Welcome to the Innovative Aerosystems third 2020 earnings conference call and webcast. All participants are on listen-only mode. Should you need assistance signal our call specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask your question you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please know 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.
Good morning. This is Geoffrey Hedrick. Welcome to our conference call to discuss our performance for the third quarter of fiscal 2020, current business conditions, and our outlook for the coming year. Joining me is Shahram Askarpour, our President, and Rel Winand, our CFO. Before I begin, I would like Rel to read the Safe Harbor message. Rell?
Thank you, Geoffrey , 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 Geoffrey .
Thank you, Rel. Three years ago, I announced that we would change our approach to the market by focusing only on products in which we had both a performance and technologically driven price advantage. The resulting trending of our operating performance seems to vindicate our change in direction. The third quarter, we experienced a historically strong growth quarter with revenues up 28% quarter-over-quarter, at 30% from a year ago. We generated sequential revenue growth in seven of the last eight quarters. In addition, revenues this quarter including production deliveries to our newest OEM customer, Textron. We are pleased to be supplying Textron our ThrustSense Autothrottle with LifeGuard protection on their new King Air 360 twin turboprop production aircraft.
We intend to build on this relationship in our joint pursuit of retrofit and upgrade of the very large fleet of King Airs, expanding the number of production aircraft to include our ThrustSense Autothrottle as standard equipment and upgrade existing fleets. The company has the industry's first FAA supplemental type certificate for its groundbreaking and patented ThrustSense Autothrottle system with LifeGuard protection on King Airs 200s and 300s with Rockwell's Pro Line 21 Avionics. The full regime Autothrottle ThrustSense system with LifeGuard VMCA protection is available for immediate retrofit and promoted at the Textron service centers as well as all King Air maintenance facilities. This LifeGuard feature can offer protection against catastrophic upsets with the loss of an engine if the pilot fails to maintain adequate air speed. Excuse me for a second.
In the process, we have overcome and continue to overcome many challenges, most notably the coronavirus pandemic. We remain focused in protecting our employees, partners, and customers, and remain ever vigilant as to its potential effect on our end markets, supply chain, and other aspects of our business. To this date, the impact has been immaterial. I am extremely proud of our team and their ability to execute in these difficult circumstances. Let me turn it over to Rel for financial details.
Thank you, Geoffrey . Thank you all for joining us this morning. Revenues for third quarter of fiscal 2020 were $6 million, up 30% from a year ago, also up on a sequential basis from $4.8 million in the second quarter of 2020. Growth this quarter was primarily in product revenue. We also had some engineering development revenue associated with final engineering on the S5 development contract, while customer service revenue was down from a year ago, mainly due to our prioritization of resource allocation. Gross margins for the quarter were 57%, up from both 55% in the third quarter in 2019, as well from 47.5% in the second quarter of 2020.
We indicated that the drop on last quarter's margins was going to be temporary as a result of product mix, an increase in warranty costs, and higher labor expense as we staffed up ahead of future production demands. As anticipated, margins bounced back and were in line with margins achieved the past few quarters. Total operating expenses for the third quarter of fiscal 2020 were $2.2 million, flat with the second quarter and up incrementally from the third quarter a year ago. I would like to once again mention that although revenues have been increasing this year, most recently growing 30% in the third quarter, operating expenses have not increased. Research and development was up approximately $150,000 from a year ago, reflecting an increase in amount of internally funded R&D, primarily related to obtaining FAA certification for the King Air Autothrottle systems.
Despite our 30% growth this quarter, selling general and administrative expenses were down from a year ago, mainly due to lower travel expense, professional fees, and trade show expenses. Most of these reductions are a result of restrictions arising from COVID-19. For the quarter, we generated operating income of $1.2 million or slightly over 20% of revenue. Due to the continued availability of loss carrybacks, we recognized minimal tax expense in the quarter. We reported quarterly net income of $1.3 million or $0.07 per share. This was the most profitable quarter in 13 quarters. Over the first nine months of the year, both net income and earnings per share increased 137% and 140% respectively, as compared to the first nine months of fiscal 2019. The company remains in a strong financial position and generated positive operating cash flow of $340,000 in the quarter and $567,000 year- to- date.
Cash has been used recently to fund accounts receivable, which are correspondingly higher due to the significant growth in revenues. At June 30th, 2020, we had $23 million of cash- on- hand and no debt. 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, Rel. Good morning, everyone. Reported on Q3, the revenues are up, profitability is at a recent high, and one of the general aviation industry's most prestigious manufacturers, Textron, has contracted with us to install our proprietary ThrustSense Autothrottle as standard equipment on their production King Air aircraft. We have achieved this progress in spite of the COVID-19 pandemic by implementing new safety policies and procedures that have kept all of our employees safe and productive, as well as protect our partners and customers. During the month of April, in order to safeguard the health of our employees, we provided our production workers with two weeks paid time off in a scattered form to minimize congestion in our plant.
We have installed automated personnel temperature monitoring at our main facility entrance with facial recognition software in conjunction with daily and in-between break sanitization, and weekly antiviral fogging of the entire facility to minimize risk of an outbreak. The organization has digested these changes, and in the third quarter, as Rel reviewed, margins were up significantly from the second quarter as operating conditions have normalized from these actions. In fact, we're continuing with our hiring to meet the growing demand in areas of production, sales, product support, and engineering. The contract for the Beechcraft King Air twin-engine aircraft represents our third OEM production contract joining the Boeing KC-46A and the Pilatus PC-24. These contracts provide an underlying ongoing stream of revenue consistent with their respective delivery schedules.
