Innovative Solutions & Support - Earnings Call - Q4 2020

Transcript

Speaker 0

Welcome to the Innovative Solutions and Support Fourth Quarter twenty twenty Earnings Conference Call and Webcast. All participants will be in 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 fourth quarter and fiscal year twenty twenty, our current business conditions and our outlook for the coming year. Joining me are Sharam Asgharpur, our President and Rel Wanan, our CFO. Before I begin, I'll ask Rel 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, Roel. Several years ago, I announced we would change our approach to the market by focusing on only products that are technologically driven performance and price advantages. I am pleased that our operating performance during this challenging period appears to validate our change in direction. Fourth quarter had a strong finish, resulting in year over year, quarter over quarter and sequential growth. Our revenues increased 31% from a year ago.

The quarter full year revenue growth was 23%. Fiscal twenty twenty was our second consecutive year of strong growth of increasing profitability, solid cash flow, and while strengthening the underlying foundations of OEM production contracts and recurring revenue that support our continued success. Based on this performance, our cash on hand and our confidence in continued success, in September, the Board of Directors declared a special 65¢ per share dividend. We were able to receive the achieve these results while protecting our employees, partners, and customers against the pandemic. While this while its impact to date on our business has been minimal, safety precautions have now been a routine have now become a routine part of our operators' commitment to ensure a safe and a healthy work environment.

We announced last quarter that Textron had awarded us an OEM production contract to supply our ThreatSense auto throttle with lifeguard protection on the new King Air three sixty twin turboprop. In November, Textron celebrated delivery of its first Beechcraft King Air three sixty turboprop aircraft. More recently, Textron announced that the ThrustSense autothrottle is standard equipment on the new King Air two sixty. Delivery is scheduled to begin in the 2021. We are pleased to be working with Textron and are grateful for the support through the certification and moved into production.

They are a strong supporter of our technology. The IS and S Autothrottle is the first among a list of three sixty upgrades mentioned in their King Air three sixty promotional material. Exstron joins two other major OEMs to feature IS and S products as standard equipment on their production aircraft, joining Pilatus PC 24 UMS and Boeing's KC-forty six tanker as major OEM contracts of prospectively significant duration and value. These contracts offer a growing base of long term recurring revenue as expected for the last years. We're supporting Textron in looking into opportunities for the ThrustSense workload reducing features on their other production platforms.

I'm grateful to see the service center organization that has positively pursued the significant retrofit opportunities of thousands of King Airs currently in service. Consequently, we are working with Textron to ensure our production levels meet the service center's demand for autothrottle and help promote the availability of this potentially lifesaving technology to King Air's owners. ThrustSense also has a base for expanding beyond the general aviation market. They look at the military aircraft and air transports and multi engine aircraft as well. In addition, we are finding that the publicity surrounding our threat sets hasn't created interest with other OEMs.

We are potentially life potentially lifesaving FAA certified one engine and operative upset protection is a compelling differentiator that multiengine operators are now very interested in. We are optimistic that the contracts with Textron support the wide adoption of a technology that not only improves aircraft performance but can provide unparalleled safety. Precipitated by our keying our business, we have hired a sales and service support representative stationed in Wichita. He will support our present business at Textron and explore new business opportunities in the region. We are working with Textron Worldwide Service Organization supporting autothrottle retrofits.

Our autothrottle programs director is successfully addressing a large military opportunities and air transport markets with very encouraging results. Continue to recruit sales and support personnel for our growing business demand and for ThrustSense, Autothrottle, and lifeguard protection systems. In addition, September 2020, we announced the FAA had certified our synthetic vision installation and auto throttle upgrade for the Eclipse jet. The Eclipse has the Eclipse was the first aircraft in which we developed an auto throttle, and we are pleased to be able to offer owners the ability to upgrade the airplanes with our latest features. The ongoing growth of the ongoing growth of online shopping continues to fuel the increase in the number of seven fifty seven and six seven aircraft being converted to cargo.

This has generated increasing demand for our flat panel display technology. Engineering and development work completed, we shipped our upgrade for U. S. Navy air data computers for the F5 in the fourth quarter. We are now marketing international customers for the F5.

