TVI Corporation Q2 2008 Earnings Call Transcript

TVI Corporation (TVIN)

Q2 2008 Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Sherri Voelkel – SVP, CFO and Treasurer

Harley Hughes – President and CEO

Don Yount – EVP & COO

Analysts

Marc Robins – Catalyst Financial Resources

Mike Vermut – Newland Capital

Charlie Pine [ph] – Feltl & Co.

Presentation

Operator

Good day, everyone, and welcome to TVI Corporation Second Quarter 2008 Conference Call. Today's call is being recorded. A replay of the call will be available via webcast on TVI's website, www.tvicorp.com. In addition, today's news release is posted on TVI's website for those of you who did not receive it by email. (Operator instructions).

At this time I would like to turn the call over to the Senior Vice President and CFO Sherri Voelkel for opening remarks. Please go ahead.

Sherri Voelkel

Thank you, and good morning.

Statements in this conference call concerning the future business, operating results, and financial condition of TVI Corporation are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations as of today, August 6, 2008, and are subject to a number of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as should, believes, expects, might result, projects, estimates, and others.

These forward-looking statements involve risks and uncertainties that are not guarantees of future performance, as actual results could differ materially from our current expectation. Such risks and uncertainties include, among other things, those set forth in the company's Annual Report to stockholders, periodic reports, registration statements, and other filings made with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements. The company assumes no obligation to update any such forward-looking statements whether as a result of new information, future events, or otherwise.

With that, I'll turn the call over to Harley.

Harley Hughes

Good morning, everyone, and welcome back.

As usual our press release was issued earlier today. The second quarter results indicate that we may have reached something of a turning point in the second quarter. Our sales rebounded from the first quarter. At the same time, we have to continue reporting operating losses, much of which we can attribute to one-time events or to other expenses related specifically to our turnaround efforts.

From a top line standpoint, we increased revenue by 46% sequentially to $9.5 million, a substantial improvement over the first quarter. I'm happy to report that we achieved growth across the entire organization, led by our Personal Protection segment which delivered a 241% sequential revenue increase. This significant jump was followed by Signature's nearly 10% sequential revenue growth and our Shelters and Related Products segment, which delivered nominal growth of 4% in the quarter.

Our goals for the quarter included generating a meaningful sequential increase in revenue, and we far exceeded that goal as we added $3 million to the top line. Just as important, we set our sights on generating momentum in each of the three segments as an indication that the turnaround plan has taken hold. While our top line is on the right trajectory, our gross margin was down slightly from Q1. This decrease is entirely due to the product mix within our Shelters and Related Products segment.

The Shelters segment produced an unusual sales mix that included a higher than average amount of low margin business this quarter, a mix that we do not foresee continuing in the coming quarters. SafetyTech and Signature helped compensate to some extent, as both the Personal Protection segment and the Rental segment expanded gross margins in Q2 versus Q1.

In terms of operating expenses, we continued seeing a number of charges in Q2 that obscured some of the progress we've made lowering cost. These items amounted to nearly $700,000 in total and included both direct and indirect costs of a proxy contest, the cost of terminating a vendor contract, and outside advisory fees. If you should strike these expenses from our Q2 expenses, we would have actually lowered our overall operating expenses despite lowering the revenue by nearly 50% sequentially. This fact speaks to the progress we've made cutting cost, as well as to the leverage that exists in our business model. We will continue to cut cost even as we see revenues continue to increase.

Now, I'd like to walk through each of the business segments in a little more detail. Beginning with the Personal Protection segment, we're extremely pleased with the progress of this business. The growth we achieved in the quarter was driven – almost exclusively driven by the C2A1 filter contract as we began production in April and began shipments in May or about halfway through the second quarter. We expect to double C2A1 shipments in the third quarter, which will not only increase the top line but will improve our margins as we spread the increased revenue contribution over a given level of fixed cost.

Further, the Army's need for C2A1 canisters prompted us to add a third shift at our filter canister plant. This shift will crank up within the next two weeks. Running the plant with an additional shift not only enables us to better meet demand for our filters, it also – it will also decrease the need for first and second shift personnel to work overtime, thereby improving margins.

One of the costs of this management – one of the goals of this management team when we first arrived at TVI consisted of converting the filter canister line that was sitting idle into a meaningful contributing asset, and clearly we've been successful in achieving that goal. With the help of our Congressional representatives, we gained interest into the military side of the filter canister market, and we expect to be producing canisters for the Army well into the foreseeable future.

At the same time, we have begun developing other types of filter canisters for use with both negative pressure and positive pressure systems. Further, we will be able to use these filter canisters on the SafetyTech PAPRs, further boosting margins on respiratory systems sold to the military through distributors and through OEM partners.

