. Do you think it makes -- do you think that signing with this other I guess major carrier makes it easier to sign these additional carriers? They're giving you guys more credibility and legitimacy?

I'm sure it has an effect. I can't measure that effect.

Okay. Great. Thanks, guys.

Thank you.

[Operator Instructions] Your next question comes from Paul Kaump.

Good morning, gentlemen. Congratulations on the orders and new business.

Appreciate that.

First and foremost, Geoff, in your prepared remarks, did you hear you correctly in saying that you expected to win 100% of that $100 million of biddable business?

I don't know if I said expected, but certainly I would have said I hope to.

Right.

We are -- we believe we have a remarkable -- we have a remarkable offering. And I'm grateful that we do. I think if we do our work well and our homework well, we should be very successful.

Okay. Given these new orders and everything that you already have in backlog, regarding facility expansion, I know you guys are in the process of moving some things around out there, and knocking out a wall or two. Can you give us an update and a rough timeline for when we might expect some of that?

And the second question relates to that, is can your current operations today support all the business that we've talked about this morning?

Yes. The answer, the simple answer, is yes. We do that kind of facility analysis continually. And as recently as yesterday, we had Ray involved in another review of our facilities readiness on the major programs that are coming in.

The very good news is that the business is -- a lot of the business that we're looking at, a significant portion of the backlog, maybe about $60 to $70 million worth of backlog, will be distributed over about a four-year period. So it's a wonderful $20 million to $25 million a year kind of almost guaranteed revenue stream.

And that's very easy to accommodate. I would tell you that the business has always been designed to accommodate $100 million in revenue out of the existing facility. Now it's a little tight at that point, but we can do that.

We have simultaneously leased additional space, office space, within a few blocks of here to carry some of our engineering and services part of the organization, so that we can continue to expand that part of the business as well.

We will also have a planned expansion. But the planned expansion, we want to have that totally independent of the necessity for production space, so that we're not artificially pressuring or impeding the production capability.

Got you.

We have the ability to satisfy that out of this facility [inaudible] for well over 12 months of the anticipated production [level].

Okay. Switching gears, just talking about Eclipse quickly, do you expect to see any Eclipse business float into the end of Q3 at all?

Yes.

Okay.

And it's an amazing system. It really is an amazing system. We're thrilled. It's given us an -- it's really strengthened our offering and our technical capability for systems.

Now do you have the go-ahead to go out and do the upgrades of the old planes that had the Avidyne avionics package aboard?

We're not going to do it. Eclipse has already announced that they will retrofit 100% of the aircraft delivered with the Avidyne equipment.

Okay. But they are in a position to do that today? Or --

Well, because we haven't delivered yet --

Okay.

Part of our -- the production -- some portion of the production will be [Q4] and the other portion of the production will be to retrofit aircraft delivered before we're up to full speed.

Okay. With respect to Q3, we've talked about you guys getting to kind of a $40 million run rate during the second half of '07 in the past year. And I'm wondering where that stands today.

That's clearly our goal, and we think we'll achieve it in the third quarter.

Okay. Last question. Given your success with Eclipse, are you seeing additional opportunities in the VLJ business? I know there are a lot of other carriers out there who have planes either on the drawing board or close to maybe getting into production that are running with it looks like Part 23 equipment on board. Just your comments there.

I'm -- my only comment is that I'm delighted that you recognize the difference between Part 23 and 25. I don't mean that in anything but really a complimentary way. It is actually a very important point, that our equipment is really designed to be compatible for everywhere from the most exacting military standards through air transport standards. So it's advanced Part 25 equipment. And obviously, that was one of the incentives for Eclipse going in our direction.

We think that will have a very strong attraction to other VLJ operators. We'll be able to offer, and we are, in the next four to six weeks, we will be announcing some enhancements to our capability of our products.

Beyond that, I would like -- I would prefer not to comment. Obviously, those are very sensitive competitive positions.

Understood. Thanks.

Your next question comes from [Ann Marie Bondago].

Hi. It's actually [Tamara Manukian] from Greenwood Investments. I just wanted to see if anything has changed. I just noticed that there was an [S3] registration form filed a couple of days ago. So can you comment on that?

