Innovative Solutions & Support - Earnings Call - Q1 2021

Transcript

Speaker 0

Good morning, and welcome to the Innovative Solutions and Support First Quarter twenty twenty one Fiscal 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 conference over to Jeffrey Hedrick, Chairman and CEO. Please go ahead.

Speaker 1

Good morning. This is Jeff Hedrick. Welcome to our conference call to discuss our performance for the 2021, current business conditions and the outlook for the coming year. Joining me today is Sharon Mascupur, our President and Reld Ronan, our CFO. Before I begin, I'd like to Raul to read the safe harbor message.

Speaker 2

Thank you, Jeff, 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, Rell. We managed to maintain revenue growth bottom line profitability and positive cash flow in the first quarter of our fiscal twenty twenty one in spite of the pandemic's impact on our industry. Although our balanced mix of retrofit and OEM has somewhat mitigated the impact of the COVID pandemic on our business. However, the exponential growth in our auto throttle has been impacted by a slower and steady expansion in demand and promising revenue growth. This was our third consecutive year in which our first quarter revenue and operating income increased from the previous year's first quarter.

In addition, we finished this quarter with a backlog that was greater than the end of the quarter, and we have achieved these results while maintaining committed to implementing precautions against COVID-nineteen that we seek to ensure the safety of our employees, suppliers and customers. Reflecting on our continual continued confidence in the business, December, the Board of Directors declared a special $0.50 per share dividend. Together with a $0.65 dividend declared in September, we returned nearly $20,000,000 of our cash to the shareholders over the 2020. As a result of our strong cash flow, we remain in excellent financial condition with significant liquidity and no debt. We have, however, expanded our access to capital by opening a credit line with our bank, making that available if we need it.

Since speaking to you several weeks a few weeks ago, we continue to make project project excuse me, progress on our strategic initiatives. Flying Magazine, a leading aviation industry publication, has just awarded ISNS one of its three prestigious annual awards for their twenty twenty Editors' Choice Awards along with SpaceX and Garmin. These highly anticipated and distinguished awards are selected by their senior editors based on the products that have the greatest influence on safety and technology and aircraft operations. Textron with Textron, we announced that they offered our ThrustSense autothrottle as standard equipment on the new King Air two sixty, further expanding our product revenue from Textron. All of our OEM contracts are expected to generate recurring revenue of significant value over the next few years.

And all of these contracts are with some of the most respected names of the industry, Textron, Pilatus and Boeing. In addition to their direct impact, these relationships are creating additional growth opportunities. In the case of Textron, we are jointly capitalizing on their global network of service centers where they are and we are promoting the autothrottle benefits. We'll go on tour next month to five of the service centers at the beginning of the month with presentations by their chief test pilot and our Product Support Maintenance Group. Retrofit market is much better than the OEM opportunity right now.

We are making progress working with Textron to more broadly adopt our technology across their product portfolio. The success of our ThrustSense technology in the general aviation market is creating opportunities in adjacent markets such as military, air transport and several multi engine aircraft. In addition to the steady recurring generated recurring revenue generated from these contracts, there remains strong demand of our legacy products with our long term customers. Recent introduction of the synthetic vision and autothrottle upgrade for the Eclipsejet is seeing steady demand. The new ownership is committed to refurbishing and upgrading used aircraft and are preparing to place sizable orders on new cockpits for those airplanes.

The strong growth of online shopping and the decrease in air passenger miles has made the seven fifty seven and seven sixty seven aircraft a choice for cargo carrier conversions. We have delivered several shipsets of seven sixty seven flight decks to Amazon, who is creating their own fleet expansion. We continue to see demand for our flat panel display technology as part of the cargo conversion upgrade of these aircraft. The first quarter was a reasonable start to the new fiscal year in light of the virus' impact on our industry, and we are confident our strategy to focus on innovative opportunities will continue to create value for our shareholders. I'll turn that over to Raul now.

