Innovative Solutions & Support - Earnings Call - Q2 2021

Transcript

Speaker 0

Good day, and welcome to the Innovative Solutions and Support Second Quarter twenty twenty one Earnings Conference Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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, sir.

Speaker 1

Good morning. This is Jeff Hedrick. Welcome to our conference call to discuss our performance for the 2021, current business conditions and outlook for the coming year. Joining me today is Sheram Asgharpur, our President and Rell Winand, our CFO. Before I begin, I'd like 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

Thanks, Will. It was a stronger quarter with revenues up, margins up, cash flow positive and a solid bottom line profitability. In addition to new orders addition, new orders were strong, and we ended up the quarter with a sequentially increase in backlog. Over the past several years, we have implemented a strategy to establish a better balance of OEM and retrofit revenues from a more diversified set of products to reduce volatility and prevent and provide a broader foundation for our continued growth. These efforts continue to succeed.

As the pandemic recedes, production contracts are now producing steady predictable revenues from some of our largest names in aviation, Pilatus, Textron and Boeing. Sales of our patented Autothrottle continue to grow. Most recently, we announced that Textron had added our Autothrottle as standard equipment to another of their new King Air aircraft, the King Air two sixty. In addition, we have been shipping to their global network of service centers to retrofit for retrofit applications where pandemic has been slowing adoption. In these recent quarterly report, however, Textron indicated they expected the retrofit market to improve and could open a significant market opportunity that is multiple times that of the production market.

The cooperation and relationship with Textron has been very strong and very rewarding. We believe that we could develop additional opportunities across their product portfolio. The success of our ThrustSense technology in general aviation is creating opportunities in other markets, such as in the military, air transport and several multiengine aircraft. We currently are seeing interest from far beyond King Air. One reason for this interest is that we have the only auto throttle with Lifeguard that is easily retrofitted.

This is appealing to owner operators because it means they don't lose revenue and can use their aircraft and prevent loss of control. Currently, the development is in currently in development is in autothrottle that will offer customers a simplified solution at lower costs. This will allow us to penetrate the lower end of the market, which is substantially larger than the turboprop that we sit at now. The same features that we offer in the turboprops, we now offer in turbofans or turbojets. As a result, we're seeing interest from multiengine aircraft, much bigger airplanes even with four turboprops.

We are they are asking us to supply an autothrottle, and we are looking at several military aircraft making the same requests. In addition, the following interest in addition to the growing interest to our autothrottle, there remains strong demand for our legacy products. For instance, cargo conversion upgrade activity remains strong and growing, leading to continued demand for our flat panel display technology and upgrades to existing systems such as synthetic vision, upgrades to Eclipse and other source of future growth. One of the key advantages to our retrofit is it takes approximately onefive of the amount of time to modify an aircraft, meaning that they save hundreds of thousands of dollars in lost revenues from the aircraft. For the 2021 now completed, we feel we have made significant progress and are enthusiastic about the opportunities we expect to arise as concerns about air travel and global pandemic

While the ongoing global pandemic continues to present its challenges, we remain confident that there are over the longer term unique capabilities and unparalleled price performance advantages of our technology will strengthen our hand and our brand globally. I'd like to turn it over to Rell now for the details of the financials. Rell?

Speaker 2

Thank you, Jeff, and thank you all for joining us this morning. Looking at the second quarter, revenues were $5,100,000 up 5.9% from $4,800,000 a year ago, primarily due to increased shipments of King Air autothrottle systems to our OEM customer. Gross margins for the quarter were 56.7%, improving as expected from both 47.5% in the year ago quarter and 52.7% in the previous first quarter. The improvement reflected reduced mature costs due to product mix partially offset by higher labor costs. Total operating expenses for the 2021 were $23,400,000 up a margin of 2.1% from a year ago and down 1.8% from the preceding 2021.

We continue to emphasize tight operating cost control. We believe current quarterly operating expense levels will be maintained for the balance of the year. Research and development expense decreased from the year ago quarter, but primarily the result of a higher proportion of efforts focused upon product development programs that were allocated to cost of sales in the quarter. Research and development expense was almost 14% of quarterly revenues, which is a reflection of our strong commitment to innovation and new product development. Selling, general and administrative expenses were up 4.6% from the year ago quarter as a result of an increase in payroll related benefits partially offset by reduced trade show expense.