All of our focus within our Personal Protection segment, however, was not exclusively on the military market. We recently introduced two new PAPRs targeting the infectious disease control and pandemic management segments of the healthcare market, which we believe are undeserved; there's great potential here. These two PAPRs, the FlexAir [ph] and the PureAir, are designed to meet the needs of healthcare professionals exposed to contaminations such as staph infections and SARS. These things are lightweight and feature rich. Importantly, we've already seen these products gaining traction in several large hospital systems.

To support the rollout of these products, we hired two regional sales managers in the second quarter who are focused on building distribution networks in the Northeast and on the West Coast. Two additional managers will be needed for the south and central regions, and they'll come on board later this year or in early 2009. With this investment, we are expanding the SafetyTech business into a third vertical market beyond the military and OEM sectors. Going forward, we will selectively add vertical niches in which SafetyTech can take leadership positions.

Arguably, the most positive news for SafetyTech came at the end of Q2 as the National Guard awarded us a $7.56 million order for C420 PAPRs. This order came on the heels of a $1.75 million order from the Guard in April. This follow-on order specifically includes PAPRs equipped with our innovative hydration system, the only NIOSH-approved system of its kind. This order, along with the C2A1 order currently in production, leaves SafetyTech with significant backlog to fulfill during the second half of 2008 and proves its ability to meet the demands of the military market going into 2009.

Turning to the Shelters and Related Products Division, we believe this quarter is a bit of an anomaly. We experienced a decline sequentially in gross margins due to the mix of lower margin shelters and lower margins targets sold in the quarter in order to meet user demands. We expect the product mix to have a more traditional look as we build the sales volume on a quarter-to-quarter basis. To do so, we will work at adding new products and more product features to our offering base.

Further, we will continue to work on broadening our customer base to include a more even mix between military and commercial customers. This effort will enable TVI to help anticipate ebbs and flows in funding in the military and in the commercial sectors. In fact, just last week, the Department of Homeland Security allocated $1.8 billion of its 2008 budget via preparedness grants to 60 urban areas within the United States. Much of that money targets areas of emergency preparedness into which we sell.

To take advantage of such funding events, we expect in the coming months to dedicate resources to monitoring and managing budget and grant cycles and by expanding our existing offerings to include special and even general-purpose shelters based on our articulating frame and AirBeam technologies. Examples of this effort include the Mortuary Affairs Systems that we sold to the Army in the first quarter.

Moving on to the Signature segment, margins incrementally improved in Q2, and revenue in the segment has stabilized since we sold off a California asset late in 2007. Today we're targeting opportunities where we can provide added value to our customers, especially situations in which we can bundle our entire offering of products, that is power, air, kitchens, and tents. Further, we continue to be very selective with the opportunities we pursue, with an aim to not only diversify the services we deliver, but also with the sectors with serve. For this reason we believe a broader mix of customers will lead to revenue growth, as well as stronger margins.

I should add that we're still in the process of restructuring this segment to cut additional costs and to raise gross margins to more acceptable levels. With that in mind, we have decided to downsize our operation in Florida and concentrate on tents at our facility in Frederick, Maryland. We expect to incur the costs necessary to complete this move by the end of the third quarter. Overall, we're pleased with the progress we've made building sales in this quarter. At the same time, we know that much work remains to manage margins to continue reducing cost. With that thought in mind, we remain hopeful that we can reach a milestone we've talked about for the past six months, achieving operational profitability in the third quarter.

During the fourth quarter call in March, we told you we believed we could put the company's operations back in the black in the third quarter. Then during the Q1 call a few months ago, we reiterated that belief. Today, we will still think it possible, but it will only come as a product of the turnaround plan we put in place over a year ago. As part of that plan, we have built the backlog needed to reach that milestone.

At the same time, the plan does not include taking any shortcuts. We will not cut corners on quality. We will not ship orders before they are complete, and we will not shortchange the business we have rebuilt. We won't try to fill – we simply won't try to fulfill our aspiration should that only be possible at the expense of our long-term objectives. They are

sustained growth, profitability, and positive cash flow.

I should add that to aid our efforts, BB&T agreed to increase the ceiling on our working capital line late in the quarter. We see this decision as a motivation for our division chiefs and their teams to continue working to rebuild this company. In a tight credit market when many banks are retreating, we are grateful for the bank's support.

And anticipating that many of our shareholders may have questions regarding the status of the investigations into alleged wrongdoings by the former CEO and Executive Vice President, we can say this. We continue to receive requests from the government agencies investigating these matters, and we are responding fully to all inquiries.

In summary, as we enter the second half of 2008, we feel the momentum building in each of the three segments, but especially the PAPRs and filters business. Pipeline activity is very promising, and we continue to build backlog. The recent inflow of funding into some of our target markets gives us more confidence in our plan. We have proved in recent quarters that we can be innovative in the product development area even on a tight R&D budget, and going forward, we will continue to find ways to constructively cut cost.

