Innovative Solutions and Support Inc (ISSC) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Innovative Solutions and Support first-quarter earnings conference call. My name is Rachel, and I'll be facilitating the audio portion of today's interactive broadcast. (Operator Instructions) At this time, I would like to turn the event over to Mr. Geoffrey Hedrick, Chairman and CEO.

Morning, and this is Geoffrey Hedrick, Chairman and CEO of Innovative Solutions and Support. I'd like to welcome you this morning to our conference call to discuss the first-quarter 2009 results, current business conditions and outlook.

Joining me today at our Exton headquarters are Roman Ptakowski, our President, and John Long, our CFO. Before I begin, I'd like to ask John to read our Safe Harbor message. John?

Thanks, Geoff. Good morning. I'd like to remind our listeners that certain matters discussed in this conference call today, including operational and financial results for future periods, are forward-looking statements that are subject to the 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 our Company's 10-K, which is on file with the SEC. I will turn the call back to Geoff Hedrick, CEO. Geoff?

Thanks, John. We reported strong results for the first quarter ended December 31st, 2008. Revenues were up by 125% from a year ago at $10.6 million, exceeding the high end of our guidance provided this last quarter.

We also recorded a flat -- we also had record flat-panel system revenues. We reported income of $1.8 million, or $0.11 per fully diluted share, consistent with our expectations. This $0.11 includes approximately $0.03 of tax advantages, but the basic operating income exceeded even our own expectations.

In this first quarter, we have improved the bottom line by nearly $4 million, from a comparable loss of $2 million in the preceding quarter. A year ago, we also posted a significant loss. These are reasonable results and provide good, sound financials going forward. They're especially remarkable considering the loss of Eclipse's $4.5 million per quarter revenue.

In September of last year, the Board of Directors voted to change the Company's senior management. I resumed the position of CEO and focused on changes in systems within the Company. We reduced the personnel count by more than 70 people and implemented broad changes throughout the organization that significantly impacted efficiencies. These included reorganization of the engineering department, allowing us to accomplish the same work with half the number of people.

Changes in the manufacturing organization have brought our inventory down from $9.4 million to $7.8 million. And redirection and refocusing of our sales and marketing teams to shift our emphasis from BLJ OEM work to retrofit military and commercial air transport. This resulted in over $60 million in outstanding bids.

Engineering efforts have been augmented by sharing specific modification costs with our partners and customers. This allowed us to invest over 12% of revenues in our -- in IR&D, with an additional 3% paid for engineering effort for these modifications. This is a historical record. This is the highest investment in R&D in a profitable year in our history.

We are in an excellent position to accomplish our objectives. With operators increasingly opting to update existing equipment rather than replace it, retrofit demand is on the rise. IS&S has a long history of a leader -- as a leader in retrofit equipment. Our equipment is designed for and well suited for the three market segments -- air transport, military, and general aviation. And we believe demand in both our flat-panel display systems and air data systems will increase as a result of the renewed interest in modernizing and improving the safety and reliability of existing aircraft.

Our Cessna relationship is a model illustration. Our work on Cessna has resulted in successful completion of -- excuse me -- successful completion of our qualification testing. And Cessna is now installing their installation harnesses in the test aircraft. We expect flight testing to commence the middle of next month. We have completed at the end of this month all flight safety software testing, and the equipment is delivered last quarter to Cessna for installation.

We have booked $6 million this quarter -- in this past quarter -- of new business, but we evaluated all our outstanding businesses. And in light of the difficult economic conditions, some of these orders, we believe, might be stretched out or delayed. And appropriately, we have chosen to remove them from our operating backlog so that only contracts which we believe will continue at the planned and existing rates are in that backlog.

It still provides us with over $47 million backlog, which is more than a year's worth of revenues. And with a stream of retrofit inquiries beginning to improve, we feel that we are beginning to see initial signs of what we believe will be a major revitalization of the retrofit market. John and Roman will talk more about both of these aspects.

I was confronted with some difficult business decisions to resize and reshape our organization, helping to improve our financial strength. Having accomplished these, we are in a much stronger and much more practically viable situation.

Gross margins in the quarter exceeded 50% as both scale and efficiency improvements enabled us to leverage our fixed cost. The renewed focus on efficiency has enabled us to get our research and development, as well as selling and G&A, costs back in line with historical relationship to our revenue levels. Each of these cores -- costs actually came in below what we had projected last quarter, while we're still investing over 12% of our revenues in IR&D, with an additional 3% paid for by customers.