For the quarter, we generated net income of $609,000 a 39% increase from $438,000,000 in the year ago quarter. The company remains in a strong financial position with cash on hand of $6,000,000 at 03/31/2021. Our cash position is net of nearly $20,000,000 of dividends dispersed in the 2020, bolstered by approximately $600,000 of positive cash flow from operations in the second quarter. 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 Sharam.

Speaker 3

Thank you, Rell, and good morning, everyone. The solid financial results that Jeff and Rell described are a testimony to our brand recognition, our business model that focuses on both OEM production and retrofit opportunities and the diversity and high quality of our customer base. This quarter, we saw strong performance in our OEM production contracts, which have generally proven sensitive to the influence of the pandemic. For instance, Textron recently noted that virtually every model of jet and turboprop they have is seeing strong activity, Adding interest in the acquisition of new jets was still largely driven by personal travel, but corporate aviation departments are starting to come alive. This is not only encouraging news for our Textron business, but also for our Galatas PC-twenty four business as well.

We believe these programs as well as our KC-forty six contract with Boeing for the U. S. Air Force to run for several years, offering a stable foundation of predictable recurring revenues from which to build. Jeff briefly mentioned our development of a more easily retrofitted autothrottle. We are working on a single button, simple operation autothrottle that will lower offer lower cost installation.

The single button faces a high resolution OLED display that occupies minimal cockpit space. It can be installed in multiple aircraft with different cockpit layouts and its generic nature will significantly reduce the time and expense of obtaining FAA certification on multiple platforms. Auto throttle remains a top priority of our research and development budget. The retrofit market is experiencing some weakness as the pandemic curtails travel while also creating some degree of caution among buyers. Nevertheless, we are having retrofit success in the air cargo market where the growth of online shopping continues to drive strong cargo conversion activity.

Consequently, shipments of flat panel display systems for seven point five and seven point six seven remains robust. With many of over 1,000 operational 7.5 and 767s still available for cargo conversion, we expect to see our flat panel display business remain strong. On the military market, as Jeff noted, our KC-forty six program remains on track, and we remain optimistic that the air data computer developed for the U. S. Navy can penetrate foreign military markets once limits on international travel and other similar restrictions are lifted.

New orders in the 2021 were $7,600,000 and backlog as of 03/31/2021, was $6,700,000 up $2,500,000 on a sequential basis from $4,200,000 on 12/31/2020. We continue to aggressively pursue growth opportunities in both the production and retrofit markets. However, as has been previously noted, safety protocols throughout our industry from those at the FAA to those restricting travel to certain countries to individual companies in person meeting restrictions remain a headwind. As these restrictions are lifted, we believe there is a growing market of owners and operators interested in adopting our OroThrottle technology. Before turning the call back to Jeff, let me quickly note the efforts of our employees to integrate new safety protocols to our standard operating procedures and how this has enabled us to maintain productivity without jeopardizing their health, safety or well-being.

I'd like to turn the call back to Jeff for some closing remarks.

Speaker 1

Thanks, Sharon. The second quarter was another quarter in which we achieved the objectives we believe best build shareholder value, revenue growth, profitability and positive cash flow. The second half improved sequentially from the first half, solid start to the fiscal year. Backlog also rose, all signs of healthy growing business. In the second half of calendar twenty twenty, we distributed nearly $20,000,000 in dividends showing our commitment to rewarding our loyal shareholders.

We remain optimistic about innovative solutions and support future, and we thank you for the ongoing support, encouragement and audience today. Operator, please turn this over for questions.

Speaker 0

Thank you. We will now begin the question and answer session. And the first question will come from George Marima with Parenta Ventures. Please go ahead.

Speaker 4

Yes. Good morning, Jeff. Thanks for taking the call. A couple of things. So I wanted to ask you on the new orders for Q1, did a lot of this come from the Boeing, like sort of the cargo retrofits?

Or was it a lot of OEM orders?