Now with that, I want to turn it back over to our CFO, Ms. Sherri Voelkel.

Sherri Voelkel

Thanks, Harley, and good morning, everyone.

Before starting the financial review, I wanted to point out that I am going to restrict most of my comments this morning to sequential comparisons rather than year-over-year comparisons. Based on the changes the organization has undergone and the sale of a large component of our Signature business in late 2007, the year-over-year comparisons are not as meaningful.

Turning to our financial results, revenue for the second quarter of 2008 was $9.5 million, up 46% from $6.5 million in Q1. As Harley outlined, the sequential revenue increase is primarily the result of significant revenue growth within our Personal Protection segment. Q2 '08 gross margin was 17%, compared with 17.4% in Q1 '08. Gross margin was slightly down from the first quarter due to the revenue mix in our Shelters and Related Products segment, which went unusually weighted towards low margin products this quarter.

For Q2 '08, SG&A expenses were $4.6 million, or 48% of revenue, a significant improvement on a percentage basis over the $4.3 million, or 66% of revenue, we reported in Q1 '08. The increase in SG&A in terms of absolute dollars related to some of the investments we made in our SafetyTech sales and marketing team, which Harley mentioned earlier, as well as some commission expenses related to the significant C2A1 and C420 contracts wins.

R&D expenses in Q2 '08 were $566,000, compared to R&D expenses of $470,000 in Q1 '08. Our R&D costs in the quarter were related to the development of the two PAPRs targeting the healthcare space, final testing for our C2A1 filter canisters, and other enhancements and general product engineering in our shelter and PAPR businesses. Interest expense in the quarter was $511,000, down 27% from the $703,000 we paid in Q1. Q1 interest expense included the cost of writing off deferred financing fees in connection with the restructuring of the credit facility. We have also benefited by the lower interest rate environment. At quarter end, our total debt stood at $27.2 million.

Turning to the bottom line, TVI reported a net loss for Q2 '08 of $2.9 million, or $0.09 per share, compared with a net of $3.1 million, or $0.09 per share in Q1 '08. As we outlined in today's release, a number of items in Q2 obscure the progress we are making in reducing our overall expense structure. These items consisted of proxy-related costs, contract termination expenses, and consulting fees, and totaled nearly $700,000 in Q2. We do not expect similar costs in Q3.

TVI's normalized effective tax rate for the quarter was approximately 39%, consistent with the first quarter. Our income tax benefit for the quarter was level with the prior quarter and was, again, negatively affected by a 50% valuation allowance taken against net operating losses generated by our SSES Rental Services division.

Now, let me provide some specifics on our designated business segments before addressing the balance sheet. In our Shelters and Related Products segment, revenue was approximately $2.5 million, compared with approximately $2.3 million for the second quarter of 2007, and $2.4 million for Q1 '08. For the six-month period, revenue in this segment was $5 million in 2008, compared with $5.9 million in 2007. Personal Protection Equipment, which includes our line of PAPRs and filter canisters, generated approximately $3.7 million in revenue, compared with $1.3 million for the second quarter of 2007 and $1.1 million in Q1 '08. For the six-month period, revenue was $4.8 million, compared with $3.3 million in 2007.

Our Signature business accounted for approximately $3.3 million in revenue, compared with $8.9 million in the same period of 2007 and $3 million in Q1 '08. For the six-month period, revenue was $6.3 million in 2008, compared with $17.5 million in 2007. The dramatic reduction in year-over-year revenue is a direct result of the sale of the Signature California assets that I mentioned at the start of my remarks.

Turning to the balance sheet, at June 30, 2008, TVI's cash totaled $615,000, compared with $328,000 at December 31, 2007. As we have mentioned previously, our restructured credit facility has increased our total borrowing capacity to $33.5 million, subject to a defined borrowing base.

At June 30, 2008, accounts receivable was $5.5 million, compared with accounts receivable of approximately $6.2 million at year-end. DSOs were approximately 50 days at June 30, 2008, an improvement compared with DSOs of 68 days at December 31, 2007. We have achieved our goal of improving DSOs through generating higher quality revenue.

Inventories at June 30 were $6.4 million compared with $5.2 million at year-end. Annualized inventory turnover for Q2 2008 was 4.2, compared with 3.1 at March 31, 2008, and 3.0 at December 31, 2007. At June 30, 2008, accounts payable was $7.5 million, compared with accounts payable of $4.1 million at year-end. Accounts payable has increased in part due to increased inventory purchases and production activity to support our increase in revenue and prepare to ship orders in the future. In addition, we have asked many of our vendors to be patient with us, and most of them have responded positively. During this period where demands on our cash has been great, we appreciate the vital role our vendors have played.