We're doing a much better job in focusing our priorities and accomplishing those objectives that will lead to the better results. The same can be said for the improvements we are achieving in our already strong financial position.

I'm especially pleased with the recent progress in the Cessna program, and we expect significant revenues from Cessna as we address the 2,500-ship market. This is the further evolution and combination of our excellent efforts with both the Eclipse and 767 equipment. This accomplishment will provide significant and expansion and functionality by satellite-related radar, OIS guidance, and inter-radio management tuning. We have delivered and regained our -- we have delivered and have shown product revenues for this program in Q1 of 2009.

I'd like to turn it over to John Long for details of last year's performance and a quick look at next year.

Thanks, Geoff, and thank you for joining our call this morning.

Revenues in the first quarter were $10.6 million, up approximately 123% from $4.7 million a year ago, and slightly above guidance provided last quarter. Revenues are also up from the fourth quarter of fiscal 2008, making this the fourth consecutive quarter of sequential revenue growth as production continues to ramp.

Revenue growth in the quarter was driven by record flat-panel display system revenues from a mix of solid customers in each of our three market segments. Flat-panel display system-related revenues in the quarter were $8.2 million. Air data product shipments in the quarter were approximately $2.4 million.

Gross margins in the first quarter were 50.3%, more than double year-ago margins, and also up significantly from the comparable Q4 normalized margin of 35.5%. Again, performance was in line with the direction provided last quarter.

Clearly, incremental product revenues and efficiency initiatives undertaken last quarter are delivered in the leverage of our fixed engineering resource and manufacturing overhead, as we anticipated. We believe margins of this magnitude are achievable over the longer term through further revenue growth. But at current revenue run rates, we're still committed to gross margins in the mid to high 40% range.

Total operating expenses for the quarter were $3.6 million. Of that, research and development expense was approximately $1.3 million, as our organizational changes and workforce reduction have reduced costs, but at the same time, we've improved productivity without otherwise diminishing our R&D output.

R&D was approximately 12% of revenue for the quarter, which is around the long-term -- or better than, as Geoff mentioned, the long-term historical average.

Sales, general, and administrative spending in the quarter totaled $2.3 million, compared to $5.9 million in the year-ago quarter. And as you remember, we did have significant legal costs in that comparable-year quarter a year ago.

More importantly, SG&A this quarter is down sequentially from the comparable Q4 '08 number of $3.1 million, and below the estimate of $2.5 million to $2.7 million that we shared with you during the last quarter call.

Recent workforce reductions and efficiency enhancements have enabled us to increase revenues while reducing our overhead. Again, at roughly 22% of revenue for the quarter, the proportion of SG&A is trending to historical averages.

Pretax income for the quarter was approximately $1.9 million, an 18% return on revenues.

As indicated in the earnings release, our effective tax rate for the quarter was 4%, primarily a result of two factors -- the reinstatement of the US research and development tax credit during October 2008; and second, our ability to realize the tax benefit associated with the bad debt expense during the quarter.

As we indicated in our second-quarter 2008 results, we established devaluation allowance that reduced the book value of our deferred-tax assets to zero on our balance sheet, in accordance with Financial Accounting Standard 109. We will continue to evaluate the need for this allowance on a quarterly basis, based upon our current and anticipated pretax income. We do anticipate a 10% effective tax rate for the second quarter of fiscal 2009.

The result is that we reported 2009 net income of $1.8 million, or $0.11 per fully diluted share. Financial position remains strong, and as of December 31st, we had $33.7 million in cash, $4.3 million in debt related to our facility, and shareholder equity of approximately $49 million, or $2.92 per share.

We quickly mentioned that while income -- a nearly $2 million reduction in inventory generated $3.7 million of positive operating cash flow was offset by both an accounts receivable -- a growth in accounts receivable and a tax payment, as a result of the legal settlement in the fourth quarter of fiscal 2008.

While our sales were uniform throughout the quarter, some delay in payment during the holiday season had an impact on our cash flow. During the early -- during January, we have collected approximately $4 million -- in excess of $4 million of our accounts receivable. And basically, the day sales are back right to normal and right on track.

