Q1 2021 Innovative Solutions and Support Inc Earnings Call
Good morning, and welcome to the innovative solutions and support first quarter 2021 fiscal earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Note. This event is being recorded.
And I like to turn the conference over to Geoffrey Hedrick, Chairman and CEO. Please go ahead.
Florida This is Geoff hedrick.
Welcome to our conference call to discuss our performance for the first quarter and fiscal 'twenty and 'twenty one.
And business conditions and the outlook.
For the coming year.
Joining me today is.
General and asking for our precedent and relevant and.
Paul.
Before up again.
Relative to read the safe Harbor message.
And good morning, everyone.
I would remind our listeners that certain matters discussed and accomplished quite a day and keeping new products and operational and financial results for future periods are forward looking statements and are subject to risks and uncertainties.
That could cause actual results to differ materially.
And Kevin a little worse, and Dennis discussed, including a new risks and uncertainties, reflecting on our company's 10-K, which is on file with the SEC and other public filings now I'll turn the call back to Jeff.
Thank you Ralph.
We manage to maintain revenue growth bottom line profitability and positive cash flow and the first quarter of our fiscal 'twenty and 'twenty, one and spa.
Kind of depends on a mix impact on our industry.
Although on a balanced mix of retrofit and all of a M has somewhat mitigated the impact of the Covid.
The pandemic our business however, the exponential growth and our auto throttle them has been impacted but a slower and steady expansion and demand is resulting in a promising revenue growth.
This was our third consecutive year and what's your first quarter revenue and operating income and crew.
<unk> from the previous year's first quarter. And addition, we finished this quarter was on.
Backlog and it was greater than the end of the core and.
Yes.
We have achieved these results while maintaining committed to implementing precautions against COVID-19 that.
And that we seek to ensure the safety of our employees and suppliers.
Suppliers and customers.
Reflecting on our continual continued confidence and the business.
And the board of directors declared a special 50 per share dividend together with a 65%.
For 65 cent dividend declared in September we returned nearly $20 million of our cash to the shareholders over the second half of calendar 2020.
As a result of our strong cash flow, we remain in excellent financial condition with <unk>.
Significant liquidity and no deaths.
However expanded our R. R.
And access to capital by opening a credit line with our bank.
And that available if we need it.
And speaking to you several weeks a few weeks ago.
We continue to make progress project excuse me and progress on our strategic wins and <unk>.
Initiatives.
Well I and magazine, a leading aviation industry publication has just awarded I asked and asked one of its three prestigious annual awards for their 'twenty and 'twenty editors choice awards, along with Spacex and garment.
These highly anticipated and distinguished awards are selected by the senior editors and based on the products that have the greatest influence on safety and technology and aircraft operations.
Extra on.
With Textron, and we announced the thing offered our dress shirts, and Marvel throttle as standard equipment on the new junior to 60 further expanding our product revenue from Textron.
All of our OEM contracts are expected to generate recurring revenue.
And I forget value over the next few years and all of these contracts are with some of the most respected names so the industry texture on Polaris and Bali.
In addition to their direct impact these relationships are creating.
Additional.
Growth opportunities excuse me.
And the case of Textron weird.
And our jointly capitalizing on their global network of service centers, where they are and we are promoting the auto throttle benefits.
We will go on and we will go on tour next month.
Five of the service centers on the beginning of the month with presentations by.
There Chief test pilot and our product support and maintenance group.
The retrofit market is much better than the O M opportunity right now we are making progress and we're working with bricks textron's two more broadly adopt our technology across their product portfolio to.
And the success of our <unk> technology, and the general aviation market is creating opportunities and adjacent markets such as military air transport and several multi engine aircraft.
In addition to the steady recurring generated.
And recurring revenue generated from these contracts there remains strong demand of our and legacy products with our long term customers.
Recent introduction on the synthetic vision and auto throttle upgrades for the eclipse jet is seeing steady demand and the new ownership is committed to refurbishing and upgrading used aircraft and are preparing to place sizeable orders on new cockpits for those airplanes.
<unk> growth.