In the aggregate, they represent the potential for future revenues that are multiple of our stated backlogs, so we consider them fundamental to our business. Textron clearly recognizes the important risk mitigation nature of our autothrottle, especially on twin-engine aircraft, and for that reason, they are making it standard equipment on their King Air. They believe the extra safety offered by ThrustSense provides Beechcraft with an advantage in the highly competitive general aviation market. Annual King Air production rates are higher than those of the PC-24. In the case of King Air also, there are already over 5,000 airplanes currently in service. Textron is also beginning to actively market our autothrottle at their service centers, so it can be offered to owners as a retrofit option. Parallel, we are also aggressively marketing our retrofit package autothrottle to government entities and our portfolio of FPDs.
We have already delivered production autothrottle for Textron, which are included in the third quarter revenues. Simulators for the production King Air aircraft are currently being upgraded with our autothrottle, and they will be training King Air pilots within a couple of months. Of course, we continue to market our autothrottle to Textron and other OEMs beyond twin turboprop aircraft, as we see applicability of some of its safety enhancements to twin jets. We are in discussion with OEMs to include our ThrustSense Autothrottle in several other production aircraft. We believe Textron's recent public announcement will attract the attention of other general aviation aircraft manufacturers, and as Geoffrey mentioned, transform ThrustSense from a nice to have to a need to have as potentially life-saving standard equipment on their fleet. Now quickly reviewing our ongoing programs. The PC-24 program remains on track to deliver approximately 50 Pilatus aircraft this year.
As with all our long-term production contracts, we are specified for installation on all of the Pilatus PC-24s, which is already over 100. These are generally only a quarter or two of deliveries carried in our backlog, and therefore, only a fraction of OEM delivery potentials is visible through that channel. We believe the PC-24 program represents a long-term opportunity and now a similar contract with Textron to significantly add to that potential. In the commercial transport market, air cargo delivery services keep buying Boeing 757 and 767 planes and converting them. As part of their conversion, we are seeing steady demand for our flat panel displays. As noted, we finished up development work for the F-5 Air Data Computer this past quarter, and we will start production deliveries for the U.S. Navy fleet retrofit this quarter.
With this contract successfully completed, we are now turning our attention to foreign militaries, which also fly the F-5 and could be a large new market for this versatile product. Our KC-46 program is also a production contract. It continues to make a steady contribution to our top and bottom line. New orders in the third quarter were $2.7 million. Backlog was $6.5 million at quarter end. Well mentioned that our travel and trade show expense was down this year. We have had fewer opportunities to personally meet with our new prospects. The FAA is on the work from home orders, which is added complexity we are managing. Despite these conditions, the FAA personnel have been very supporting of our efforts by diligently reviewing our submittals and timely issuance of certifications, such as the most recent certification for the production King Air.
In the aggregate, we don't believe the pandemic will have a material impact on our business and are excited about the prospects of our portfolio of products. Let me turn the call back to Geoffrey for some closing remarks.
Thank you, Shahram. As pleased as I am with the performance for this quarter and the past couple of quarters, we must be very diligent that we keep the pursuit up, and our nose to the grindstone, as they say, to make sure that we realize the opportunities that have been presented to us. This will require a vigilance in our growth requirements of personnel and investments in technology. We're pleased that we performed as well as we did in the middle of the COVID-19 pandemic. Our people in our plant and the things that we did to the plant, created a work environment which essentially had zero impact from the pandemic. I'm very proud of the people in this company that made it happen, and I'm pleased at our work, changing the environment that they worked in.
Our focus remains strengthening our organization, opening those new relationships that have been provided to us with some of this technology, and further growth in our portfolio of price for performance products. Thank you for your attention today. Please, operator, open us up for discussions.
We will now begin the question and answer session. To ask question you may press star then one on your telephone keypad. If you're using a speakerphone, please take-off the headset before pressing the keys. To withdraw your question, press star then two. At this time we will pause momentarily to assemble our roster. The first question is from the line of David Campbell with Thompson, Davis, & Company. Please go ahead.
Hey, guys. Congratulations on a good quarter. You actually got to my forecast revenues, and your profits were better than my forecast, thanks to G&A being less than expected. Over the long term, it seems to me that the biggest contribution will come from aircraft production that compete with the King Air. I mean, the King Air has been around for about 30 years, I think. I don't know how many new King Airs they'll be producing. It seems like the biggest protection potentially would be for competing aircraft that don't have that capability, re-retrofit of existing King Airs. Can you give us any thoughts about how the company views the marketplace?
Well, a couple of things. First of all, there's not a hell of a lot of twin-engine airplanes coming out that are new. The King Air is a proven standard. As we said, the large market is not so much ongoing production, although that's excellent business. There's 5,000 units out there. These are valuable aircraft. These aren't single-engine Piper Cubs. They're well-maintained, and oh, by the way, people fly them around with their families now. If people who are interested in protecting their families and protecting the airplane, I'll be interested in our autothrottle. That's in part why Textron is promoting it through their retrofit centers. I think the King Air is still a strong airplane. The new 360 is a fast airplane.