Subsequent quarters, we expect to be basically generating cash flow consistent with the expected revenue growth and profitability. And I'd like to now turn the call over to Roman for some comments on the current market conditions and new product and business development.

Thank you, John. Let me first address the activity in the recently concluded quarter. The quarter's revenues were generated across a diverse customer base and across our three market segments.

In the commercial air transport market segment, we continued to ship flat-panel display systems to both cargo carriers and to revenue passenger airlines. General aviation revenue this quarter included shipments for Pilatis PC-12 applications, and our initial product deliveries assessment. With our flat-panel display system now being installed, it is expected flight testing will take place in the very near future.

In our military sector, the Company's revenues were generated from C-130, KDC-10, KC-767A, L-1011 TriStar, and Homeland Security applications.

Included in our military segments were shipments of a new product, our high-resolution 20-inch diagonal displays. These displays are used by tactical officers in the rear of the aircraft. This is a good example of how the Company is widening the application of its flat-panel products.

During the quarter, we returned to historical rates of engineering spend while maintaining our ability to support our growing customer base. We increased the productivity of our engineering staff through broader utilization of software and other tools to increase the quality and efficiency of their efforts. We were able to deliver in line with schedules and add new programs to our portfolio.

In light of today's economic situation, we conducted a thorough analysis of our backlog to make our own evaluation of the production plans of our customers. Although we have had no cancellation of any customer orders, we have taken a conservative valuation of the order book and have restated it to a level of $47 million as of December 31, adjusted by analysis from $53 million.

Now to look ahead. In spite of the difficult industry climate, the Company remains optimistic about its prospects. We have over $60 million in outstanding proposals, consisting of $10 million for air data products and $50 million for flat-panel display systems. The majority of these could be awarded in this fiscal year.

We also have an additional $28 million of proposals in process. We believe the introduction of our Vantage and Cessna cockpit display products are entering the general aviation market at an opportune time. As the sale of new planes slows, we believe that aircraft owners will be motivated to undertake upgrades and retrofits.

An IS&S flat-panel display system is an improvement that offers the operator a very short payback period. These systems allow operators to upgrade their aircraft to a new flat-panel display system while leaving existing third-party avionics installed in the aircraft, thus minimizing the cost of the upgrade.

It also provides the owner the opportunity to upgrade to new radios, transponders, GPS, or other third-generation avionics. They can select from the best of breed from all the major vendors, providing choice unmatched by any other supplier.

Additionally, the Vantage product will provide independent operated service centers with improved logistics. With Vantage, the independent service center operator has only to make a minimal inventory investment, because this single product can be retrofitted into a number of different airframes, such as Falcons, Hawkers, King Airs, Lear jets, and so on.

The military segment is showing increasing signs that long-delayed maintenance and upgrade programs are going to be funded. Our outlook, both near- and intermediate-term, is to be able to sustain higher volumes, make profits, generate cash, and increase our footprint in all three of our market segments -- commercial, general aviation, and military.

I'd like now to turn the call back to Geoff. Thank you.

Thanks, Roman. Before beginning the call questions, I'd like to summarize today's remarks.

Number one, last quarter we suggested that we would be cash-positive, profitable, and we would grow the revenues. Well, we grew the revenues, and we were indeed profitable, and as John explained, the cash flow was missed by about two weeks, and we are now cash-positive in a very substantial way. We believe that was due substantially not to the holidays. We were happy that both of our principal customers have plenty of cash and a lot of responsibility.

We're beginning to generate momentum in growing revenues, improving profitability, delivering positive cash flow, and intend to build on that momentum. Our products are designed to meet the most stringent requirements so they can be used in all market segments -- commercial air transport, military, and general aviation. And in the current economic environment is shifting the emphasis from building new aircraft to retrofitting existing fleets, which have historically been our strongest market and the basis and mission of our Company.

We are heavily invested in our sales and marketing operation to introduce our capabilities across all three segments of the industry. And our products have received an endorsement from some of the world's largest operators, which we are installing our equipment on their aircraft as we speak. The credibility gained through these relationships has encouraged a wider market interest and planted seeds for increased demands, which we expect will arise from the emphasis on aircraft retrofit. Finally, over the last few months, we've instituted major changes throughout our organization to prepare for additional growth, improve operations, and generate returns on investments.

