Business & GA, Commercial

Q&A: IS&S: Display Systems Provider

By Jonathan Ray | November 1, 2008
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Now in its 20th year, Innovative Solutions & Support (IS&S) has evolved from being a supplier of discrete avionic instruments to providing advanced, integrated display systems as well as air-data products, fuel gages and engine instruments. The company’s flat-panel displays are available as retrofit solutions for a range of aircraft, including the Boeing 757/767, the C-130, Cessna Citation 550 and Pilatus PC-12. IS&S is on contract with American Airlines to provide 214 shipsets of its Cockpit Information Portal display system for the carrier’s 757/767 fleet over four years.

Over time, IS&S has cultivated roughly equal amounts of business in the commercial air-transport, military and general aviation segments. The balance across markets has been prudent given problems associated with a recent, major customer in the GA category. IS&S entered into a five-year Original Equipment Manufacturer agreement with Eclipse Aviation in the spring of 2007, signing on to provide the primary flight and multifunction displays of the Eclipse 500 Avio NG avionics suite. Together with other suppliers, IS&S certified the new suite, which replaced the original Avidyne system, in a remarkable 10 months. But the Eclipse 500 program has been troubled by production delays and technical and financial problems, negatively affecting suppliers and the aircraft’s largest customer, DayJet.

Avionics visited IS&S’s headquarters in Exton, Pa., just as the publicly held company, which trades on the Nasdaq National Market, announced revised financial targets due to lower-than-expected orders from a "major customer," known to be Eclipse Aviation. Following a tour of the company’s 46,000-square-foot production facility, which turns out 150 to 200 displays a month, we spoke with Roman G. Ptakowski, a former B/E Aerospace executive who has served as IS&S president since March 2003. Following is that interview.

Q: IS&S provides avionics across a range of markets — military, business, air transport. What are the percentages across those markets?

A: We do participate in what we call the three major market segments: commercial, military, and then general aviation, corporate, business jet as a catchall. Year over year those percentages vary. The long-term trend is we get about a third from each of the segments. Most recently it’s been as high as 60 percent from general aviation. We received the Eclipse 500 award for the Avio NG cockpit display system. With them coming on board as a large OEM, that changed the percentages significantly over the short run. We do see, with the winding down of the flight and ground-test programs in commercial air-transport, next year these [segments] get back into a balance long-term of a third, third, third.

Q: Is that balance by design or just the way it happens?

A: It’s a little of both. It is by design in that we purposely want to participate in each of those segments because we think each of them makes us focus on slightly different things. The military segment has the highest, if you will, hardware qualifications, the most ruggedization requirements, the temperature range, the environment they operate in. By providing hardware for that, we provide very robust designs. Commercial air-transport, with their Part 25 Level A software certification, ensures we provide as high a level of software capability and integrity as is required by the marketplace…. General aviation, with the value of their particular aircraft hulls, forces you to stay at a price point that makes you very competitive. We think, by focusing on all three segments, we get cost-competitiveness, we get the highest software safety levels and we get the environmental ruggedization, courtesy of the military. It’s kind of the best of each, the end product we have.

Q: How does your business break out along product lines?

A: Post-RVSM compliance date, the air data product line represents about 15 percent of our revenues. The balance is in flat panels, and although we do differentiate between engine instrument display systems and the flat panels, basically they’re merging together and we no longer segregate [them]…. Post RVSM compliance of Jan. 20, 2005, we recognized the company needed other product offerings. We started back in 2003 in earnest to create a second product line, and that’s been the flat-panel display systems.

Q: Is RVSM compliance tailing off as aircraft come off the production line RVSM capable?

A: Retrofit has already tailed off after the compliance date…. There are remaining aircraft, but the people who have not chosen to update to RVSM compliance are unlikely to now.

Q: Is the analog instrument business you do trailing off?

A: Analog instruments are in what I’ll call a support mode. We do support them, but basically, yes, they’re trailing off. For people who have got existing installations, we do provide customer service, support, repair, recertification, so you can provide reentry of the equipment. But with the technology today, what electronics do [in terms of] size reduction, fuel consumption reduction, higher reliability, greater in-service length — analog instruments are basically an item of the past, a legacy product.

Q: What do you forecast as the size of the 757/767 display retrofit market?

A: We believe there is a candidate population of about 1,700 aircraft. We now have either retrofitted or have under contract over 300 [of those]. American Airlines [is the main customer], but we have over two dozen in service with other operators, chiefly ABX Air and a number of VIP aircraft whose owners choose to remain anonymous.

Q: What about the Cessna Citation retrofit market?

