Q2 2022 Innovative Solutions and Support Inc Earnings Call
Good day and welcome to the innovative solutions and support second quarter 2022 earnings Conference call. All participants will be and then listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to.
Ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to share them ask apart. Please go ahead.
Good morning.
This is showing a masterful chief executive officer of innovative solutions and support.
Welcome to a cultural school to discuss our performance for the second quarter of fiscal 2022.
Current business conditions and outlook for coming year.
Joining me is relatively minor.
Our CFO .
While we begin I'd like.
To read the Safe Harbor statement.
Sure 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-K.
Which is on file with the SEC and other public filings now I'll turn the call back to Cheryl.
Thank you Rob.
In the second quarter, we continued our steady growth with revenues up 34% earnings up 135% and nearly $2 million of cash added to our financial position.
Together with our strong first quarter. This is one of the best six months in six years.
At the foundation of our aftermarket business. We believe we have excellent products in attractive growing markets, including our award winning auto throttle.
Powell displays for air cargo conversions.
As our OEM product base continues to grow our aftermarket equipment is being installed on some of the world's most popular aircraft by the most highly respected owners operators and aircraft manufacturers, both domestically and internationally.
We have been known to the industry.
For a compelling price for performance products for over 30 years, and we plan to remain so for many more this is a formula for success.
Now, let me discuss our recent results and future.
Revenues in the second quarter were up 34%, which led to gross margins of over 61%.
Highest margins 60 days.
Our model.
Certainly generate attractive margins as we achieve scale.
This quarter, we continued to generate revenues.
From both a stable ODM production contracts, which offer a solid base of predictable recurring revenue and from the air cargo retrofit market.
Are experiencing strong demand for our cockpit upgrades.
Because our production O&M contracts extend that over several years.
And that does not seem to be any decrease in pesos cargo conversions. We believe we have a solid foundation for growth.
Resultingly our strategy to continue our growth and create shareholder value is straightforward.
<unk> to innovate our existing products and develop new products.
One of which is.
You have to think about is that new process to reduce almost all installation time.
Retrofits.
We are now in the process of receiving a straight unsecured shifts on the FAA to introduce a product and installation service.
For our <unk> customers.
Essentially.
New program slides are highly trained and certified technicians to the King air owners angles, where the installation is completed at this site saving owners, both time and money.
So long.
The owners need to fly the Red cross to Delever at this path for a week or possibly longer.
The delayed price to schedule and ultimately perform the installation.
Our marketing research results indicate.
That offering this service will accelerate the adoption rate of aftermarket kinky around PC 12 customers.
Yeah.
We're also broadening our product.
Market potential by developing new oral solid technology.
Jeff with turbo fans, such as CJ aircrafts.
For many other variations of Kingdom.
Kraft as well.
As part of this strategy, we will continue to invest in research and development.
This quarter, we maintained a high level of investment in R&D.
Losing customer sponsored R&D.
After a long period.
Relatively dormant.
Due to the pandemic level restrictions.
We are ramping up our sales and marketing activity attending more trade shows meeting face to face with customers performing more customer test flights.
Consequently.
After a typical winter slowdown orders picked up nicely in the last few months and we ended the quarter with an increase in backlog compared to December 31st.
This has also led to increasing level of interest from militaries around the world.
Rely on the dependable 10 gas for.
Air Ambulance and surveillance.
I mentioned the military is growing interest last quarter and I'm encouraged by the level of intensity to reach those discussions have risen.
Like many other manufacturers.
Baffling inflation <unk>.
<unk> chain challenges.
On labor availability.
We continue to support our customers we have added safety stocks on inventory, while managing to keep expense increase is modest relative to our overall growth.
As of today, we don't foresee any major disruption.
So our operations from any of the factors, including the conflict in Ukraine, and the Lockdown in China.
You have experienced growing sales and earnings through the pandemic strained supply chain inflation and many other issues.
As some of our end markets begin to improve and pandemic imposed restrictions are lifted we feel confident that we are well positioned to build this success.
And continue to generate steady financial results.
I'd like to turn it over to Ralph to review our financial in more details. Thank you Sharon and thank you all for joining us this morning.
For the second quarter revenues were $6 8 million up 34% from $5 million a year ago.
Revenues in our general aviation business in our coronary remains strong as we continue to ship product onto the PC 24, and Textron King Air long term OEM contracts.
In commercial Air Transport, there had been no let up in the demand for flat panel display systems for air cargo conversions.