Now let me provide you with our expectations for the second quarter of 2009. Based on current conditions, we expect revenues to be in the $9.5 million and $10.5 million range, with earnings per share expected to be in the $0.04 to $0.07, assuming the 34% tax rate with positive cash flow.

With that, operator, will you please turn it over for questions? Thank you.

(Operator Instructions.) Your first question comes from the line of Steven Denault with Northern Securities.

Good morning, everyone. Very nice quarter.

Thank you.

I got in a little bit late into the queue, but it sounds like the backlog's at $47 million, and you restated it and scrubbed it a bit. Did you communicate or can you provide any color in terms of was it one or many programs that you reduced your expectations for?

It was about five. Five or six. And it consisted of not canceled orders, but orders which we believed would be stretched out. Remember, the industry tends to do that. Instead of canceling orders, very often they'll stretch them out.

We believed that if we wanted a sound backlog that we could reflect our revenues on going forward in the short term, we needed to essentially scrub those out of the backlog. We have not canceled the orders, and we're hopeful that they'll resume, but right now we don't know when.

Okay.

It was about five -- I think five or six different orders. Some small, as small as $40,000, and some substantially larger.

Okay. And I may have missed -- where's the Cessna program at this point in time?

Cessna's doing great. It's actually ahead of schedule, but Cessna's been remarkably responsive and energetic in getting this on and going. We spent two weeks of testing, as a system, for electromagnetic interference and went through the most stringent lightning tests, et cetera. So we're very pleased with that.

They are modifying some of their harnesses for the aircraft. Remember, they're actually designing that the harnesses will drop into aircraft when they do the retrofit. And that modification delayed the program by a week or two, but we're still on schedule, we believe, to have it installed and flying by the middle of next month, that is, February.

So it's moving along very well. The product itself is really performing outstandingly, and I think Cessna is very pleased, and we're very pleased and enthusiastic. And it's interesting, they're even planning on -- and looking at potentially scheduling aircraft in for modification during the flight test. So we're all very optimistic on the outcome.

Okay, good. And you made reference in terms of the pipeline beyond backlog, and I thought I heard you say $10 million air data, $50 million flat-panel?

That is correct.

Are they -- are you -- is there any weighting, in particular favoring commercial versus military or anything of that nature?

Approximately 40% military, and the balance is commercial and general aviation.

Okay.

General -- commercial air transport is -- continues to need to operate. General aviation's probably -- that market segment's been probably hit the worst.

Yes.

Happily, we redirected our energies last year into -- away from trying to find another OEM general aviation supplier. We focused on military and commercial air transport. Our timing was fortunate.

So do you -- it sounds like you feel there's a high likelihood that you'll have incremental programs that you'll be able to talk about over the coming quarters.

Yes. But I don't have to tell you that economic conditions at best are uncertain. We watch it every day. We're determined to keep the business profitable and manage our cash flow. I mean, that's number one. You can't win the race if you're not in the race, and we intend to be there, and be there strong.

But we're encouraged 'cause we're in the right market segment. We think that this is a time -- I think, broadly, people look at this -- even the new administration is talking about upgrading existing aircraft fleets instead of buying some new weapon systems. So we think we're in a very good position to serve the market, and we're optimistic toward the future, especially considering the horrendous economic problems.

Yes, okay. And a final question. Does the engineering modification development line item get rolled up into flat-panel display now, as we move forward? Used to kind of pull that out as a separate -- or talk to it as a separate line item within net revenue.

Yes, Steve, we'll be combining and reporting one sales line, one cost-of-sales line, because we are a company that sells products, and the NRE is associated with that effort. But, again, trying to focus on the different attributes of the margins along the way. Many of these projects are longer-term, but basically, yes, to answer your question, we will be presenting one line, and we prefer that, as we run the business, everyone think about it in those terms.

The non-recurring engineering, understand, is all product-related. We don't provide engineering services as a company. We only -- we'll charge for engineering to modify existing products to adapt to a customer's specific needs. To isolate that as a separate revenue line item is -- it makes no sense. So now we are identifying it as really a support for our manufacturing organization.

Yes, I would agree. I mean, it seems like it's something that should be reported in research and development. And then your ability to charge for it you can net against whatever costs you incur.

Yes, exactly, that's what we do, and that's the way, historically, we've done it. It was only last year that we chose to do it differently. But we're back to doing it what we've done historically.