Let me turn this over to Rell for some financial results.

Speaker 2

Thank you, Jeff, and thank you all for joining us this morning. Looking first at the fourth quarter revenues were $6,300,000 up 31% from $4,800,000 a year ago and generated a 39 percent increase in operating income. This was the fastest quarterly rate of growth in this fiscal year. Growth this quarter was almost entirely in product and customer service revenue as we completed final engineering on the U. S.

Navy F-five air data computer development contract, and we shipped the entire production order in the quarter. Gross margins for the quarter were 55.8%, down from 59.5% in the year ago quarter, with the decrease attributable to product mix, higher warranty and material costs. Also, this quarter, we had limited engineering development revenue, unlike the year ago quarter, which yielded strong margins. Nevertheless, margins remain in line with the historical averages achieved over the years. Total operating expenses for the 2020 were $2,300,000 up from $2,000,000 in the year ago quarter.

This modest increase in expense reflects the additional the addition of resources needed to support the company's 30% revenue growth rate. Research and development expense was up over the year ago quarter, reflecting a shift to internally funded R and D now that the customer funded F5 development contract is completed. R and D was approximately 11% of quarterly revenues, which is consistent with our strong commitment to innovative and new product development. Selling, general and administrative expenses were up about 8% from the year ago quarter, again primarily due to the need to add resources to support our increased business activity. For the quarter, we generated operating income of $1,200,000 or approximately 19% of revenue.

Other income was down from the year ago quarter as interest rates decreased. We reported quarterly net income of $1,200,000 or $07 per share. Looking at results for the year. Total revenues were $21,600,000 up 23% from $17,600,000 for full year 2019. The company reported fiscal twenty twenty net income of $3,300,000 or $0.19 per share, an increase of 7473%, respectively, from net income of $1.9 or $0.11 per share for fiscal twenty nineteen.

The company remains in strong financial position. We generated over $2,200,000 of positive cash flow from operations in fiscal twenty twenty, of which $1,600,000 was generated in the fourth quarter and had $12,600,000 of cash on hand at 09/30/2020. The company is debt free. In September, the Board of Directors declared a cash dividend in the amount of $0.65 per share or approximately $11,200,000 which was paid on 10/01/2020. The dividend appears as an accrual on a 09/30/2020, balance sheet offset by a corresponding restricted cash.

We believe that 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, Brev, and good morning, everyone. The fourth quarter was our best sales quarter of the fiscal twenty twenty and put a fine point on our second consecutive year of top and bottom line growth and strong cash generation. More importantly, it was a year in which we worked our third OEM production contract with a Tier one manufacturer, Textron. King Air three sixty and King Air two sixty are new aircraft that will feature our ThrustSense autothrottle as standard equipment, join our ongoing OEM contracts with Pilatus and Boeing. These OEM contracts, we are building a solid foundation of recurring revenue that should last for years.

Let me also quickly reiterate what Jeff mentioned earlier. We generated this strong growth and profitability and successfully executed on the King Air contract while implementing new safety policies and procedures that have kept all of our employees safe and productive as well as protected our partners and customers. The King three sixty program is just ramping up with the first production aircraft delivered to a customer last month. The King Air two sixty is scheduled for delivery in the 2021. We have been shipping Front Sense units to Textron since third quarter and expect orders to naturally follow the anticipated increase in production over time.

In addition to shipping units for installation on the TINGER three sixty, we are also shipping units to Textron for distribution to the service centers where they have been used for retrofit installations. As Jeff mentioned, the retrofit opportunity is much greater than the forward phase, with about 5,000 King Airs currently in service, which we estimate represents about a 300,000,000 total addressable market. At this point, we are certified for retrofit on the Beachcraft and GH300 series equipped with Proline Fusion avionics and the Proline 21 equipped Beechcraft King Air 200 series. Other variations of this STC are being pursued with some imminent. We are consequently also shipping autothrottles to our installation partners where it appears many King Air owners take their aircraft for service.