Total debt at June 30th, 2008, was $27.2 million, compared with $25.4 million at year-end. At June 30, 2008, although we were not in compliance with our covenant to maintain a minimum EBITDA for the quarter ended June 30, 2008, of $450,000, that noncompliance was waived by BB&T. We continue to keep a close eye on funds availability and are striving to achieve results that will put us back in compliance with our covenants. We believe that our credit facility gives us adequate financing flexibility to enable us to continue executing our plan.

That concludes my prepared remarks on the financials. Before opening the call up to questions, I want to provide you an update on two additional items

first, our listing status with the NASDAQ Stock Exchange; and second and update on the proxy contest vote tally.

As most of you know, we filed an appeal with the NASDAQ listings qualification panel in early July and were granted a hearing which took place late last week. We presented the panel with our plan to regain listing compliance and asked that they provide us with an additional 180-day waiver, which would extend from the date we filed our appeal, July 2nd. So essentially we would have until December 2008 to meet the minimum bid price requirement. We expect the panel to render its decision within 30 days of our hearing. We are continuing to take steps to regain compliance, and we'll update you through a press release as soon as the panel renders its decision.

Regarding the proxy contest, we want to formally thank the shareholders for their support. We note, however, that the official vote tally which TVI publicly reported significantly understated the actual support which the company and its management received in the proxy contest. Although the company retained the services of a leading independent vote tabulation company to certify the vote, due to a clerical error, the official results did not include over 1,160,000 shares owned by a stockholder, which were voted for the company's director nominees and in support of the company's recommendations on all proposals. Because this error did not change the outcome on any matter voted on at the meeting, the company accepted the certified tally rather than incurring the time and expense to formally challenge the vote. Nevertheless, this under vote had the practical effect of significantly understating the support which the company and its management actually received in the proxy contest.

With that, we will now open the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Thank you. Our first question comes from Mr. Marc Robins with Catalyst Financial Resources. Please proceed with your question.

Marc Robins – Catalyst Financial Resources

Hey, thank you, folks, and I appreciate you going through all the details of the quarter. I'm going to ask kind of a basic question. Since there's so much change going on and I'm trying to get a better handle as to how the company is redirecting its efforts in realigning its business, what's the philosophy of management in its direction in taking its Shelter business? I mean, how do we assess the direction the company is going in its Shelter business? What are you trying to do?

Harley Hughes

Well, yes, Marc, I appreciate the call and appreciate the question. It probably is murkier on the outside than we see it. The – what we're trying to do is regain a foothold in this area and especially in the military in the broader context. The funding for – that went through DHS and through FEMA right after 9/11 was very rich, and it was a really target rich environment for folks like TVI was at the time, selling shelters and even a modest surge system.

That started changing for – everybody could have a different perspective on why, but the money did dry up starting probably in late '05 and all during '06 and then '07. It's now going back in, as evidenced from the $1.8 billion from this administration, back to DHS via grants out to the 60 urban areas that we talked about a while ago.

Okay, when we saw this funding shift, previous management continued to work with distributors to get into the traditional commercial market that had existed since right after 9/11. And it was rich for a while, but to continue that in '05 or mid-'06 and early '07, it was pretty clear that there wasn't any money there, and even the distributors totally changed themselves. They slimmed down and got rid of many, many salesman, and it just wasn't the place to be. At that time it would have been good if TVI had aggressively tried to shift to the military market.

Of course, the National Guard is more – I'm not going to say more agile, that's the wrong word, I'd make everybody angry here, but the National Guard is sometimes a little quicker to penetrate than the traditional Department of Defense and the other services. So the National Guard was good for us, and we're going to increase selling shelters in that area. Our follow-on mortuary systems we are confident will increase in volume.

We want to break into other military markets, as well. We think we can. We have a good product at the right price, and we're not threatening any of the big boys at this point in time, but we should be able to pick off some there. But we want to be agile enough to get back in the commercial side, and we will. That's kind of a mixed bag I'm giving you there, but our philosophy is to continue what we've established, and we established this sometime third quarter of '07 I would say as far as direction.

Don Yount

Hi, Marc, this is Don. How are you?

Marc Robins – Catalyst Financial Resources

Yes, great. Thank you, Don.

Don Yount

I'd like to throw two tidbits onto Harley's response. One is that the approach with the shelters is not dissimilar. It's not a mirror image, but it isn't dissimilar to the efforts we've made with the respiratory products and even at Signature where the attempt is to drill deep with our product expertise and be able to not only extend features and functions of the existing products. It also is to develop some new ones, and if I may be crass, develop new ones on the cheap, and that's what we did with the mortuary system. That's what we've done with our new airframe structure but at the same time to be able to follow the funding.

