Innovative Solutions & Support - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, and welcome to the Innovative Solutions and Support First Quarter twenty twenty Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the call over to Jeffrey Hedrick. Please go ahead.

Speaker 1

Good morning. This is Jeff Hedrick. I'd I'd like to welcome you this morning to the conference call to discuss our performance for the 2020, current business conditions and our outlook for the coming year. Joining me are Sharon Mascupor, our President and Rael Wouinand, our CFO. Before I begin, I would like Rael to read our safe harbor message.

Thanks. Thank you, Jeff,

Speaker 2

and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods, are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially, either better or worse, from those discussed, including other risks and uncertainties reflected in our company's 10 ks, which is on file with the SEC and other public filings. Now I'll turn the call back to Jeff.

Speaker 1

Thank you, Earl. The New Year is off to a good start with our fifth consecutive quarter in which we generated revenue growth quarter over quarter. Revenues were comprised primarily of product sales and customer service revenue, both of which carry attractive margins, which led to our 58 gross margin in the quarter, down only slightly from peak margins achieved last quarter. I'm pleased that we continue growing the business while maintaining healthy margins. Last quarter, as I mentioned, was the best quarter in New York orders for more than two years.

And I am pleased to announce last quarter's orders were also very strong. We once again finished the quarter with a backlog that was greater at the end than it was at the beginning. In addition, we also have production contracts that extend over a number of years that we believe have promised a different additional revenue not reflected in our current backlog. The largest of these was a very successful Pilatus PC-twenty four. We have previously disclosed that they intend to increase their PC-twenty four production by 25% this year.

This has been a remarkably successful aircraft program, maybe one of the most remarkably successful that I've seen in many, many years. We remain pleased with the financial results we have been recently reporting for some of our most significant recent progress is not reflected in our current results. Most recently, we were awarded a supplemental type certificate for the Revolutionary Protection system against catastrophic loss of control with one engine inoperative. The milestone achievement was followed by our first agreement with a aircraft manufacturer to supply our ThrustSense autothrottle as standard equipment on new aircraft production. They reflect, we believe, a market interest to quickly adopt the technology not only in a targeted retrofit market but in the OEM market as well.

Authorities suggest that one engine out loss of control accidents are responsible for multiple catastrophic accidents annually. And our VMCA control system will mitigate or if not totally eliminate this condition. Originally developed for the retrofit market, our Autothrottle is receiving interest in both domestic and international OEMs. We are pleased to have announced that an aircraft manufacturer that intends to include our autothrottle as standard equipment in our new aircraft production. Between the retrofit and aircraft manufacturer systems that have been certified, we believe our potential market opportunity is very large and growing.

Therefore, we are undertaking a number of actions to help accelerate the adoption. First, we're working on means and methods to reduce downtime required for installation, an important consideration in any retrofit application. Second, we are we continue to refine and enhance the product adding new features that add functionality, value that would be that will improve operational efficiency and safety. Finally, we conclude continue to pursue new opportunities in all our commercial air transport, military and general aviation markets. We see large potential demand in military and regional aircraft markets for our autothrottle.

Our plan is to continue to pursue additional STCs on multiengine aircraft and retrofit market with existing large fleets. We're also looking to expand our OEM business. Some of the aircraft that we are targeting in these markets are much larger and we feel our autothrottle can provide a meaningful improvement in aircraft's safety and reduce pilot workload. With the autothrottle STCs in both single and multi engine aircraft secured and the recent qualification of our VMCA, that is the loss of engine of control problem. That's what VMCA is.

Technology and the award of the OEM agreement, we believe Autothrottle technology is positioned for very significant growth. Let me turn it over discussion of our financials.

Speaker 2

Thank you, Jeff, and thank you all for joining us this morning. Revenues for the 2020 were $4,500,000 a 13% increase compared to the 2019. A majority of revenues in the quarter were generated from product sales, primarily general aviation and military as well as a steady level of customer service revenue. The small amount of engineering revenue we earned this quarter as compared to the 2019 reflects the completion of the F5 development contract. Gross margins for the quarter were 58%, up from 54% a year ago.

Gross margins reflect an increase of first quarter revenue from product sales and the growth of our high margin customer service revenue. Margins also reflect the leverage obtained when we increase volume across our fixed overhead. Total operating expenses for the 2020 were $2,400,000 up from $2,100,000 in the first quarter a year ago. Research and development expense increased from a year ago. This reflects an increase in the amount of internally funded R and D for which is expensed as incurred in contrast to funded R and D, which expensed or charged the cost of goods sold.

