Innovative Solutions & Support - Earnings Call - Q2 2019
May 9, 2019
Transcript
Speaker 0
Good day welcome to the Innovative Solutions and Support Second Quarter twenty nineteen Earnings Conference Call and Webcast. All participants will be in listen only mode. And please note, this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Hedrick, Chairman and Chief Executive Officer.
Please go ahead.
Speaker 1
Good morning. This is Jeff Hedrick. I'd like to welcome you this morning to our conference call to discuss our performance of the 2019, current conditions and our outlook for the coming year. Joining me today are Sharma Mas Kapoor, our President and Rellal Wenhan, our CFO. Before I begin, I'd like have Rell to read our Safe Harbor message.
Rell?
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, Will. Company's second quarter results continue to reflect the cost controls and marketing refocus initiated at the end of last year. Both revenue and backlog increased and we were profitable for the second consecutive quarter. In addition, the business generated $900,000 in cash. Each one of the three market segments, commercial air transport, general aviation and military contributed to that improvement.
This quarter, we generated revenue in all three segments and we generated revenue in both product and engineering contracts. Retrofit programs for commercial air transport and general aviation PC-twenty four production primarily drove the second quarter sales. The highly successful Pilatus PC-twenty four jet program is in full production and we believe a steady stream of order will be received over the remainder of this year and years to follow. Our general aviation sales included sales of our new PC-twelve NG Auto throttle, PC-twelve Classic full cockpit upgrades with Auto Throttle and the sale of our UMS product to multiple OEMs. In the military, we are completing our work on new air data computer development contract.
Test units have been delivered to the Navy Their evaluation and testing, if testing proves successful, we believe that the Navy will proceed into the production phase of the order. As I discussed on the last earnings call, we are focusing our resources on fewer, more promising opportunities. This focus shows an improved productivity and shorter development cycle time. We continue to remain optimistic in our outlook for our patented ThrustSense Autothrottle. We believe that the ThrustSense has broken new ground, especially in the twin engine turboprop market.
Several days ago, we announced the receipt of a STC for the ThrustSense autothrottle for retrofit in the King Air. The ThrustSense autothrottle provides engine protection like the most advanced jets and is a full regime autothrottle for takeoff to landing, including go around. ThrustSense computes and controls power levels, which are designed to reduce pilot workload and which we believe brings a new level of convenience and safety to King Air owners and operators, which are I think there's something like over 10,000 airplanes out there. We're applying ThreatSense autothrottle into other applications that show great promise. We are aggressively marketing the autothrottle focusing on what we call its ability to provide fourth dimension control of the airplane.
Market interest and awareness is now increasing for what we believe is a compelling combination of safety features and low installation costs. Let me turn it over to Rell for a discussion of the financials.
Speaker 2
Thank you, Jeff, and thank you all for joining us this morning. Revenues for the second quarter of fiscal twenty nineteen were $4,200,000 a 13% increase from the 2018 and our second consecutive quarter of revenue growth for fiscal twenty nineteen. Product sales comprised approximately 88% of total revenue with the balance comprised of revenue related to engineering services on the F5 development contract. Gross margins for the quarter were 56%, an increase from 44% from the same quarter last year and also a sequential improvement from the 2019. We
Speaker 1
believe
Speaker 2
the improvement in gross margins to reflect better leverage from increased revenues, reduced direct material costs and the benefit of the workforce reduction implemented in the 2018, as well as more profitable pricing on the engineering contract. Total operating expenses for the 2019 were 2,200,000 down $600,000 compared to approximately $2,800,000 in the second quarter a year ago. Research and development expenses were down $400,000 from this quarter compared to the same quarter last year, while selling and general and administrative expenses were down approximately $200,000 for this quarter compared to the same quarter last year. Each of these decreases reflect the impact of the third quarter fiscal twenty eighteen workforce reduction as well as some variability between quarters due to expenses such as accounting, legal and other. While R and D spending is down from a year ago, a shift in our strategy has enabled us to improve the productivity of our spending by investing in fewer, but we believe are more promising technologies.