Growth of online shopping and a decrease and.
And passenger miles has made the $75 seven and six.
And 76 seven aircraft of choice for the cargo carrier conversions.
We have delivered several shifts sense of 76, seven and flight decks to Amazon, who is creating their own fleet expansion. We've continued on.
Continue to see demand for our flat panel display technology as part of the cargo conversion upgrade of these of these aircrafts. The first quarter was a reasonable start.
New fiscal year and lighter the viruses 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 it on over to <unk> now.
Thank you, Jeff and thank you for thank you all for joining us this morning.
At the first quarter revenues were $4 9 million up 8% from $4 5 million a year ago.
And I can increase and King Air Auto throttle system sales and growth and the flat panel display revenues arising from the ongoing conversion of 75, seven and 767 aircrafts to Corp.
And to air cargo planes gross.
Gross margins for the quarter were $52 seven compared to 57, 7% and a year ago quarter. This was primarily attributable to an increase and direct cost as we stand up operations to efficiently meet the demands on both increase and production programs under contract and the increasing demand for air traffic Air Transport retro.
And services warranty expense also increased in the quarter.
Margins remain in line with historical averages and can be expected to expand as we leverage our fixed investment through revenue growth anticipated on the balance of the year.
Total operating expenses for the first quarter for the first quarter of fiscal 'twenty and 'twenty, one were $23 3 million down marginally from a year ago, and basically unchanged from the preceding fourth quarter of fiscal 'twenty and 'twenty.
Operating expense control remains a 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 and the quarter research and development expense were over 12% of quarterly revenues, which was 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 our first quarter operating expenses reflect the increase and staff brought about by steady growth as well as the one time costs typically incurred and the December quarter, such as our annual audit.
This increase was partially offset by reduced marketing show expenses and a result of COVID-19.
For the quarter, we generated operating income of two.
132000, and a marginal increase from the year ago quarter, We reported quarterly net income of 240000.
Or a penny a share as compared to net income of 328 <unk> per share and a 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.
The company remains in strong financial position with cash on hand, and a $5 6 million at December 31, 2020, our cash position net of nearly $20 million of dividends disbursed in the fourth quarter offset by approximately $1 7 million of positive cash flow from operations.
Anticipating operating cash flow positive for the full year the company is debt free.
Consequence, Consequently, we believe the company has sufficient cash from operations for the foreseeable future.
Like to turn the call over to Sharon.
Yes.
Thank you Raul and good morning, everyone.
Continuing a trend and the first quarter that now stretches back over the last couple of years.
New revenues generated a profit.
And we were cash flow positive.
These results reflected growth of recurring revenues from OEM production contracts ongoing demand for our legacy products and a growing aftermarket upgrades on <unk> products.
And also reflect the diversity of our markets.
High quality of our customers were among the most respected brand and the industry.
This focus on working with.
And with the best and the business from both new and existing airframes.
The new and existing technology has proven to be a formula for success.
While our allowed US PC 24 on Boeing KC 46 contracts have been underway for some time on Textron King Air contracts are beginning to ramp up.
Initial units, including those tickets for simulators have been shipped.
And the King Air 260 <unk>.
Scheduled for delivery later this year and the new version and have seen 90 to follow we are not at full run rate production volume.
Excellent.
That has delivered 18 <unk> hundred <unk> in the fourth quarter and texture on sales production rates increase.
Will follow suit.
And larger opportunity and the King GAAP market as the approximately firecrest and aircrafts.
Currently and service.
We estimate the retrofit market to be a $300 million opportunity.
The versatility and performance of on oral <unk> is enabling us to look at growth potential across all our markets.
Pressure on Air Transport General Aviation and military.
Whereas.
Darren and conversations with manufacturers on both twin turboprop between jet and multi engine aircrafts with regards to our overall strong.
Not only and the business aviation market, but in the military and other market as well.
Well on some of these discussions have slowed down due to the pandemic. The interest is real and the potential is exciting.
As always is and.
Encouraging to receive further recognition from our trucks since almost all from industry experts such as recent flying magazine Editor's Choice Award.
