Innovative Solutions & Support - Earnings Call - Q3 2018

Transcript

Speaker 0

Good morning, and welcome to the Innovative Solutions and Support Third Quarter twenty eighteen 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 Mr. Hedrick.

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 the third quarter fiscal twenty eighteen current business conditions and outlook for the upcoming year. Joining me today are Sharon Mascupur, our President and Relmanand, our CFO. Before I begin, I'd like Rellen to read the 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, 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. In the third quarter, revenues were down, but backlog increased from the second quarter. Revenues were down 25% as compared to a year ago, reflecting the lower beginning backlog in the quarter. In the third quarter, we took actions to better align the company with evolving market opportunities. Because of our confidence and the potential of our ThrustSense autothrottle, which has been granted U.

S. Patents and European patents have been granted as well as that of our existing portfolio of cockpit technologies, we have implemented new organizational structure to intently focus on these opportunities while streamlining the business to support our strategy and reduce costs. Importantly, we have transitioned the organizational structure from market oriented strategy to a product oriented strategy, consistent with many of our competitors. So that for instance, our dedicated autothrottle utility management system will now pursue growth in all markets and all opportunities. We have staffed it with a new sales staff with ten or years of direct auto throttle experience, and that will aid us in addressing these markets.

We believe that this new approach will help us improve market development and penetration because of the added technical and other product expertise this will bring to point of customer contact. To support the further development and certification of our autothrottle, we purchased a Beachcraft King Air. By owning the aircraft, we have now unrestricted access and that helps to speed the development process. We have already successfully flight tested the majority of the system's unique features. Later this month, we have planned to conduct our first flight test with the FAA.

This test, the first of several, is an important step in obtaining product certification. When certified, King Air will join our existing PC 12 autothrottle as another large market that our new dedicated autothrottle team can aggressively target. Beyond the autothrottle, we are beginning to see new interest emerge for a variety of our other innovative solutions. We are presently under contract to develop a new air data computer for the US Navy in support of their next gen program. This air data computer is expected to find broader demand in the market.

We are presently upgrading the utility management system to provide our existing customers and future opportunities with significant performance versatility improvements. Consequently, we have modified our strategy to focus on these well defined markets. As a result, we are able expect to gain efficiency inherent in this narrowing of focus. We are in the early process we are early in the process and the third quarter, so it's too soon to show the impact of these more concentrated efforts. It may even take a quarter before we see significant results and effects of these changes, which are consistent with our historic perspective, which is long term.

Our balance sheet continues to remain strong. And with lowering operating expenses, we are well prepared to undertake a period of investment and change. Over the long term, we believe this dedication of our proven technology will reward us with improved market visibility and increased growth. Let me turn it over to Rell for a discussion

Speaker 2

on the financial results. Thank you, Jeff, and thank you all for joining us this morning. For the three months ended June 3038, net sales were 3,400,000 compared to $4,500,000 from the third quarter of last year. Consistent with recent quarters, the majority of revenue was either from production contracts or customer service, including revenue recognized on intra quarter book and ship orders. For the 2018, gross margins were 47%, down from 52% in the third quarter last year.

Despite lower volumes, which would tend to adversely impact our ability to absorb fixed overhead and thus weigh on margins, we have managed to stay to sustain healthy margins, primarily due to lower material costs and higher margin customer service revenue. However, continue to caution that margins can vary from quarter to quarter as a result of changes in either product mix or volume. Total operating expenses in the third quarter were $2,700,000 down from $2,900,000 in the 2017. Research and development expense were approximately $200,000 lower than a year ago, and we should see this expense continue to trend downward as a result of the workforce reduction during the quarter. I would point out that as measured as a proportion of revenue, it is clear we remain committed to investing in research and development.

Selling, general and administrative costs were $1,600,000 in the quarter, little change from a year ago. Going forward, we do expect lower spending in SG and A as we did make workforce reductions in this area. For the 2018, we reported a net loss of $1,000,000 inclusive of $259,000 severance expense due to the workforce reduction. Beginning in fiscal twenty nineteen, we expect to realize a savings of $3,500,000 on an annual basis in payroll and related costs. In the year ago quarter, net income was $19,000 which reflected a 537,000 income tax benefit due to a change in anticipated profitability in that year.