People are taking many of the airplane, the King Airs, and putting bigger and faster engines on them as well. The market opportunity, in our opinion, is very large, and King Air is an ideal aircraft because it's a high-value airplane, that we provide real performance advantages and safety to the airplane itself and the flight crew as well. Putting it in other airplanes, single-engine airplanes, we do that. We're finding that we're looking at not just GA, but military aircraft, air transports. Not only twin-engine, but multi-engine airplanes. We can do exactly the same thing in a multi-engine airplane. The traditional approach to autothrottles is prohibitively expensive and basically makes it impossible to retrofit. Our system is capable of doing both of those. We think we have a very strong advantage.
I'll remind you, our market direction was always a very strong retrofit company because we believed that when business was bad, they stopped buying new airplanes, and they fixed the old ones, and when business was good, they couldn't get the new airplanes fast enough, so they had to fix the old ones. That formula worked out extremely well for us in the past. I believe that that formula will continue to work for us. I'm optimistic and very pleased. Honestly, I see a relationship with Textron and their enthusiastic support, and by the way, very active support by Textron, and oh, by the way, the FAA, who acknowledged that, as they said to me, "We lose almost 100 people, 100 lives a year, and what you're doing here is going to save lives." I think that's a good endorsement.
Right. Did you have any King Air retrofit revenues in the quarter?
We're just beginning to actively market it.
We didn't have an STC until about three weeks ago, we're doing it now. We see it as a strong market opportunity, and in our existing PC-12, we're announcing the new generation autothrottle for the PC-12 that offers everything their new airplane does and many more, with a whole bunch of patented features that provides the operators real safety and system awareness.
There was King Air revenues in the quarter, right?
Yeah.
Yeah. Not really.
We shipped out 13-
13 units.
13 ship sets of production equipment.
Simulators as well.
Textron's being now more aggressively marketing the retrofit than they were three or four months ago?
Well, they didn't do it at all three or four months ago, for two reasons. First of all, they wanted to make sure that they announced their new airplane, which just came out two days ago, with an autothrottle, and they didn't want to undermine that announcement. Secondly, we hadn't finished the certification of the units and delivered the production units yet. They were preparing. This is a big deal, preparing. They have these service centers, which are huge. Each one is huge. I think the one in Tampa has about eight hangars, enormous operation. They have to get that staffed up and trained and start getting the equipment available before they do an announcement. They don't want to make an announcement and then say, "Oh, well, we don't have any units to give you." It's starting to come up.
Remember, the other thing that's compounded it is the COVID-19. They were shut down in the plant. Nobody was bringing their airplanes in because of the epidemic, the pandemic. All of that had a negative effect, but we're seeing that clearing out, and we're frankly very optimistic.
Yeah, it sounds like you'll get some good new business in the fourth quarter, in your September quarter. If I'm reading that right, that's what it sounds like to me.
Immediate retrofit opportunities, about $300 million worth of opportunities.
Right.
We have the teams out. We're hiring a guy in Wichita, opening up an office at that in the center of the United States to promote this, and by the way, support Textron. We're delighted. Textron's done a hell of a good job in implementing it and putting it on their airplane. They did it with a remarkable speed and support. We couldn't be more delighted, as we are with the FAA, who has acknowledged that this is a very valuable thing for safety, and they want to get it implemented as quickly as possible, safely.
Mm-hmm. Rel, I have one last question. Re`l, what about the taxes? When will you begin to accrue taxes for your income?
Well, we're right at the tipping point, and we have unused credit. I would say this year it'll be something small like this year, but probably going into the next year, we'll probably realize a little larger tax expense. We do have tax credits, things like that. You can use 5% against it. I would say next year, that's when.
What about the fourth quarter? You expecting tax accruals in the fourth quarter?
I think if it is, it'll be small to this. It depends. We're right there at the tipping point with our NOLs and such.
I'm anticipating if we do, it'll be small.
Okay. Well, that's it for me. Thanks again for doing such a great job.
David, thanks again for your support. You've been great. Although I will tell you, I almost sold all my stock from your last report.
Well.
Take care of yourself. Good to talk to you.
Thank you.
The next question is from the line of George Marima with Pareto Ventures. Please go ahead.
Good morning. Thanks for taking my call.
Good morning.
I had a question regarding Textron. For the new production part, are you just doing the 360s, or are you also doing their new production of other platforms like the 200s and C90s?
Their intention is to do all of them. They're doing one at a time. You can understand when they bring this onto the production line, it's a major job, and it was even bigger than we saw. They're trying to get this done in a matter of months, where the lead time's usually a year and a half or more. They're going to bring up the 360. That was the important one. That's their latest and greatest airplane. By the way, if you look at the announcement, the first announcement is the IS&S autothrottle for the 360.
Right.
The interior and other things came, because it's a significant improvement. It's worthwhile looking at that YouTube as well from the chief test pilot. I would tell you that the intention is to put it in all the aircraft. That's what they told us. It takes time to get that done.
Well, for what it's worth, if you look at the company's website on their brochures, your product is already pictured on the C90s and the 200 series.
Well, that's wonderful.
They obviously plan to do it pretty quickly, apparently.
I've been in the business longer than I want to admit. Textron has showed grit and drive that is incredibly refreshing and totally atypical. They've done a hell of a job.
Well, thank you.