We've had more success in the short term, I think, with the respiratory products, but we are taking new product designs and new feature designs and new functions to the military, and we're getting traction. It's just we don't appear to be getting the same kind of quick hits that we were able to get with the National Guard with the PAPRs and then obviously to get the kind of volume that we did on the C2A1 canisters out of the box. I mean, remember the Army awarded us a chunk of that last tender, and we still hadn't shipped a single filter to them. So, I don't think it's a dissimilar strategy, and it's consistent with this notion of following the funding.

The second thing I'll throw on about the shelters is that that was the piece of the business, and Harley alluded to this. That was the piece of the business that had been neglected the most by prior management. And I’d say that because they completely missed the shift in funding. So we're having to gain a foothold, we're having to get traction in the military markets from pretty much a standing start. Whereas SafetyTech had always had some presence in the military, not much but some, and so had Signature for that matter with events like Modern Day Marine and that kind of thing. But the real issue for the Shelter business is we're having to build our presence in the military from even more of a standing start than with the other two divisions.

Marc Robins – Catalyst Financial Resources

Now how do you adapt to the next phase of whatever the military is going through? I mean it looks like we may be beginning a stand down in Iraq. Does that mean you go to foreign militaries? Does it mean that – you know, obviously you do more Homeland Security. How do you adjust the business for the next shift in whatever is going to happen?

Harley Hughes

Exactly, and I should have mentioned this, but –

Marc Robins – Catalyst Financial Resources

I mean I was thinking we are out in the – I'm out in the West, and the one thing that amazes me is every cotton-picking year, there's just this incredible response required for forest fires. And all of it, California is a tinder every year, and Oregon and Washington have – you know, this year is not quite so bad, but it's just the beginning of August. And it's amazing the kind of trucks, wash trucks, lav trucks, food trucks, and it's just a hodgepodge of equipment and water equipment and so forth and so on.

And there's no rhyme nor reason and the rates that they pay are unbelievable. And I would think that – you know, thousands and thousands of guys that are out there fighting these fires – guys and gals, excuse me, and I would say, “well, here's an opportunity for guys who know what the heck they're doing with equipment that is far better than some of the used surplus crap that's out there now.” They could really make an opportunity, make lemonade out of lemons. I don't know. I have no clue what the size is, but here's something that goes every cotton-picking year.

Harley Hughes

Yes, you make a good point and one that – actually, you describe a situation somewhat similar to the military and what they're in. They – remember, the first cause of the military, the first goal is they buy things that explode (inaudible). And once that's met, then you begin to think about, "okay, I've got to recover wounded and so forth." I'm not going to say that's been given a second shift, but this latter part, even if draw down occurs – I mean draw down will occur I think regardless of which party is elected here in November. I think they're dedicated to it, and the country is going to most likely retrench.

The focus in either scenario of the election, the focus will be on things that protect and save. So our shelter future is very bright, and then I would say even brighter than if we were continuing in some intense conflict. Hopefully, the retrenchment and the focus will be on protecting and surviving. That's good for us. The other point you bring up is one that we will explore, because that could be a great opportunity there for a few things that we have in mind.

Don Yount

And Marc, that – this is Don again. That $1.8 billion in grants is exactly the kind of news that disaster response people, the firefighters you're talking about out in California, needed to hear, because a lot of that money, particularly after 9/11, municipalities, states, hospital systems, they became dependent on or at least got used to federal grant money out of the Department of Homeland Defense or out of FEMA to buy the equipment and to be prepared for the kind of events like those fires.

And 2005 in my – this is my opinion, I do have some statistics to support it, but 2005 was the year when a lot of that money went back to the Defense Department to support the war effort, and those municipalities are going to be happy to see this money come in, because it will alleviate that hodgepodge when it comes to firefighters. It will alleviate a lot of the stress that emerging management people have been feeling in Florida and in the Gulf Coast since the whole Katrina mess. And in that regard, we've been very fortunate that we haven't had any hurricanes for the last two years, because it's arguable how prepared some of these states and municipalities are for another big one.

Marc Robins – Catalyst Financial Resources

That next disaster wherever they may be, okay.

Harley Hughes

Yes, sir.

Marc Robins – Catalyst Financial Resources

Okay. Now, the next thing that I'm going to ask is, you guys have done a heck of a lot of work cleaning up and patching up and so forth and so on, and it's gone pretty not very well noticed. And probably, I guess this is kind of unfair. But it looks to me like one of the things that you should do is a reverse split. Has there been a lot of talk about that yet or consideration?

Sherri Voelkel

Well, as part of our plan given to the NASDAQ to regain compliance with their minimum bid price, that obviously is one of the items we're considering in connection with that plan.

Marc Robins – Catalyst Financial Resources

Okay. I mean, you've got a nice number of shares. It's probably a little large for the size of firm you are, but not too out of whack, so I'm just curious. It was just a spurious thought, so – okay, well, keep up the good work as you've got. Like all turnarounds, they require a heck of a lot more work than you ever imagined, and it’d take a lot longer than you ever thought, so –

Sherri Voelkel

Thank you very much.

