Innovative Solutions and Support Inc (ISSC) 2023 Q1 法說會逐字稿

Greetings, and welcome to Innovative Solutions and Support, Inc. First Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

您好，歡迎來到 Innovative Solutions and Support, Inc. 2023 年第一季度收益電話會議。 （操作員說明）提醒一下，正在錄製此會議。

It is now my pleasure to introduce your host, Michael Linacre. Thank you. Mr. Linacre, you may begin.

現在我很高興向您介紹主持人 Michael Linacre。謝謝。 Linacre 先生，您可以開始了。

Thank you, operator, and good afternoon, everyone. I would remind our listeners that certain matters discussed in the conference call today, including information about 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.

謝謝接線員，大家下午好。我想提醒我們的聽眾，今天電話會議中討論的某些事項，包括有關新產品以及未來期間的運營和財務結果的信息，都是前瞻性陳述，存在可能導致實際結果出現重大差異的風險和不確定性，從所討論的內容來看是好是壞，包括我們公司的 10-K 中反映的其他風險和不確定性，該 10-K 已提交給美國證券交易委員會和其他公開文件。

Now I'll turn it over to our CEO, Shahram Askarpour.

現在我將把它交給我們的首席執行官 Shahram Askarpour。

Thank you, Mike, and good afternoon, everyone. I will begin today with remarks on our performance in the fiscal first quarter of 2023, followed by comments on the upcoming year and our long-term growth strategy. I will then turn the call over to Mike, who will take us through the details of the financials. .

謝謝邁克，大家下午好。今天，我將首先評論我們在 2023 財年第一季度的業績，然後評論來年和我們的長期增長戰略。然後我會把電話轉給邁克，他會帶我們了解財務細節。 .

We began the year on solid footing with revenues of $6.5 million, driven by stronger OEM volume and engineering development contracts. Underlying end markets remain strong, particularly with OEM customers. I'm pleased to announce that during the Q1 2023 period, we received our FAA supplemental type certificate or STC for the King Air with the G1000 an NXi flight decks and deliver our first aircraft. This STC opened an additional 700 potential aircraft for our King Air autothrottle, which builds on the existing growing aftermarket King Air platforms.

在 OEM 銷量和工程開發合同的推動下，我們以 650 萬美元的收入開始了堅實的基礎。基礎終端市場依然強勁，尤其是 OEM 客戶。我很高興地宣布，在 2023 年第一季度期間，我們獲得了帶有 G1000 和 NXi 駕駛艙的空中國王的 FAA 補充型號證書或 STC，並交付了我們的第一架飛機。該 STC 為我們的 King Air 自動油門增加了 700 架潛在飛機，它建立在現有不斷增長的售後市場 King Air 平台之上。

As we have stated in the past quarters, our winning formula starts with excellent products in attractive growing markets. This effort is supported by more than 500 cockpit upgrades in 757, 767 and 737 platforms combined with a rapidly growing presence in general aviation.

正如我們在過去幾個季度所說，我們的製勝法寶始於有吸引力的成長型市場中的優秀產品。這一努力得到了 757、767 和 737 平台的 500 多次駕駛艙升級以及通用航空領域快速增長的支持。

Gross profit in the first quarter was $3.7 million compared to $4 million in the prior year, mainly due to product mix. As a percentage of sales, gross margin was 57.1% compared to 59.3% in the prior year. We believe these results reflect the success of our innovative products in the market and our dedication to excellence in delivering for our customers.

第一季度的毛利潤為 370 萬美元，而去年同期為 400 萬美元，這主要是由於產品組合。毛利率佔銷售額的百分比為 57.1%，而去年同期為 59.3%。我們相信這些結果反映了我們創新產品在市場上的成功以及我們致力於為客戶提供卓越服務。

Turning to product development and beginning with autothrottle, we continue to invest in additional platforms that benefit from our trusted products as well as increased functionality that help generate additional revenue. Of these 757, 767 engine indication and crew alerting system upgrade development program is progressing well. We expect this additional offering on our successful 757, 767 platforms to generate solid revenue for years to come. We also remain laser focused on the short-term opportunity to meaningfully expand margins through better facility utilization and intend to accomplish this goal through a mix of organic growth and strategic bolt-on M&A.

