Innovative Aerosystems, Inc. (ISSC) Earnings Call Transcript & Summary

Good morning. I'm Geoffrey Hedrick, Chairman of the Board of Innovative Solutions and Support, Inc. As Presiding Officer, I hereby call to order and welcome you to the 2020 Annual Meeting of Stockholders of Innovative Solutions and Support, Inc. On behalf of the company, I would like to thank the many shareholders who have evidenced their confidence in management by sending in proxies. Also, I would like to thank those shareholders who are joining our virtual Annual Meeting today for your participation and interest. We believe in engaging with our shareholders and given the uncertainty caused by the ongoing coronavirus outbreak. I hope that this live webcast meeting will maximize the participation of our stockholders while being mindful of the safety of everyone in attendance. At the conclusion of the Annual Meeting, management will answer any questions from shareholders regarding the business. I would like now to take this opportunity to introduce you to the members of the Board of Directors who are in the attendance of the meeting. They are Glen R. Bressner, Managing Partner, Activate Venture Partners; Winston J. Churchill, Managing General Partner, SCP Private Equity Partners, L.P.; Robert E. Mittelstaedt, Jr., Retired Dean, W.P. Carey School of Business, Arizona State University; and Roger A. Carolin, Venture Partner, SCP Private Equity Partners, L.P. Also, Shahram Askarpour, our President; and Rell Winand, our CFO are present today. In addition, present today from Grant Thornton are the company's independent audit firm is Mr. James Epperson. Also present and representing our legal firm is John LaRocca from Dechert LLP. The company has appointed Jane Ludlow of Broadridge Financial Services, Inc., our stock transfer agent, to act as Judge of Elections. Ms. Ludlow should now unmute and introduce herself.

Good morning, everyone. This is Jane Ludlow, the Judge of Election.

A copy of the judge's oath of office will be filed with and made part of the minutes of this meeting as Exhibit A. Mr. Bressner will serve as Secretary of the meeting. We will now begin the meeting. I will call on Mr. Bressner to present certain items in connection with the holding of this meeting. Mr. Bressner?

Good morning. And thank you, Geoff. A list of the shareholders of record who are entitled to vote at this meeting, which has been prepared in accordance with Pennsylvania corporate law and the company's bylaws is available on our virtual meeting website under the heading Registered Shareholder List. Together with copies of the annual -- of the notice of the annual meeting and proxy statement, the letter to the shareholders, proxy cards and the company's annual report on Form 10-K for fiscal year 2019. They are available for inspection by any shareholders during the course of this meeting. An affidavit as to the mailing of the notice of availability of proxy materials on March 6, 2020, to shareholders of record as of February 18, 2020, is available also and will be filed with and made part of the minutes of this meeting as Exhibit B. The rules governing the conduct of the meeting today are available on our virtual meeting website under the heading Rules of Conduct. Thanks, Geoff.

I'm sorry, I didn't unmute. Thank you, Mr. Bressner. For purposes of voting at this meeting, the proxies have been solicited by the Board of Directors of the company and the shares owned by these shareholders will be voted and represented at this meeting pursuant to these proxies. Ms. Ludlow, do you have a quorum present today to conduct business?

Yes, Mr. Chairman. They've been deposited with the secretary proxies solicited by the Board of Directors and signed by shareholders of the company entitled to vote at this meeting. In excess of 50% of the company's shares are represented at the meeting, either by their attendance on this webcast or by proxy.

Therefore, a quorum being present, we will move on to the actual business of the meeting. If any of you would like to view the -- excuse me, I'm sorry. I clear my throat. Happily, I do not have the virus, but I got something else that I was battling it, I guess. So a quorum being present and we'll now move onto the actual business of the meeting. If any of you would like to view the proxy statement during the meeting, it is available on our virtual meeting website under the heading Proxy Statement. May I have a motion to waive the reading of notice of the Annual Meeting of the Shareholders?

I move that the reading of the notice of Annual Shareholders Meeting be waived.

Mr. Carolin?

Yes, I second the motion.