At June 3038, we believe the company remains in a strong financial position with nearly $21,000,000 of cash on hand and no debt. Despite the loss during the quarter, the cash used in operations was only $200,000 in the quarter, but we did use approximately $2,400,000 to purchase the King Air. We believe the company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Sharon.

Speaker 3

Thank you, Rob. Good morning, everyone. As Jeff mentioned, oil referral remains a prime focus. We already have certified on the PC-twenty four NextGen cockpit, and we are working on a second general aviation overthrow for the beach Beechcraft King Air. We made a significant investment to purchase a King Air b 200 GT aircraft.

This aircraft represents the newer model King Airs. We believe this model has the greatest haul value and will serve as the best platform for our effort to secure our initial King Air certification. We expect that our partnership with Blackhawk Modifications will significantly benefit from this base certification by allowing us to demonstrate the safety and operational capabilities of our oral throttle in a twin turbo platform. We have already installed our autothrottle in our King and have successfully performed company test flights with FAA designated flight test pilots. Next week, we have scheduled a flight test of King Air autothrottle with the FAA that we believe will result in an expedient certification of our system.

Since we acquired the aircraft, we've made significant progress and had previously been somewhat stalled based on aircraft availability. This delay is one of the reasons Jeff suggests that our performance over the next couple of quarters may best be evaluated primarily in terms of the progress of our investment and development rather than revenue growth. Let me quickly remind everyone why the has created such a buzz. We believe that our Autothrottle provides a set of innovative safety features, including engine protection and aircraft envelope protection, while yielding significant fuel savings through constant optimization of aircraft speed. We also believe that an autothrottle system will be a key element in harnessing the benefits of next gen mandates such as ADXV and RNP.

The company has received the patent on our autothrottle. In addition, we received trademark approval of ThrustSense for our autothrottle product line. We have received significant interest in our ThrustSense autothrottle from potential customers and industry experts. The experts' opinion expressed in various aviation publications have characterized our NexGen Flitex and turboprop Oroto as one of the most innovative products the experts have seen in the industry. More recently, our ThrustSense autotel has received increased interest from both aircraft OEMs and engine manufacturers to integrate with our offering.

As Jeff mentioned, to capitalize on this opportunity, we have reorganized the business by transitioning from a market focus to a product focus. To spearhead our autothrottle initiative, we have recently added a new business development manager who is well seasoned in the autothrottle market. We have already received our initial orders, shortly expect additional orders for the PC-twelve auto throttle. We anticipate delivery of several systems this fiscal year. Looking at some of our other ongoing programs, the PC-twenty four program is going well with $1,200,000 in new orders in the third quarter.

Based on statements from industry experts, Pilatus may sell over 50 PC-24s a year over the long term. We are investing engineering efforts in performance enhancement for the UMS product line to support Elanis for additional features on the PC-twenty four platform as well as applicability of UMS to other aircraft types. Finally, we continue to ship our legacy products in the air transport and military markets. In summary, we have taken a disciplined approach centered on the key tenets of our growth strategy. We believe that this will enable us to have better control over our performance in the long term, which we believe is the key to building value for our shareholders.

Let me turn the call back to Jeff for some closing remarks. Thank you, Sharon. We

Speaker 1

arrived at our decision to narrow the focus of our technical and business resources to focus on those things that we believe have the highest probability of return. In the past, the the many opportunities we pursued distracted and weakened our focused efforts on the few now proving to be very successful programs. Our autothrottle is the first and only part 23 FAA certified turboprop autothrottle. As mentioned before, it's covered by both US and European patents. We believe that our flat panel displays and new ThrustSense autopilot autothrottle as well as the UMS are technologies that have tremendous long term potential, and that we need to concentrate our efforts on those areas.

The addition of our Autothrottle product line manager will drive these will will drive these effects. While the new quarter or two may be bumpy, we let our new strategy take root and see the certification certification of the King Air and the huge market opportunity it brings play out over the longer term, and we believe that we can penetrate these markets and create value for our shareholders. I appreciate your time and interest today, and I'll be happy to answer your questions. Operator, please.

Speaker 0

Thank you. At this time, we will open the floor to questions. And I am showing no questions at this time. So I would like to conclude our question and answer session as well as today's conference. We thank you for attending today's presentation, and you may now disconnect your lines.