Based on products that have greatest influence on safety and technology and aircraft operations.
Briefly reviewing some of our ongoing programs.
PC 24 program has been highly successful and we expect aircraft delivery rates to remain at steady levels. We believe this program will continue to run for many years operating predictable stable recurring revenues.
As Jeff mentioned the ongoing growth.
Online shopping and the dramatic decrease.
Passenger traffic as cargo carriers aggressively acquiring 757 and 767 aircraft.
We are now converting to cargo planes.
Part of these conversions on cargo carrier customers.
Against Icelandair, DHL and Amazon.
And our installing our flat panel display systems.
They're.
And there are over a thousand operational Kevin and five Sevens 767.
And a large number are still available for cargo conversion and retrofitting we.
We believe will lead to ongoing steady demand for our flat panel display technology.
Our KC 46 program with Boeing.
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 cockpit with our synthetic vision and enhanced auto throttle technology.
Rich we receive FTC just this past September.
New orders and the first quarter of fiscal 2021.
$5 4 million on.
Up $2 million.
Actually from the fourth quarter of 2020.
Backlog as of December 31, 2020 was $4 2 million, which is also on 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.
And to backlog.
As I first mentioned last quarter. The pandemic has limited our ability to price personally meet with customers and.
Prospects as well as to work with.
Which is operating under work from home directive.
He has got headwinds are temporarily slowing some of the progress we would have otherwise anticipated.
On and the longer term, we do not expect the impact of the pandemic to materially alter our overall growth strategy.
All of our ability to drive profitability and generate positive cash flow.
Before turning the call back to Geoff for some closing remarks, let me quickly note the FX.
Of all our employees to integrate new safety protocols.
And our standard operating procedures and how this has enabled us to maintain productivity without jeopardizing, the health and safety of LTE.
And then turn the call back to Geoff for some closing remarks.
Thanks, Sean.
New fiscal year is off to a solid start with revenues up continued profitability and strong cash flow.
Yes.
We have rewarded our shareholders with nearly $20 million and dividends and the second half of calendar 2020 and.
And as our intention to continue to build the business to create even greater value for our shareholders and the long term.
Thank you for coming.
Thank you for your ongoing support and thank you for your encouragement.
Thank you for your audience today.
Operator, please turn yourself and some questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question will be from David Campbell, Thompson Davis and company.
Hey, Jeff sure well, Hey, David Thanks for your comments today, and we're doing good job.
Despite the pandemic and then and take on your company.
And I also want to thank you very much for the special dividend in December.
Remember.
And that was well needed and well well well needed by the candles and family. Thank you. Thank.
Thank you very much.
On the whole pillar.
Revenues and coming orders will begin new and flake.
And there's enough.
Yeah and then.
And your various products and preserve as is.
So.
And Jamie.
<unk>.
Probably more earnings and I should quit.
And.
One of these one of these quarters.
Thanks.
Optimism.
Hi, guys.
And so some meaningful profits.
Yes.
And any problems with that please let me know thank you.
And I'm on the FERC sky that wants to buy.
And more profit remember on the largest shareholder and the company. So I wanted to have lots of profit southwest.
Keep up the good work.
Thank you.
Yes.
The next question will be from Roger Goldman a private investor.
Good morning, Jeff.
Well done team very nice quarter in spite of all the headwinds and <unk>.
And very optimistic Jeff I have a question about.
Battery powered Arab light.
There's a lot of attention being given to the battery power as the future of aviation there any number of incredibly well funded start ups or ready fly on these airplanes with delivery expected and the next two years.
Have you looked at playing in that market and if so how.
The quick answer is no we haven't.
Lee.
And we would like to see the market develop a little.
A little more definitively.
My judgment is that.
Terrific you can do a lot of things with electric Motors and you can't do with any other.
Propulsion and teams.
On other problems continues to be a source of.
A source of energy to drive from owners.
Yes from difficult.
The latest.
Louise.
And looks at and trying to use hydrogen and a new way to produce and.
Energy would be good and there is.
