Innovative Solutions and Support Inc (ISSC) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Innovative Solutions and Support second-quarter 2012 earnings conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Geoffrey Hedrick, Chairman and CEO. Please go ahead, sir.

Good morning. This is Geoff Hedrick. Welcome to Innovative Solutions and Support's second-quarter 2012 earnings conference call. I'm pleased this morning to be joined by Ron Albrecht, our Chief Financial Officer, and Shahram Askarpour, who was appointed President of the Company earlier this month.

Before getting started, I'd like to ask Ron to read our Safe Harbor message.

Thank you, Geoff and good morning, everyone. I would like to remind our listeners that certain matters discussed in the conference call today including operational and financial results for future periods, are forward-looking statements and are subject to the 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.

Now I'll turn the call back to Geoff.

Thanks, Ron. The results in the second quarter reflect our ability to balance the need to produce results in the near term while strategically investing to build value for our shareholders in the long term.

For the second quarter, we were both profitable and cash flow positive with net income of $289,000 or $0.02 per share and operating cash flow of $628,000. At the same time, we continued to extend our engineering efforts on four very important new programs that have the potential to significantly increase our adjustable market, both OEM and retrofit applications, while entering a period that will be focused on advancing our engineering and development contracts and while maintaining a strong balance sheet and commitment to our historical operational efficiency.

During the second quarter, we realigned our resources to better reflect the growing demand for engineering services at a time when our production requirements have leveled off. Once again, we have demonstrated our ability to adapt to changing market conditions; to meet our profitability and cash flow objectives. The successful completion of these various engineering and modification and development contracts will expand our market opportunity, enhance the Innovative Solutions and Support franchise, and create value for our shareholders.

Let me turn it over to Ron for a more detailed review of our recent financial performance. Ron?

Thank you, Geoff.

Revenues for the second quarter were $6.8 million, up from $6.7 million in the prior year quarter. In addition, revenues in the quarter were up $2 million sequentially from $4.8 million in the first quarter of this fiscal year, driven primarily by an increase in engineering revenues.

With this year's emphasis on new program development, gross margins continue to be influenced by the increased portion of revenues generated on the engineering contracts, which includes certain third-party subcontractor costs. Despite a higher proportion of these lower margin revenues, gross margins were 46% for the quarter and reflected the impact of operational cost reductions in the second quarter.

Total operating expenses for the quarter were $2.8 million, down from $3.4 million a year ago. On a sequential basis, second-quarter operational revenues were level compared to the first quarter, reflecting the effect of certain nonrecurring costs in the first quarter, offset by increased [IR&D] spending. For the quarter, we reported net income of $289,000 or $0.02 a share, again a sequential improvement after a first-quarter loss.

Cash flow from operating activities was approximately $628,000 in the quarter, enabling us to increase our cash balances by $400,000 to $43.2 million at March 31, 2012, net of spending over $200,000 to repurchase shares in the quarter.

At the end of the quarter, accounts receivable included $760,000 from sales to American Airlines prior to its bankruptcy. Based on the present status of the bankruptcy proceeding, we are not able to determine when or to the extent which of these receivables will be collected.

Looking to the full year, we are forecasting revenues to be roughly comparable to the last fiscal year. However, given the risks and the present economic environment, revenues for the year may be less than last year, which could result in negative profitability for the year. Potential military, and American Airlines order shortfalls are the major contributors to the decreased revenue outlook.

I will turn the call over to Shahram Askarpour for some comments on current market conditions as well as an update on the progress of our business development and new programs.

Thank you, Ron. I would first like to thank Geoff and the Board of Directors for appointing me as President, succeeding Roman Ptakowski following his retirement. I'm very pleased to be in this new position joining Geoff, Ron, and the rest of our experienced management team at what is a very exciting time for Innovative Solutions and Support.

The Company is executing on its growth strategy. Last year, we focused on winning engineering modification and development programs and were selected by several customers to develop products for their new platforms.

This year, we are focused on advancing those programs through the engineering phases and bringing new products and capabilities to market. The successful execution of this strategy will result in new capabilities, both OEM and retrofit, that will increase our addressable markets.

Let me briefly review the status of our engineering modification and development efforts. The system integration and cockpit avionics upgrade of the National Nuclear Security Administration, Boeing 7-400 classic aircraft provides CNS/ATM capabilities with similar efficiency and performance to the next-generation Boeing 737 aircraft at a fraction of the cost.

This integration program eliminates legacy CRT displays in avionics, leverages commercial aftershock technology, and provides a platform for future upgrades. Included are capabilities such as the flight management system, TCAS, enhanced ground proximity warning system, NEXRAD, weather display, statcom and ADS-B. They have now installed the equipment for the first phase of the program and test flown it on the first aircraft.