轉向產品開發並從 autothrottle 開始，我們繼續投資於受益於我們值得信賴的產品的其他平台以及有助於產生額外收入的增加的功能。其中757、767的發動機指示和機組告警系統升級開發項目進展順利。我們預計，在我們成功的 757、767 平台上推出的這一附加產品將在未來幾年產生可觀的收入。我們也仍然專注於短期機會，通過更好的設施利用率來有意義地擴大利潤，並打算通過有機增長和戰略補強併購來實現這一目標。

On the organic side, we continue to expect an expansion of our R&D program in fiscal 2023 to around 13% of sales from 10% in fiscal 2022. The first quarter, our R&D ramp below this level as we are in the process of ramping up our engineering resources. Cockpit automation remains a focus area for us, as demonstrated with the development of the autothrottle for King Air PC-12 and Eclipse.

在有機方面，我們繼續預計 2023 財年我們的研發計劃將從 2022 財年的 10% 擴大到銷售額的 13% 左右。第一季度，我們的研發斜坡低於這一水平，因為我們正在加速我們的工程資源。正如 King Air PC-12 和 Eclipse 的自動油門開發所證明的那樣，駕駛艙自動化仍然是我們關注的重點領域。

Beyond autothrottle, we are expanding automation throughout our product portfolio, specifically to other areas that can drive customer value by enhancing safety and reducing operating costs. We have the key product lines and technologies to further automate cockpit operations, which would significantly enhance flight safety and eventually lead to crew reduction.

除了自動油門之外，我們還在整個產品組合中擴展自動化，特別是通過提高安全性和降低運營成本來推動客戶價值的其他領域。我們擁有關鍵的產品線和技術，可以進一步實現駕駛艙操作的自動化，這將顯著提高飛行安全並最終減少機組人員。

In terms of inorganic opportunities, as I have noted in December, we have assembled a business development team to pursue opportunities. During the first quarter, we developed an active pipeline and while it is too early to share any details, we now have the ability to identify and execute on attractive product line type acquisitions that complement our existing portfolio. We expect to be able to fund bolt-on acquisitions through cash on the balance sheet and free cash flows from operations, which exceeded $6 million in fiscal 2022.

就無機機會而言，正如我在 12 月指出的那樣，我們組建了一個業務開發團隊來尋求機會。在第一季度，我們開發了一個活躍的管道，雖然現在分享任何細節還為時過早，但我們現在有能力確定並執行有吸引力的產品線類型的收購，以補充我們現有的產品組合。我們希望能夠通過資產負債表上的現金和來自運營的自由現金流為補強收購提供資金，在 2022 財年超過 600 萬美元。

Taken together, we believe we can grow ourselves, increase our asset utilization and drive incremental margin to overall business. At full capacity, we believe our infrastructure can support a meaningful increase to our operating results and total free cash generation.

總而言之，我們相信我們可以發展自己，提高我們的資產利用率並推動整體業務的增量利潤。在滿負荷運轉的情況下，我們相信我們的基礎設施可以支持我們的經營業績和總自由現金產生量的顯著增長。

To conclude, we're off to a good start for the year with a strong outlook as we deliver on our legacy products and new offerings. Thank you for your time and interest, and we look forward to updating you with further details in the upcoming quarters.

總而言之，隨著我們交付傳統產品和新產品，我們今年開局良好，前景廣闊。感謝您的時間和興趣，我們期待在接下來的幾個季度為您提供更多詳細信息。

Now I will turn the call over to Mike for a closer look at the numbers.