In addition to our PC 24, and the King air or through OEM production programs. We continue to enjoy steady predictable revenue from our Boeing KC 46, a production contract.
Our revenues in any one quarter are largely determined by customer production schedules and lately. These production schedules have been on the rise with for instance, Textron reporting continued growth and the sale of its general aviation aircraft.
<unk> continues to run at a high production rate. In addition customer service revenues remained strongest sales in the quarter were up 12% from a year ago.
Total new orders in the quarter were approximately $8 2 million. So that we finished the quarter with a backlog of $7 5 million, which was compared to $6 2 million at the end of last calendar year.
Gross margins for the quarter were the best of them.
And over.
Six years at 61, 1% up from $56 seven a year ago quarter as well as up sequentially from 59 three last quarter.
Margins continue to trend in line with historical averages with any fluctuation from quarter to quarter primarily.
Attributable to product mix as well as leveraging our fixed manufacturing costs achieved through revenue growth.
It's better than 30% revenues growth in each of the last two quarters compared to the year ago quarter. As you can see that margins have been running at very high level I'm.
As Sharon mentioned, our model can sustain attractive margins as we scale the business.
Total operating expenses for the second quarter of fiscal 2022 were $2 4 million or 35% of revenue compared to $2 3 million or 45% of revenue a year ago.
Research and development was down compared to a year ago, we continue to target, 10% to 12% of revenue for R&D.
Selling general and administrative expenses were up marginally from a year ago quarter to do both due to both our growth over the past year as well as some relaxation and public health restrictions, we have been resuming marketing spend on in person trade show those customer visits underlying.
We believe quarterly operating expenses level will remain in the current range for.
For the quarter, we generated operating income of $1 8 million nearly triple last year 611000 return on sales in the quarter was 26, 4% and more than double.
11, 9% recorded last year.
We recorded taxes of 390000, a quarter in line with our anticipated at 21% rate for the year and reflecting that we are fully utilized or of our tax Nols.
Net income for the quarter was $1 4 million Retrans per share an increase from 608000 or <unk> <unk> per share in the year ago quarter.
The company remains in a strong financial position, we generated $1 9 million of operating cash flow in the second quarter and $3 4 million over the first half of fiscal 2022.
Our quarter ended March 31, we had $11 6 million of cash on hand.
Previous thesis as previously discussed on the fiscal year earnings call in December the company anticipates that due to the ongoing supply chain issues and challenges as a result of the COVID-19 pandemic, we will continue to maintain a slightly higher than normal level of inventory as an added measure of precaution. The company is debt free.
We believe that the company has sufficient cash to fund operations in the foreseeable future now.
Now I'd like to turn the call back to Sharon for some closing remarks.
Thank you Rob.
The first half of 2022 has been one of our most profitable in many years.
Our production contract customers are experiencing strong demand for aircrafts are auto throttle as standard equipment.
Cargo conversion market remains robust.
Backlog is up.
We've increased our marketing efforts and new products and services are on the right.
We have been the strong operational team dedicated to value, creating innovation and our plan to continue strengthening the organization as we grow the business.
Do you have and also great technology that disposal.
I think and enthusiastic team dedicated to execute on our growth plan.
We will now open the floor for questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
You are using a speakerphone, please pick up the handset before pressing the keys.
Dan Your question has been addressed and you would like to withdraw your question. Please.
Thank you at this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
Our first question comes from David Campbell with Thompson Davis <unk> Company. Please go ahead.
Good morning, everyone and thank you for doing such a great job.
Managing the company.
Without the help of <unk>.
Fred Yes fedrick.
But the haynesville hanging on and lets say very proud of what <unk> been producing.
Congratulations great quarter. Thank you.
Just wanted to ask you. This question a couple of questions about the cargo market.
There is no immediate concern I think but.
What do you need to can you tell us what aircraft types.
You then.
Providing.
Luke flat panels for the conversions.
And.
Hi, I'm, a little concerned that the cargoes inversion Margaret because.
Right now it's been.
Lucid a lot by the lack of capacity in the airfreight market between.
Yes.
Dan.
China.
Well that's.
<unk> founder and sooner or later, we'll get.
Well that capacity back there.
And I don't know whether the cargo conversions are ready for that.
For that increase in capacity.
It's likely to come later.
So do you have any comments on all of that.
So.
I mean, so far what we're seeing is that new.
Can you airlines actually adding cargo capacity and introducing <unk>.
<unk> services.
It seems there is a heavy reliance on the 75 to 767 platform.
And.
We continued seeing orders on those platforms.