They really have. They didn't just give us an order. They really attacked this in a very incredibly professional and aggressive way, one that's not common in many large corporations.
When you, last quarter, sort of sized up the opportunity from Textron, were you just talking about the 300 series, or their total platforms of C9 and 200s?
Frankly, we looked at the largest opportunity, and I think even Textron acknowledges it as well, is this huge installed base of aircraft, and the retrofit opportunities for those aircraft. I may remind you that the company was built on retrofits. We did $150 million on the KC-135 program. We did RVSM for over 60% of the world market. Those were all retrofit. The wonderful thing about retrofit is the volume comes in and grows. Anyway, we look at it now as a joint effort with Textron, and Textron is aggressively marketing it as an install in their existing fleets.
Right. On the OEM new production, though, were you factoring in their other platforms yet when you started talking about it last quarter, or were you just talking about the 360s that were?
No, we didn't factor them in at all.
Okay. On the retrofit market for the next year with Textron, do you have any feeling on the cadence of that?
We're hoping it's going to be an abrupt supply, but it's always a surprise in the retrofit market. We see it in a strong way. We're talking to the military on a variety of multi-engine airplanes, and they see some acute safety issues that can only be addressed with our autothrottle. We're delighted we found that. We're talking about safety issues that destroy the airplane and kill the crews.
Are you in more advanced stages of talks with other OEMs and military at this point, or is it first inning level?
Well, I prefer not to comment, as they say, but you can presume that that's realistic. The market's there, and we have a number of demonstrations that have been very successful.
That's great to hear. I noticed on your website, you're doing some pretty aggressive hiring, it looks like, and your new orders have been a little bit lumpy. I'm assuming this previous quarter was lumpy due to coronavirus. Have the orders picked up with all this hiring?
Well, we haven't done a lot of hiring. We've done a lot of advertising for people. You always do that, because you usually pick one out of 20 or 30 people. You got to bring a lot of them in. We start an ad campaign for hiring often six to 12 months in advance of the specific need. You got to do it. It takes time to go through the process and to get people that are a good fit for the company.
Okay.
We don't hire people that we don't need because I find it personally insulting seeing them reading their screens and not working. We all take a real interest and focus on. They're doing a great job. The team is doing a really good job, especially some of our young, new engineers. They've got piss and vinegar. They're good people.
It sounds like you believe that after it ramps up the Textron retrofit kind of annual business could be more than the OEM business for new production.
Oh, yeah. I think Textron believes that, too.
Yeah. Okay.
New production, you don't double new production in a hurry. You're going to run new production at roughly the rates of the historical rates. Some variations up 20%-30%, but not 200%-300%. You have a potential market of 5,000 of just one kind of aircraft, and by the way, they're operating. The aircraft are operating, and they're significant investments. It's not like they go into the market where the retrofit cost is a miserable, palpable portion of the cost of the airframe itself. These are traditionally far more expensive airplanes.
My last question, then I'll cede the floor here. In terms of production numbers, the King Air 360 versus their 200s and C90s, are their C90s and 200s vastly lower production numbers or somewhat similar? Do you have any idea?
Well, the 360 just got released, so we'll see how it goes.
Well, their old 350s or the 300 series.
The 350s and the 200s. The 350s and the 200 we think are going up. What we're finding is the military's using them a lot.
Oh, okay.
They use them both for reconnaissance, and they use them for transports.
Okay. I imagine for a military, you'd essentially be a very unique product. It'd be a sole source contract or would it be bid?
What was that? Would it be sole source?
I imagine on a military contract, because your product's unique, it'd be a sole source contract.
Well, no, we don't have a sole source, but it's unique enough that it's going to be covered by about six patents.
Yeah.
We tend to enforce it, and our batting average of enforcing our patents is, we bat 1,000.
Yeah. Okay. Very exciting stuff. Thank you.
Thank you.
The next question is from the line of Joseph Lefler with Retail. Please go ahead.
Good morning. Congratulations on a great quarter. You sound very excited, and I'm very excited for you for the future. I would like to know if you can help me out a little bit quantitatively on what kind of sales ramp you would expect for this quarter and for next fiscal year. What your internal projections might be for quarterly sales going forward. Thank you.
We obviously make a habit of not predicting that, because every time we do it, we either end up with a coronavirus or, as in Boeing, how about the 200 airplanes are sitting on the ground. Because a good portion of our business is retrofit, on both military, commercial, and general aviation, we don't ever predict the next quarter, other than I can tell you that internal estimates, we don't want it to go down if we can at all. We try to keep going up, and that's the only way we keep our shareholders happy. We're mindful of that. Our long-term estimates are that end.
If you take a look at the fact that we have not sold one retrofit system yet, the market opportunity is $250 -$300 million. I would say in between those two, zero and 300 is a big number, and I'm sure that if we do our job, we'll realize our fair share of it.
Well, you did mention that you expect the future sales to be multiples of your current backlog, and perhaps you could give me some color on what that means.
Well, you know what our current backlog is. We can tell you that. Our market opportunity, I can only tell you what we believe our market opportunity is, and you have to rely on our judgment or somebody else's judgment on whether it's valid. The fact is that we think we have a unique product that does not exist. There's no competitor out there now, and we're very pleased with it, and we want to exploit opportunities in other areas. As it's gotten acceptance by one of the largest OEMs in the world for general aviation, we expect that retrofit market is going to be achievable. I tell you what, I think you can get a better perspective, probably in one to two quarters. Sometime early next year, we should have an idea how we're doing penetrating the retrofit market.