Good reasons for it because remember a battery that together and the lighter as it jumps up its charge.
And all that huge amount of weight and select hiring a full load on fuel to lending and you don't want to do that.
And maintenance.
And a lot more.
Problematic.
Maybe I don't know how long it'll detract from it won't be.
Probably 20 years, I'll remind and aspire.
And by Chalmette, and telling us we're going to have fusion energy and for 30 years from the last two years. So.
And it will happen and I am sure I, just don't know why and.
Meantime, we're very much focused towards.
And the conventional demand, there's an awful lot of aircraft out there, especially on.
Interested in our auto throttle.
And this award bye bye.
Well I think it was quite interesting because they selected Spacex landing that that booster, which was amazing and having watched and NASA not ever being able to do it sat on a huge achievement and.
Luckily government and a hell of a job getting on auto land and.
A small airplane.
We'd like to think that we can do on our own land and a bigger airplanes and they manage their.
We're happy to say.
And.
Cash on the FAA and told US sales of 100 or two.
Favorable year for ups and actions.
And that we're doing here today and the certification they believe theyre going to say.
And lives.
That to me is humbling and.
And also.
And so is promising for the business.
Thank you.
Thanks for the question.
Again, if you have a question you can press Star then one the next question will be from Michael Friedrich <unk> and other private investor.
Good morning, everyone.
Good morning, Hey, guys can you talk to your would've been about the twin debt market you had mentioned debt.
And the comments.
I know that previously prior to through and you had already developed and auto throttle for the eclipse.
And I'm not going forward would you be.
Would you be looking to use less sense and a.
And the twin jet market and what what advantages you guys have and that market over the existing players that are already there.
But the biggest one is our patented <unk> upset protection.
Addison, Texas, Spengler status and Texas.
<unk> made.
And all the news of the airplane with 13 people on board rolling over on its back and crashing and killing them all.
And we happen to be one of those people, it's really important.
The equipment that we make actually prevent that from happening.
And that is unique and try to try to deal with the problem for over 100 years unsuccessfully.
And we're able to do it patent debt and put it into practice and and Textron had the vision.
And the and the initiative to actually go ahead and put it on their airplanes as quickly as they did.
And we're proud to be and partner with with Textron and we see a huge markets. We've been we've been contacted by.
I'd say, if I count the number of URB price, probably 5000 airplanes and beyond the King Air.
Are people who want to put.
And on auto throttle AOR on travel are all call on the airplane and what are the reasons and one on one of the other big reasons for for our.
On a throbbing unique is to my mind, it's the only one that is really retrofitted.
And and.
And any other.
Auto throttle and you'll have to.
Build a whole new throttle quadrant and the airplane structural huge modifications.
Or put on a new engine so we.
We do two things.
And protect the engine, which costs three quarters are on to $1 billion to overhaul and.
If you over temperature and you have to pull it.
Or.
Or exceed and since then.
Sandwich, the airplane and.
And loss of control accidents and can kill you. So all of those make it a compelling cash and.
And now.
Our latest version of it well.
It will enable us to do it without taking the aircraft out of service and.
And that's an amazing achievement.
Right right, we can do a retrofit without losing the revenue from the aircraft.
Oh, that's great. So Joe do you have back to the fact that.
And now.
I'm talking about the twin jet market I know Addison was a cold air situation.
Specifically more to it.
It'll throttled being done on the eclipse.
Well that well that's left and be applicable to other twin jet models or is there a different.
Form of bottled water and you'll be marketing and that area.
No it'll be very similar if not identical.
We are as we speak and.
And talks with another menu and other OEM.
Yes.
Okay.
And two aircraft and one way of doing and and say and you Havent turboprop and the turbo fan and turbofan.
We think of as a conventional jet airplane.
The eclipse had turbofan engines and we are looking at other airplanes as we speak debt.
Used turbofan engine.
And the same the same safety features we offer and the turboprops and we now offer the turbo jet and the reason we were so attractive and the turboprop market.
Virtually there was no auto throttle for the care and 5000 airplanes out there and no one on trial.
Because it is very difficult.