Okay, that makes sense. Thank you.

Thanks, Steve.

Thank you.

Your next question comes from the line of David Campbell with Thompson & Davis Company.

Yes, good morning, everybody. You talked about the $60 million of bids, outstanding bids. What was that look like a year ago, or what did that look like in September? Is there any significant difference in bid activity?

David, good morning. We're seeing an increase, particularly in the military right now. Commercial seems to be holding at similar levels, and then I would say GA is underweighted because what we're doing with Vantage, going after initial installations with a large number of these independent service centers. So they don't initially commit to any kind of large quantities. So in that sense, our increase is up across all the segments.

But primarily in military.

Primarily right now in military, in terms of those numbers that we just presented.

And we would expect that. We expect an increase in demand. Remember, we've always tried to do a third and a third and a third, probably like most other people in the industry. And it varies a lot, but our military part of the business is starting to get stronger.

Stronger, yes.

And these are results, in some cases, of bids that we've had long standing for four years. In one case, we have a bid that we started four and a half years ago, believe it or not, and it's just now coming to fruition. So that's sort of the distribution. And the last time I think we talked about outstanding bids, to my knowledge, we --

That was back in 2006.

Yes, and we won two thirds of those anyway, and I don't think we lost anything. It just got delayed. So it's a positive sign, and as you know, some of these programs are pretty large. So unlike having a nice small stream, steady stream of new business, they come in big lumps, like the American order and FedEx and a few others.

Right. Now, are the commercial bids new airlines or just the same airlines with different programs?

No, no, they're different airlines.

They're different customers.

Different airlines. New customers. Remember that in 57/67 alone, there's about 1,700 aircraft opportunity. To our knowledge, we're the only STC solution, and we have about 17% of the market. So there's a good 80% of that market still available, and we're obviously pursuing it aggressively.

The economic uncertainties make it difficult to be more precise. What we're doing is we're working hard, beating feet, as they say.

Right. In terms of the engineering revenues that aren't being reported anymore that were reported last year, should those revenues have been really down in the R&D costs, or should they then allocate it up to air data and flat-panel revenues?

No. We tried to explain -- isolating the revenue at the engineering revenue was probably inappropriate, and certainly in this condition. Our engineering is only in support of product development, either at the abstract research and development or product development. And we've chosen to assign it exactly that way as part of IR&D.

Okay, so it really is a combination of air data and flat-panel revenues?

Flat-panel, and we do need to include, from an SEC perspective, David, that NRE revenue, much to our chagrin, on the revenue line. But, again, it is part of the product margins and the product revenues. So it is up there, but again, we do not want to get into discussions around margins on it or anything of that nature. It's one sale.

The revenue and quotes that we get from that is simply a part of the total engineering effort required to produce a product. And we've asked our customers to share in that expense, and they support modifications to our equipment that are unique to their applications. So we don't assign -- we don't look for or solicit non-recurring revenues at all. It's not a product line. It is simply a support structure.

Right. Now what -- you said you got $6 million of new orders in the quarter. Is that right?

That's correct.

Yes.

And is that a combination of air data and flat-panel, or all flat-panel?

It's both.

And so, normally, without adjusting for product delays, delivery delays, you would've had an increase in the backlog?

Yes, that's correct. Right. Well, you would've (inaudible - multiple speakers).

Unless it would decrease.

Yes. We would've shipped --

We shipped over 10 million -- yes, a net $4 million reduction in the backlog occurred --

Right.

-- outside of any of these adjustments we made based on our own analysis.

Right.

David, we could expect that backlog number to vary $20 million both sides. It could go -- very reasonably go down to $30 million and go up to $70 million or $80 million. If it goes up too high, our customers are going to be very happy we're not delivering. But even on the low side, if we were down to $30 million backlog, still would represent several quarters of production.

So where we are, $50 million is still very strong. It still represents more than a year's worth of revenue, so it will vary. It's going to vary significantly, especially now that we're actually back in business and shipping something for a change. We're actually seeing the backlogs are now -- will vary and will go down a little bit. When we get the next hit, if we were to get a big program, we wouldn't try to pretend that that somehow was representative of a huge increase any more than these shipments are a significant decrease in backlog.