現在我將把電話轉給邁克，讓他仔細看看這些數字。

Thank you, Shahram. And thank you all for joining us today. I will review our financial results for the first quarter of fiscal 2023. Revenues declined slightly by 2.7% to $6.5 million in the first quarter versus $6.7 million in the first quarter of fiscal 2022. The decrease was largely due to lower commercial aftermarket revenue, which is partially offset by growth in our general aviation OEM business.

謝謝你，沙赫拉姆。感謝大家今天加入我們。我將回顧我們 2023 財年第一季度的財務業績。與 2022 財年第一季度的 670 萬美元相比，第一季度收入略微下降 2.7% 至 650 萬美元。下降的主要原因是商業售後市場收入下降，這部分被我們的通用航空 OEM 業務的增長所抵消。

The decrease in commercial sales was primarily a function of when the sales orders were received for our aftermarket retrofit business from commercial air transport customers. These orders may fluctuate from quarter-to-quarter while we continue to anticipate that sales will support the short-term organic growth trajectory. Demand from our OEM business remained strong during the quarter. Sales from engineering development contracts, or EDC, improved as a result of 2 research and development projects. Customer service revenue was consistent with prior year.

商業銷售額的減少主要是因為我們從商業航空運輸客戶那裡收到售後市場改造業務的銷售訂單。這些訂單可能會隨季度波動，而我們繼續預計銷售將支持短期有機增長軌跡。我們 OEM 業務的需求在本季度保持強勁。由於 2 個研發項目，工程開發合同 (EDC) 的銷售額有所提高。客戶服務收入與上年持平。

New orders in the first quarter were approximately $3.3 million and backlog was $8.5 million as of December 31, 2022. Backlog is up from $6.2 million as of December 31, 2021. We include only purchase orders in hand from the Pilatus PC-24, Textron King Air and the KC-46A long-term programs in our total backlog. The current backlog includes a large contract with one of our general aviation OEMs that is locking in their supply chain beyond their normal advanced order. Given this increase, total backlog levels do not necessarily translate to increased future sales. We anticipate that these programs will remain in production for about a decade and should continue to add to production sales already included in the backlog.

截至 2022 年 12 月 31 日，第一季度的新訂單約為 330 萬美元，積壓訂單為 850 萬美元。截至 2021 年 12 月 31 日，積壓訂單為 620 萬美元。我們僅包括德事隆 Pilatus PC-24 的手頭採購訂單空中國王和 KC-46A 長期計劃在我們的全部積壓中。目前的積壓訂單包括與我們的一家通用航空原始設備製造商簽訂的一份大合同，該合同鎖定了他們的供應鏈，超出了他們正常的提前訂單。鑑於這種增長，總積壓水平並不一定會轉化為未來銷售額的增加。我們預計這些項目將繼續生產大約十年，並且應該繼續增加已經包含在積壓訂單中的生產銷售。

First quarter gross margin was 57.1% versus 59.3% in the first quarter period from a year ago. Cost of sales increased due to the combination of higher less profitable OEM business, lower product sales and slightly higher direct material costs, which adversely impacted our operating leverage. Note that all our long-term OEM production contracts include escalation clauses that provide for the passing along of a portion of cost increases incurred as a result of inflationary pressures.

第一季度毛利率為 57.1%，而去年同期為 59.3%。由於利潤較低的 OEM 業務增加、產品銷售減少和直接材料成本略高，銷售成本增加，這對我們的經營槓桿產生了不利影響。請注意，我們所有的長期 OEM 生產合同都包含升級條款，這些條款規定轉嫁因通貨膨脹壓力而導致的部分成本增加。

As we've mentioned on previous calls, our optimized operating model is based on a fixed cost platform with relatively lower employee head count. We expect our operating leverage and margin profile to improve as sales growth returns over the remainder of the year. Total operating expenses were $2.9 million in the first quarter compared to $2.5 million in the prior year first quarter. The uptick in general and administrative expenses in the quarter was mainly on account of noncash long-term employee stock compensation and professional and legal fees.