With the wind down of the F-five contract, funded R and D has been significantly reduced. Selling, general and administrative expenses were up $230,000 primarily reflecting the increased investment in sales and marketing. In the quarter, we earned $96,000 of other income, 79,000 of which was interest income. Due to tax loss carryforwards, we incurred no income tax expense in the quarter. We reported quarterly net income of $328,000 or $02 per share, more than double the $139,000 or $01 per share over year a ago.

The company remains in a strong financial position despite a very modest use of cash in the quarter, primarily to fund increase in receivables and inventory associated with our steady growth. At December 3139, we had over $22,200,000 of cash on hand and no debt. We believe the company has sufficient cash to fund operations in the foreseeable future. Now I'd like to turn the call over to Sharon.

Speaker 3

Thank you, Rell. Good morning, everyone. In the first quarter, we continued to achieve steady progress towards our short term and long term goals. In the near term, we had another quarter of top line growth and a doubling of our profit. Longer term, we witnessed two important developments that we believe will result in the success of the StructSense autothrottle: an STC for our patented VMCA technology and our first contract with an OEM that intends to make our autothrottle standard equipment on production aircraft.

As Jeff mentioned, as pleased as we are of our string of quarters of revenue growth and profits, we are equally pleased of what these two recent developments mean to our future opportunity. So let me first provide a little bit more color on each of them. We believe our VMC mitigation technology is the first of its kind. And with it having been evaluated and approved by three different departments within the FAA, we also believe that RSCC has been validated as a de facto standard for this catastrophic loss of control mitigation feature. We have already discussed how independent evaluations by leading aviation authorities have lauded the product in various aviation trade publications.

So relative to competitive products in the market, the ability to incorporate VMC a lot of control prevention in our autothrottle provides a tangible competitive advantage. The award of an agreement with an aircraft OEM that intends to make our autothrottle standard equipment on their production aircraft has been announced. Due to the nature of our agreement with the manufacturer, there is little more we can share with you about this agreement at this time other than what was previously announced. Nevertheless, we believe that having been chosen by an OEM as standard equipment for production aircraft is further market validation of our autothrottle value. We're also in discussion with other aircraft OEMs to include fluxants as standard fit into their production aircraft as well as retrofitting their existing fleet.

In the propeller market, there are a great number of multiengine aircraft ranging from smaller Part 23 piston to larger air transport Part 25 turboprop aircraft as well as numerous multi engine turbofan aircraft that would benefit from our VMCA technology in both military and commercial markets. On the aftermarket side, we have been pursuing markets through certified installers and MROs. We are also pursuing large military fleets through approved integrated and military installers. Meanwhile, our strategy is to pursue the larger OEM opportunities directly through our own sales organization. We anticipate oral throttle production orders and installations will start this fiscal year.

This will be the beginning of what we believe is a ramp up that has significantly potential to increase future revenues. Just quickly reviewing the programs driving current results in the CC-twenty four program has been running at a steady level that we believe should approximate 50 Pilatus aircraft this year. Again, this is a long term contract, which we believe will span multiple years and generate demand for thousands of units. Only a fraction of ultimate value is in our backlog. In the commercial air transport market, we are experiencing steady demand for our Boeing seven fifty seven and seven sixty seven portfolio of cockpit technology.

We expect that the revenues from the air transport side of the flat panel will stay at current levels for the near future at least. And since many of these are close to off the shelf products, these sales can generate nice margins. In the military market, our production KC-forty six program continues forward. This is an ongoing program, which we believe will provide a continuous revenue stream for a long time. Development and flight testing on the F5 computer is now complete.

The company has now received the expected additional engineering contract to enhance the design assurance level of the unit. Additionally, we anticipate receiving a production order contract for the U. S. Navy in the near future. We also believe this product has the potential to be sold to foreign militaries as well.

Backlog is up again from last quarter, and revenues from backlog continued to be supplemented by a steady demand for customer service, intra quarter book and ship work and the contribution from long term contracts, where only a fraction of the total contract is reported in committed backlog. New orders represent a mix of commercial, air transport, military and general aviation programs. As we glance back at the recent challenging years where we invested significantly in the ThrottSense autothrottle development and initial certification, we are pleased to begin to see the reports of that vision. Let me turn the call back to Jeff for some closing remarks.

Speaker 1

Thanks, Sharon. I attribute these results to our disciplined commitment to better leverage our core technologies and innovation in our designs in both the commercial, general aviation, and military markets. And for a strong fiscal two thousand nineteen, we're entering the year with new momentum and new wins. We remain cautiously optimistic. We're obviously excited about our Autothrottle program, and we believe this program over the longer term can generate expanding acceptance so that as it proceeds, the growth will approach an exponential growth rate.

