Good morning, and welcome to the Innovative Solutions and Support First Quarter 2021 Fiscal Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Geoffrey Hedrick, Chairman and CEO. Please go ahead..

Good morning. This is Geoff Hedrick. Welcome to our conference call to discuss our performance for the first quarter of fiscal 2021, current business conditions and the outlook for the coming year. Joining me today is Shahram Askarpour, our President; and Rell Winand, our CFO. Before I begin, I'd like 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. We managed to maintain revenue growth, bottom line profitability and positive cash flow in the first quarter of our fiscal 2021 in spite of the pandemic's impact on our industry. Although on a balanced mix, retrofit and OEM has somewhat mitigated the impact of the COVID pandemic on our business.

However, the exponential growth in our autothrottle has been impacted but the slower and steady expansion in demand is resulting in a promising revenue growth. This was our third consecutive year in which our first quarter revenue and operating income increased from the previous year's first quarter.

In addition, we finished this quarter with a backlog that was greater than the end of the quarter. And we have achieved these results while maintaining committed to implementing precautions against COVID-19 that we seek to ensure that safety of our employees, suppliers and customers.

Reflecting our continued confidence in the business, in December, the Board of Directors declared a special $0.50 per share dividend, together with a $0.65 per -- $0.65 dividend declared in September, we returned nearly $20 million of our cash to the shareholders over the second half of calendar 2020.

As a result of our strong cash flow, we remain in excellent financial condition with significant liquidity and no debt. We have, however, expanded our access to capital by opening a credit line with our bank, making that available if we need it.

Since speaking to you several weeks -- a few weeks ago, we continue to make progress on our strategic initiatives. Flying Magazine, a leading aviation industry publication has just awarded IS&S one of its 3 prestigious annual awards for their 2020 Editors' Choice Awards, along with Spacex and Garmin.

These highly anticipated and distinguished awards are selected by their senior editors based on the products that have the greatest influence on safety and technology and aircraft operations.

Textron -- with Textron, we announced that they offered our ThrustSense autothrottle as standard equipment on the new King Air 260, further expanding our product revenue from Textron.

All of our OEM contracts are expected to generate recurring revenue of significant value over the next few years and all of these contracts are with some of the most respected names of the industry, Textron, Pilatus and Boeing. In addition to their direct impact, these relationships are creating additional growth opportunities.

In the case of Textron, we are jointly capitalizing on their global network of service centers where they are and we are promoting the autothrottle benefits. We will go on toward next month to 5 of the service centers at the beginning of the month, with presentations by their Chief Test Pilot and our product support maintenance group.

The retrofit market is much better than the OEM opportunity right now. We are making progress working with Textron to more broadly adopt our technology across their product portfolio.

The success of our ThrustSense technology and the general aviation market is creating opportunities in adjacent markets, such as military, air transport and several multiengine aircraft.

In addition to the steady recurring generated -- recurring revenue generated from these contracts, there remains strong demand of our legacy products with our long-term customers. A recent introduction of the synthetic vision and Autothrottle Upgrade for the Eclipse Jet is seeing steady demand.

The new ownership has committed to refurbishing and upgrading used aircraft and are preparing to place sizable orders on new cockpits for those airplanes. The strong growth of online shopping and the decrease in air passenger miles has made the 757 and 767 aircraft a choice for cargo carrier conversions.

We have delivered several ship sets of 767 flight decks to Amazon, who is creating their own fleet expansion. .

Thank you, Geoff, and thank you all for joining us this morning. Looking at the first quarter, revenues were $4.9 million, up 8% from $4.5 million a year ago, reflecting an increase in King Air Autothrottle Systems sales and growth in the flat panel display revenues arising from the ongoing conversion of 757 and 767 aircraft to air cargo planes.

Gross margins for the quarter were 52.7% compared to 57.7% in the year ago quarter. This is primarily attributable to an increase in direct costs as we staff operations to efficiently meet the demand of both increase in production programs under contract and the increasing demand for air transport retrofit services.

