Innovative Solutions and Support Inc (ISSC) 2020 Q4 法說會逐字稿

Welcome to the Innovative Solutions and Support Fourth Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. This is Geoffrey Hedrick. Welcome to our conference call to discuss our performance for the fourth quarter and fiscal year 2020, our current business conditions and our outlook for the coming year. Joining me are Shahram Askarpour, our President; and Rell Winand, our CFO.

Before I begin, I'll ask Rell to read the safe harbor message.

Thank you, Geoff, 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 Geoff.

Thank you, Rell. 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 a 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 2020 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 and continued success, in September, the Board of Directors declared a special $0.65 per share dividend.

We were able to receive -- 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 ThrustSense Autothrottle with LifeGuard protection on the new King Air 360 twin turboprop. In November, Textron celebrated delivery of its first Beechcraft King Air 360 turboprop aircraft.

More recently, Textron announced that the ThrustSense Autothrottle is standard equipment on the new King Air 260. Delivery is scheduled to begin in the first half of 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&S autothrottle is the first among a list of 360 upgrades mentioned in their King Air 360 promotional material.

Textron joins 2 other major OEMs to feature IS&S products as standard equipment on their production aircraft, joining Pilatus PC-24 UMS and Boeing's KC-46 tanker, as major OEM contracts have 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 and looking into opportunities for the ThrustSense workload-reducing features on their other production platforms. We're grateful to see the service center organization 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 centers' demand for autothrottle and help promote the availability of this potentially life-saving technology to King Air's owners. ThrustSense also has a base for expanding beyond the general aviation market to look at the military aircraft and air transports and multiengine aircraft as well.

In addition, we are finding that the publicity surrounding our ThrustSense has created interest with other OEMs. We are potentially -- our potentially life-saving FAA-certified one-engine-inoperative 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 air carrier performance but can provide unparalleled safety.

Precipitated by our King Air 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. We continue to recruit sales and support personnel for our growing business demand and for ThrustSense Autothrottle and LifeGuard protection systems.

In addition, in September of 2020, we announced the FAA had certified our Synthetic Vision installation and Autothrottle Upgrade for the Eclipse Jet. The Eclipse has -- the Eclipse was the first aircraft in which we developed an autothrottle, and we are pleased to be able to offer owners the ability to upgrade the airplanes with our latest features.

The ongoing growth of online shopping continues to fuel the increase in the number of 757s and 67 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 on -- for the F-5 in the fourth quarter. We are now marketing international customers for the F-5.

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

Thank you, Geoff, and thank you all for joining us this morning. Looking first at the fourth quarter, revenues were $6.3 million, up 31% from $4.8 million a year ago, and generated a 39% increase in operating income. This was the fastest quarterly rate of growth in this fiscal year. Growth in this quarter was almost entirely in product and customer service revenue as we completed final engineering on the U.S. Navy F-5 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 historical averages achieved over the years.

Total operating expenses for the fourth quarter of fiscal 2020 were $2.3 million, up from $2 million 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 more internally funded R&D, now that the customer-funded F-5 development contract is completed. R&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 $1.2 million or approximately 19% of revenue. Other income was down from the year ago quarter as interest rates decreased. We reported quarterly net income of $1.2 million or $0.07 per share.

Looking at results for the year. Total revenues were $21.6 million, up 23% from $17.6 million for full year 2019. The company reported fiscal 2020 net income of $3.3 million or $0.19 per share, increase of 74% and 73%, respectively, from net income of $1.9 million or $0.11 per share for fiscal 2019.

The company remains in strong financial position. We generated over $2.2 million of positive cash flow from operations in fiscal 2020, of which $1.6 million was generated in the fourth quarter, and had $12.6 million of cash on hand at September 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 $11.2 million, which was paid on October 1, 2020. The dividend appears as an accrual on our September 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 Shahram.

Thank you, Rell, and good morning, everyone. The fourth quarter was our best sales quarter of the fiscal 2020 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 1 manufacturer, Textron. King Air 360 and King Air 260 are new aircraft that will feature our ThrustSense Autothrottle as standard equipment, to join our ongoing OEM contracts with Pilatus and Boeing. With these OEM contracts, we are building a solid foundation of recurring revenue that should last for years.

Let me also quickly reiterate what Geoff mentioned earlier. We generated this strong growth and profitability and successfully executed on the King Air contract, while implementing new safety policy and procedures that have kept all of our employees safe and productive as well as protected our partners and customers.

The King Air 360 program is just ramping up, with the first-production aircraft delivered to a customer last month. The King Air 260 is scheduled for delivery in the first half of 2021. We have been shipping ThrustSense units to Textron since the third quarter and expect orders to naturally follow the anticipated increase in production over time.

In addition to shipping units for installation on the King Air 360, we are also shipping units to Textron for distribution to the service centers where they have been used for retrofit installations. As Geoff mentioned, the retrofit opportunity is much greater than the forward-fit, with about 5,000 King Airs currently in service, which we estimate represents about a $300 million total addressable market.