All of those in favor of the motion are requested to indicate by saying, aye, all opposed, nay. The motion is carried. And accordingly, the reading of the notice of the Annual Meeting is waived. I believe this concludes our procedural business. As you will note from the Proxy Statement, there are 3 items of business to be voted on today. I will open the floor to consideration of the first item of business as listed in the notice of the Annual Meeting and the election of 5 directors. After nominations of the directors are presented, those of you who have not submitted a proxy may vote. Please note that each of the directors must be voted on separately. I call upon Mr. Churchill to make the nominations for directors of the company.

I nominate Geoffrey S. M. Hedrick, Winston J. Churchill, Roger A. Carolin, Robert E. Mittelstaedt, Jr. and Glen R. Bressner to serve a term of 1 year, ending with the Annual Meeting of Shareholders in 2021 and until his respective successor is duly elected and qualified.

Mr. Bressner?

I second the nominations.

I declare the nominations for election of directors are closed. Is there any discussion of the nominations for Director? And as much as the discussion of the nominations of Directors is complete, I will open the floor to our second item of business on the agenda. It is listed in the notice of the Annual Meeting, the approval of the advisory vote of the executive compensation in compliance with Dodd-Frank Act, Section 14A(a) of the Exchange Act, the company seeks the views of its shareholders every 3 years on the design and effectiveness of the company's executive compensation program. I ask that Mr. Carolin make a motion to approve the compensation paid to the company's paid officers as disclosed in the Proxy Statement.

I move that the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and narrative discussion be approved.

Mr. Mittelstaedt?

I second the motion.

Is there any discussion of the advisory vote on executive compensation? And as much as the discussion of the advisory votes on executive compensation is complete, I will open the floor to the third item of business in the agenda. As listed in the notice of the Annual Meeting, the appointment of Grant Thornton LLP as the company's independent public accounting firm for the fiscal year ending September 30, 2020. I call upon Mr. Bressner to make a motion to ratify the appointment of Grant Thornton.

I move the appointment of Grant Thornton LLP as the company's independent registered public accounting firm for the fiscal year ending September 30, 2020, be ratified.

I second the motion.

Is there any discussion of the appointment of Grant Thornton? And as much as the discussion of the appointment of Grant Thornton is now complete, I declare the polls open for voting. Shareholders in attendance who have not voted or who wish to vote, change their votes may now do so by clicking the link provided on our virtual meeting website. As any shareholder who has already voted and does want to -- does not want to change their vote, you need not take any action. I'm leaving time for voting. [Voting]

I suspect there is no problem. The polls are now closed. The Judge of Elections will give a report.

Thank you, Mr. Chairman. I report the preliminary results of the voting as follows. All directors have received a majority of the votes cast and have been elected to serve a 1-year term and until their successors are duly elected and qualified. The advisory vote to approve the compensation of the company's named executive officers has received the majority of the votes cast. And the appointment of Grant Thornton LLP as the company's independent registered public accounting firm for the fiscal year ending September 30, 2020, has been ratified. Thank you.

There being no further business, I will entertain a motion for adjournment.

So moved.

I second the motion.

All those in favor of the motion to adjourn, please say aye. All those opposed nay. The motion is carried. The Annual Meeting is hereby adjourned. And I will take any questions that you might have regarding the business. Before we begin, however, I would like to ask Rell Winand, our Chief Financial Officer, to read the safe harbor message for the benefit of everyone in the meeting.

Thank you, Mr. Chair. Thank you, Mr. Chairman. We advise you that the discussions today may include forward-looking statements. As that term is defined under the Private Securities Litigation Reform Act of 1995. Our forward-looking statements include any information we provide on future business operations or regarding the future financial performance of the company. All forward-looking statements mentioned are subject to risks and uncertainties that could cause the actual results to differ. Possibly materially from those contained in the forward-looking statements. Some, but not all of these risks and uncertainties are discussed from time to time in the company's press release and security filings with the SEC, particularly in our Form 10-K. We undertake no obligation publicly for today to revise any forward-looking statements as often as the informations future is or otherwise. Thank you.

Are there any comments or questions from anyone in the audience today? You may submit these questions by typing in the question box on your website. And Rell, you're going to relay that to me?