Speaker 2

Thank you, Jeff, and thank you all for joining us this morning. Looking at the first quarter, were $4,900,000 up 8% from $4,500,000 a year ago, reflecting an increase in King Air Auto throttle system sales and growth in the flat panel display revenues arising from the ongoing conversion of seven fifty seven and seven sixty seven aircraft to air cargo planes. Gross margins for the quarter were 52.7% compared to 57.7% in the year ago quarter. This

Speaker 3

primarily attributable to an increase in direct costs as we staff operations seven to efficiently meet the demand of both increase in production programs under contract and the increasing demand for air transport retrofit services. Warranty expense also increased in the quarter. Margins remain in line with historical averages and can

Speaker 2

be expected to expand as we leverage our fixed investment through revenue growth anticipated over the balance of the year. Total operating expenses for the 2021 were $23,300,000 down marginally from a year ago and basically unchanged from the preceding 2020. Operating expense control remains our priority and we do not believe they will rise much further from current operating levels over the balance of the year. Research and development expense decreased from the year ago quarter, reflecting increased product development programs that were allocated to cost of sales in the quarter. Research and development expense were over 12% of quarterly revenues, which is consistent with our strong commitment to innovative and new product development.

Selling, general and administrative expenses were up marginally from the year ago quarter. Note that first quarter operating expenses reflect the increase in staff brought about by steady growth as well as the one time cost typically incurred in the December quarter such as our annual audit. This increase was partially offset by reduced marketing show expenses as a result of COVID-nineteen. For the quarter, we generated operating income of two and thirty two thousand dollars a marginal increase from the year ago quarter. We reported quarterly net income of $240,000 or $0 a share as compared to net income of $328,000 or $02 per share in the year ago quarter.

This decrease in net income is due to a reduction in interest income this quarter, reflecting the decreased cash balance and lower interest rates compared to the year ago quarter. Company remains in strong financial position with cash on hand of $5,600,000 at 12/31/2020. Our cash position is net of nearly $20,000,000 of dividends dispersed in the fourth quarter offset by approximately $1,700,000 of positive cash flow from operations. We anticipate being operating cash flow positive for the full year. The company is debt free.

Consequently, we believe the company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Sherif.

Speaker 3

Thank you, Rell, and good morning, everyone. Continuing the trend in the first quarter that now stretches back over the last couple of years, we grew revenues, generated a profit and were cash flow positive. These results reflect the growth of recurring revenues from OEM production contracts, ongoing demand for our legacy products and the growing aftermarket upgrades for TrussSense products. Also reflect the diversity of our markets, high quality of our customers, but among the most respected brands in the industry. This focus on working with the best in the business on both new and existing airframes, new and existing technology has proven to be a formula for success.

While our Pilatus PC-twenty four and Boeing KC-forty six contracts have been underway for some time, our Textron King Air contracts are beginning to ramp up. Initial units, including those ticketed for simulators, have been shipped, but with a King two sixty not scheduled for delivery until later this year and the new version of C90 to follow, we are not at full run rate production volumes. Textron has noted that it delivered eight King Air 360s in the fourth quarter and as Textron sales production rates increase, it will follow suit. Large opportunity in the King Air market is the approximately 5,000 aircraft that are currently in service. We estimate the retrofit market to be about a $300,000,000 opportunity.

Versatility and performance of our autothrottle is enabling us to look at growth potentials across all our markets, special air transport, general aviation and military. For instance, during conversation with manufacturers of both twin turboprop, twin jet and multiengine aircrafts with regards to our autothrottle, not only in the business aviation market, but in the military and other markets as well. While some of these discussions have slowed down due to the pandemic, the interest is real and the potential is exciting. Always, it is encouraging to receive further recognition for our ThrustSense autothrottle from industry experts such as recent FLY magazine Editor's Choice Award based on products that have greatest influence on safety and technology in aircraft operations. Briefly reviewing some of our ongoing programs, the PC-twenty four program has been highly successful, and we expect aircraft delivery rates to remain at a steady level.