Both organizations are aggressively marketing the retrofit. In fact, we are opening an office in Wichita to not only promote the product but also support Textron. The relationship with Textron is going well and provides a solid foundation from which we expand our autothrottle market, not only horizontally across King Air platforms but other OEMs as well as the military. We are in conversation with manufacturers of both twin turboprop, twin jets and multiengine aircraft with regards to our autothrottle. Potentially life saving nature of truck sense on multi engine aircraft is a feature in which virtually all OEMs have an interest.

September 2020, we announced that the FAA had certified our synthetic vision installation and auto throttle upgrade for the Eclipse jet. This installation marks iSyneta's first upgrade directly to Eclipse owners and involves substantial pre orders. Eclipse owners now have the benefit of significant functional upgrades and ongoing product support directly from the partnership with ISNS. I will now briefly review some of our ongoing programs. The EC24 program has essentially reached steady state production levels.

We expect to ship close to 50 shipsets in fiscal twenty twenty one to support their current production rate. This program remains highly successful. Teladis is very satisfied with our performance. This program, we believe, is expected to continue to run for many years, offering a predictable, stable recurring revenue stream. Dynamics in the commercial transport market are also essentially unchanged.

Their cargo delivery services continue to convert Boeing seven fifty seven and seven sixty seven planes, including upgrades to our flat panel displays. When we once contracted with large installers, we are now doing more direct sales to carriers, which has proven much more successful. There remains over 1,000 operational seven fifty and 767s that are still in need of retrofitting with an even larger number of 737s yet to be updated. Development work for the U. S.

Navy F5 data computer was completed, and we delivered production units for the U. S. Navy fleet retrofit in the fourth quarter. This was a highly successful program, and we are now turning our attention to foreign military, which also fly the F5 and would be a large new market for this versatile product. Our KC-forty six program with Boeing is one of our three OEM production contracts.

It continues to make steady contribution to our recurring revenue and profitability. New orders in the 2020 were over $3,400,000 and backlog as of 09/30/2020, was 3,600,000 Bookings for the full year were in excess of €19,000,000 Keep in mind that backlog at the end of any one quarter is not necessarily indicative of future business activity as we generate a good portion of our revenue from customer service and intra quarter booking ship orders. The ongoing pandemic has had peripheral effect on our sales and marketing activities, limiting our ability to personally meet with customers and prospects, causing some complexity working with the FAA, which is operating under work from home directives. Balance, we do not believe the pandemic has or will have a significant impact on our business and are excited about the prospects of our portfolio of our products.

Speaker 4

Let me turn the call back

Speaker 3

to Jeff for some closing remarks.

Speaker 1

Thanks, General. The growing success of our autothrottle strongly suggests that this strategy is creating real value for both our customers and for our stockholders. We're entering a new fiscal year with momentum for two years of strong growth, solid balance sheet, and a portfolio of products that are receiving enthusiastic market reception. We see a great opportunity. Thank you for your ongoing support and encouragement.

Thank you to the audience today. I'll take questions as required.

Speaker 0

Thank you. We will now begin the question and answer session. And the first question will come from David Campbell with Thompson Davis and Company. Please go ahead.

Speaker 1

Good morning, David.

Speaker 4

Hey, good morning, Jeff, Rahul and Jerome. Thanks for having such a good quarter. I just wanted to ask you, Real, about what you assume what I should assume for a accrued tax rate in fiscal twenty one. I would say Will it will there be will there begin to be a tax accruals?

Speaker 2

Yeah. There'll be some expense, but it'll be lessened because we still have some NOLs and some r and d So I would use I'm estimating use like a 5% effective tax rate type of thing.

Speaker 4

Okay. Thanks. And Jeff and Sharam, were any of the shipments to the King Airs, were any of them for were were were some OEM and some retrofits or all retrofits?

Speaker 1

Oh, no. We have both. A lot of a lot of OEM, actually. 20 odd OEM shipments. Obviously, the airplanes haven't come off the line yet.

But and then and then a very a very rapidly growing demand in retrofit.

Speaker 4

But no retrofit revenues yet?

Speaker 1

Oh, well, yeah. Oh, yeah. No. We have we have both

Speaker 3

actually, Textron did an installation in Australia on a retrofit on using our, ortho. We've had a quite

Speaker 1

a number of them. We've had you know, they're local service centers. They have a huge network of service centers throughout the world. And the the very encouraging thing is they are very aggressively promoting the the auto throttle retrofit. So it looks it's it it looks better almost every day.