But we are being cautiously optimistic, as I said, about our current projections. We still will have to work to ensure that we can provide our customers with the high quality and reliability on which we have built our reputation. I'll turn it over to the operator for questions and answers.

Speaker 0

Thank you. At this time, we will open the floor for questions. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you can press star then 2. At this time, we will pause momentarily to assemble our roster.

Once again, if you'd like to ask a question, you can press star then one. Our first question comes from George Maraima with Pareto Ventures.

Speaker 4

Hi, good morning gentlemen. I had a couple of questions. The first question on this new OEM, when are you guys expecting to start shipping on that?

Speaker 1

In the next six to six to eight weeks.

Speaker 4

Six to eight weeks from now, you'll begin shipping? Correct. K. And are there any is there any commentary regarding, like, the how many planes they make a year? Or what what's the size this operation is?

Speaker 1

It's gonna be formally announced to the industry in the the late spring of this year. So we've been asked by the OEM not to comment on it until the announcement comes out.

Speaker 2

Okay. Fair enough.

Speaker 1

And that and that's the reason why I'm sorry about this. We're not trying to there's nothing nothing unique about this situation. It's just simply we want to announce it together at at the appropriate time, and that's a a few months away.

Speaker 4

Okay. Okay. And then on the comments you made regarding the military segment, I quite catch all that. What what are the were you talking about a military opportunity for auto fence? Or Yeah.

Absolutely. Absolutely. Could you could you elaborate a little bit more on that? Well,

Speaker 1

there's a there's a number of aircraft that would would be helped by an autothrottle, and there just hasn't been an autothrottle that was readily installed in the existing aircraft. We have one that can be. We have a number of opportunities that we've identified. It is simply a question of adapting our our actuator into the airplane. We have we've got two or three targets that we're working on as we speak.

And so we think that the military market is going be a good and a big one. In addition, the regional aircraft like the ATR forty two and seventy two, these are twin engine turboprops, have suffered from the same kind of loss of engine accidents. And our system has demonstrated that it can protect against that, prevent that from happening. So as a safety feature and to reduce pilot workload, it's compellingly attractive. We have multiple patents on the technology.

So we're we're always guardedly confident. But we think there's an opportunity there, and we were we were just visiting somebody yesterday and talking about the program, and they expressed a great deal of interest. So we're optimistic, yeah, in all three in all three segments, military, commercial and business jet

Speaker 4

Ian, on the AutoSense, on the retrofit market, can you give any commentary on what's happening currently in the 2020 with that? You shipping now?

Speaker 1

And what's We have two installations going on right now for airplanes and the commercial ones. They're both Pilatus PC 12. We have a King Air. We're looking at we're just about to finish the latest version of our King Air, and we'll be supplying that for the first commercial installation, I I would say, in about three months. So it's it's building momentum.

Right now, we're we keep refining the the product. The twin engine product has now been certified for for the loss of engine recovery, but we've enhanced its operation so that it will accommodate very high rates of change of the airspeed so that under catastrophic conditions, it still works and provides recovery. It's very good. It's totally unique. It's never been done before by any airplane, commercial or military.

Speaker 4

K. Have you have you had feedback from the MROs on their outreach to the market on this?

Speaker 1

There's two things that are gonna happen. The OEM some of the OEMs have certified service centers throughout the world. And that's gonna be that's already in progress to have them offer it

Speaker 4

I see.

Speaker 1

For retrofit. It's a large number of aircraft of all kinds that will be serviced by these service centers. And then we deal with the FBOs. FBOs, because this is the the the area that we're in right now, MROs would deal more more generally with the larger aircraft. So we use FPOs, and we expect to to have upwards to 20 totally as doing installations on a regular basis.

Speaker 0

Our next question comes from Rick Teller, a Private Investor.

Speaker 5

Yes, good morning. Two things with reference to what you said in your opening remarks. One is that you're still working to reduce the downtime. I recall in the last conference call that you were holding up any possible installations pending your your developing these new methods. How how long do you think it would be before you think your installation methods will be kind of let's call them standardized enough that you can say, okay.

This is this is good enough to go with.

Speaker 1

Now we're there. But we'll we'll continue to improve it. But right now, the the installations that are going on now follow the pro the profile we developed, and it looks very good. Our effort is to try to get this thing down to a couple days so that the owners don't have to tie their aircraft up for for a week or two. Anybody that owns an airplane hates to give it up even for a day.

So that's why we're doing it way. Also, it increases the number of units that can go through the the modification places. If it takes a week, it could it could do fewer per week. That's simple.

Speaker 5

Right. Okay. Good. And and one other thing you mentioned, you said that you're also trying to improve the product by adding new features. Are are these features things that will have to go through a a process with the FAA to get get approval?