Okay, great.
In the meantime, I intend to stay profitable and get the business together, which is what I've tried to do since I founded the company.
Okay, great. Thank you very much, and good luck.
Thanks for your interest.
The next question comes the line of Rick Teller, who's a private investor. Please go ahead.
Yeah, good morning. I have a couple of, I guess, accounting questions. It relates to the fact that I think last quarter, new orders were listed as, I forget what, $7 or $8 million. They were pretty high. The third quarter, they were listed as $2.7 million, which was quite a drop. I know you say, and this is a standard language in I think all your releases, that backlog excludes potential future sole source production orders, and then you name some of them, and you've added Textron King Air to that. Does that mean that some of the new orders in your second fiscal quarter, the March quarter, included orders for the King Air 360, and the $2.7 million, therefore, they'll no longer be counted in new orders or in backlog? Is that correct?
That is correct.
Okay.
Yeah, we received those orders in the second quarter, and we did not receive in the third quarter any new orders, but it comes and goes. That's the point is it's intermittent. It's not like you get a two-year run rate kind of order. It doesn't work that way. As Shahram was talking about, you get two quarters in advance, maybe, or so. It all depends up to them.
Right. Okay. Also, I'm curious how the accounting will be handled on the retrofit business, because I could see if, let's say now Textron is training all their service centers, "Hey, we're going to bring in a lot of customers who might want a retrofit for this." If they get a customer says, "I'd like this retrofitted on my older King Air," will the service centers have already ordered product from us, or do they wait until they have a customer who says they want it, and then they order from us?
I think-
So far, we have not delivered to them anything for the-
Retrofit, yeah.
for the retrofit, but we anticipate that we'll do that.
They've indicated that's exactly what they have to do. They tell us that they're going to have to stock it. We've delivered, as we said, a number of units for the production. We're going to have to obviously deliver more when they expand it beyond the 360 and put it in the 200 or 250. Did I understand you have a King Air?
I'm sorry, you said what?
Well, you mentioned you said my King Air.
Oh, no, I don't have a King Air. Are you kidding?
I understand. At any rate, it takes a fair amount of time to get it up and going, if you can imagine that. I would say it's going to be several months before they start stocking the retrofit lines. People that come in and say, "I'm bringing my airplane in, I would like to put the autothrottle in," they'll probably try to get us to do a quick delivery or take their production hardware, and we will support that.
Okay. What I'm getting at is, let's just say it's a year from now, and they've got some level of steady retrofit business. Would these service centers be keeping some inventory on hand at that point?
I'm sure they would. I did a simple estimate, and they have 10 service centers in the U.S., and it takes probably to install one of these about a week or less to install an autothrottle. The service centers probably have, I don't know, they have several centers, have hundreds of people. At any rate, if they did one a month, you would do 120 retrofits a year. That's only at one a month.
Right. Okay. Presumably they would have some inventory.
They have it.
I just want to. Yeah, from an accounting point of view, does that get counted in our sales when we ship it to the service center, or is it only when they install it in an airplane?
Oh, no, it's when we ship it to the customer.
Got it. Okay.
If they move it to the service center, that's their issue, but we show the revenue as soon as we ship out the door.
Okay, good. I was just trying to figure out how that was going to be handled. A question that has nothing to do with accounting. I'm just curious where we are, if at all, in trying to get the aircraft insurance companies to reflect the safety benefits of the autothrottle in the insurance premiums that they charge King Air owners. Because I understand that's a pretty hefty sum, and even a fairly small discount on insurance would go a big way to paying for the autothrottle.
Yes. Just like in the fire insurance in your house, if you put in fire alarms or an alarm system, it may not be an overwhelming saving, but you recognize you want to do it now because over a 10-year period, you pay for the damn thing. Yeah, you're absolutely right, and happily, Derelle has contacted the insurance company, and the underwriter said we're having a meeting with him within.
A couple weeks now.
I've been asking him that question, as you might guess, for the last couple of weeks, so I assure you that he understands the program.
Great. Terrific. Okay. Well, thank you so much.
Thank you for your interest.
The next question is from the line of Michael Friedrich, who is also a private investor. Please go ahead.
Morning, everyone. I have a question, sort of a follow-up question to an earlier question in the call. I think just going back to last quarter's notes, I think, Geoffrey you had mentioned you thought that as early as next year that the OEM revenue may be as much as, I think it was the prior year's sales. Without just ballparking it, that's somewhere in the $15 -$18 million range. When you were saying that, Geoffrey, and I just wanted to make sure I understand what you were saying, you were only talking about the existing three OEM deals, not any additional OEM business you might be getting from Textron once the other King Air productions are approved. Is that correct?
Well, two things. First of all, I would like to believe that our OEM demand would be $15 million. I think we have, if we look at the two, it could be double digits. It could be $10 million, $12 million kind of next year for sure. We think the larger influx of business is going to be in the retrofit. We look at the production aircraft as good steady business. We wouldn't expect it if we do the entire King Air production line and the pandemic sort of lightens up and we get people back moving their aircraft. Although, among other things, I think I'm optimistic that people will be flying their airplanes more often because it's a lot more comfortable being in your own airplane and not worrying about who's sitting next to you.