Income tax expense for the 2019 was $8,000 due to the utilization of tax loss carry forwards. Income tax expense for the 2018 was $200,000 due to change in the valuation allowance. We reported a quarterly net income of $202,000 or $0 per share during this quarter compared to the same quarter a year ago. We incurred a net loss of $1,300,000 or $08 per share. We believe that the company remains in a strong financial position and has generated positive cash flow in the quarter.
At March 3139, we had over $21,000,000 of cash on hand and no debt. We believe the company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over
Speaker 3
to Sharon. Thank you, Will, and good morning, everyone. Over the past three months, we have continued to make steady progress across the organization and for the second consecutive quarter posted increase in our key financial metrics. Narrowing our developmental efforts, employing more aggressive sales and marketing initiatives and implementing tighter cost controls have made us a more focused, efficient organization, and we are operating at a high level. Consequently, the second quarter was as successful as the first quarter, and we are seeing steady increase in our revenues and profitability.
Much of the quarter's revenues were in our Commercial Air Transport segment from flat panel displays for the Boeing seven fifty seven and seven sixty seven. Encouragingly, these are orders for our portfolio of existing cockpit technology, which require little additional engineering and are therefore quite frequently our most profitable products. As Jeff mentioned, the Pilatus PC-twenty four is one of the most successful new aircraft launches in the industry. As a supplier of the aircraft's utility management system, shipments are keeping pace with their sales as Pilatus is ramping up to full capacity. Keep in mind that although we believe Pilatus will be ordering a significant quantity of shipsets per year, we only include a very small portion of this future revenue in our backlog that reflects orders for delivery within two quarters.
We're also experiencing increased interest from other piloted and optionally piloted aircraft manufacturers for the UMS product. In the the military market, the KC-46A program continues to enjoy steady production. As mentioned last quarter, we are looking at some additional opportunities with Boeing's international military customers. In addition to product sales, we're also generating profitable engineering revenues in our military segment. Our contract to develop a new air data computer for Navy leverages our experience from the A10 air data computer.
So our development costs and time have been minimal compared to other development arrangements where we are not as familiar with the technology. We see interest for similar military air data computers for other platforms in The U. S. And international military markets. Of course, echoing Jeff's sentiment, we believe our greatest current opportunity is in the general aviation market with our ThrotSense autothrot.
Having recently received the STC for the King Air, we now have our baseline STC that we hope will open the door to a market of what we believe to be over 5,000 variable King Air aircraft. To capitalize on this opportunity, we continue to roll out our comprehensive marketing plan and strengthen the underlying infrastructure needed to ensure the launch is a success. The manufacturers, installers, MROs and others with whom we have been conducting demonstrations have been impressed with our Throttess autothrottle technology. As mentioned last quarter, we have made deliveries of both the stand alone and cockpit autothrottle configurations, and we are optimistic that activity will grow as more installations are performed. The addition of a twin engine version to our product portfolio as a result of the groundbreaking FloodSense product, as we believe, helped to overcome the daunting challenge of getting a twin turboprop autotrol approved by the FAA and paved the way for what should be easier thrust and certification of additional piloted and optionally piloted aircraft.
Finally, I would note the $5,300,000 in second quarter's orders and the $5,500,000 in March 31 backlog as recent high watermarks that further affirm the steady progress that has been the goal of our recent strategy. I would also note that we have several long term production contracts on which we took we book only the most immediate orders. The broad based improvements we have achieved across our commercial air transport, military and general aviation markets is an encouraging endorsement of our more focused strategy. We believe the new products rolled out and under development offer even greater promise for continued progress. Let me turn the call back to Jeff for some closing remarks.
Speaker 1
Thanks, Sharon. Steady progress achieved in the second quarter is an encouraging sign that our end markets are improving and our strategy is on target. Interest is growing in our advanced flight deck, the unique autothrottle and utility management systems, all of which deliver what we believe is industry leading price for performance and the responsive to ever growing needs for improved safety amid new or impending tighter regulations. I am very pleased with where we are as an organization as productive and focused as ever. So in conclusion, I appreciate your attention today and we'll open up the call for questions.