A: The population of the Citation retrofit program that we have with Cessna is about 4,500 aircraft, and we believe some 2,500 of that are candidates, and this is the Citation 5 and 6 series. We have a solution designed along with Cessna to address that segment of the Citation population.

Q: What is the universe of Pilatus PC-12 retrofits?

A: The universe there is a little over 300 aircraft, the majority of which are here in North America. That’s a potential; we’re doing a number of retrofits there. Unique among competitors, we actually have multiple architectures. You can buy a PC-12 upgrade with two 15-inch panels, four 10-inch panels or a combination of one 15, two 10s or two 10s only, as long as we have redundancy of at least two displays. We have an architecture that has been certified by the FAA. We provide a lot of flexibility so people can do a single-side upgrade and then eventually do the dual side. They have an opportunity to address it the way they see fit.

Q: Was that a blanket certification for these different options?

A: We initially received the two 15-inch panel solution certification. Then we went for the others; for the various architectures we had to submit flight-test information, certification data on each of the solutions. So, yes, there was some reuse, but ultimately each of the solutions stands on its own.

Q: You’re also doing C-130 displays. That’s a huge market. How much of that would you hope to capture?

A: I would segment the market, I would say broadly, into U.S. domestic opportunities and than non-domestic. The U.S. DoD has been spending money elsewhere, so to get experience, to get rolling with this, we did a number of foreign contracts first. We have C-130 solutions for Pakistan, New Zealand, Canada, the Royal Netherlands Air Force. We’ve worked with a number of the integrators — Boeing, Marshall Aerospace in Cambridge, England, L-3 SPAR Aerospace and Lockheed Martin — to get started. Two C-130s are flying with the U.S. Coast Guard with our engine instrument solution. We have follow-on orders from them, and we’re working with them to do the full cockpit upgrade. That should lead ultimately, we believe, to the U.S. Navy and to the rest of the DoD opportunities.

Q: What is the progress of the display roll-out with American Airlines?

A: They have been training pilots on a full-motion simulator, so they’re preparing their fleet for that. Their first aircraft is in flight-test, with imminent release to service.

Q: Is there interest in display retrofits from other airlines?

A: We’re certainly talking to all of the obvious candidates, those with the large fleets. In Europe, we have interest…. Certainly our existing customers have been good spokespersons for us.

Q: You also have a display option for the Boeing 737?

A: We’ve currently tabled it, and the reason is, with the issue of fuel concerns and so on, we’ve seen a lot of parking of airplanes by operators. We still believe we have a viable solution, but until the marketplace settles down there, the interest has waned at the moment. But we can restaff that and support it if the opportunity develops.

Q: Are there any other platforms you are planning STCs for?

A: We have received TSO certification on the DC-10. It will get a foreign certification rather than a STC, and so that becomes a possibility. We’re working on TriStar, or L-1011. That’s in ground test right now. In terms of the Boeing aircraft, the 757/767 and the different variants, we still have some additional STCs to obtain. We’ve submitted to EASA for European certification of the 757/767 solution.

Q: Could you describe your role in the Avio NG retrofit [for the Eclipse 500], originally, and now the new-build Eclipses? Was that on short notice that the new team was brought together to produce the Avio NG? Was that a challenge for IS&S?

A: Yes and yes, to those points. We were approached by Eclipse as a potential supplier of the cockpit display system. They already had an architecture in mind because they had a number of aircraft that been certified and supplied with the incumbent vendors at that time. But they were looking to upgrade the capabilities of the offering in the aircraft. In a sense, we were made for each other. They wanted a short-term solution and, having come largely from a retrofit background, not an OEM background as a company, we knew how to work with existing interfaces, designs, and knew how to do it both rapidly and cost-effectively. We viewed that as a challenge. Between contract and certification of Avio NG — and there were other vendors involved, PS Engineering, Honeywell and others — it took 10 months, and I think that’s unprecedented. We are very pleased with the achievement. Since that time, we’ve had contracts with Eclipse. We’ve continued to upgrade the functionality. They’ve received certification for flight into known icing conditions. We were involved with that, as well as others. I don’t want to suggest that any of this is solely attributable to us.

Q: Can you say how many Avio NG units you’ve shipped?

A: No. We’re covered on that contractually to not disclose that.

Q: The intellectual property dispute [against Kollsman Inc., J2 Inc., Zachary Technologies, and individuals] has been resolved in your favor. Can you explain the dispute?