We believe this program will continue to run for many years, offering predictable, stable recurring revenues. As Jeff mentioned, the ongoing growth of online shopping and the dramatic decrease in passenger traffic as cargo carriers aggressively acquiring seven fifty seven and seven sixty seven aircraft. They are now converting to cargo planes. Part of these conversions, our cargo carrier customers such as Icelandair, DHL and Amazon are installing our Flat Panel Display Systems. There are over 1,000 operational seven fifty seven and seven sixty seven, and a large number are still available for cargo conversion retrofitting, we believe will lead to ongoing steady demand for our flat panel display technology.

KC-forty six program with Boeing is one of our three OEM production contracts, continues to provide a steady contribution to our recurring revenue and profitability. Finally, we maintain our relationship with Eclipse and its aircraft owners, many of whom are upgrading their cockpit with our synthetic vision and enhanced autothrottle technology, for which we received STC just this past September. New orders in the 2021 were $5,400,000 up $2,000,000 sequentially from the 2020. Backlog as of 12/31/2020 was $4,200,000 which is also an increase compared to the end of the previous quarter. Backlog at the end of any one quarter is not necessarily indicative of future business activity as revenue is also comprised of intra quarter book and ship orders never enter backlog.

As I first mentioned last quarter, the pandemic has limited our ability to personally meet with customers and prospects as well as to work with the FAA, which is operating under work from home directive. These are headwinds that are temporarily slowing some of the progress we would have otherwise anticipated. But in the longer term, we do not expect the impact of the pandemic to materially alter our overall growth strategy or our ability to drive profitability and generate positive cash flow. Before turning the call back to Jeff for some closing remarks, let me quickly note the effort of our employees to integrate new safety protocols, our standard operating procedures and how this has enabled us to maintain productivity without jeopardizing their health, safety or well-being. Let me turn the call back to Jeff for some closing remarks.

Thanks, Sharon.

Speaker 1

The fiscal year is off to a solid start with revenues up, continued profitability and strong cash flow. We have rewarded our preferred shareholders with nearly $20,000,000 in dividends in the 2020, and it is our intention to continue to build the business to create an even greater value for our shareholders in the long term.

Speaker 3

Thank you for coming.

Speaker 1

Thank you for your ongoing support. Thank you for your encouragement. Thank you for your audience today. Operator, please turn this over for questions.

Speaker 0

We will now begin the question and answer session. First question will be from David Campbell of Thompson Davis and Company.

Speaker 4

Hey Jeff, Sharam, Rell.

Speaker 2

Thanks

Speaker 4

for your comments today and for doing a good job despite the pandemic and that impact on your company. I also want to thank you very much for the special dividend in December. That was well needed by the Campbell family. Thank you. Thank you very much.

I'm hopeful revenues in coming quarters will begin to reflect the optimism of you have in in in your various products and for services.

Speaker 3

So

Speaker 4

I'll continue to estimate probably more earnings than I should. But one of these one of these quarters, I expect your optimism will produce some meaningful profits. Do you have any problem with that? Please let me know. Thank you.

Speaker 1

Listen, I'm the first guy that wants you to have more profit. Remember, I'm the largest shareholder in the company. So I want to have lots of profits. I'm with you. Keep up the good work.

Speaker 0

The next question will be from Roger Goldman, a private investor.

Speaker 5

Good morning, Jeff, and well done team. Very nice quarter in spite of all the headwinds and very optimistic. Jeff, I have a question about battery powered airplanes. There's a lot of attention being given to to battery power as the future of aviation. There are any number of incredibly well funded startups who are already flying these airplanes with delivery expected in the next two years.

Have you looked at playing in that market? And if so, how?

Speaker 1

The quick answer is no. We haven't. We we would like to see the market develop a little a little more definitively. My judgment is that it's terrific. You can do a lot of things with electric motors that you can't do with any other propulsion means.

One of the problems continues to be a source of a source of energy to drive them over. Matters are difficult. Latest looks at trying to use hydrogen in a new way to produce enough energy would be good. And there's good reasons for it because remember, a battery doesn't get any lighter as it gives up its charge. You're carrying all that huge amount of weight.