Speaker 0
The first question comes from David Campbell. Please go ahead.
Speaker 4
Hi, Jeff. Hi, Brill. Hi, Sharam. Good Good morning, David. Thanks for hitting my estimates for the quarter.
You did it. Yes, that was amazing. That doesn't happen very often. But you hit my estimates. Congratulations.
You. So Ram, you talked about the commercial aviation. It sounds like you've got some new business there. I imagine the seven sixty seven business is coming from cargo conversions. I'm a little confused why where the seven fifty seven business is coming from.
Can you elaborate?
Speaker 3
That, again, is Carlos. Some of that is from existing customers.
Speaker 1
In light of recent situations, seven fifty seven continues to be an attractive airplane.
Speaker 4
So you're upgrading their flat panel display. That's what you're doing, right? In the
Speaker 1
July because as of next year, end of next year, there won't be any support for the existing equipment. So it's important for them to do the modifications of the airplanes.
Speaker 4
And how about the 767s, am I right that most of those are the cargo conversions?
Speaker 1
Similar situationally, But are, we have a stronger position on the 57, as you know. We're also selling to some of
Speaker 3
our existing airline customers as well internationally as they add the fleet.
Speaker 4
Right, right, right. Well, it sounds great because everything seems to be clicking at the same time with their with the commercial aviation going up and the King Air business hasn't started yet, right?
Speaker 1
Not really. It's just about to And we see real promise in that. It's a huge market. If we do our job right, we'll do very well. The product works And
Speaker 4
you'll be selling those to fixed base operators. Is that what Yes. You
Speaker 1
We're already doing that, we're showing them to all kinds of people right now. And remember, it's applicable to everything from a piston turbo a piston airplane all the way up to a conventional turbofan jet. So it's really quite a remarkable product line.
Speaker 4
Right, right, right, right. Does this fight with China over the trade disputes, does that have any potential for your company?
Speaker 1
I mean China I guess there's obvious uncertainty in China. But if you think about China, they don't do business they're pragmatic business people. They do business with us because they have to and because we provide the best product for the money. So my opinion is if you do your job correctly, you should still be okay. Obviously, products have a different problem.
But in our case, to the extent that we sell our standard product and are not involved in trying to share technology and things like that. We're delighted to be able to work with China. It's a great opportunity. It's a great market.
Speaker 4
And overall revenues for the rest of this fiscal year would be appropriate to slowly increase them on a sequential basis from where you were in March?
Speaker 2
Yes, we see a slow we see a ramp up. Yes, you can see it in our backlog, obviously, as it increases. Our sales should We follow expect sort
Speaker 1
of a we'd hope a nice steady increase. So that's what we hope we see. And we're certainly planning on it. And the backlog obviously reflects what we think we're going to be shipping. So you can see an although we don't talk about targets for the sales, you can see the backlog has gone up.
And consistent with the backlog going up, you'll see our revenues for the quarters go up as well.
Speaker 4
Yes. Yes. Well, I was estimating a backlog of $5,500,000 at the March. So that's what happened, right?
Speaker 1
Well, that's because you estimated it, we said. Should have estimated it more. If we had estimated 6,000,000 we would have had 6,000,000 We just we didn't know what to do.
Speaker 4
Well, congratulations. Thanks again for doing such doing so well.
Speaker 1
Thanks for your support all these years. Appreciate it.
Speaker 4
Yes, I'm going to continue supporting. Thank you very much.
Speaker 0
The next question comes from Charlie Pine of Van Clemens and Company. And
Speaker 5
I'd like to congratulate you all on good me, on more good progress in the second quarter.
Speaker 2
Thank you. Thank you.
Speaker 5
I have a few questions. They primarily would be addressed on the recent STC that you got for the King Air. I guess I was slightly surprised I had been anticipating that from your some of the earlier comments in the prior call that it didn't sound like that you were going to be able to get the STC until sometime this summer. Was that incorrect? Or did something just kind of happen that actually moved it up a little bit more?
Speaker 1
First, let me ask you, is that good or bad?