From various airlines internationally.
Domestically.
Every quarter, we receive orders indications that we get is more cargo conversions.
Obviously what limits.
What limits is at.
At the rate they can do carnival comdata James on the on the 760 770 <unk> is only a few places.
In the world that can do that conversion, but.
But.
Right.
Our our molecule shows that at least for the foreseeable future.
There is no slowdown of that activity.
And we constantly look at what other.
<unk> features and capabilities, we can add to our existing base, we have over 500.
Existing customers with our.
Cockpits and $75 767 platforms as well as 737.
Yeah.
Our product development assets.
Look at.
Additional features that we can.
We can provide the existing customers as well as in new customers.
Have you seen any demand for 730 sevens.
And Airbus models.
For the conversions.
Currently we don't have.
Solution for the Airbus models.
We do have a solution for the 737.
We see.
From some of the existing customers that they are growing their fleet and we get indications that.
There will be future.
Our procurement.
Some of our equipment.
But right now the majority of what we see from the $5 seven and mainly six seven convergence.
Hi.
Hi.
There is increasing interest in Airbus conversions.
Is there something against keeping you from getting into that business.
You just have to do to develop the product.
Yes.
And again, we continually look at.
The market the competition.
And I'm glad that there is a need.
Where do we see.
Something like that is going to be.
<unk> feasible.
We then deploy our engineering resources towards that platform.
Right.
Hi.
Profit margins, 61%.
Uh huh.
As long as revenues are there is how do you see any.
Do you see any reason why those margins should go down.
I mean, the only thing.
Yeah.
The way, we quote it won't affect us would be any kind of material costs, but we seem to be handing handling that very well. So I don't see why you can stay in that range.
Lately and what the $58 50 960.
Range personal product mix a little bit.
Yes, the sales hold I think we'll be fine.
And what are the tax rate the rest of the year.
23%.
Hum.
We're 21 one points.
Some state tax effect.
If you want a ballpark is towards 'twenty, one I think it was 21, 2% a quarter before.
It's up a little bit, but big picture, 21% works.
Well.
Yes, that's great.
And the King airs Tim King airs conversions.
So <unk> been getting you've been getting.
Orders for those conversions and now you've got a good SaaS can do it faster.
You'll probably get more orders.
Looking at it.
That's.
That's what we anticipate.
Yeah.
Once we get this.
Right.
Right now were seeking approvals from <unk>.
That allow us to do our own installation right.
Remotely.
And once we get that.
And again, what we've seen from the marketing effort.
Net debt.
There is there is.
Reasonable interest from the customer base.
To utilize that.
That remote installation capabilities that we will like the convenience of it.
Alright.
And then last question is.
Anthony Good morning, as fast as it is in demand.
There was increasing.
Adding new employees.
In engineering or in sales, though.
What are you.
Yeah, I'll speed that along.
We do that.
As needed basis.
And.
I think it's.
I think it's more important to find the right people to add on that just add on people.
And.
But we do see.
We spend a lot of effort in.
In the interview process.
As well as judiciously looking at potential candidates.
But we grow that.
Grow our employee base steadily.
And we continue to do that.
Revenues growth.
Alright, Thanks, I'll, let someone else ask.
Yeah.
Thanks, David.
Okay.
Again as a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Michael Friedrich with.
Private Investor. Please go ahead.
Hi, Good morning, everyone wanted to get back to us.
A little more information on that new retrofit project process can you give me give us some idea.
The amount of time, it will take for the conversion to take place and.
I believe last month, we had even talked about the last call we talked about the idea of.
You folks are keeping more kids on hand and.
There was other attempts to speed up the process, but just maybe give us an idea of how quickly this can be done and.
Also the feedback you've been a little more information on the feedback you've been hearing from potential customer at a time.
Hum.
How quickly the uptake will be Amit.
Sure so.
Our.
Internal process to do the installation we were looking at one week.
Installation.
Looking at.
Doing that at customers.
<unk>.
And so there is it.
The level of.
Convenience.
What is the customer number one.
Is that.
They don't have to fly their airplanes some of them.
It's done right at that facility. They don't have to go through the inconvenience. So.
The airplanes down in that in.
In the third party location.
And and.
Then go back haul and then go back over that to get their ethane and then come back.
As well as it is.
The selection is going to be done by buyer by the factory experts.
Actually train other installer. So so those people are going to go through the installation of Florida.
I think about something like 75% of the people that we approached.
Directly.
And did the survey.
Indicated that they would be.
That this wood.
Okay.