There's going to be a desire to fly private aircraft like the King Air, by the way. At any rate, if they do that, if we just get the full level of production, it could be upwards to 100 shipsets a year in OEM. If you're talking about
Okay.
Remember, this is very early in the game. We've just released it on the first production aircraft. We've got some work to do to get it on the other aircraft. The equipment is ready to go on it. They still have to feed their production line. There's multiple months of delay there.
Okay. Just over to the PC-24 production, I know we're up to 50 shipsets a year. I think longer term, if you took a look at their total goals for that plane, that number should keep going up. Do you have any idea what the maximum? I think if you did the numbers, it could be as many as, at some point, 100 a year. Is that what you guys are seeing as well, or is that number too high?
No, that's possible. It's a remarkable airplane. It could go up to that level. Remember, it's a replacement for some turboprops, and it's significantly more expensive, but it's a very high performer. They built an entire huge expansion to their facility. They virtually doubled the size of their manufacturing facility in Stans, Switzerland. We've been there, obviously, a number of times, and it's a brand-new high-volume facility. They're cautious. The company is sensibly cautious and moving smoothly and slowly. They don't want hiccups. They don't want to jump too quickly, and they're doing it deliberately and doing a hell of a good job. Remember, they did 40 and then now 50, and I would expect them to creep up toward the 100. It's a great airplane.
Great airplane. Yeah, it sure is. Okay.
As a matter of fact, it is a great airplane too. We got one. We love it. I love it, anyway.
Yeah, Geoffrey, on the multi-prop engines, I know right now you have really no competition on that, but I'm sure you follow the idea that Pilatus has developed their own autothrottle for their new production PC-24.
Let's be clear, it's not an autothrottle. We have an alternative, and by the way, they didn't develop it. Pratt & Whitney supplies it with two settings. That's cruise and climb. Our autothrottle does a great deal more. Oh, by the way, we're announcing a series of patents of stuff that never existed before, focused toward that. Oh, by the way, that autothrottle, as you would refer to it, is not retrofittable into the 700 airplanes.
Beautiful.
What I like to do is you teach the pilot how to do it.
The pilot sets that. I was going to say, I like how you pounced on me there. I like the confidence. That's great.
Look, Pilatus, a wonderful company, and oh, by the way, I bought a Pilatus airplane three weeks before I took the company public. Nobody like you would say, "You got rich and bought an airplane." It's been an incredibly good airplane, and we're very fortunate to have them as a customer. It's a great airplane.
Oh, yeah. I realize that.
They're doing a great job.
Yeah. Okay, one more thing, and then I'll let you go. I think you guys posted an article about how all of the CRT instrumentation is being discontinued on the 737s and 767s. Can you give me an idea of the remaining opportunity, and I know this is more of a worldwide question, in the flat panel display area and the cockpit renovation area that you guys are in? Are you still working with Lufthansa on that?
We're not working with Lufthansa much now.
Okay.
What we're doing is we're finding more direct sales to the carriers. It's become more successful for us. There's remaining about 1,000 757s and 767s that still remain that need to be retrofitted. Obviously, there's a huge number of 737s that our system is applicable to. We're seeing constantly, we're delivering every quarter. We're delivering equipment for those platforms.
By the way, any competition we have is significantly more expensive, and as the value of the airplane declines, which it does with age, people don't want to spend a lot of money on an old airplane. We offer two huge advantages. Our retrofit system, besides having an incredible record of reliability and performance, also can be installed in a matter of less than a week, four or five days. The competitor takes a month. It costs somewhere between $50,000 - 75,000 a day to put a transport aircraft on the ground. It gives you a compelling reason why we actually should improve our competitive position.
Great. All right, guys. Well, a lot of irons in the fire. Hopefully we add and keep adding more, and congratulations.
Thank you very much. We got our work cut out for us.
Got you. Take care.
Thanks.
The next question is on the line of Craig Rose with Axiom. Please go ahead.
Hello, guys. Thanks for all the color today. Understanding that the biggest market for you right now is the retrofit of the King Air, Shahram mentioned other opportunities. Could you name the next highest valued target for retrofit? He also specifically said twin engine jets. Does that mean Textron has an exclusive on this application for turboprops?
No, they don't have an exclusive for turboprops. We did the Eclipse and did an autothrottle on the Eclipse almost five years ago. By the way, now selling software upgrades to that equipment for Eclipse. We know how to do a turbofan engine. We have had people that have contacted us and expressed an interest in putting them both in their production and potentially retrofit, primarily production. We see a market in that area. We'd rather not identify it as you can sort of expect. We also see it in other multi-engine aircraft and traditionally turboprops. There are tens of thousands of them in operation right now that would benefit enormously from our autothrottle.
As an example, we're able to do something and have patents pending on it now for a loiter mode, where we actually measure the efficiency of the airplane in real time and adjust the speed of the airplane to maximize its endurance. We're the only people that have ever done that. It works. People that do reconnaissance and surveillance are very interested in this system.