It's like carrying a full load of fuel to landing, and you don't want to do that. It makes it a lot more problematic. Maybe I don't know how long it will take, but it will be probably twenty years. I'm reminded by Sharon that they're telling us we're going to have Fusion Energy for thirty years for the last seventy years. So it will happen, I'm sure.

I just don't know when. And in the meantime, we're very much focused towards the conventional demand. There's an awful lot of aircraft out there, especially interested in our autothrottle. Delighted that this award by it was quite interesting because they selected SpaceX for landing that booster, which was amazing. Having watched NASA not ever being able to do it, it's a huge achievement.

And bluntly, Garmin did a hell of a job getting an autoland in a small airplane. We'd like to think that we can do an auto land in a bigger airplane if the demand is there. Happy to say that and pass on to this. FAA told us they lose one hundred or two people a year for upset accidents.

Speaker 6

The

Speaker 1

work that we're doing here today and the certification, they believe are going to save lives. That to me is humbling. And it it also also is promising for the business.

Speaker 3

Thank you.

Speaker 1

Thanks for the question.

Speaker 0

The next question will be from Michael Friedrich, another private investor.

Speaker 6

Guys, can you talk to me a little bit about the twin debt market? You had mentioned it in the comments. I know that previously, prior to thrust sense, you'd already developed an auto throttle for the Eclipse. And I'm not going forward, would you be would you be looking to use a thrust sense in the twin jet market? And what advantages do you guys have in that market over the existing players that are already there?

Speaker 1

Well, the biggest one is our patented VMCA upset protection. Addison, Texas, Magnus Addison, Texas made all the news of the airplane with 13 people on board rolling over on its back and crashing and killing them all. We happen to be one of those people. It's really important to think we the equipment that we make actually prevents that from happening. And that is unique.

They're trying to deal with the problem for over one hundred years unsuccessfully. We were able to do it, patent it and put it into practice. And Textron had the vision and the initiative to actually go ahead and put it on their airplanes as quickly as they did. We're proud to be a partner with Textron, and we see a huge market. We've been we've been contacted by, I'd say, if I count the number of airplanes, probably 5,000 airplanes beyond the King Air of people who want to put an autothrottle, a autothrottle, r autothrottle on the airplane.

And one of the reasons one of the other big reasons for our autothrottle being unique is, to my mind, it's the only one that is really retrofitted. And any other autothrottle, you have to build a whole new throttle quadrant in the airplane, structural huge modifications, or put a new engine in. So we do two things. We protect the engine, which costs 3 quarters of a million to a million dollars to overhaul. And if you over temperature it, you have to pull it or exceedances that can damage the airplane and loss of control accidents that could kill you.

So all of those make it a compelling case. And now we're latest version of it will enable us to do it without taking the aircraft out of service. And that's an amazing achievement.

Speaker 6

Right. Right.

Speaker 1

We can do a retrofit without losing the revenue from the aircraft.

Speaker 6

That's great. So, Jeff, back to the, back to the, the question now. We're I'm talking about the twin jet market. I know Addison was a King Air, situation, specifically more to the auto throttle being done on the Eclipse. Will that will the thrust ends be applicable to other twin jet models, or is there a different form of auto throttle you'll be marketing in that area?

Speaker 1

No. It'll be very similar, if not identical. We are as we speak in in talks with another man here, another OEM that they if you isolate the two aircraft, one way of doing it is saying that you have a turboprop and a turbofan. And the turbofan are the what we think of as a conventional jet airplane. Like the Eclipse had turbofan engines.

And we are looking at other airplanes as we speak that use turbofan engines. And the same safety features we offer the turboprops, we now offer the turbojet. The reason we were so attractive in the turboprop market is there were virtually there was no autothrottle for the King Air. 5,000 airplanes out there and no autothrottle because it is was a very difficult thing to do because the way the controls went out to the engines left an enormous amount of slack and problems with the control system. We were able to fix that.

So we have a unique solution and that's hopefully, will continue to show interest from a a broad range of people in the industry.