正如我們在之前的電話會議中提到的那樣，我們優化的運營模式基於員工人數相對較少的固定成本平台。我們預計，隨著今年剩餘時間的銷售增長回歸，我們的經營槓桿和利潤率狀況將有所改善。第一季度的總運營費用為 290 萬美元，而去年第一季度為 250 萬美元。本季度一般和行政費用的增加主要是由於非現金長期員工股票補償以及專業和法律費用。

Higher G&A costs are expected to continue into the second quarter and moderate into the second half of the year. The growth in operating expenses was offset in part by higher interest income generated from the combination of a larger amount of balance sheet cash, higher interest rates and the reallocation of funds into higher interest-yielding investments compared to the same period in the prior year.

較高的 G&A 成本預計將持續到第二季度，並在今年下半年放緩。與上年同期相比，資產負債表現金數量增加、利率上升以及資金重新分配至利息收益更高的投資所產生的利息收入增加，部分抵消了運營費用的增長。

R&D expenses were approximately 11% of revenue and in line with the year ago first quarter levels. Our expectation of targeting 13% of revenue for R&D in 2023 is unchanged, and we, therefore, expect R&D expenses to gradually rise over the coming quarters.

研發費用約佔收入的 11%，與去年第一季度的水平持平。我們對 2023 年將收入的 13% 用於研發的目標沒有改變，因此我們預計研發費用將在未來幾個季度逐漸上升。

Tax expense in the first quarter was $0.2 million compared to $0.3 million in the prior year quarter. First quarter net income was $0.7 million or $0.04 per share versus $1.1 million or $0.07 per share in the first quarter of fiscal 2022.

第一季度的稅收支出為 20 萬美元，而去年同期為 30 萬美元。第一季度淨收入為 70 萬美元或每股 0.04 美元，而 2022 財年第一季度為 110 萬美元或每股 0.07 美元。

IS&S maintains ample flexibility driven by significant liquidity and a debt-free balance sheet, which enables us to be very well positioned to capitalize on organic and inorganic opportunities. We had $19.4 million of cash on hand as of December 31, 2022, up from $17.3 million at the end of fiscal 2022. The company generated cash flows of $1.8 million from operations and received net cash of $0.4 million from financing activities from the exercise of stock options during the quarter.

IS&S 在大量流動性和無債務資產負債表的推動下保持充足的靈活性，這使我們能夠很好地利用有機和無機機會。截至 2022 年 12 月 31 日，我們手頭有 1,940 萬美元的現金，高於 2022 財年末的 1,730 萬美元。公司從運營中產生了 180 萬美元的現金流，並從融資活動中獲得了 40 萬美元的現金淨額本季度的股票期權。

Looking at the remainder of fiscal 2023, we expect to continue to generate strong cash flows with the maintenance of current gross margin levels and cost control. We anticipate increasing our capacity utilization and expanding operating leverage as we drive revenue growth by capitalizing on organic and inorganic opportunities through the remainder of the year.

展望 2023 財年的剩餘時間，我們預計將在維持當前毛利率水平和成本控制的情況下繼續產生強勁的現金流。我們預計在今年餘下時間利用有機和無機機會推動收入增長，從而提高我們的產能利用率並擴大經營槓桿。

With that, operator, we are ready for any questions.

有了這個，接線員，我們準備好回答任何問題。

(Operator Instructions) Our first question comes from David Campbell with Thompson Davis.

（操作員說明）我們的第一個問題來自大衛坎貝爾和湯普森戴維斯。

Congratulations on a solid quarter. I was surprised with the general and administration expense, $2.1 million, I believe it was in the quarter. Does that reflect the creation of your team to look for additional opportunities or different products that you may acquire. And this so -- will you continue to generate that $2.1 million every quarter?

