Welcome to the Innovative Solutions and Support Fourth Quarter 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 Geoff Hedrick. Welcome to our conference call to discuss our performance for the fourth quarter of fiscal year 2020, current business conditions and our outlook for the coming year. Joining me are Shahram Askarpour, our President; and Relland Winand, our CFO..

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, our 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'm pleased that our operating performance during this challenging period appears to validate our change in direction.

Fourth quarter had a strong finish, resulting 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 in continued success, in September, the Board of Directors declared a special $0.65 per share dividend. We were able to achieve these results while protecting our employees, partners and customers against the pandemic.

While its impact to-date our business has been minimal, safety precautions have now been a routine -- have now become a routine part of our operators commitment to ensure 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 life guard 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 King Air 260 delivery scheduled to begin in the first half of 2021. We're pleased to be working with Textron and are grateful for the support through the certification and move into production. They are a strong supporter of our technology.

The IS&S autothrottle is the first among the list of 360 upgrades mentioned in their King Air 360 promotional material..

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 F5 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 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, not that the customer-funded F5 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..

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 booked 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. These OEM contracts 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 customs.

The King Air 360 program is just ramping up with the first production aircraft delivered to a customer last month. King Air 260 is scheduled for delivery in the first half of 2021. We have been shipping ThrustSense unit to Textron since 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 Air currently in service, which we estimate represents about a $300 million total addressable market.

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

We are consequently also shipping to autothrottles our installation partners where the peers many King Air owners and take the aircraft for service. Both organizations are aggressively marketing the retrofit, thanks to our opening an office in Wichita to not only promote the product but also support Textron..

Thanks, Shahram. Growing success of our autothrottle strongly suggests that this strategy is creating real value for both our customers and for our stakeholders. We're entering a new fiscal year with momentum for two years, a 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..

Thank you. We will now begin the question-and-answer session. And the first question will come from David Campbell with Thompson, Davis & Company..

Thanks for a good quarter.

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 the year 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 -- or some OEM and some retrofits or all retrofits?.

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 event in retrofit..

But no retrofit revenues yet?.

OEM.

We have both -- actually Textron done installation in Australia on a retrofit on using our autothrottle..

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 better room almost every day. It's very good..

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

Maybe, yes. We'll do a little better..

Okay. Well thanks for everything and the questions..

We're trying to do better. We're trying to keep a more stable and straight growth. Look, the 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 others on supporting our products and see it large retrofit opportunity. Listen, we're already -- we're delivering 5, 7, 6, 7 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 pandemics, most of aerospace companies have been struggling. We've done really well..

Well, you're doing a great job. Thanks for all your help..

If I could do what I'm hoping to do this coming year, and we'll start looking a lot better. I think we're fortunate we have a very good product. It's 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. Every day, get up and as said, kick ass and take names..

Thanks a lot for answering question. I've got to get off from a call that I appreciate your work you're doing. Thank you..

Thank you..

The next question is from Roger Goldman of Private investor..

And 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 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, the 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. You can..

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

But it's a reasonable question, absolutely. Look, 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..

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 the kind of things. We are actually looking at dividends on a long-term basis because we believe 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.

Yes..

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 missed 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, I look forward to it..

I know. Okay, thank you..

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..