Warranty expense also increased in the quarter. Margins remain in line with historical averages and can be expected to expand as we leverage our fixed investment through revenue growth anticipated over the balance of the year.

Total operating expenses for the first quarter of fiscal 2021 were $23.3 million, down marginally from a year ago and basically unchanged from the preceding fourth quarter of fiscal 2020. Operating expense control remains a priority, and we do not believe they will rise much further from current operating levels over the balance of the year.

Research and development expense decreased from the year ago quarter, reflecting increased product development programs that were allocated to cost of sales in the quarter. Research and development expense were over 12% of quarterly revenues, which is consistent with our strong commitment to innovative and new product development.

Selling, general and administrative expenses were up marginally from the year ago quarter. Note that first quarter operating expenses reflect the increase in staff brought about by steady growth as well as the onetime costs typically incurred in the December quarter, such as our annual audit.

This increase was partially offset by reduced marketing show expenses as a result of COVID-19. For the quarter, we generated operating income of $232,000, a marginal increase from the year ago quarter. We reported quarterly net income of $240,000 or $0.01 a share as compared to net income of $328,000 or $0.02 per share in the year ago quarter.

This decrease in net income is due to a reduction in interest income this quarter, reflecting the decreased cash balance and lower interest rates compared to the year ago quarter. .

Thank you, Rell, and good morning, everyone. Continuing the trend in the first quarter that now stretches back over the last couple of years, we grew revenues, generated a profit and were cash flow positive.

These results reflect the growth of recurring revenues from OEM production contracts, ongoing demand for our legacy products and the growing aftermarket upgrades of ThrustSense products. Also reflects the diversity of our markets, high-quality of our customers, but among the most respected brands in the industry.

This focus on working to the best in the business on both new and existing airframes, the new and existing technology has proven to be a formula for success. While our Pilatus PC-24 ongoing KC-46 contracts have been underway for some time, our Textron King Air contracts are beginning to ramp up.

Initial units, including those ticketed for simulators, have been shipped with the King Air 260 not scheduled for delivery until later this year and the new version of C-90 to follow, we are not at full run rate production volumes. Textron has noted, that is delivered 18 King Air 360s in the fourth quarter.

And as Textron sales production rates increase will follow suit. The larger opportunity in the King Air market is the approximately 5,000 aircraft that are currently in service. Estimate the retrofit market to be at a $300 million opportunity.

The versatility and performance of our autothrottle is enabling us to look at growth potentials across all our markets, commercial air transport, general aviation and military.

For instance, we are in conversation with manufacturers of both twin turboprop, twin jet, a multiengine aircraft with regards to our autothrottle, not only in the business aviation market, but in the military and other markets as well.

While some of these discussions have slowed down due to the pandemic, the interest is real and the potential is exciting.

As always, it's encouraging to receive further recognition for our ThrustSense Autothrottle from industry experts, such as recent Flying Magazine Editors' Choice Award based on products that have greatest influence on safety and technology and aircraft operations.

Briefly reviewing some of our ongoing programs, the PC-24 program has been highly successful, and we expect aircraft delivery rates to remain at a steady level. .

Thanks, Shahram. The fiscal year is off to a solid start, with revenues up, continued profitability and strong cash flow.

We have rewarded our effect shareholders with nearly $20 million in dividends in the second half of calendar 2020, and it is our intention to continue to build the business to create even greater value for our shareholders in the long-term. Thank you for coming. .

The first question will be from David Campbell of Thompson, Davis & Company..

Thanks for your comments today, and for doing a good job despite the pandemic and an impact on your company. I also want to thank you very much for the special dividend in December. That was well needed by the Campbell family, thank you very much.

I'm hopeful revenues in coming quarters will begin to reflect the optimism of -- that you have in your various products and for services. So I'll continue to estimate probably more earnings than I should. But one of these quarters, I expect your optimism will produce some meaningful profits. If you have any problem with that, please let me know..

Listen, I'm the first guy that wants to have more profit. Remember, I'm the largest shareholder in the company. So I want to have lots of profits. I'm with you. Keep up the good work..

The next question will be from , a Private Investor..