祝賀一個穩定的季度。我對 210 萬美元的一般和管理費用感到驚訝，我相信這是在本季度。這是否反映了您的團隊的創建是為了尋找您可能獲得的額外機會或不同產品。這樣一來，您會繼續每個季度產生 210 萬美元嗎？

Yes. Thanks for the question, David. And yes, the actual operating expenses were $2.9 million versus $2.5 million last year. That's part of the increase is what you mentioned. But really, a lot of this came up was added as a direct result of the passing of our founder. Going forward, we have a long-term compensation and a bonus plan in place that we have not had before. That will put us more in line with our peers and the industry.

是的。謝謝你的問題，大衛。是的，實際運營費用為 290 萬美元，而去年為 250 萬美元。那是你提到的增加的一部分。但實際上，其中很多都是由於我們創始人去世的直接結果而增加的。展望未來，我們有一個長期的補償和獎金計劃，這是我們以前沒有的。這將使我們更加符合我們的同行和行業。

And a lot of this -- having said that, a lot of these expenses are in stock. So there's not a cash impact. You can see that we generated $1.8 million in the quarter of free cash flows. So not affecting the company's ability to generate cash. Also some onetime legal fees in there, bringing the company in line with peers as far as corporate governance and other temporary -- or costs that are temporary in nature.

其中很多 - 話雖如此，其中很多費用都在庫存中。所以沒有現金影響。你可以看到我們在本季度產生了 180 萬美元的自由現金流。因此不會影響公司產生現金的能力。還有一些一次性的法律費用，使公司在公司治理和其他臨時性或臨時性成本方面與同行保持一致。

It sounds like some of this was a temporary cost related to related to the stock options and other expenses that you may not have in the rest of the year. So should we anticipate that trucking, general and administrative expenses should go down from where they were in the first quarter?

聽起來其中一些是與股票期權相關的臨時成本和您在今年剩餘時間可能沒有的其他費用。那麼我們是否應該預期卡車運輸、一般和行政費用會比第一季度的水平下降？

I would say the run rate will be -- and there are some temporary costs in there, some onetime costs, but they will be lower than what we ran in the first quarter. But I think generally, they will be up from historic run rates just based on our new long-term compensation incentive as well as bonuses as well as investing into the team for future growth.

我會說運行率將是 - 那裡有一些臨時成本，一些一次性成本，但它們將低於我們在第一季度的運行率。但我認為，總的來說，基於我們新的長期薪酬激勵和獎金以及對團隊未來增長的投資，它們將高於歷史運行率。

Yes. And you mentioned an impact from the founders dying a year ago. How is that an impact?

是的。你提到了創始人一年前去世的影響。影響如何？

Well, our former founder did own 20% of our shares, and we did, from time to time, issue special dividends that was effectively -- is long-term compensation plan. So to kind of replace that and offer our current executives and management team a long-term incentive plan, we don't own that percentage of shares, we needed to increase that G&A item.

好吧，我們的前創始人確實擁有我們 20% 的股份，而且我們確實不時地發行特別股息，這是一種有效的長期補償計劃。因此，為了取代它並為我們目前的高管和管理團隊提供長期激勵計劃，我們不擁有該比例的股份，我們需要增加 G&A 項目。

And your interest income was a substantial amount. Is anything nonrecurring about that? I realize interest rates are higher, and that's why that happened to at least some of it, but I'm surprised that it was this much up -- up this much all of a sudden.

你的利息收入是一筆可觀的數目。有什麼是非經常性的嗎？我意識到利率更高了，這就是為什麼至少其中一部分會發生這種情況，但令我驚訝的是它突然上升了這麼多——突然上升了這麼多。

If you look at our cash, from year-to-year, our cash more than doubled last year. We ended the year at over $17 million. We have over $19 million in the first quarter. We only had $9 million at the end of last fiscal 2021 year-end. So it's a combination of having more cash. Interest rates are also a lot higher now than they were a year ago. And we also did reallocate some of the funds to higher-yielding interest accounts as well.