At this point, we are certified for retrofit on the Beechcraft King Air 300 series equipped with Pro Line Fusion avionics and the Pro Line 21-equipped Beechcraft King Air 200 series. Other variations of this STC are being pursued with some imminence.

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 conversations with manufacturers of both twin turboprop, twin jet and multi-engine aircraft with regards to our autothrottle. Potentially lifesaving nature of ThrustSense on multi-engine aircraft is a feature in which virtually all OEMs have an interest.

In September 2020, we announced that the FAA has certified our Synthetic Vision installation and Autothrottle Upgrade for the Eclipse Jet. This installation marks IS&S'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 IS&S.

I will now briefly review some of our ongoing programs. The PC-24 program has essentially reached steady-state production levels. We expect to ship close to 50 shipsets in fiscal 2021 to support their current production rate. This program remains highly successful. Pilatus is very [excited about] our performance. This program, we believe, is expected to continue to run for many years, offering a predictable, stable, recurrent revenue stream.

Dynamics in the commercial air transport market are also essentially unchanged. Their cargo delivery services continue to convert Boeing 757 and 767 planes, including upgrades to our flat panel displays. Where 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 75 and 767s that are still in need of retro fitting and even larger number of 737s yet to be updated.

Development work for the U.S. Navy F-5 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 F-5, and would be a large new market for this versatile product.

Our KC-46 program with Boeing is one of our 3 OEM production contracts. It continues to make steady contribution to our recurring revenue and profitability. New orders in the fourth quarter of fiscal 2020 were over $3.4 million and backlog as of September 30, 2020 was $3.6 million.

Bookings for the full year were in excess of $19 million. Keep in mind that backlog at the end of any 1 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 directive. On 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.

Let me turn the call back to Geoff for some closing remarks.

Thanks, Shahram. 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 2 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 the questions as required.

(Operator Instructions) And the first question will come from David Campbell with Thompson, Davis & Company.

Thanks for having such a good quarter. I just wanted to ask you, Rell, that what do you assume -- what I should assume for accrued tax rate in fiscal '21? Will there be end-of-day tax accruals?

Yes. There'll be some expense, but it will be lessened because we still have some NOLs and some R&D tax credits. So I would use -- I'm estimating -- use like a 5% effective tax rate type of thing.

Okay. And Geoff and Shahram, were any of the shipments to the King Airs -- were any of them for -- were some OEM and some retrofits? Or all retrofits?

No. OEM, both.

A lot of OEM, actually, 20-odd OEM shipments. Obviously, the airplanes haven't come off the line yet. But -- and then a very rapidly growing demand in retrofit.

But no retrofit revenues yet?

OEM, no, we have.

Yes. We have both.

Actually Textron did an installation in Australia on a retrofit on -- using our autothrottle.

We've had a good number of them. We've had -- their local service centers, they have a huge network of service centers throughout the world. And the very encouraging thing is they are very aggressively promoting the autothrottle retrofit. So it looks as -- it looks better almost every day. It's very good.

So you expect that to be -- so you expect those revenues to increase in fiscal '21?

Very much so. We believe that the growth is going to be exponential.

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

Yes.

Maybe we'll do a little better.

Yes.

We're trying to do it -- we're trying to do better. We're trying to keep a more stable and straight growth. Look, we had -- operation is good. It generates cash 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 of the fixed overheads, a lot of which affects precedent profitability.

So we're very optimistic about the future. We're very pleased about Textron's interest and support in our products, and see a large retrofit opportunity. Listen, we're already -- we're delivering 57, 67 systems to another very new demand for package carriers. So I mean it's -- the business is coming up. And when you consider the other effects of pandemic, if you look at -- most of aerospace companies have been struggling. We've done really well.

Well, you're doing a great job.

I won't (inaudible) yet. If I could do what I -- well, I'm hoping to do this coming year, then it will start looking a lot better. 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, everyday get up and, as if Marines say, kick ass and take names.

(Operator Instructions) The next question is from [Roger Goldman], a private investor.

First of all, thanks for a great quarter and a great year. It validates my late father's trust in you, as you know. And my sister and I are much appreciative. I also want to 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 a 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?

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

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

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 in a business 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 paying interest in pennies.

Yes, yes, yes.

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

We are actually looking at dividends on a long-term basis because we believe that the business itself will generate cash on a regular basis, and that we believe that our stockholders could make good use of cash. So we're very conscious of that. That's what precipitated the $0.65. And yes, we continue to look at it, especially in light of what might be changes in taxation policy.

Exactly. Yes. 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.

We miss your dad. He was always funny. He's a good guy.

Well, thank you. We miss him, too. We miss him, too, but I'm hoping after COVID just to come on out there and meet you guys and spend some time. So look forward to it.

I know. My wife (inaudible) looking at me. I don't know. Okay.

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.

Thank you.

It 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.