Innovative Aerosystems, Inc. (ISSC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Innovative Solutions & Support Fourth Quarter Fiscal 2015 Year End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation by management, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and CEO. Mr. Hedrick, you may begin.

Good morning. This is Geoff Hedrick, Chairman and CEO of Innovative Solutions & Support. I would like to welcome you this morning to our conference call to discuss fourth quarter and full year 2015 results, current business conditions, and our outlook for the upcoming year. Joining me today are Shahram Askarpour, our President; and Rell Winand, our CFO. But before I begin, I would like Rell to read our 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 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, than 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.

Thanks Rell. Fiscal 2015 was a year of recovery. Although, our revenues were down, the increased proportion of our higher margin production revenues, increased gross margins and generated $1.5 million in cash flow from operations, ending the year in a better cash position than the start of the year. We have made significant progress moving from a concentration on a select engineering development program to a broader focus on the opportunities in support of our growing portfolio of products. The end of the Delta program accelerated the transition to a greater focus on production contracts. Earlier this year, we strengthened our sales and marketing efforts as well as our internally funded research and development efforts. Once again in the fourth quarter, research and development expenses exceeded those of a year ago. Now, we believe we are starting to reap the benefits of these decisions. In the fourth quarter, we booked $6 million and ended the quarter with an increase in backlog for the first time this year. Orders were primarily from existing products across a number of platforms where we’ve had great success in markets where there are large fleets. In addition, we received orders for our newer products. This rapid return on our internally funded research and development investment is especially rewarding. Many of the orders from our international markets -- we continue to view international markets as particularly attractive and as our proprietary price performance value proposition seems to be resonating with broad cross-section of owners and operators in Europe, Asia and the Middle East. I would like to comment on our new product, which is different than virtually all of our products in our portfolio. You may recall that the Eclipse checks contained an IS&S auto-throttle computer that is certifying and operating well. We decided to adopt entire Eclipse flight deck to several high-end turboprops, PC-12 as an example. This auto-throttle requires a development of a revolutionary power control actuator for non-FADEC engines. We have developed and have patents pending, which are applicable to a product range of turboprops including twins. It may also be applicable to large multi-engine military aircraft. The enthusiastic reception at NBAA was exciting and remarkable. We are optimistic about a large expanding market for our new products. The order trend continues, even accelerating into the first quarter of fiscal 2016. We have booked in excess of $10 million in new orders already this quarter and again, primarily for existing products. In contrast to the large programs of recent years, requiring extensive engineering before they are ready for production, many of these new contracts go into production immediately. Given that we have spent considerable amount of effort, implementing efficiency and productivity enhancements, we believe we can achieve the margins on our product revenue in line with historical average. A heavier overall potion of production revenues should boost gross margins. Our momentum has creased recently compared to the beginning of fiscal 2015 with $16 million recently booked orders. We plan to continue our aggressive sales and marketing effort, especially in the international markets. We also plan to maintain our internal research the development to further broaden our product portfolio, particularly in the high interest areas such as NextGen technology. And let me turn this over to Rell for a detailed description of our financial performance.

Thank you, Geoff. And thank you all for joining us this morning. For the three months ended September 30, 2015, revenues totaled $3.1 million compared to $9.9 million the same quarter a year ago. Fourth quarter revenues are consistent with the quarterly variability anticipated in the fiscal 2015. In the fourth quarter, product sales were $2.4 million or 77% of total revenues; in the third quarter 84% of revenues were product sales. These two recent quarters of predominantly production revenues are in line with what we have expected should be a steady transition to a higher proportion of productions revenues. For the full year 2016, engineering revenues were $5.5 million, one of the lowest levels in years and down 61% from 2014. Gross margins for the fourth quarter were 35%, in line with full year gross margins. For the year, gross margins were up compared to fiscal 2014. Gross margins continue to be greatly influenced by quarterly revenue volumes and product mix. For both the quarter and the year, margins did not benefit from an increase in engineering revenue margin which had frequently yielded little to no margin in recent years. Based on the composition of current backlog and opportunities in our pipeline, we expect to see the proportion of revenues generated from production contracts to increase in fiscal 2016. Total operating expenses in the fourth quarter were $2.6 million with selling, general and administrative expenses of $1.6 million. As previously mentioned, we began to incur additional legal expenses from the Delta matter in the third quarter and we expect to see those expenses continue into the beginning of 2016, at least at higher levels. For all of fiscal 2015, Delta related legal expenses totaled over $600,000. R&D expense for the fourth quarter rose to $955,000 from $682,000 a year ago and was the highest quarterly level for fiscal 2015, reflecting our commitment to new product research and development. For the fourth quarter, the operating loss was $1.5 million and the net loss was $1.4 million or $0.08 per share. Operating loss for the current year was $2.2 million and the net loss for the current year was $4.7 million or $0.28 per share of which $3.7 million or $0.22 per share was attributable to a non-cash valuation allowance of the Company’s deferred tax assets, some of which may be recoverable in future profitable periods. At September 30, 2015, the Company had $16.3 million of cash on hand and remained debt free. Since the tax valuation allowance is a non-cash charge, over the course of the past twelve months, we generated $1.4 million in cash from operations. We believe the Company has sufficient cash to fund operations for the foreseeable future. With the influx of new orders received to-date, we believe that the variability evidenced in fiscal 2015 will be minimized, as there will be less reliance on book and bill orders in fiscal 2016. Shahram?