Okay. An additional question or two. You mentioned the military. I assume the military is one of the largest fleet operators when you add up all the branches of the military of the King Air. And so have-
I honestly don't know how big it is, but I know it's in hundreds of them. There's various versions of them. Everybody has a King Air somewhere. We've already talked to people like the DEA and those kinds of people. We're progressing with opportunities there. They're very interested in, as an example, DEA flies around loitering, looking for bad guys. This thing takes care of that and keeps the crew safe. It really pays off. Yes, it's there. I would prefer not to identify the specifics. I'm optimistic that we're going to get a significant amount of military business. Oh, by the way, they pay really quick.
That's great. I'll just stress the insurance industry awareness as I think your previous question, Rick mentioned, is probably really important. The LifeGuard name I think is great, I'd just like to compliment you on that. The new air cargo company that everyone's heard of now, Amazon, what does that mean to you guys and what has it meant with your relationship with FedEx?
Well, just so you know, Amazon is operating a fleet by leasing it from two big operators. We supply the 40 of those aircraft are operated with our equipment. Amazon is operating it themselves. Where they go with that, and there's a lot of rumors on what's going on, but we would expect to be around for the operation. As I said, the downtime is fractional. It's a small downtime. We actually were able to modify an airplane in 24 hours once. That's never been done ever in the history of the industry. We have that as an advantage, and it's actual cost, and the performance is proven. We get reliability numbers that are outstanding. There are hundreds of thousands of hours of reliability. We expect and hope that we'll get that. We're going to be diligent to try to bring it in.
That would be a strong opportunity. Just to give you a little background, I can remember when I delivered equipment to FedEx when they had seven airplanes.
They have 700 now. I remember how it grew.
Great. That's all, guys. Thank you.
Thank you. Thanks, Craig. Good talking to you.
The next question is from the line of Marcel Herbst with Herbst Capital. Please go ahead.
Good morning. Thanks for taking my question. Congratulations on a strong quarter and all the progress you're making on the autothrottle. I wanted to follow up on the orders, which have slowed down a bit for obvious reasons. How were your orders trending throughout the quarter and into July? Do you see a pickup at all?
Well, as you can imagine, it's lumpy. If you get an order or anything, it's a big bump. Right now, it's about what we expected, but we're diligent. Clearly, we're optimistic that we have the right product and there's a right market. I'm committed to making sure that we continue to make a profit. Whatever that takes, that's what we try to do all the time.
Right. I'm also trying to get a sense of how many King Air 360s might be produced every year. If I packed it at 50 Kings a year, would that be too aggressive or too timid an estimate?
Well, the 360 is for upgrading, obviously, a large part of the fleet. I don't know, but I would guess initially 10 and then 20, and then 30 kind of thing. The 300 is about 50% of their production right now. I would expect the 360 to take over what is now the 300 series production.
I see. Do you know how many.
Remember, we're not focused on only the 360. They've already made a commitment to do it on all the other airplanes. That's why they're doing the retrofit. They're doing one airplane at a time. It's a monumental task to get it through the system. Once they got the 360 done, which was a critical one, the other ones should be easier, and they should follow in line.
Right. If you look at those models that they are committing to eventually integrating you, how many airplanes do they produce a year?
It varies. I'm saying that they've already talked about retrofitting the C90, so they're going to put it on the 90, on the 250, and the 200. Ultimately, it's whatever their total production is. Their committed position is that they're going to put this autothrottle on 100% of the King Airs. How quickly that happens, I don't know.
Right. If you look back at 2017, 2018, or 2019, how many King Airs do they produce in a typical year?
They might-
Roughly about 100.
Yeah, it depends on the economy. We said that the retrofit is probably going to be a lot more.
Right. Okay, perfect. Well, thanks so much for taking my question.
King Air's a great airplane. We expect military programs. Frankly, we're teaming with Textron as we speak on a proposal to the military. I mean.
Oh, that's good to know.
It's moving along very quickly. This is visibility at their very top management. They're very responsive. Very responsive.
Great. Thank you.
Thank you.
The next questioner is Derek Bubble with Aberdowning. Please go ahead.
Hi, gentlemen. Congratulations on an amazing quarter, and just a really exciting market opportunity looking forward. Long time listener, first time caller here, so thanks for taking my questions.
Thanks for hanging in there as long as you did.
My pleasure. You talked about $300 million worth of immediate retrofit opportunities for the King Air.
Correct.
Have you looked? Pardon?
Potential market, yes.
Got you. Have you looked at the total addressable market? Because you mentioned a lot of other markets, including the military markets. Have you looked at what the total addressable market is, and are there any numbers around that?
I'm always reluctant to do that. I'll tell you why. I would be delighted if I could get a substantial portion of the King Air market. We would almost choke on it. We're aware that the other market is probably four, five, even six times the size. Whether or not we penetrate it and go after it, and whether the people want to keep the airplanes, all kinds of ifs. To be prudent in our judgment, we restrict our estimates, if you can appreciate that.
Yeah, definitely appreciate that. Under-promising and over-delivering.
To some degree, it's opportunistic. If somebody comes along and says, "Gee, I got an airplane, there's 300 of them out there that need this, and we would need that this, that, and the other," we may look at applying our autothrottle system to it. It's reasonably scalable and quite adaptable. We've been very lucky with it. It's been very good.
Yeah. It's absolutely impressive and exciting. What a great spot to be in from a strategic standpoint. I'm curious, given the size and the market opportunity, have you thought about partnering up with a strategic partner to make sure that you can meet this huge potential unmet need?