It's very good.

Speaker 4

Uh-huh. So you expect that to be so you expect those revenues to increase in fiscal twenty one?

Speaker 1

Very much so. And we believe that the growth is gonna be exponential.

Speaker 4

Right. Right. The usual this quarter, this December, we'll have the usual seasonal downturn. Is that correct?

Speaker 1

Maybe. Yeah. Maybe we'll do a little better. Yeah.

Speaker 4

Okay. Well, thanks for answering the questions. I

Speaker 1

We're trying to do we're trying to do better. We're trying to to keep a more stable and straight of growth. Look. We've had the operation is good. It generates cash every every day virtually.

It's excellent. It was profitable. And as our volume goes up, it becomes more profitable, not only because it covers all the fixed overheads, a lot of which affects the president profitability. So we're very optimistic about the future. We're very pleased about Textron's interest and support in our products and and see a a large retrofit opportunity.

Listen. We're already we're delivering five seven six seven systems to another very a new demand for for package carriers. So, I mean, it's it's business is coming up. And and when you consider the the the other effects of pandemic, you look at most of aerospace companies have been struggling. We've done really well.

Speaker 4

Well, you're doing you're doing a great job. Thanks for all your help. If I can do what

Speaker 1

I well, I'm hoping to do this coming year, then it'll start looking a lot better. I I think we're fortunate we have a very good product that is very producible. We've got a great customer. All of our customers are outstanding. We're very fortunate with that.

So we just keep working at it. You know? Every day, get up and and as the marines say, kick ass and take names.

Speaker 4

Well, thanks a lot for answering the question. I gotta get off of the call, but I appreciate all the work you're doing. Thank you. You here, Kevin. Merry Thank you.

Speaker 0

Once again, if you have a question, please press The next question is from Roger Goldman, a private investor.

Speaker 5

First of all, thanks for a great quarter and a great year. Validates my late father's trust in you, as you know. And my sister and I are much appreciative. I also wanna acknowledge the fact that the last quarter and the last year of history, but it sounds like you guys have set the company up for fabulous growth in the future that without being Pollyanna could make the past look like small potatoes. So congratulations on that.

My question, as it usually is, goes to the use of cash. We've got a company with no debt with solid operating profit. And even after the dividend, a fair amount of cash on the books. Any thoughts of either an acquisition or a small regular cash dividend that I think would have a great impact on the stock price?

Speaker 1

It's a good question. Some of that I can answer. Some of that you can

Speaker 5

No. I I know you can't. I know you can't.

Speaker 1

But but it's a reasonable question. Absolutely. Look. We have we know we generate a lot of cash. And our interest is we're operating the business not not for us to look at cash that doesn't generate any income at all.

I mean, I personally have cash accounts that they're they're paying interest in in pennies. So

Speaker 5

Yep. Yep. Yep.

Speaker 1

But we have no interest in doing that anymore. If we can reasonably invest it in other things, we're doing some some, automation on the floor and and and CapEx kind of things.

Speaker 5

But we

Speaker 1

are actually looking at dividends on a long term basis because we believe that business itself will generate cash on a regular basis, and that we believe that that our stockholders can make good use of the of cash. So we're we're very conscious of that. That that's what precipitated the 65¢.

Speaker 3

Yep.

Speaker 1

And, yes, we continue to look at it, especially in light of what might be changes in taxation policy.

Speaker 5

Exactly. Yeah. That's all that's all I can ask for. And, again, well done. You guys are doing a great job of positioning this company for the future.

Speaker 1

We miss your dad.

Speaker 3

He was always fun. He's a good guy.

Speaker 5

Well, thank you. We miss him too. We miss him too. But I'm hoping after COVID, Jeff, to come on out there and meet you guys and spend some time. So I know.

I'm looking forward to it.

Speaker 1

Kinda looking at me. I know.

Speaker 0

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 3

Thank you.

Speaker 0

Appears that our management line is inadvertently disconnected. So we thank you everyone for joining today's presentation. The call has been completed, and you may now disconnect. Take care.