如果你看一下我們的現金，從年復一年來看，我們的現金去年翻了一番多。我們年底的收入超過 1700 萬美元。第一季度我們有超過 1900 萬美元。在上一個 2021 財年末，我們只有 900 萬美元。所以這是擁有更多現金的結合。現在的利率也比一年前高很多。我們也確實將部分資金重新分配到收益更高的利息賬戶。

Right. Have you had any impact from Airbus, converting their cargo. More of their equipment is being converted from passenger to cargoes, which has benefited your company's Boeing contracts. Do you see any plan in Airbus developing the same relationship?

正確的。你有沒有受到空中客車公司的影響，轉換他們的貨物。他們的更多設備正在從客運轉為貨運，這使貴公司的波音合同受益。您是否看到空中客車有任何發展相同關係的計劃？

We currently don't have system upgrade -- cockpit upgrade system for the Airbus fleet being converted to cargo. But we continue delivering on our 737, 757, 767 cockpits for cargo conversion as well as other airline operators as they're looking to upgrade their cockpits. So we see that kind of a steady demand that we've had now continue in general. And we're also putting together replacement for the EICAS system in this, which is the engine indication and crew alerting, we should augment those cockpits as well as opportunity to go to take a chunk of those 500 airplanes that are out there and offer them an additional upgrade.

我們目前沒有系統升級——空客機隊的駕駛艙升級系統正在轉換為貨運。但我們繼續交付我們的 737、757、767 駕駛艙以進行貨運轉換以及其他航空公司運營商，因為他們正在尋求升級他們的駕駛艙。因此，我們看到我們現在的那種穩定需求總體上仍在繼續。我們還在為 EICAS 系統安裝替代品，即發動機指示和機組人員警報，我們應該擴充這些駕駛艙，並有機會從那裡的 500 架飛機中取出一部分並提供給他們額外的升級。

I've seen where UPS and FedEx are grounding several of their aircraft, their older aircrafts, which tells me that their demand for capacity is down. Is that -- have you seen any impact on your customers from that trend?

我已經看到 UPS 和 FedEx 停飛了他們的幾架飛機，他們的舊飛機，這告訴我他們對運力的需求正在下降。那是——您是否看到這種趨勢對您的客戶有任何影響？

Not significantly. I mean this has always been -- the aftermarket on the 57, 67 has always been for us kind of cyclic. We get a few years up and then it kind of goes down and it varies between, I guess, $5 million to $7 million a year. I don't see it getting out of that range anytime soon. It's going to have -- some years going to be more, some years are going to be less.

不顯著。我的意思是，這一直都是——57、67 的售後市場對我們來說一直是一種循環。我們上升了幾年，然後下降了，我猜每年在 500 萬到 700 萬美元之間變化。我認為它不會很快超出該範圍。它將有——有些年會更多，有些年會更少。

Well, air freight rates jumped 2 years ago, but they're now down to normal levels. So the airlines aren't experiencing the same demand factors as they had. But I think...

好吧，空運費率在 2 年前飆升，但現在已降至正常水平。因此，航空公司沒有遇到與以前相同的需求因素。但我覺得...

But the passenger's up significantly. Yes. So again, our cockpit is not necessarily tied into cargo operations. It's applicable. I mean Icelandair is one of our customers, and we provide a cockpit for the 757, 767 on the passenger.

但乘客人數明顯增加。是的。同樣，我們的駕駛艙不一定與貨運業務相關聯。這是適用的。我的意思是 Icelandair 是我們的客戶之一，我們為乘客提供 757、767 的駕駛艙。

(Operator Instructions) We have no further questions, at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

（操作員說明）目前我們沒有其他問題。今天的電話會議到此結束。此時您可以斷開線路。感謝您的參與。