Thank you, Rell. Good morning, everyone. I would like to provide an update on the progress achieved during the fourth quarter as well as our current strategy and plan. Since the termination of work on the Delta contract, we have been articulating our strategy to improve efficiencies, increase sales and marketing activities, and invest in new product development to win new orders, the backlog and return the Company to growth. I am pleased to report that this strategy is starting to deliver the intended result, as we see that the increased activity levels of the past year are starting to be converted into new orders. An example of our newly developed products is the Integrated Global Navigation System or IGNS. IGNS development has been entirely funded with internal resources and not dedicated to a specific customer. Since the IGNS was designed to be integrated with our flat panel display system, our large customer, a European airline has also purchased our flat panel displays and integrated standby for the fleet of Boeing 757 aircraft. Also, our intensified marketing efforts for international customers are showing positive results. Over the past few months, we have received orders for Boeing 757 display system from an international cargo carrier and we have received orders for Boeing 737 flight management and display system from another international operator. The Boeing 737 flight deck and flight management system order marks our first commercial customer to purchase the advanced cockpit which we developed for a national nuclear security agency. The full flight deck comprised of our flight management and display systems received FAA certification a year ago. We are seeing strong indications that our classic Boeing 737 flight deck upgrade offers good growth potential in Europe and the Far East. Similar to the IGNS product, we enlarged the sale of our flight management system by linking our flat panel display systems to the order as a means for the customer to maximize aircraft safety and situational awareness, while significantly reducing the cost of ownership over the existing aging avionics. In total, new orders for the fourth quarter were $6 million including backlog to $7.6 million at September 30, 2015 from $4.8 million at June 30, 2015. More importantly, in the current first quarter we have continued to convert pipeline to backlog with in excess of $10 million in new orders booked from October 1st to-date. I would like to emphasize that the majority of the new orders are for our existing products and build upon the platforms where we have historically had success; the Boeing 737, 757, 767 as well as the C130. These are all large fleets where our strategy has been to expand market share by introducing new products and features that augment our existing offers. As a result, we are having success not only with our established products such as flat panel display system but we are also making progress with our newer products such as our integrated standby units, flight management system and IGNS. In many cases, it is the solution sale comprised of multiple IS&S products. This reflects our concerted effort to continually broaden our offering portfolio in the markets we believe to bear the greatest potential. On the new product development front, we just introduced a few future generation flight deck featuring the patent pending PT-6 Auto-Throttle for multitude of general and business aviation aircraft. Our initial installation is in a Pilatus PC-12 aircraft that features our latest generation cockpit system developed for the Eclipse 550. This offering includes our integrated dual RNP flight management system, electronic flight bags, synthetic vision, data, altitude, heading reference system, or our ADAHRs, integrated standby, ADS-B capable Beta 3 GPS, and of course our new auto-throttle controlled by our integrated flat panel display system. We are seeing encouraging interest from aircraft OEMs and installers who forward fit and retrofit of the PC-6 Auto-Throttle into various platforms. I would now like to provide some brief comments on our other development programs. The flight testing underway, the Pilatus PC-24 engineering development program remains on course for commercial orders, starting in late 2016, and our Boeing KC-46A program is also making steady progress. Heading into fiscal 2016, our goal is to continue to build on our momentum and establish innovative solutions and support as a partner on which owners and operators can rely to cost effectively upgrade their cockpits with technology that significantly improves aircraft performance and safety. I would now like to turn the call back to Geoff.

Thank you, Shahram. Over the past year, we have balanced the need for recovery of the organization, while maintaining a strong financial position to support our future growth initiatives. We believe much of the heavy lifting is completed and we now expect to be on an upward slop, looking at new orders and building backlog. I want to thank everyone at IS&S for their efforts in making this happen. Now, we need to build on our momentum. Our goal for 2016 is to grow profitably in the business and generate cash. And we believe this is a solid strategy to create value for our shareholders. We thank you for your continued interest and support. Operator, we are now ready to take questions.

[Operator instruction] The first question comes from David Campbell of Thompson Davis & Company. Please go ahead.

Good morning, Geoff. Congratulations on all these new orders. Very impressive.

It’s good because they are from a broad variety of products, throughout our product lines. I told you, we had a spectacular reception at NBAA, plus we had 300 people at the airplane. It was amazing.

It sounds like you’ll be profitable this fiscal year.

Yes.

You don’t have any problem with that, okay. Because the backlogs are growing so fast, I mean 10 million in new orders.

That’s in two months.

I know it, in two months.

I wouldn’t count on that happening every two months but I think it will -- it’s certainly in the hand is better than in the bush.

I already do my numbers and sending [ph] to you but I’ll be forecasting a profit for the fiscal year.

We will be doing that. We should do that well. Importantly we have very, very few -- a very little revenue if any from engineering development programs and they’re all from production programs. The only aspect that is going to hit us is the legal fees that on the Delta suit. But we see the matter certainly manageable. And they might affect our earnings for the year. But we are confident on that. I think the court will bear us out. And we feel positive that we will get our contract too as it is.

When we look that that’s -- legal fees are non-recurring, or at least an extraordinary expense that you can almost take out of the operations?

Yes, I know but they’re an operating expense. The good news is we’re generating cash to pay for it. As current, we are in solid shape.

I got to go. But thank you very much. I’ll talk to you soon.

Good talking to you. Thanks for calling in.

As there are no more questions, this concludes our conference for today. Thank you for attending.

Thank you for joining today.

Thank you. You may now disconnect your lines.