Speaker 5
No, that's very good.
Speaker 1
Okay. Look, it was actually a sort of a strategic deployment. The autothrottle for the King Air has a bunch of optional features. And each one of those optional features is new technology, which I've had a number of people comment about trying to get their head around it, trying to understand it. What we chose to do is get the fundamental autothrottle system with the actuators and control of the engine and safety features all fully operational and certified, and we did.
And now we can add additional features on for additional protection. And they're all, by the way, optional features that you get you pay for. So they're going to be incrementally added over the next couple of months. So what that gave us is, first, allow people to start installing sooner than
Speaker 3
we had hoped.
Speaker 1
And ultimately, we'll get the same total penetration in the end or in fact more, but we'll be able to get started much earlier. Does that make sense?
Speaker 5
Yes, it does. Thanks. Let me follow-up on a couple of other things. First of all, just as far as overall, as far as getting SDC, it was a long wait, but better late than never.
Speaker 1
It was a tough one. I mean it had never been done before. Pioneer always is the guy that gets the arrow. The guy at the head of the line usually gets shot. And we have it was a tough road.
But I'll tell you, it wasn't because the certification authorities were being difficult, unfairly difficult. To the contrary, they were all enthusiastic about the product, and we actually had some of them. These are saying that two hundred to three hundred people die every year, and we're going to save their lives. So that's an amazing thing for them to say. But they went through the hard work of making sure that it was right, and it was tough.
And at times, was painful for us. And in light of other problems, I'm sure they had their own distractions. So I got no complaints at all. I think it's just if it's unique, the people who are certifying it are used to saying, well, I could do that because in the past, I've done this, that and the other. That
It had to be all new. And we're grateful and delighted that we got through it.
Speaker 5
Well, I'm very happy, and I'm sure everybody that's been sticking it out for this amount of time as you've gone through the process is also pleased that finally getting to getting across the finish line. I'd like to have you explain a little bit of a distinction I'm having a bit of problem with. Jeff, you mentioned in your prepared remarks that there is over 10,000 planes for the King Air. And then, Sharon, you said that it was 5,000 King Airs. What number should we really be using to model on?
Speaker 1
Talking about addressable market and non addressable, etcetera. The 5,000 or $6,000 number is The more conservative
Speaker 5
So 5,000 to $6,000 for the addressable market.
Speaker 1
But That's that's just only when it came It's only when when It was
Speaker 3
the finished $10,000 he was including PC-twelve and Okay. I guess I'd
Speaker 5
I guess, I'd like like to to ask what would be a sort of natural follow-up. How soon do you believe you could start to recognize some meaningful revenue on the King Air Autothrottle installs?
Speaker 1
Well, I'll tell you what we're doing, in part because we have a little bit of breathing room. We want to make sure that the installation is simple and fault free. And that's going to take us to several installations with our team in place to make sure that we've got it optimized. I want it foolproof. And so we're going to spend a little bit of extra focusing on the installation and some of the optional features that we talked about and be able to have a complete package and not rush it into the marketplace.
We learned that from one of our OEMs who showed a better judgment than I have by moving their airplane production deliberately into volume in such a way that they didn't end up with fire drills at the end of the line.
Speaker 5
Do you think that there is a possibility that you could start to see some meaningful revenue in your fourth quarter? Or do you think it's more it's not it's more probable that it will start to
Speaker 1
And show off in the simple answer is we're not sure. The reality is that if we get lucky, the installation kits work well, we don't have any big problems, we could get installations in revenue in the fourth quarter. If not, it will be the first quarter of the following year. But I think, honestly, for the first time, we don't have to rush into this. And that, I think, is going to pay off very, very handsomely in the future.
So the simple answer is, I'm not sure there's a chance. It's the first it's the last quarter or the first quarter.
Speaker 5
Okay. Well, we've waited this long. Another few months isn't going to it just want to
Speaker 3
get in
Speaker 1
an airplane and get it flying and not have problems in the first installations. I want it to be smooth. And whatever it takes for us to do that, we're going to do.