Honestly, we've taken a look at teaming with Textron and potentially another OEM that has another airplane, is probably the best way to do it, rather than another manufacturer. The other manufacturers, I don't see that other than if they want to sell a cockpit system and need an autothrottle, they may come to us for the autothrottle. I think teaming with Textron is formidable. It's really, to be blunt with you, it's as high as I could have had my expectations. I'm delighted that they're working as hard at it as they are. It's terrific. I'll be happy to just support them for the near future.
Excellent. Then on the last call, you talked a little bit about how you were seeing a shift from first class and business class commercial over to private aviation. I'm curious, have you still been seeing that trend through year- to- date? Are there any numbers that you could put around that?
Take a look at a company called Wheels Up. They operate King Airs. They got 100 airplanes now all over the country. 100. That's a lot. PlaneSense has PC-12, and they're buying them like they're going out of style. More and more people are looking up and saying, "Look, if I have to spend $7,000 to go round trip to frigging California, I don't need to have to run, spend two and a half hours going through a airline terminal. If I could get it, go over, and the airplane will wait for me, and I'll get on it and relax in the airplane." Increasingly, there's reason to believe that it's a reasonable solution. I had some friends that were in Palm Beach three months ago, and they had to come up, and they were anxious about getting on a commercial airplane with the COVID pandemic.
They got eight people all in from the same condominium complex, and also lived in the Philadelphia area, to pull together in a matter of two or three days, and they chartered an eight-passenger turbofan jet to take them up. It ended up costing them roughly the same as a first-class ticket, but a hell of a lot more convenient.
That's great color, really appreciate it. I work for a large institutional firm, and for the purpose of this call, I'm a private investor because the opportunity is just too small than what we would have as a minimum investment from an institutional standpoint. From an institutional standpoint, what I would recommend is that you get some sell-side coverage, maybe get an investor relations campaign going, get your calls out on FactSet, maybe do some additional conference calls so you can get some more traction in the institutional market. Last but not least, if you could get an active options trading, calls and puts traded on your stock, that would drive some more additional volume and then give current investors some additional liquidity.
All those three things together would probably drive a significant increase in your share price and be good for shareholders and for yourselves. Sorry, not to lecture, but just wanted to give you some suggestions in a public forum.
I appreciate the advice. We are, or at least I am reluctant to oversell the company. We've had some wonderful times. We've actually had times where we generated an 18% net after- tax, sorry, 30% net after-tax profit. That was wonderful, but that also is vulnerable if you can't keep supporting behind it. I'm a bit more conservative in my estimates. When I've got a well-established retrofit business, then I'll be talking to the Street again. We've had some pretty good luck, as you probably know, over the past years, but properly there, you don't want to oversell the business. You don't want to promise things that you can't deliver, and I'm trying to be a little circumspect.
Fair enough. Well, you've done a fantastic job running the company, Geoffrey, and fantastic job with this product. I have a friend who's a commercial airline pilot, and he's incredibly excited about the autothrottle. He thinks it's one of the greatest developments in the history of aviation. Wonderful job. Really excited to be on board. Thanks for everything you've done here.
Thanks for your kind words. I promise we'll keep trying to build the business. I actually really want to deliver on my promises. It's a challenge. I had a director who was head of all of engineering for Boeing, and he said his boss told him integrity was doing what you said you would do when you said you would do it. I think about that every day.
We need more people like you in our society, Geoffrey.
Just saying. You have a good day.
Thanks. You too.
Oops. We got Craig Rose is back.
We have one further question from the line of Craig Rose of Axiom. Please go ahead.
One follow-up question. You mentioned Wheels Up and the size of their fleet. What are the odds that you could get the FAA to mandate this safety feature on all charter aircraft, similar to what they did in the 1970s with terrain awareness on planes and did not do with helicopters, we have recently seen what can happen there. What are the odds of that?
I think we got to prove this, and I think it's notable. We're very proud of Textron's selection of us. Trust me. I was there when we did the first presentation. It was a difficult implementation. It was a unique situation where we had developed a product, and they're not used to that. They're used to having people develop a product for them. We developed it for ourselves. They were extremely supportive, and that gives me confidence that there is a strong safety market, and I think the FAA knows it for sure. If the NTSB learns to acknowledge it, I think it could be. Look, it's very straightforward. Addison, Texas, the guy, if you get an airplane, if you ask a pilot how the airplane can get too slow with an engine out, it's catastrophic.
Sadly, it's a terrible situation, and I guess that's true with any airplane, but especially this. We mitigate that. We do it with something that's never been done before. By the way, there's a whole bunch of other things it does besides VMCA protection, under speed protection, all kinds of things. I'm hoping that the NTSB notices it, and if they do, they can put pressure on the appropriate authorities. I don't think there's any reluctance to implement this. I can tell you that the FAA has been as supportive in the certification of this equipment, and it's taken, by the way, almost six years, as I've ever heard or seen in my career. They've done an extremely thorough, but did not drag their feet. They did an admirable job. I think it's a possibility.
I think there's a good possibility that that could happen. We got to pay our dues and get it in the airplanes and show that it's good and reliable. It only has to save one person's life, and that'll make all the difference.
Great. Thank you.
Good talking to you. Take care. That appears to be the end of the discussion. We appreciate your interest in joining us today. We're signing off. Have a good day. Good luck. Stay well.
The conference is now concluded. Thank you for attending today's presentation.