Yes. So I will read them aloud, yes.

All right.

Let's wait.

As we're waiting for -- as we wait for the questions, I'd like to make a couple of comments. The obvious 400-pound gorilla is the coronavirus. That's deeply impacted the entire nation. We are not escaping any threat from that. But we've taken immediate remedial action to minimize the impact on our business. Our business remains with plenty of orders, and I desire to satisfy those obligations for these new orders. That means we have to keep the plant up and operating, which we have been doing. But we took some prudent steps. First of all, every weekend, the entire facility gets sanitized by a group of people that come in and spray. And at the same time, every night, all working surfaces in the manufacturing and in the office areas are wiped down with antiseptic wipes. The -- on the production floor, we've divided the production floor into 2 shifts, 2 manufacturing shifts, but separated not by day, but by week. So half of the manufacturing operation operates for the first week, they go on paid furlough for the following week, while the other half of the manufacturing operation comes and works. The object -- the thoughts behind this is, if anybody were to get a viral attack, it would not take out the entire manufacturing area. So this separates the 2 and gives us an assurance that at least half of it even under the worst conditions would exist. We are fortunate. We have -- this quarter has a good strong backlog that we're going to work on. And we're optimistic about continued growth in this quarter and subsequent quarters. We are, in fact, not only are we -- we're not furloughing, we are actually hiring, and we are actively and aggressively hiring to meet what we believe is a growing demand. That demand, in part, is a result of 2 things that the company focuses on. As many of you long-term investors may recall, we've always focused on the retrofit part of our transport business because we believe that in good times, the operators require additional airplanes to carry the growing demand. And in bad times, that the first thing they cut were new airplane acquisitions and tended to upgrade their existing fleets. That served us well for the last 20, almost 30 years. So in addition to that, we've now broadened our scope into the general aviation field. We're now working with 2 major manufacturers of business aircraft, both a turboprop and turbofan. Both of those companies are doing well strongly. And in fact, there is some indication that people avoiding being seated in air transport, would prefer for safety reasons to be a contained environment that you get in a smaller business aircraft. So that appears to continue to be stronger than anticipated. And in both cases, we've increased our percentage of revenue from the general aviation market significantly. And while we maintain the retrofit fleet and see continual orders for our retrofit packages for 757, 767 cargo jets. So that's a summary of the business. And we remain strong, we remain open, we are hiring new people, and I'm delighted to say that last quarter, we finished the quarter in the middle of this coronavirus scourge and expected to lose people when, in fact, the entire workforce worked. All the people came in. They could call in sick, they knew they could get paid, but they did it anyway.

Mr. Chairman, we have a few questions. When you get ready.

Yes, I'm ready to go.

Okay. You probably answered some of these. The question is the company disclosed on the last earnings call, that shipments with an OEM would commence in 6 to 8 weeks, is that still on track?

That's still on track. We expect to deliver some OEM production shipments this quarter maybe a week later depending on the impact of the coronavirus. The coronavirus doesn't affect our manufacturing, but it does affect the FAA's certification branch. So to the extent that it affects that might impact deliveries. But the products will be manufactured and complete, ready to go by the end of the quarter.

Okay. Here's -- you answered some of this already, but another question is, is the company having any supply chain issues with materials or components?

Yes, we always do. I mean, we'd have, but fewer than probably anticipated. The good news is a lot of the equipment that we needed we brought in and it's ready to go. We have a few things, connectors, things like that are always vulnerable. But we remain -- for our subcontractors, our suppliers, we remain a preferred customer because we remain open and we're not delaying our parts shipment. We're, in fact, if anything, accelerating, if possible.

I see if there's any other questions. You've already talked. There was a question about the labor course, but you've already talked, you've already addressed that. So I think that's it.

I'll tell you, our labor force is how much a good group of people. I was really, really pleased and impressed with their performance. So if there are no further comments or questions for the -- from the audience, I thank you for your attendance today. And I'll conclude this meeting.

Ladies and gentlemen, that will conclude today's presentation. We do thank you for joining, you may now disconnect.