Harley Hughes

Thank you very much.

Operator

(Operator instructions)

Harley Hughes

I would like to say before there's another question –

Operator

Thank you. Our next question comes from Mr. Mike Vermut with Newland Capital. Please proceed with your question.

Mike Vermut – Newland Capital

Hi, gentlemen. Nice quarter here. Good improvement at least. I'm just trying to get a sense as to how you see margin progression over the next few quarters and if you can give us some kind of insight as to how you see the company developing into '09 and also just what the backlog looks like for the rest of the year.

Sherri Voelkel

Mike, this is Sherri. I'll start with your margin question. In the Shelter business, we had an unusual quarter with the mix, and we expect the next couple of quarters our mix to look a lot different and thus improve the margin in that business. In the filter canister line, we just started shipments mid-quarter. With that, we had a full quarter's worth of fixed costs, such as depreciation and rent and those types of things that obviously the shipments didn't cover.

With a full quarter's worth of shipments, in addition we're putting in some additional automation that will reduce the number of individuals that are on the line. We're also putting in the third shift that will reduce overtime costs. So we expect the third quarter margin on the filters to be improved over the second quarter. And again, with the Signature business, we're seeing slow margin improvement, but the focus on the facilities versus short-term tent rental is starting to show our improvement in the margins in that business.

I'll let Don address the second part of your question.

Mike Vermut – Newland Capital

Thank you very much, Sherri.

Don Yount

To Sherri's point, SafetyTech and TVI specifically are fixed cost businesses, and we build that sales volume. And while I'm not at liberty to give you a backlog, I can tell you that we're – we obviously had a backlog to hit our expectations for Q3, and I think we have the backlog to hit our expectations for Q4. And our expectations are to keep building this revenue. Will we go up 46% quarter after quarter? I don't know that I could answer that even if I had an opinion, but I do believe that we have the backlog to get there. And as we get that backlog produced and out the door, you're going to see us covering the fixed costs at SafetyTech and TVI.

Signature is more of a variable cost business, and there it's purely managing the mix and being focused on the jobs that we undertake. Our obvious focus here is to do more integrated work, to do more long-term work, and I have to tip my hat to the folks at Signature, because it's meant a fundamental change in their business from the direction they had been sent on, I don't know, 18 months ago, two years ago when Rick was still here, and they have answered the call. It has not been easy for them. In fact, it's been difficult. But they have – they bought into the plan, and they've stayed focused, and it's important for us to say thanks to them, especially in a public forum like this one.

For 2009, my – obviously our goal is to get operating profitability knocked over first, then get to net income. And I think 2009 is – I can't promise an EPS in any given quarter, and I can't promise any specific margin number, but we're on the right path to get there. We think funding events both in the military and in the commercial sectors are good for us and positive for us. You know, Harley talked earlier about the Defense Department and about how there's this contrast between things that go boom and things that don't. And we're seeing a number of programs that fall right into our bailiwick that we think we have a good chance to get, so the pipeline is building. And of course we're now thinking about 2009 and building the backlog for 2009.

So, we expect that we're going to be making our debt service payments and paying all of our own bills in 2009, and I think you can infer from that, that that means profitability. How much? That's a hard thing to predict today, because we're still in turnaround mode, but as Harley said, we think Q2 and getting that revenue bounce back was a big event for us. And with that, talking about 2009, there are some steps in the plan for the second half of this year that we think will help set us up for 2009, I think the most important of which is we need to focus some resources on programs and not just military programs and not just government programs but also programs on the commercial side.

I think the folks at SafetyTech are doing a great job today of looking at the healthcare market, and on the cheap, we've been able to develop the FlexAir and the PureAir, which are – there's nothing out there like in the marketplace. We've been to see a number of very large hospital systems and shown them what the system can do. We expect we'll see revenue from that in the second half of the year, and that's revenue that isn't in the plan.

At the same time, on the Shelter side, we know about a lot of programs. We've got a process in place to sift through them. We need to know more. We need to know more about what's going on, so we'll be dedicating some resource to greater intelligence about what's going on both on the military side and the commercial side and continue to develop the presence in these vertical niches, whether it's military or whether it's health care, whether it's disaster response, and then do that with the right products. We're spending a lot of time and we'll be spending even more time on product in the second half of the year. I hope that helps.

Mike Vermut – Newland Capital

That certainly helps. And just one last – when are the next tenders on the filter side?

Don Yount

We expect – go ahead, Harley.

Harley Hughes

That should be – it could be anytime in September or halfway through October. It could actually come at the end of August but more likely September.

Mike Vermut – Newland Capital

And what would the size on those be? Any clue?

Don Yount

Big.

Mike Vermut – Newland Capital

They're big.