Hey, Chris.
Asian, making gas process.
Because of the convenience so.
So we decided that based on that go ahead and get approval from the FAA. So we can offer this address.
Okay, and you said the install of the people who will be doing the installation well.
Will they be.
Yes.
Hawaii or would they be a third party.
Right now the plan on that being to see employees.
Okay.
Okay, and then approximately how many.
How many crews or how many how many of these can be done at a time.
What would you will get higher as needed or do you are you ready to go with.
With a couple of teams or how many <unk> how many are we talking about here.
I would start with one team and.
Then grow the team as market demand, we see market demand.
Okay. Okay, and then real quick you touched a little bit on the military yet but.
Can you give me an idea of approximately how large that marketplaces.
I think if you look at it internationally.
There is.
Probably close to a thousand king airs that in the military service various.
Government.
Operation.
Okay. Some of the features we provide.
For a special mission.
As part of our oral soluble functionality.
Makes it very attractive.
Got it.
And I guess in this last.
Quarter in Q2.
We had the fleet.
Please operator.
Actually lease up airplanes.
I believe to the U S government.
They've bought for the street, but are awful.
In the process of installing it.
And so they're beginning to see.
Of course on the military side.
It takes a long time.
They've got that put in for but they've got to approve it and they got to want it. It's a process and then they've got to put it for the budget. So it takes it doesn't happen overnight.
Right sure.
And are you able are you do you have to get approvals in every country or are you able to use the FAA approvals to be able to.
Provide these upgrades in other countries.
So it depends on the country, but right now I think we got approval for about 40 countries.
Okay.
Well that's great that's great.
They take FAA some have around it all depends on the contract some of them I accept the yards.
That's true.
So.
Great great well.
Congratulations guys.
One nice part is that yes, it's nice to see sales coming back a little bit by that.
There is no question about it by looking at the.
The income statement that the company is being mined very efficiently and hopefully when those when those number of kick in on the top line.
So that will go straight to the bottom so keep going guys. Congratulations thank you.
Thank you very much.
One final time is you have a question you May press Star then one if you would like to ask.
The question. The next question comes from Roger Goldman at private Investor. Please go ahead.
Good morning, and well done guys.
As you know as you know my dad, starting to investing in the company about 10 years ago.
Mr and I have inherited that also inherited the belief in the company and it feels like all systems are go.
So nice job.
Our patience is being rewarded.
So just a couple of questions.
Obviously, the future is very bright also obviously you have a lot of cash.
And that cash has real real value.
Particularly as we go into a recession.
And particularly with rising interest rates.
Im not necessarily lobbying for a dividend I am lobbying for good use of the cash and I would actually hope that you guys are actively looking at.
Yes, the acquisitions.
And may be more rapidly expanding your distribution.
I think.
This kind of environment with the product mix and margins you have fortune favors the bold.
And with with five months worth or soon to be six months worth of cash and no bank debt.
Youre in a real business really great position to take care of dislocation.
And I would just encourage you and again.
Certainly, we'd like a dividend, but frankly I'd, rather see you use the money to expand faster.
Yeah.
Sorry, do you want to comment on that.
Is that making similar comments on that.
So we're.
We used the cash judiciously.
I don't believe there is a NUPLAZID doing gathering a dividend.
At the moment.
But I.
In your Tam.
With regards to use of cash.
Yes.
You said on the next call Hey, we're going to invest the 1 million $2 million and something.
We will expand our distribution network or expanded RMB or whatever.
I'd vote for that like I don't think stock buybacks or that idea because that says you have not been better than what the money and I don't think dividends and a growth company or necessarily that idea.
But frankly, I don't think six months worth of cash on the balance sheet.
No public plans to spend it and no bank debt is a good idea either.
So I'm speaking of somebody who has spent his career in banking so.
I'd really like to consume those guys.
I really like this you guys being more aggressive I guess is what I'm, saying and I think you have a lot of room to be aggressive without betting the company.
And I just want to encourage that.
Thank you. Thank you very much thank you.
I mean, you guys have been doing a great job just more and.
Remember now remember when everybody else is running away that's when you should Brian Schwartz.
And we're going to be in.
And economic condition that we are a lot of people are going to get very scared.
And that creates nothing but opportunity for small nimble competitors.
Yes.
I can just speak for my sister and I were with you on that alright, well. Thank you for your confidence in the company.
I appreciate it thank you very much.
Okay.
Yes.
And there isn't it.
Time. This concludes our question and answer session.
<unk> has also now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.