Speaker 1

Let me have Shyam answer that in specifics. But the distribution generally was more uniform than even we had anticipated. Shyam, can you comment, please?

Speaker 3

Sure. Yes. So we received new OEM orders from Techstroke, Pilatus as well as Boeing. As well as on the cargo markets, we had strong retrofit orders.

Speaker 2

That's Q2. You said Q1, you meant Q2.

Speaker 4

Well, yes, the current quarter, yes, this quarter.

Speaker 3

I think you meant '21. Yes.

Speaker 1

What's rewarding is the demand at Amazon continues.

Speaker 4

Yes. Okay. Yes, I just wanted to see how heavy it was. Because I know on the OEM business, like the King Air is the only produced seven planes in Q1, but that's your seasonal low quarter. It just goes up sharply from here into the fourth quarter.

I'm talking about calendar quarters now. But yes, I just want to see the flavor of the ordering there and how it came. And then also, I was excited to see in your press release about your new low cost product, which sounds like that is going to address the piston engine market, correct?

Speaker 1

Bingo.

Speaker 5

I'm

Speaker 1

said bingo. I'm sorry.

Speaker 4

Bingo. Okay. Yes. Okay.

Speaker 1

That's what I What was we believe is, well, it turns out the technology was it turned out to be ideal. We were able to reduce our costs probably in half or better and produce a simpler, lower cost installation. So we see this as a broad application to a lot of the Textron product lines and also a very easy retrofit. It reduces the retrofit time in less than half.

Speaker 4

Wow. Okay.

Speaker 1

That's cool. It's a very good product. And it's yes, it's very nice.

Speaker 4

So the new product can also be applied to like the King Air platforms as well?

Speaker 1

Yes. You could put it in the King Air. The question is, do you want look, what it does is it allows you to operate

Speaker 2

the

Speaker 1

autothrottle far more simply. There's not a lot of there's no setting of numbers or anything else. You push a button on and off basically. So it makes it much simpler to operate. But the real advantage to it is that it will provide a very fast retrofit time.

Speaker 4

Yes. Well, I'm also excited about the piston market because, as you know, that's a huge market.

Speaker 1

How about the B58? They made 8,500 of those, and they still have common problems with all twins that we had a solution for. So we think it's going to be a very good product for us and for Textron. And Textron has been remarkably supportive. We're delighted.

Speaker 4

And about how long do you think until this becomes available on market for retrofits and all that?

Speaker 1

I just assume it will be soon. It will be soon. The actual day, can't. I mean this is an engineering program at the same time. It's pretty much done actually.

We're in flight test now. But like everything, as soon as you give it a date, you know you're going to slip it. So I'm being a

Speaker 4

little bullish. But you're thinking 2021, though, it sounds like.

Speaker 1

Absolutely,

Speaker 4

Okay. In terms of the retrofits, what is sort of the cadence going on right now? And what do you anticipate? Well, I guess this new product will change the inflection on that use, you predict. But what's the current cadence of the retrofits?

Speaker 1

It's really I mean, it's a sort of a steady progression. As more and more people install it, they feel more comfortable with it, etcetera, etcetera, etcetera. But most importantly, remember, autothrottles were always considered, especially when we got started, people say, what the hell do I need autopilot, an autothrottle for? I don't need a cruise control. I want to fly my airplane.

Well, our most recent product, which is tied to the one button, literally means that you can fly the airplane just like you always did, except it provides a background safety so that you get the effect of FADEC engine and safety controls that have never been seen before. So it's the ideal situation. It's for the pilot that says, I still want to fly my airplane, but I would like all those safety features. This does both.

Speaker 4

Okay. And how are and my last question is in terms of supply chain of getting product to make your product, is that okay right now? Or are having a lot of problems with that?

Speaker 1

You mean trying to get parts?

Speaker 4

Yes.

Speaker 1

Yes. Yes. And look, I've been through this over the years. And but I think it will work out. We have a couple of choke points that we're monitoring carefully, but I'm not overly concerned.

Speaker 4

Okay. But so far, you've been able to make product and ship product, sounds like?

Speaker 1

Yes. We're doing that now. But remember, we also have inventory.