Well done, team, very nice quarter in spite of all the headwinds and very optimistic. Geoff, I have a question about battery-powered airplanes. There's a lot of attention being given to battery power as the future of aviation.

There are any number of incredibly well-funded start-ups who are already flying these airplanes with delivery expected in the next 2 years.

Have you looked at playing in that market? And if so, how?.

The quick answer is no, we haven't. We would like to see the market develop a little more definitively. My judgment is that it's terrific. You can do a lot of things with electric motors that you can't do with any other propulsion means. One of the problems continues to be a source of energy to drive the motors. That is difficult.

The latest looks at trying to use hydrogen in a new way to produce enough energy would be good. And there's good reasons for it because remember a battery doesn't get any lighter as it gives up its charge, so you're carrying huge amount of weight. It's like carrying a full load of fuel to landing, and you don't want to do that.

It makes it a lot more problematic. Maybe -- I don't know how long it will take, but it will be probably 20 years. I reminded Shahram that you're telling us we're going to have fusion energy for 30 years for the last 70 years. So it will happen, I'm sure. I just don't know when.

And in the meantime, we're very much focused towards the conventional demand. There's an awful lot of aircraft out there, especially interested in our autothrottle. We're delighted that this award by Flying, it was quite interesting because they selected SpaceX for landing that booster, which was amazing.

Having watched NASA, not ever being able to do it. So a huge achievement. And bluntly, Garmin did a hell of a job getting an auto land in a small airplane. We'd like to think that we can do an auto land in a bigger airplane if the demand is there.

We're happy to say that -- and perhaps on -- FAA told us that they lose 100 or 200 people a year for upset accidents. The work that we're doing here today as a certification, they believe are going to save lives. That to me is humbling. It also is promising for the business..

. The next question will be from , another Private Investor..

Can you talk to me a little bit about the twin jet market you had mentioned in the comments.

I know that previously, prior to ThrustSense, you had already developed an autothrottle for the Eclipse and that going forward, would you be looking to use ThrustSense in the twin jet market? And what advantage you guys have in that market over the existing players that are already there?.

So the biggest one is our patented Vmca upset protection. Addison Texas -- Ferris, Addison Texas made all the news of the airplane with 13 people on board, rolling over on its back and crashing and killing them all. We happen to be one of those people. It's really important if the equipment that we make actually prevents that from happening.

And that is unique to try to deal with the problem for over 100 years successfully. We were able to do it, patent it and put it into a practice. And Textron had the vision and the initiative to actually go ahead and put it on their airplanes as quickly as they did. We're proud to be a partner with Textron, and we see a huge market.

We've been contacted by, I'd say -- if I count the number of airplanes, probably 5,000 airplanes beyond the Kind Air are people who want to put an autothrottle, a autothrottle, our autothrottle on the airplane.

And one of the reasons -- one of the other big reasons for our autothrottle being unique, is, to my mind, it's the only one that is really retrofittable. And any other autothrottle, you have to build a whole new throttle quadrant in the airplane, structural huge modifications or put a new engine in. So we do two things.

We protect the engine, which costs $0.75 million to $1 million to overhaul. And if you over temperature it, you have to pull it or exceedances can damage the airplane and loss of control accidents that could kill you.

So all of those would make it a compelling case and now we're -- our latest version of it will enable us to do it without taking the aircraft out of service. And that's an amazing achievement. I think we can do a retrofit without losing the revenue from the aircraft..

That's great. So Geoff, back to the question, though, which was, I'm talking about the twin jet market. I know Addison was a King Air situation, specifically more to the autothrottle being done on the Eclipse.

Will that -- will the ThrustSense be applicable to other twin jet models? Or is there a different form of autothrottle you'll be marketing in that area?.

No, it will be very similar, if not identical. We are -- as we speak and talks with another menu -- another OEM that -- I expect to aircraft -- one way of doing it is say, you have a turboprop and a turbofan. And the turbofan what we think of as a conventional jet airplane. Like the Eclipse had turbofan engines.