Don Yount

It will be – the tender will probably be about the same size as the last one, and the question is how much of it we get and how much of it is awarded to 3M.

Mike Vermut – Newland Capital

Okay. And then one last one, just looking at the business and the pieces, what will SafetyTech – I know you had a first – a rough first quarter this year. What on a run rate conservative number should SafetyTech alone look like?

Don Yount

Yeah, that's a hard question to answer, Mike, but let it suffice to say that the stuff we published as of June 30, that's not as of today but as of June 30, or actually I should say July 1, there was $12.5 million of business sitting out there in backlog between the National Guard order and the filter plant. So infer from that what you will, but there's no question that a couple of the strategic decisions we made with SafetyTech nine months ago, even as far back as a year ago this time when we still weren't sure just how big a mountain we had to climb, looks like they're paying off.

Harley Hughes

And the other thing, Mike, is that the addition of the FlexAir and PureAir, that's going to be significant for us. We will be more flexible. We're not just tied to a C2A1, although the best crystal ball any of us have and all the people that we talk to outside this corporation is that that is – the C2A1 is a requirement, a continuing requirement, and the command that's responsible for it, that's TACOM, has I believe – I'm not putting words in their mouth, but they have their plan. They intend to adhere to it, which means you've got to order a certain number of these things every quarter or every four months. It depends on what they set up. On the commercial side, though, it's extremely exciting for PureAir and FlexAir.

Mike Vermut – Newland Capital

Okay, so this is the big growth engine that you see right now. So – excellent.

Don Yount

It's one of a number. Are you talking about specifically about FlexAir and PureAir, Mike or –?

Mike Vermut – Newland Capital

Yes, Flex, yes.

Don Yount

They are solutions that we've developed to go into a niche that we think is under served, and there are others, and not just at SafetyTech, but we think that's also true at TVI and to some extent at Signature. At Signature, we think the kitchen market is under served, and at TVI, we think there are a couple of spots where we're going to be able to come out with product enhancements, product extensions where we're going to be able to leverage in places that are underserved.

Mike Vermut – Newland Capital

Okay. Keep it up, guys.

Don Yount

Thanks, Mike.

Operator

Thank you. Our next question is from Mr. Charlie Pine [ph] with Feltl & Co. Please proceed with your question.

Charlie Pine – Feltl & Co.

Hello. Good morning, everyone.

Harley Hughes

Good morning.

Sherri Voelkel

Good morning.

Charlie Pine – Feltl & Co.

Just a couple of questions. First of all, I'm trying to get my hands a little bit on your breakeven right now. On a go forward basis, where do you see on a normalized basis for the entire organization, where do you really see the breakeven at on a quarterly basis? Because it's – you know, the Q2 number is a lot different than the Q1 number, even though you had significantly higher sales and even taking out the $700,000-odd of what you're kind of describing as one-time costs. I'm sort of seeing now a breakeven of roughly $12 million, $12.5 million a quarter. Is that the number I should be working with?

Don Yount

Charlie, this is Don. I don't – I would love to tell you that that's the number, and on one spreadsheet on my laptop computer, it is. Unfortunately, I have about five or six other scenarios, and it's a matter of we continue to run into what I'll call the rebuilding expenses. I'd call them restructuring and try to qualify it with a little R, but then the accountants would get upset with me, because that opens a whole a whole bag of issues with FASBs, and Sherri's sitting here laughing at me.

So for example, with the downsizing in Florida we're going to have some costs. They don't go into a breakeven analysis on a steady state basis obviously. I don't know what the split today is going to be between what stops occurring in Florida and what we're going to continue to have to spend in order to maintain our presence down there, particularly from a disaster relief standpoint.

So, do I think that $12.5 million is a bad number? No, but I have five others that I think could be good numbers, too. Understand, though, Charlie, that with the increases in revenue, we're going to have some increases in costs. I mean, at SafetyTech we're spending some money right now for the first time on seeding the market for the FlexAir and the PureAir. At the same time, we also cut some expenses at SafetyTech. We cut even more at TVI and about the same amount at Signature. At the end of Q2, we haven't seen the benefit of that yet, and we won't see the benefit of those cuts until Q3.

So do I think you're way off? No, but do I think $12.5 million is the exact number? I can't answer that. It just depends on analysis that's still going to flow out of some of the moves we're making.

Charlie Pine – Feltl & Co.

Well, we talked – getting back to that charge or cost that you might have to change the Signature business in Florida, I mean, what are you estimating roughly about how much you think you're going to have to expense on that?

Don Yount

It could be as much as $400,000, but I don't have an exact answer for you, so I can't commit to it, Charlie.

Sherri Voelkel

We're in the middle of negotiating some –

Don Yount

We're doing some negotiations, and I don't want to talk about it, because I don't want to give away our negotiating position, but –

Charlie Pine – Feltl & Co.