Speaker 5
How many partners are you working? I'm just kind of curious. How many partners are you working with as far as on the installation side of it right now?
Speaker 1
How many what?
Speaker 5
How many of your partners, MROs and other field operators, are you working with right now I on the installation
Speaker 1
don't know the actual number, but we have a significant number of service centers that are that signed up for that installation. What we want to do is refine the installation, put it a video format so that the mechanics all over the country, for that matter, all over the world, have a reference document that they can look at and know exactly where every wire it's not the equipment in the airplane, that's the easy easy part. It's the wiring and how you attach it to the other systems in the airplane. And that's critical, obviously. So those are the things we're refining.
We're making sure that the wire lengths of as much as 20 feet are accurate within an inch or two. So those are the kinds of things we need to do.
Speaker 5
Okay. All right. Well, great. Well, thanks for answering those questions. And once again, congratulations on finally getting the STC and also for the continued return to profitability in the business.
It's very gratifying to see again.
Speaker 1
Thank you very much. I'm a little embarrassed to realize that I'm being complimented on doing what I said I would do when I said I would do it. I thought that's what I was supposed to do. I had a Director who ran Boeing's engineering department for many years, and he said his boss told him that Integrity was doing what you said you would do when you said you would do it. I'm going try to do a better job of that.
Speaker 5
Well, stay at it, Jeff. We appreciate it. Thank you.
Speaker 0
The next question comes from Mr. Michael Frederick. Some
Speaker 6
questions on ThrustSense. And I wanted to get have you provide a little more color on not just safety end of it, but the engine protection portion or the value proposition of the engine protection end of it. And maybe provide a little bit of detail on essentially the damage that is done to these engines and the costs associated with fixing things right now? I'm trying to get an idea of the general value proposition of this upgrade.
Speaker 1
Well, it varies a lot. Obviously, the turboprops we're talking about a new engine installed is probably $1,000,000 If you over temperature an engine and you got to do a hot section, you're talking several 100 thousands of dollars to do it. And that's just over temperaturing for a very short period of time. A hot start, you have to do a hot section. It will vary.
I guess the cheapest thing you can do is a borescope for 20,000 or $30,000 The most expensive is $1,000,000 and that's on a cheap engine. On a good engine, an air transport engine is $10,000,000 or $15,000,000 So it varies a lot. Protecting the engine is critical. In some cases, just remember even inspection takes the airplane out of service for some period of time. So it has some real advantages and that's why people have paid on other kinds of engines significantly more for what's called FIGEC or full authority digital engine controls.
We provide the same kind of protection without on conventionally fueled engines.
Speaker 6
Okay. Jeff, give me an idea of what is the normal life cycle of a PT6 engine?
Speaker 1
I mean, I can't I'll tell you a little data that I know is I think in one of our airplanes is three thousand five hundred hours, and they're actually pushing it to four thousand. But if you have a hot start, all bets are off, obviously. So it depends a lot on the engine. They're anywhere from I don't think they're any above 3,000 as a turboprop. And I guess some of them will go up to 4,000 or 5,000.
They're pretty damn reliable. They're remarkably reliable. But they're extremely sensitive to temperature. And you over temperature by even 10 or 20 degrees, you can do some real damage.
Speaker 6
Okay. Okay. So I mean so obviously, the ThrustSense does is a tremendous value proposition for these owners. Another question I had for you was, in the third quarter of last year, you guys at least briefly mentioned the idea of potentially this becoming something that would be carried by OEMs or maybe even engine manufacturers? Now engine manufacturers, obviously, there's one engine manufacturer.
But can you provide any maybe outlook on the idea of where you could see this going? Could it potentially be something that's part of an actual new aircraft?
Speaker 1
Yes. But we can't talk about it. But obviously, we're looking at that.
Speaker 2
But
Speaker 1
that honestly, don't want to discuss it.
Speaker 6
Okay. Got it. Got it. And on the rollout, you had said that just on the last questions that you were not in a hurry or that you weren't pressed for basically time on this. I wanted to just get a little bit more detail on that.