This first-phase installation includes the primary and standby flight display systems. The supplemental tax certification developed for the Boeing 737 classic aircraft will permit us to sell to a market of approximately 1,000 aircraft. It also moves us into a more valuable position, allowing us to increase the dollar amount of our typical contract by an order of magnitude.

The contract with Boeing for aerial refueling operated control and display units for the 149 United States Air Force KC46A tankers continues in the engineering modification and development phase. The first prototype units have been delivered to Boeing System Integration Lab for evaluation and testing.

Our general aviation business approach is to leverage our core technology and further our product offerings in the cockpit. We are doing so in the development of an advanced avionics suite, applicable to a large number of aircraft and rotor craft platforms including the Cessna Citation and the Eclipse aircraft. The new OEM Advanced Electronic Monitoring and Control System contract is proceeding according to schedule.

Adding these new capabilities to our portfolio of product and services not only enlarges our market but also yields additional benefits that strengthen the value of the Company. Our expanding system integration capability extends beyond our traditional flat panel displays to provide owners and operators the comprehensive cockpit modernization in the commercial air transport, military, and general aviation markets.

These programs generally are our higher dollar or value orders which translate into significant topline growth. Consequently through the successful execution of our strategy, we simultaneously improve our competitive position and increase the size of our addressable markets.

At the end of the second quarter, we have a backlog of $25.5 million, in line with the backlog we have carried for the better part of last year. I would note that backlog does not include the production phase of the Eclipse contract, the production phases of the new OEM advance, electronic monitoring and control system contract, or the production phases of the Boeing KC46A tanker contract.

Our goal is to ensure that we achieve our objectives by aligning resources to execute on the program on the contract and to effectively leverage our existing product portfolio to capture the opportunity for near-term revenues. We are putting the greater emphasis on proposals that take commercial advantage of our existing product range and are in line with our technology roadmap.

I will be focused on maintaining the right balance of resources to build our capabilities on both the short and long term while preserving the integrity of our financial condition.

I would now like to turn the call back to Geoff.

Thank you, Shahram. Before we open the call to questions, let me summarize with a few closing thoughts and our expectations for the balance of this year. We expect this to be an unusual year. We are engaged in a number of programs that we believe will transform our business, enhance and strengthen our industry recognition and increase shareholder value. In bringing the various opportunities under development to market, we will again demonstrate our ability to provide the industry with technology that outperforms the competition at a faction of the cost. With the increased industry visibility associated with these high-profile programs, we expand the network of owners and operators who select Innovative Solutions and Support for their contact cockpit IP and related needs.

For the fiscal year ending September 30, we expect revenues to be roughly comparable to 2011 after taking into account potential disruptions that may arise from current market conditions. Our goal remains to manage the business conservatively to remain profitable and generate positive cash flow.

Operator, you can now open the call for questions.

(Operator Instructions). David Campbell, Thompson Davis and Company.

I know there is uncertainty on American Airlines. That's one of the risks you cited in your revenue forecast for the year. Were there any American revenues in the March quarter or deliveries in the March quarter?

No.

And that's in spite of the fact that they -- you think just have too much inventory from previous deliveries or have they stopped modifying the 757 -- 767?

I think the short answer is yes. It's very difficult to get good visibility on what's going on at American operationally. But our sense is that they've slowed down the rate of their modification program and they are being -- managing their inventory more closely.

Right. Well, of course now that the trustee is really in control of the situation, I guess, so it's difficult to predict. So your forecast of little or no change at this point and revenues for fiscal 2012 assumes no further deliveries in American Airlines?

No, right now it's uncertain but we understand they continued a single line. They had multiple lines, four or five. It's down to a single line of modification, which slows it down by a factor of three or four to one. We expect some additional modifications and therefore some potential additional revenues from American.

In addition, we're negotiating price adjustments for the number of units and for a support contract going forward. So there are some revenue opportunities at American.

I can't tell from your discussion whether you think the revenues will not exceed last year's forecast and could be lower, or will there possibly be a slight increase in year-to-year revenues?

I think the former is more logical. The impact of a couple of these things have been probably more severe than we expected while they're trying to -- while American is trying to look at what their inventory levels are, et cetera. So that uncertainty is impacting us a bit more than we had anticipated. But we still see and they tell us that they have a long-term program and they anticipate doing still a significant number of additional aircraft.

And the other risks in the revenue forecast are related to the military, I think you mentioned, meaning the military budget being under such scrutiny -- is that the problem?

And again, it's back to uncertainty situation. I think -- yes, I think there's great opportunity, because the military will be looking for value in an even stronger way than they have in the past. And we have very cost-effective solutions. That's the good news. The bad news is they're trying to understand what to do because they have that looming automatic cut that is sitting there and general uncertainty in their budget.

So, I mean, the answer is -- we don't know. We're watching carefully to see what happens.