Speaker 4

And

Speaker 1

so it's not a simple answer. But in general, that's an accurate one.

Speaker 4

Yes. Okay. Thank you, Jeff.

Speaker 1

Thanks.

Speaker 0

Next question will come from Michael Friedrich, Investor. Please go ahead.

Speaker 5

Good morning, gentlemen. Congratulations on the quarter, the new products. I had a question for you about the turbo fan market. Are you guys finding that your auto throttles are actually displacing existing FADEC like auto throttles that are on the marketplace?

Speaker 1

No, no. You wouldn't replace a FADEC Autothrottle. What our Autothrottle does is it puts the FADEC attributes like protection against over temperature, over speed in a turbofan, over torque in a turboprop. It provides those safety controls and prevents you from these horrendous damage you can do to a turboprop, easily get $05,000,000 worth of damage in literally a couple of seconds. So this prevents that.

That's why you have it. Have it, even more importantly, to prevent loss of control accidents, where allowing the airplane to get too slow, you lose control and it's catastrophic. And our autothrottle has got a patented feature that prevents that. So those are the strengths of it. But we're not going to replace FedEx.

But remember, about 80% of all the engines out there are non FedEx.

Speaker 5

Okay. And Now the big engines,

Speaker 1

we're obviously not going to go after the big air transport engines because they're all FADEC. But we can provide similar operation in a non FADEC engine.

Speaker 5

So you're saying that most existing turbofans are not FADEC?

Speaker 1

Most existing turbo props. Now I don't know about turbo But I'm going to tell you that it wouldn't surprise me that there's a significant number, if not high percentage, of turbo fans that have that are non FATEC.

Speaker 5

Got it. Got it. Another question for you, Jeff, is on the new product. When we're talking about piston planes like Cessnas and whatnot, I know there's they're all different levels of pilot certification, like some people can only fly during the day, others have to fly others have instrumentation approvals and everything. The implementation of autothrottle actually help accelerate a pilot's ability to move up that chain?

Speaker 1

Actually, we don't look at it that way. I'll tell you what we how we do look at it. Primarily, it's the system was conceived to take the workload off of the pilot, which is important. But remember, even though you're taking the workload off of it, you still got to be prepared and capable of managing without the thing operating. So you don't gain a great deal there.

Where you do gain, we believe, is a safety feature, which is unique to our technology. We're the only people in the world that provide proportional mitigation of slowing airspeed loss of control. You don't only have to look at Addison, the Addison crash to see what happens to an airplane when it gets too slow. And that's why people are strongly warned against it. In our case, we have something that actually proportionately controls the power on the engines to keep the flight path stable.

Speaker 5

Understood. And Jeff, just ballpark, do you have any idea what percentage of the piston market is actually dual props as opposed to just single prop planes?

Speaker 1

No. I mean, I

Speaker 5

don't I

Speaker 1

mean, it would be a but I can tell you there's an awful lot of piston twins. Twins,

Speaker 5

right. Okay.

Speaker 1

A lot.

Speaker 5

Where you're more applicable to the twins, correct?

Speaker 1

Well, no, we're applicable to everything. I mean, the single engines we started with in PC-twelve, and it does a great job there. It manages the airplane in a way that most operators marvel when they see the airplane take off because it sounds like a single when it takes off, whether it's single or twin. No, it's the twin the advantage we have with the twin is this patented loss of control accident. And nobody has done anything about it one hundred years.

The problem existed one hundred years ago, but nobody had a solution. We did. We finally came up with one. And it hasn't cost a lot. That's the good news.

Speaker 5

Yes. You guys certainly got to crack the code.

Speaker 3

Well, that's all I have

Speaker 5

for you, Jeff. Congratulations. Hopefully, all this mania will get behind us soon, and you

Speaker 1

guys will be back to full speed. Yes. Well, I appreciate that. Yes, we're working on it. We have a good team.

Team works well, I'm proud of them.

Speaker 5

I know you do. I've been with you for a while. Well, keep going, okay? Take care. Thanks.

Speaker 0

This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.

Speaker 1

Thank you, gentlemen. Thanks. Bye.