Turning to do.
<unk>.
The way the controls went out to the <unk> left and enormous amount of slack and <unk>.
And with control system, we were able to fix that and shop.
And we ever unique solutions.
And that's hopefully we will continue to show.
Interest and from.
Broad range of people and the industry.
Okay. Good good other questions. Yes can you talk to me about what's going on with the FAA right now and I like you just said that they are 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 yes, we have a lot but.
I would tell you that.
Our ACO is Boston and they've done an outstanding job.
They're typically the bottleneck.
And even working from home and have gone out of their way and in some respects working from home is reasonably good we've dealt with and thanks Joe.
We used to have got debt.
Just disappeared on us and quicker.
And while we're waiting for an answer.
And our RFID I has been remarkably responsive and.
I wanted to be careful I don't want to.
Jakes.
Very good performance working from home and I'll tell you what.
Uh huh.
I believe that and five years, maybe two years and.
25% of our key employees will be working from home.
There's a huge resource.
Early retired remarkably talented people.
And at my age I refer to them.
Sure.
[laughter] that debt.
And what we're going to keep busy at work and.
It brings so much to our company and we're in.
And I have to below.
And you're going to leave California to come work for us and we hope to happen to that resource and we got a conscious effort to do it and I'll tell you.
And conducted by last three board meetings Bye bye.
Computer.
We don't require people and from Phoenix anymore.
And by the way, we got through the board meeting and our early because we're all focused on getting the job done setting having the normal channel mix.
And the personal relationship and that's unfortunate but.
We are all four percentage job so it's actually quite good.
Okay and then.
Yeah.
Figure that on a handler I'll tell you right now so far.
Boston, but growing very very well I've done an outstanding job.
Okay.
Do you have other applications that are beyond textron that are currently and with them. Okay.
A large portion and understand that goes up and it really good partner and that.
They recognize that it's terrific to put it on the new aircrafts and they of course did and it immediately but importantly debt.
The existing fleet.
Valuable aircrafts is over 5000.
And this is on.
Relatively modest investment relative to other cost and the earthquake.
Yields huge savings savings and maintenance 70 engine and.
And maybe most importantly, maybe lifesaving.
And we are.
Very positive we're getting people with four engine.
Multi engine aircraft and bigger much bigger airplanes with four turboprops and are asking us to build and auto throttle for them.
Looking at several military airplanes right now on the same exactly the same requirement.
Right right. Okay, one more question, Jeff and I'll, let you run.
Briefly touch on a little bit more on the Covid impact.
<unk>.
It sounds like this is more affecting the rollout of the <unk>.
The retrofit market.
Auto throttle does this have to do with the idea that you can't actually visit people and probably saying that they can't actually.
Take the plane up in and try things out I mean, what can you just kind of give a little bit more color on what the.
What the hurdle and you know to kind of getting all of that and going well.
And clearly no expert on that but.
Let's take a look at a couple of other problems.
And things like Covid.
And on an airplane you probably you know hop on your airport every day the way you used to two golf places, although what we're finding is kind of interesting.
And and increasing demand and.
Hello, Jack.
Market, so that people who on a travel.
We have friends and go to Florida and wood.
Because they are at risk.
And they don't have their shot Chad.
Leasing airplanes.
Running airplanes checked.
And make the trip so you see a lot more and that area.
People doing upgrades.
And then they're all preoccupied with them.
The basic how and why.
Stay alive and stay healthy problem and they don't worry so much about how they're going to fly.
Lunch and Joe.
Uh huh.
And topic.
And.
Impacts the demand that it impacts our ability to talk to our customers, we have a customer who's very interested but why can't visit them.
Well you have people that we would like to demonstrate our airplane and it.
And limits that too so yeah, it's subtle and in some cases, but it's pervasive for sure and.
And has a huge impact.
Thank you Jeff I appreciate the clarity.
Good luck going forward. Thank.
Thank you very much.
And that looks like the last one thank you for your time and attention today.
If you do have questions you can always call well and we'll get them answered for you. Thank you again for your for your interest and your investment.
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.
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