Obviously in the longer term, it's not as negative. It's just the short term we don't know what -- and I'm not sure they do, either.

Well, there was revenue from the DoD in the first quarter?

Yes.

The other thing -- a couple of other things -- the flat panel -- you didn't give us a breakdown between flat panel and Air Data sales.

It is dominantly flat panel although we're seeing a number of new opportunities in Air Data so that's a positive look, as well.

But not in the March quarter, it was mostly Air -- mostly flat panel --

Not in the March quarter, no.

It would be relatively typical with what you've seen in the last several quarters, David.

Which wasn't much Air Data -- yes, very small.

And you mentioned the four large programs. Shahram went through them. His fourth one, I'm not quite sure what that is -- for what aircraft is the electronic monitoring contract? What is that?

So we actually haven't released the name of the aircraft, essentially by the request of the customer. They have not announced this aircraft yet and once they make their announcement, we will freely talk about it.

Is that general aviation or commercial?

No comment.

And how is Pilatus doing? Do you get any revenues from Pilatus?

Very little.

A lot of this is affected to some extent by military, because some of the sales are into the military and then with respect to the non-military market, it's affected by the general downturn in general aviation.

So that's not contributing anything. I assume FedEx is still proceeding along as planned. Is that correct?

That is correct.

So the general aviation programs that are mentioned in your avionics improvement, that would include the Eclipse and what aircraft, the Cessna aircraft?

That is correct. Also the other platforms that were working with various customers.

Learjets, etc.

[We will have full] application across a number of platforms.

Right. And you had some revenues from that in the March quarter?

That is a new product which is based on -- it's mainly based on the -- it is a product that we developed in the past for Eclipse but it's a new product that is in the vault.

So there wasn't any revenues there in the March quarter.

Not from that product range, no.

Right. Okay. The 737 classic really has potential. When will that be finished? When will the engineering part be completed for the -- I guess it's the two aircraft you're doing for the space agency. Is that it? I can't remember.

By the end of this year, the fiscal year.

Right. By the end of the year. And then you'll be free to sell it to commercial, other operators of the 737.

That's correct.

That's correct.

Right. That seems to be your biggest possible new program, at least that you can talk about.

Certainly short term.

That's what I mean, short term. The Boeing contract will presumably produce some business in the 2013 year, or is that --? Well, it did produce some in the March quarter, I take it, but the basic production of your tanker assuming the DoD mess doesn't screw that up, will be in fiscal 2013?

I don't believe currently that the production is that soon.

2016. I think it's 2016.

2016 is what they are --.

Between now and 2016 we have a lot of deliverables, C drills and prototypes and [sell] units et cetera.

As well as units for the test aircraft and flight testing that they do.

Right. Okay, well I think that does it for me. Thank you very much.

Thanks, David.

(Operator Instructions). Tim Fronda, Sidoti.

Thanks for taking my questions. First question, the price negotiations during the last quarter, are those all resolved, so we shouldn't expect a big dip in revenues like the last quarter?

Are you talking about American?

Are you talking about American? I'm trying to -- I'm sorry I'm trying to catch up -- I don't know specifically what we're --

I knows some revenues were just delayed during the last quarter.

-- we're still in American revenues. We're still in negotiation. We hope that we get them resolved for this quarter. Yes, I'm sorry. We did not resolve them by the end of last quarter. We are still trying to get them resolved as we speak. We hope and expect that to be done hopefully within the next month.

And can we expect the gross margin to be more in the 46% range going forward with more of a shift to EMD work?

I think that that's probably true. The margins on the production programs are maintained at that more or less historical levels, but the engineering programs typically carry a lower margin. And you will probably notice within the -- you won't notice this -- but within the production line is third-party hardware associated with this NNSA program, which carries a lower margin.

So you may see visually that the production margins are not as high as they had been historically, but it is not really reflective of what is going on with our own internal production. It's more of a function of the third-party sales which carry a much lower margin than internal production.

Okay. And final question, do you intend to use cash on hand to repurchase stock over the next few quarters -- continue with that?

We have a stock repurchase program approved under the various SEC rules. We only disclose what's been done historically and that will be disclosed in our Q2 results, though, that should come out in the next week or so. We look at share purchases opportunistically and don't make any forecasts as to what we may or may not do.

Okay, thank you for your time.

Thank you.

Dan Bergman, Bayberry Asset Management. Mr. Bergman, your line is open. (Operator Instructions).

There are no further questions at this time.

Okay, thank you. Since there are no further questions, I'd just like to close with an appreciation that you all attended. We are optimistic about the future and with regard to expanding our product offering and expanding the depth of our product offering. Shahram has refocused our marketing efforts into a strategic opportunity rather than a broad spectrum view of the market. We have focused our energies towards strategically significant programs which we believe will yield a much more stable forward look. Thank you again for attending. Goodbye.