All right. But the fact that the backlog -- the fact that the orders have been -- in your analysis, you changed some of the backlog to reflect possible delays in deliveries. But have you changed your revenue plans for the last two quarters?

No.

No. No. We're just simply being pragmatic. We look at programs, especially new modification programs that have slipped by several months. And we simply -- rather than looking at programs that may have been on the books for a while or are obviously delayed, we just moved them out. And we just took them off of the backlog because there is some risk in it, and we want to be --

And David, specifically, none of the backlog that we moved out of our numbers was in the second half or for the second quarter in this fiscal year at all.

Okay. Okay. And the tax rate, John, is going up to 10% in the second quarter. What would we expect in the third and fourth quarters, assuming some level of profitability comparable to the first two quarters?

I guess, David, we are willing to go out, and we have gone out with second-quarter guidance. And at this point, 10% is what we see, and, again, as I mentioned in my call comments, we'll continue to -- as things evolve, we'll continue to look at the rate and advise accordingly. But 10% is right now what we see for the second quarter, and if you want to extrapolate that, that's your decision.

The answer is, we can't give you a number for the third and fourth quarter.

Yes.

But how much of the -- the difference between 10% and 40%, how much of that 30% is research and development credits, and how much of it is other credits?

As I mentioned in the conference call script, the fact that we're able to realize the benefit, from a tax perspective, of a bad debt expense, that will help us again under APB 28 across the whole year, I can tell you that. And the R&D credit did take the rate from 10% to 4% in the first quarter.

And as you know from my comment again, the Congress did reenact the R&D credit, which, again, will benefit us for the balance of the year. But we had, in effect, that catch-up in the first quarter.

So those two factors, David, would -- the R&D credit now being back in place, and the bad debt expense benefit being realized, will allow us to be substantially below the statutory rate, to the best of our knowledge at this point. But, again, Q3 and Q4, I don't have a -- we have a lot of moving parts. I can't see clear right now to -- comfortably to give you advice on what that overall will be.

David, we feel reasonably fortunate that we could project out next quarter with some positive earnings and some growth. I mean, we feel very fortunate there. The third and fourth quarters, we're working our butts off to make sure that they happen. And the only thing I can tell you is, we focus on operating income, making sure that our operating income is in line, and do the best we can with the tax and tax variations.

Could some of these outstanding bids have an impact on the third and fourth quarters?

Probably --

Some marginal amount. Some book-and-bill, but nothing substantial.

Nothing substantial.

Okay, thanks a lot. Appreciate it.

You're welcome.

Thanks, David.

Your next question comes from the line of Jeff Harvey with Janney Montgomery Scott.

Morning.

Morning. Hello?

I guess not.

Okay.

Operator?

Rachel?

Okay.

Would you move to the next questioner, please?

Yes, sir, one moment.

Thank you.

I'm sorry, Jeff, your line is open.

Hello? Okay. Rachel, we don't seem to be connecting.

Your next question is from the line of Michael Ciarmoli with Boenning & Scattergood.

Hello?

Hello?

Sounds like we're having a problem with the --

Rachel, can you check --

There's something wrong with your system.

Hello?

Hey, who's this?

This is Michael Ciarmoli. Can you guys hear?

Yes.

Yes, we can hear you. We're back in -- good morning. Hello?

Mike? Rachel?

We have no further questions.

Rachel, Mike Ciarmoli wasn't able to ask a question. Can --

And neither was --

Jeff Harvey wasn't either.

You cut them both off.

Can you --

(Inaudible - multiple speakers)

Okay, let me reopen their lines. One moment.

Connection problem.

Hello?

Mr. Harvey, your line is open.

Good morning. Can you hear me now?

Yes, we can.

Yes, sure can.

Okay.

We just want to be clear, we don't make this equipment.

I'm glad to hear that. I wondered if you could break down what percentage in the quarter was commercial, military, and general aviation, where you expect that to be in '09? In other words, I'm just trying to figure out where you expect the biggest growth to come from.

Our growth -- we expect it to come from basically all three segments.

It's going to be --

Yes, but [not only] -- again, we tend to expect in the near term here that air transport, the commercial air transport will give us the largest growth opportunity in the short term. Military will be right behind that, and then -- 'cause we're seeing funding behind programs that we do expect awards from. And then general aviation, as the --

Cessna.