And we are looking at other airplanes as we speak that use triple fan engines, and the same safety features we offer the turboprops, we now offer the turbojets. The reason we were so attractive in the turboprop market is they were virtually -- there was no autothrottle for the King Air, 5,000 airplanes out there and no autothrottle.

Because it was a very difficult thing to do because the way the controls went out to the engines left an enormous amount of slack and problems with the control system. We were able to fix that. So we have a unique solution and that's -- hopefully, we'll continue to show interest from a broad range of people in the industry..

Okay. Good, good. Other question, Geoff. Can you talk to you about what's going on with the FAA right now? And like you just said they're doing a work-from-home program.

Do you have pending applications with them right now that you're still waiting to hear from them on?.

Yes, we have a lot. But I would tell you that our ACO is Boston, and they've done an outstanding job. I mean they're typically the bottleneck, but they've gone -- even working from home, they've gone out of their way. In some respects, working from home is reasonably good.

We dealt with an SGO where we used to have guys that just disappeared on us, and while we're waiting for an answer. Our FAA has been remarkably responsive. And I want to be careful, I don't want to jinx the very good performance. Working from home, I'll tell you what.

I believe that in 5 years, maybe 2 years, the 25% of our key employees will be working from home. I believe it's a huge resource of early retired, remarkably talented people and at my age, I referred to them as mature, that want desperately to keep busy and work and can bring so much to our company and we don't have to move them.

We don't have to go tell them, you're going to leave California to come work for us, and we hope to happen to that resource and we got a conscious effort to do it. I'll tell you, I conducted my last 3 Board meetings by computer. We don't fly people in from Phoenix anymore.

We do it on -- and by the way, we got through the Board meeting an hour early because we're all focused on getting the job done instead of having the normal chit chats. Now, you miss the personal relationship, and that's unfortunate, but we are all focused on a job. So it's actually quite good.

If the FAA figures out how to handle it, I'll tell you right now. So far, Boston's been doing it very, very well, have done an outstanding job..

Okay.

Do you have applications that are beyond Textron that are currently in with them?.

Yes. In fact, a large portion -- and understand Textron's been a really good partner in that. They recognize that it's terrific to put it on the new aircraft and they, of course, did it immediately. But importantly, the existing fleet of valuable aircraft is over 5,000.

And this is a relatively modest investment relative to the cost of the airplane that yields huge savings, savings and maintenance on the engine, and maybe most importantly, maybe lifesaving. So we're very positive.

We're getting people with 4 engine -- multiengine aircraft, bigger -- much bigger airplanes with 4 turboprops that are asking us to build an autothrottle for them and we're looking at several military airplanes right now on the same -- exactly the same requirement..

Right. Right. Okay. One more question, Geoff, and I'll let you run. Just briefly touch a little bit more on the COVID impact to -- it sounds like this is more affecting the rollout of the retrofit market in the autothrottle.

Does this have to do with the idea that you can't actually visit people in person and they can't actually take the plane up and try things out.

I mean what -- can you just kind of give a little bit more color on what the hurdles are here to kind of getting all of that going?.

Well, I'm clearly no expert on it. But let's take a look at a couple of the problems. We have things like COVID.

And you own an airplane, you probably -- you don't hop in your airplane every day, the way you used to, to go places, although what we're finding is kind of interesting is there's an increasing demand in small jet market so that people who want to travel, we have friends to go to Florida and would -- because they're at risk and they don't have their shots yet, they're leasing airplanes or running airplanes to make the trip.

So you see a lot more in that area. But for people doing upgrades, I mean we're all preoccupied with the basic of how do I stay live and stay healthy problem. And they don't worry so much about how they're going to fly to launch it at -- and tuck in. So it impacts the demand that it impacts our ability to talk to our customers.

We have a customer who's very interested, no, I can't visit him. We have people that we would like to demonstrate our airplane with, and it limits that, too. So it's subtle in some cases, but it's pervasive for sure, and it has a huge impact. That looks like the last one. .

Thank you for your time and attention today. If you do have questions, you can always call Rell, and we'll get an answer for you. Thank you again for your interest and your investment..

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day..