A: The court has made its pronouncements. The technology that was involved there was the trade secrets of our air-data computers, our air-data equipment. There was a finding of misappropriation of six trade secrets by J2 Inc. and Kollsman. The jury found for us first, awarding some $6 million in damages at that time. And then the court found "willful and malicious conduct" and awarded punitive and exemplary damages, attorney’s fees, past interest, of approximately another $12 million, plus another $5 million, or $23 million total. That is pending final judge’s orders. [Kollsman’s parent company, Elbit Systems Ltd., of Israel, on Sept. 3 announced a settlement by which Kollsman paid IS&S $17 million to resolve their litigation. "Under the settlement agreement, all claims between IS&S and Kollsman have been dismissed with prejudice, a final agreed injunction has been entered and the matter has been fully and finally mutually settled without any admission of guilt by either party," Elbit stated. On Sept. 8, IS&S announced a special cash dividend to shareholders of $1 per share, funded through proceeds of the settlement with Kollsman. — Ed]

Q: IS&S employs 190 employees, and you’re a publicly traded company. What are the advantages of having a [public] company of this scale, which can be very nimble and responsive to customer requirements — as long as the board approves.

A: The first thing I would say is I know everybody by their first name. As the president, if you have a smaller population, it’s more manageable. The sight lines and the hearing lines are pretty short. We do think, as a result, this forces us to be economical in efforts and costs. The disadvantage of a small company being publicly traded is the costs of regulatory compliance, types of things that any small business in the U.S. faces. We’re not unique in that challenge.

Q: You’ve grown over the past three years in that your business has increased substantially. Do you have any plans for organic growth, new platforms, new programs, more space?

A: We expect to grow at least 20 percent next year. We’ve made these [predictions] as public statements. We do believe our product offering is expandable to other aircraft platforms. As a prudent business, we’ll go after the larger platforms first. We have opportunities in commercial and general aviation and the military to do that. We would like to expand our OEM presence as that opportunity presents itself. That’s a longer-term process; retrofit is shorter term. OEM, new design, new platforms — not many Eclipses come along where you can do something in a year. Generally, you’ve got to put in three to five years on OEM platforms. Our product offering has expanded in the sense that we can display more and more information on our displays, what we call our Cockpit Information Portal. It’s a gateway to information — charts, maps, electronic flight bag functionality, satellite weather radar — all those types of things are possible. Once you have a screen, people want to present information. Tuning of radio nav/comm as we do on the Eclipse Avio NG product line, we can offer that same capability on other platforms. Growth will come, additional platforms with similar solutions and product functionality expansion. The denser use of airspace — RVSM addressed the vertical separation; we have two more dimensions, lateral separation and front to back. Flat panel display systems can provide the pilot with the awareness to be able to do that.

Q: Is there anything you would like to add?

A: From our standpoint as a company, we’ve changed from being a discrete instrument supplier to now a systems provider. That carries a different level of complexity with it, a different requirement of safety performance. We believe we offer, and have shown with quite a number of installations, a very viable, credible, very flexible product that people are recognizing more and more. It’s like an election — the more purchase orders we get, it’s akin to getting more votes. And we see that; more people are voting our way.

Hedrick Reassumes Title Of CEO At IS&S

Three weeks after revising down its financial targets due to lower than expected orders from "a major customer," Innovative Solutions & Support (IS&S) replaced CEO Raymond J. Wilson, who had served just over a year.

In a Sept. 10 filing with the Securities and Exchange Commission, the company said Wilson’s employment "was terminated effective as of" Sept. 8. Chairman Geoffrey S.M. Hedrick, who founded IS&S in 1988, reassumed the duties of CEO.

Wilson, a former Airbus executive who initially served on the IS&S board of directors, was named CEO in June 2007.

On Aug. 20, IS&S announced revised financial targets for the fourth quarter and the fiscal year that ended Sept. 30. Fourth-quarter revenues were expected to decline from $14 million to a range of $10 million to $12 million, with a reduced gross margin. Fiscal-year revenues were revised at $30 million to $32 million.

The lesser targets were attributed to a drop in orders from an unnamed major customer, known to be Eclipse Aviation. IS&S is supplying the flat-panel display system of the Eclipse 500 Avio NG cockpit.

In a conference call with analysts the following day, Wilson said the revision "was necessitated by a change in delivery schedules recently communicated to us by a major customer…. We had built resources over the past 18 months to support customer production plans, and we’re taking actions to align resources with the new production requirements."

Wilson said cost-cutting steps, including job reductions, were underway.

"We’ll continue to identify efficiency opportunities to align our overall resources with production requirements to achieve profitability in fiscal year 2009," he said.

"Our management team is intensely focused on delivering profitability and we are disappointed that we will not achieve that goal this quarter. Despite this setback, we continue to believe that our existing backlog of a diversified mix of commercial, general aviation and military orders, and improving operational efficiency, will enable us to achieve profitability in fiscal 2009. We are prepared to take any further hard actions to achieve our objective." — Bill Carey

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