I can. The S3 registration was literally an amendment to the S3 registration that was initially filed about two months ago. Yes. Two and a half months ago. It was -- it needed to be amended because of a three-day or four-day timing between our last release, our Q release -- is that correct? So that's why we had to refile it.

But there's no difference in the original filing. There's nothing changed. It was -- it had to be amended to bring it up to date. But just -- it was a technical amendment to conform with SEC requirements. Nothing else has changed.

Not the number of shares or the people. And no, I'm not registering another 3.5 million shares. I wish I had them to register.

Okay. And I think that last quarter, you mentioned that you did not register it for the purpose of selling.

No. Look, without going into too much detail, just basically I took my founder shares, since we went public, and we -- since 2000, I already had well over .5 million registered. So I didn't really need to register them.

We made a decision, as I mentioned before, at the Board of Directors, to register all of the outstanding shares that had not yet been registered. And the reason you did that is that we had about 10 or 15 stockholders that had, in some cases, modest amounts of stock, and every time, if they wanted to sell them, they -- it required a review by our attorney and a letter from our attorney on every single transaction. That was expensive for the company. It was difficult and time-consuming for the person selling it. And so we decided to register all of those.

At the same time, I registered my shares. I kept my stock because I had a lot of stockholders, and I decided that I thought this was a great investment. I still do. And by the way, I've done very well with it. I'm proud to be a stockholder.

Great.

So no, I'm not ready to sell. I think it's going to go up. How about that?

Sounds good. Thank you. Good quarter.

My lawyer is shaking his head, so -- any other questions?

Your next question comes from David Campbell.

Jim, David. I just wanted to ask you again about this [$802,000] or your new accounting for engineering modification revenues. The margin on that, the costs of it were $723,000, so you made roughly 10%. Is that also a function of volume? Or is that always going to be 10%?

No. That's -- it's a function of a specific program, David, that we completed. A military program that we completed on a paid for R&D basis, where we actually incurred additional costs to drive the technology in the direction we were going. This isn't always the case, David, but you'll find [whenever] we get paid for R&D, we can take the opportunity there to drive it a little further.

David, just practically, we are not in the business to sell engineering. We provide engineering services to our customer. We don't make -- we're not looking to make profits, large profit, off of engineering at all. We do it purely as a -- as a service to the customer. And the reason we isolate it is so it didn't confuse the margins of our ongoing business. And that's why it's separated.

But this -- the amount of it on a quarterly basis is going to be all over the place, is what you're telling me?

It may be zero next quarter. But if we combined it with the existing production, it would have affected the entire margins. You would be calling me and saying, how come our gross margins are down to 47%? And I'd say, well, we have $800,000 [inaudible] that's engineering in this margin.

So we thought it would be clearer to the shareholders to identify that separately. We do it purely as a support service to our production. And if it makes a little money, we're delighted. But we don't see it as anything but a small revenue generator.

The problem is to put it in our estimates and add historical business. We need some restated data for other quarters in the last year. Is that going to be available, Jim?

In the last couple of years, David, it's been under 10% in both years, of revenue. This quarter, it approximates 25% of revenue. That's why we wanted to break it out specifically.

Okay. So in the --

Unusually high as a percentage last quarter. All right?

So it was under 10% the last two fiscal years?

That's correct.

Okay. Well, I'll just do my usual guessing, which I do all the time anyway.

You do a good job of it, I might add.

Well, you just keep getting new orders from some of my friends in the air transport world, and that'll take care of that problem.

I think I'll do that.

I know who you got your order with. Thanks. Good luck, and congratulations.

Thank you.

Your final question is a follow-up from Michael Ciarmoli.

Michael?

Yes. Actually, the question's been answered. Thank you.

That was a great question. Thank you. Ladies and gentlemen, thank you for your interest. We're very excited here about the clear growth direction of the business. Recent orders and interest have vindicated our faith in where we were going, and we see really a remarkable future.

Again, I'm delighted to welcome Ray Wilson to the team, and we look forward to a remarkable future. Thank you.

This concludes today's conference.