Okay, well. I mean, if nothing else I was at least maybe just trying to seek some kind of a range of from a best case to a worst case, but that gives me something to work with. Let's see.

The other thing I guess I wanted to ask a little bit about, we had talked – well, a couple things. We had talked offline once, and I think maybe even on some calls, there had been some discussion, A, that there was possibly several release – I mean, you had the National Guard contract, which was a great order, but there was supposed to be some release – it seemed like there was going to be a stream of releases that might have been hitting the market.

And besides the National Guard thing, we really didn't see much in the way of any PR after that for the last 30 days or for probably much before that. Do you think that there's going to be much in the way of higher visibility for the company going forward, and is there any new developments going on regarding your efforts to do anything for disaster relief in China?

Don Yount

Let me address the press release question first, because China is a long and boring answer – well, maybe not a long and boring answer, but it is a boring answer. Charlie, we have taken a position all along that we were never – we didn't – I shouldn't say we were never going to be accused. We never wanted to be accused of doing the same thing our predecessors did which was to issue a press release every time somebody sneezed.

The National Guard was a great press release. I think there will be opportunities for us to issue more press releases and give people visibility into the revenue stream. One of the things that we have talked about but we have not come to any conclusions about either as a management team or with the board is changing our internal policy about when we issue press releases. A year ago this time, we took a position that we were under so much scrutiny and under so much pressure we had to be very careful what we said. Obviously, some of the pressure is easing, as we feel like now we're starting to see the revenue ramp and the plan is really taking hold.

So, our view here has been singles are not – and we hit a lot of singles, but singles are not necessarily press release worthy. Are doubles press release-worthy? Yes, it depends on the double. We would issue a press release on a triple, and we’d obviously issue press releases on home runs. And maybe we needed to rethink that, so we will talk about that, Charlie. That being said, I do think that there are opportunities in the pipeline that are going to be more newsworthy in Q3 and Q4.

Regarding China, there has been something of a standstill in the conversation there. Harley can give you better color about this, because he's closer to it than I am, but bear in mind that there's a whole lot going on in China right now with the disaster relief, and I think there's an opportunity there, but I also think that we have to stay on top of it, we have to continue to monitor it, and there's a bureaucracy there to deal with the Chinese government that I suspect any of us would find frustrating if we were trying to deal with it on a day-to-day basis.

Go ahead, Harley.

Harley Hughes

Yes, we're very careful not to say anything about the Chinese handling of this disaster and are confident that they're doing everything in their power. That's the positive, which is what the country has been also. Now, we have two avenues into there to sell, not – well, to sell some inventory that would work perfect in that situation, one of them was more directly through the military and the other more directly through the government. And we worked with the – well with the US Chamber of Commerce of South China.

Don Yount

And I'll throw a comment in here, Charlie. Both avenues have worked very hard. They've been very responsive to us. We've sent stuff to them. They've sent stuff back. The question-and-answer, give and take has been as constructive as it could be. I think it's – anyway, I'll let Harley finish, but I just – we believe that our paths into China have been working this very hard.

Harley Hughes

Some others that we know of established offices immediately in Beijing and Shanghai. And frankly, feedback we received is that was seen as pushing the envelope a little bit to take advantage of a national natural disaster. We aren't seen in that vein. At the same time, the Chinese government said, "stop, we don't know what we have, we don't know exactly what we need." They are being very careful how they organize. Of course, they've got the Olympics they're looking at. And you can infer all kinds of things from this, but we were told we would hear more, as they have told everybody, not just us, around Labor Day. So, we're – we have a great proposal. We have stuff that will certainly help the victims and the government, and we are continuing to let them know that we're ready to respond at a moment's notice.

Operator

Thank you. At this time, we have reached the end of the question-and-answer session. I will turn the conference back over to Mr. Harley Hughes for any closing additional remarks.

Harley Hughes

Yes, for those that are still listening, I just want to say and emphasize that even though we have, and we're continually reminded of this in one way or another, a lot of work left to do, and some of it's going to be really hard, a lot of it's been hard up to now, that the best assurance we can give you shareholders is the leadership in the segments and the leadership at the corporate level, who have been with us day to day and night to night, are extremely optimistic about our future. And they are eager to meet the challenges that are out there in order to get this company back into a solid business footing.

We're continually reminded that we are so much better off today than we have been at any time since actually October of '06 that it's frightening in one respect, because oh my gosh. And two it's something that those of us here in the fray continually ignore. Not ignore, we don't pay enough attention to. So, I want to leave you with that much of a positive note. There's a lot more good here than most of what you see in the financials and our inability to predict the future based upon well-known laws and so forth and so on. Anyway, it's bright from our perspective.

Thank you all.

Operator

And that concludes our conference call. Thank you for joining us today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. U.S.ERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!