-- Cessna product line gets delivered into their service centers, and, again, as we've said before, they've got 34 service centers worldwide, that we expect growth there. And then the Vantage product line is creating a lot of interest, and we're supporting quite a number of these independent service centers in their efforts to try to adapt the product to their logistics programs.

Primarily air transport --

Can you break down a percentage number, though, for me?

Percentage for?

For the last quarter or going forward?

Going forward is really what I'm interested in. I mean, do you expect 40% commercial?

It's still -- it's going to remain probably about 40%, 40%, and 20%.

That's what I would've guessed.

And I know, primarily, if you remember, our performance this year is remarkable, mostly in the extent that almost $20 million worth of revenue anticipated from Eclipse disappeared entirely. $4.5 million in this quarter disappeared entirely, so --

Yes, I would presume the worst --

We have to make these records even without that. And in part, that's a significant reason why the general aviation part is down as much as it is.

Right. I would certainly presume the commercial -- or the general aviation market would be the slowest growth because of the cancellation of small jets and things like that, but --

But happily, we're in a good position, and Cessna has been enthusiastically supporting the program, so we're delighted, actually.

Yes, and you might be --

So we're optimistic, but, again, it's going to move out a little bit before (inaudible - multiple speakers).

You get farther. I would presume the military is pretty much ingrained. I mean, typically these programs are locked in for some period of time, so that's probably fairly stable, I would presume.

We actually hope it grows. And as you point out, we're doing initial stages of a significant program with both Homeland Security and the Navy. And the front end of those programs is a relatively small amount of revenue. The production phase will hit within about a year, but they're well established and all provided for. So there's good solid business, and it's a business that we've been doing for a while.

Right. Thanks very much.

It's a good mix.

Thank you.

Thank you.

Your next question is from Michael Ciarmoli.

Hey, guys, thanks for taking the call, and nice quarter.

Thank you.

Question on the backlog. How much of the current backlog is shippable in the next 12 months, and then how much is more of that longer-term revenue mix, I guess, in relation to American Airlines and FedEx?

I'll answer. The first part of that question is, about $16 million is shippable.

More than that. The second half of the year --

More than that, 'cause I mean, that's the second half of the year, and then we've given you a guidance of $9.5 million to $10.5 million this quarter that we're in right now.

So in the next 12 months, how much? So we're talking roughly half of that?

More than half.

A little more than half, yes.

Okay.

Over a 12-month period. Right.

Okay.

'Cause that gets you also into the next [quarter].

Yes. It's probably about $30 million.

Okay. Okay. That's good. And in terms of -- Geoff, you said -- I guess you expect a revitalization of the market here, and I'm just trying to get my hands around -- you had bookings. You expect some to be canceled. You push that backlog down. What's given you that confidence out there? I understand the need to retrofit. There's also a need to get some of the older planes out of service.

So it seems like that -- have you sized up whether the market's really going to be there for that 737? Just if you could walk me through why you're seeing confidence. It seems like there's a lot of hesitation on kind of the global carriers right now to -- they're trying to right-size their fleets more than anything, and it seems like even some retrofit work might get pushed aside.

Okay, well, first of all, we're not doing anything on the 737, and the 737 is vulnerable because the airplanes are getting old. They're not terribly fuel efficient, and so the old ones will be put down. So we're not on the 737 --

Have you scrapped, then, all of your STC work for the 737?

We are on hold.

Both shelved.

Last quarter, I think we talked about it.

Okay.

We put it on hold for exactly the reason you're talking about, because we thought it would be vulnerable. Listen, when the very difficult times came, it's going to vary. It may change the potential market for the 37.

But let's talk about the 57/67. By far, and without exception, this is the ideal retrofit fleet. Every 757 and 67 are in great demand. They're fuel efficient. Very, very high-performance aircraft. And those are the aircraft that are being focused on to put on things like winglets. Winglets are being put on by American Airlines, over 200 aircraft, and our flight deck as well.

So this is an area -- and, again, I mentioned that we are the only STC solution for the 757 and 67. We are now starting to get -- we just booked an international, or are about to book an international order for a freighter change out of IAI.

So we see this as a very strong market. There's 1,700 to do, and we only have 17% of them, and they are not being taken out of service. Every one of them stays in service, so that's a perfect fleet. 37, on the other hand, is vulnerable, as would be things like the 727s. So we see a very good situation there.