Is that simply because you've got plenty going on? Or is it the idea that the MROs are filled up with next gen work? Is there any could you provide a little more detail on what you mean by that?
Speaker 1
Well, a couple of things. First of all, we want to get the installation time down as far as we can because as a former personal airplane owner for thirty five years, nothing annoyed me more than I have to lose my airplane even for a day just
Speaker 6
because I
Speaker 1
didn't have access to it. And you so we really want it to be a very minor disruption to the owner for this installation. That's number one. Number two, the other issue I talked about is we have a little lot of time. Look, our business is starting to respond to some of the actions we took last year.
We're seeing the company making money. We're generating generated almost $1,000,000 in cash last quarter. So we're in a reasonably comfortable position where we don't have to run a fire drill to keep ourselves alive. And we're going to use that time in a planned and disciplined way to improve our long term opportunities.
Speaker 6
Got it. Got it. And just a couple of quick other quick things. Any idea what the next STC is going to be? Is that going to be more of the King Air series or another turboprop?
Speaker 1
I'm not sure. I don't know. I mean, we just every time one gets issued, we're pleased. Honestly, the FAA, it's easy to go up in an industry and complain about the federal services, the administration services, making it difficult for your business. In this case, that's not been the case in general.
I mean, the delays are appropriate sometimes as much as I don't like them. I have no idea where the next one would be. But with any kind of luck, we'll have another one within a month.
Speaker 6
Okay. Okay. Okay.
Speaker 1
It's just a surprise, right?
Speaker 6
Well, thank you. Okay, good.
Speaker 1
That's behind door number three.
Speaker 6
All right. I look forward to it. Okay. One more quick question. On the KC-forty six, obviously, that's a major rollout by the military.
Never been able to kind of get an idea of really how significant that is to you folks in terms of revenue. The part you're providing is that a significant cost item? Or is this more of like a lead into other things?
Speaker 3
I mean it's a good sized program,
Speaker 1
but it's not significant to our revenues.
Speaker 6
Okay. Okay.
Speaker 1
It's very good. We're very happy, and it goes on for a very long period of time in a very predictable way. And it's a very good program. It make or break the business one way or the other? No.
But it's a wonderful opportunity, and we're delighted with it.
Speaker 6
The
Speaker 0
next question comes from Mr. Irwin Goldman.
Speaker 7
Hi. You guys may remember me. I'm the old guy who was at the meeting. Would like I
Speaker 1
don't know why I was at the meeting.
Speaker 7
A few questions. Number one, you had commented then that you were hiring and you were looking for about 11 people. So you'll let me know about that one, how that went. I'm also very interested in knowing in the last two quarters, how did the sales break down percentage wise among the three leading customers? And my third question is, what if anything to the old Eclipse company?
Is there any movement there? And does that look like they'll be back producing and using some of our services and merchandise? Okay, go.
Speaker 3
So with regards to the hiring, I think we've hired like six or seven people so far since the meeting, and we continue with our hiring efforts. And regards to the Eclipse, they will not be building new aircrafts. Right now, they're in bankruptcy court. And whether they will emerge or not remains to be
Speaker 5
seen. Our
Speaker 3
agreement with them to that we would supply equipment to Eclipse customers only through them, it's will soon be completed. And we will have the opportunity to direct market upgrade to that fleet of over two fifty aircraft.
Speaker 2
With regards to the revenue, for the six months, it's pretty much even breakdown between general aviation, which is primarily Pilatus and 7005 70 '6, which is you have basically an MRO, big MRO is a lot of stuff over that term. So between the two type of industries, almost it's a fifty-fifty, but approximately.
Speaker 7
Then Pilatus has become the number one sales area?
Speaker 2
Of any one, yes, of any one customer.
Speaker 7
Okay. That's all. I don't have a lot of questions today. Thank you so
Speaker 1
much. You have good questions. And we're delighted. And I and you remember what you said to me when you left the annual meeting. I think about that almost every day.
Speaker 7
Okay. Thank you.
Speaker 2
Thank you, sir. All right.
Speaker 0
With no further questions, this concludes our question and answer session. And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.