Speaker 6

Okay. Good. Good. Another question, Jeff. Can you talk to me about what's going on with the FAA right now?

And I like you just said, they they're doing a work from home program. Do you have pending applications with them right now that you're still waiting to hear from them on?

Speaker 1

Yeah. We have a lot. But I would tell you that our our ACO is Boston, and they've done an outstanding job. I mean, they're typically the bottleneck, but they've gone even working from home, they've gone out of their way. In some respects, working from home is reasonably good.

We dealt with an HGO where we used to have guys that just disappeared on us, and we could while we're waiting for an answer. Our our FAA has been remarkably responsive,

Speaker 3

And I want to be careful.

Speaker 1

I don't want to don't want to jinx the the very good performance. Working from home, I'll tell you what. I believe that in five years, maybe two years, the twenty five percent of our key employees will be working from home. I believe there's a huge resource of early retired, remarkably talented people, and at my age, I refer to them as mature, that want desperately to keep busy at work and can bring so much to our company. And we don't have to move them.

We don't have to tell them, you're leave California to come work for us. And we hope to tap into that resource, and we got a conscious effort to do it. I'll tell you, I conducted my last three board meetings by computer. We don't fly people in from Phoenix anymore. We do it on and by the way, we got through the board meeting an hour early because we're all focused on getting the job done instead of having the normal chitchats.

Now you've missed the the personal relationship, and that's unfortunate, but we we are all focused on a job. So it's actually quite good.

Speaker 6

Okay. And and you so so yeah. If

Speaker 1

the FAA figures out how

Speaker 3

to handle it, I'll tell

Speaker 1

you right now, so far, Boston's been doing it very, very well. They've done an outstanding job.

Speaker 6

Okay. Do you do you have applications that are beyond Textron that are are currently in with them? Yeah. Okay.

Speaker 1

In fact, a large portion and I understand that Textron's been a really good partner in that. They recognize that it's to put it on the new aircraft, and they, of course, did it immediately. But, importantly, the the the existing fleet of of valuable aircraft is over 5,000, and this is a a a relatively modest investment relative to the cost of the airplane that yields huge savings, savings in maintenance on the engine and maybe most importantly, maybe life saving. So we're very positive. We're getting people with four engine multiengine aircraft, bigger much bigger airplanes with four turboprops that are asking us to, build an autothrottle for them.

And we're looking at several military airplanes right now on the same exactly the same requirement.

Speaker 6

Right. Right. Okay. One more question, Jeff, and I'll let you run. Just just briefly touch a little bit more on the, the COVID impact, to, it sounds like this is more affecting the rollout of the, of the retrofit market in, the auto throttle.

This have to do with the idea that you can't actually visit people in person and they can't actually take the plane up and and try things out? I mean, what can you just kinda give a little bit more color on what the what the hurdles are here to kinda getting all of that going?

Speaker 1

Well, I you know, I'm clearly no expert on it, but let's take a look at a couple of the problems. When you have things like COVID, and you own an airplane, you probably you don't hop in your airplane every day the way you used to to go places. Although what we're finding is kind of interesting is there's an increasing demand in small jet market so that people who want to travel we have friends that go to Florida. And because they're at risk and they don't have their shots yet, they're leasing airplanes or renting airplanes to make the trip. So you see a lot more in that area.

But for people doing upgrades, I mean, they're all preoccupied with the basic of how do I stay alive and stay healthy problem. And they don't worry so much about how they're going to fly to lunch at Nantucket. So it impacts the demand, then it impacts our ability to talk to our customers. We have a customer who's very interested, but I can't visit them. We have people that we would like to demonstrate our airplane with, and it limits that too.

So it's subtle in some cases, but it's pervasive for sure, and it has a huge impact.

Speaker 6

Thank you, Jeff. I appreciate the clarity, and good luck going forward.

Speaker 1

Thank you very much. Look, that looks like the last one. Thank you for your time and attention today. If you do have questions, you can always call Rell, and we'll get them answered for you. Thank you again for your interest and your investment.

Speaker 0

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.