Or are they kind of smaller things that you can just add on without having to do substantial testing?

Speaker 1

Well, most of them are small enough so that we can get a change to an existing STC and not go through a long recertification process. Other features may or may not be so significant that they'll need recertification. But we're moving in both areas very quickly. And quite bluntly, the FAA has been extremely cooperative. They're they're still being very prudent, but there's no they're we're not experiencing any delays from getting from working on it.

They work on it immediately. So we couldn't be happier.

Speaker 5

Great. Thank you.

Speaker 1

Thank you.

Speaker 0

Our next question comes from Michael Friedrich, a private investor.

Speaker 6

Good morning, gentlemen. I a question about the process of getting the thrust sense included in a new plane with the OEMs. Is that something that also requires an FAA approval like the retrofit market? Or if if it's if it's going in during production, is there a different process to getting that accepted?

Speaker 1

Well, I mean, it's the the type certificate allows an OEM to install the equipment in phase down on the line and ship it. So that's it can be used to support production in early stages. Ultimately, the OEM was the OEM is gonna want a to do a type certificate as opposed to a supplemental type certificate. And he'll take the supplemental type certificate and submit it to the FAA with an application for a type certificate for that exact model and the same installation. So it's not a it's two different situations.

But in either case, it doesn't hold up the OEM's ability to deliver product.

Speaker 6

Okay. Okay. And when you're talking about using ThrustSense on these larger military type planes, is the would the per unit cost of of the of the item go up on a larger plane, or is it is it a relatively standard cost across the board?

Speaker 1

Well, on a larger airplane, it's gonna be more obviously, more involved. So you you can be you can figure that the price is gonna go up. I mean, there are four engine airplanes that we do that we can do, and it's not an issue. But you it it would the price would go up almost proportional to the number of engines.

Speaker 6

Okay. Okay. And then and then

Speaker 1

You know, it's it's hard to to find. But in general terms, a bigger airplane takes more equipment, longer distances, all of those things, and therefore, it's gonna be somewhat more expensive. Okay. Sure. Sure.

Speaker 6

And and and I I know that there's a a huge number of planes in the in the in the piston market. Is is it eventually, will this product be available for the the on a price scale low enough for these, these smaller piston type planes?

Speaker 1

Yes.

Speaker 6

Okay. Okay. And The system

Speaker 1

the system is remarkably adaptable from the very low end all the way up to the high end. I owned a I owned a piston airplane for thirty five years, so I'm acutely aware of what it costs. And by the way, none of those are cheap.

Speaker 6

Don't know what I'm I'm using I'm using

Speaker 4

a relative I'm using a

Speaker 6

relative term. So That's right. Right. Right. And I I guess that's it.

Thanks, guys.

Speaker 1

You're welcome. Have a good day.

Speaker 0

Our next question comes from Mike Hebergh with Acxiom.

Speaker 2

Hi, Jeff. How are doing?

Speaker 1

Mike, good morning. How are you?

Speaker 2

Doing well. Quick question for you.

Speaker 4

Is it realistic to expect that the at some point, the NTSB might make a recommendation to the FDA the FAA to mandate the autothrottle for commercial applications because of the safety nature?

Speaker 1

I don't know whether the n g I you know, I I honestly, I can't project that. They and and they've obviously mandated, oh, tossed, yeah, which was then there was a lot of support from the from the congress on that as well.

Speaker 3

Right.

Speaker 1

I I think what what's gonna mandate it is if you think about it, your airplane has it and your competitors don't, why would you wanna fly in an airplane that if you got too slow with an engine out, it fits rolls on its back unrecoverable and kills you? I mean, that if you own if you own an airplane that's 5 or $10,000,000 or even a million dollars, why would you wanna not want the equipment to do it? And I think, you know, aircraft manufacturers are very reasonable. I mean, they really do. I'm when they know that something is safe, it helps the safety, I don't think they hesitate finding a way to put it on their airplanes.

So whether it's mandated or not, don't I know. It should

Speaker 3

have been any

Speaker 2

know Has

Speaker 4

there been any discussion with with insurance companies who insure aircraft operators?

Speaker 1

That's a very strong way to do it. And contacting insurance companies is obviously obviously very smart because, you know, when they do fail, it is a pretty ugly conclusion. It's there's not there's not too many survivors. So at any rate, look. The the the the only reason it hasn't been done before is it never existed before.

I think, based on our experience today, the manufacturers are very very interested and are being very expeditious about implementing it.

Speaker 4

Great. Thank you.

Speaker 1

Thank you.

Speaker 0

As we have no further questions, this will conclude our question and answer session as well as today's call. Thank you for attending our presentation. You may now disconnect.