We also see, in the military, similar situation with the aircraft. There's some question about the amount of funding that's going to be available for some of the new weapon systems, and they are intently looking at modifying and upgrading their existing fleets of aircraft.

So we're reasonably optimistic. I would tell you right now, if you take a look at our performance the last quarter, that was substantially due to the 757/67 revenue. We see the American orders and the FedEx requirements staying on for several years to come. So we've got a very positive look, and we think there's going to be significant retrofits in the military.

Okay. On the American Airlines and FedEx, how far penetrated are you guys into those programs? And have you seen any changes to their deployment schedule, given the economic conditions?

Not at all, and they wouldn't because you couldn't afford to operate a fleet with half looking one way and half the other. I mean, they're committed and they will not slow down. I mean, they have over 200 aircraft, American Airlines, and they're going to finish it.

And they're doing it because it makes good economic sense. They did an evaluation of the operating costs of the aircraft and how they could significantly reduce them. Besides the fact that we removed almost 200 pounds out of the airplane, which is another revenue seat, by the way, they see significant savings. So that's why they've pursued the program independent of ours. The size of their program that includes our flight deck is significant, and they're proceeding on schedule. And, in fact, they had one line doing modifications. They are up to two, and about to open two more lines to do four parallel modification lines.

Okay, that's good news to hear. So how far penetrated are you into each of those programs?

We're on their schedules. That's part of the confidentiality. They don't release those schedules.

They won't allow us to do that, but let's say it's significant. We're in there, but certainly less than half.

Okay. Fair enough. And just back to the proposals you've got out there. Can you give us a sense as to how that breaks down in terms of geography, geographic mix?

It would probably be imprudent to do that. I mean, I could tell you, I'm sure we have a couple of our competitors on the line. But the programs are military and commercial air transport, primarily. So our business -- I mean, we're actually getting potential discussions on Eclipse, even, but we have not included that in any of our backlog opportunities. So it is in commercial air transport and military, and some of these military programs have been in work for over three years.

Okay, but you won't talk about geography? I mean, is it more --

I really --

It's a mix of domestic and international.

Okay.

It's primarily domestic.

Domestic, right. And [it expands]. We have talked about -- quite a number of our military programs were international ones. We did a lot of our efforts there, and now we're seeing that payoff here, both domestically as well as part of the international opportunities.

Sure. Okay. And then, really, I guess the last question I had. In terms of your overall head count right now, where are you guys at with total employees?

160. Right about --

About 160, but we got rid of -- we terminated a significant number of contract people. We discovered, sadly, that we had put an enormous number of engineering bodies in, but they were so inefficient that they cut down the efficiency of the existing ones. And we accomplished significantly less with twice the number of people.

It's not unexpected. I would tell you that people who understand engineering departments would understand that overloading it with people the way we did -- and by the way, those efforts were focused on two programs, basically.

Okay.

Eclipse and Marshall's job, and those two are not in our backlog.

Okay. That's helpful. And you know what, just one last question. You brought it up, Geoff, about the competitors probably listening in. Are you seeing anyone creep in on the 767/757 space, the guys like Rockwell, Honeywell, or even some of the smaller private players?

No, absolutely not, and trust me, it's a big job to get in. The cost of entry is significant. And we have a very good product, and our customers are very happy with it.

So as long as we stay competitive and our performance stays good, I think we will remain the supplier. We work at it every day. We saw that this was an opportunity. Even when some of the major players, very big players, didn't see this as an opportunity, we did, because what we do for a living is retrofit. We know that. We know the business. We know how to do it, and know how to do it effectively.

Okay, good enough. Thanks, guys.

Thank you.

We have no further questions. Mr. Hedrick, are there any closing remarks?

Yes. Just briefly. Look, we're encouraged with this first quarter's performance, but the job is to get the business back and operating the way it's supposed to be. We're encouraged that our efforts have restored it to a reasonable operating. The Company is operating as a good, solid company, and we intend to further work and try to get it back doing the blocking and tackling that makes an effective, efficient operation.

So we're positive toward the future, but can't help but be a little apprehensive about the general world economy. I would expect everybody is. So we're pleased. We've done some of the good things, and we're going to keep at it and look forward to talking to you next quarter. Thank you.

This concludes today's conference call. You may now disconnect.