Research: Innovative Solutions and Support

Notes from their Q2 Release and Call:

Q220 results

• backlog was up to $6.5mm
• started seeing production deliveries from newest customer – Textron
• they had just announced that they had been awarded supplemental type certification (STC) with thrustsense autothrottle of the Beechcraft King Air 300 on Aug 4^th
• thrustsense provides VMCA and engine protection – proportionally reduces engine power to maintain directional control
• offers protection against catastrophic upsets with the loss of an engine if pilot fails to maintain adequate airspeed
• installing the autothrottle is risk mitigation
• is the first and only certified autothrottle for King Air 200 and 300 aircraft
• there are over 5,000 King Airs out there
• annual production rates of King Air is higher than Pilatus
• is being actively marketed at service centers and at Textron shops
• will be standard equipment on all new King Air 360 turboprops
• also will be added to new 200s and C9s
• – their operating expenses were not up at all even though revenue was up 30%
• so now they have OEM production contracts for 3 aircraft: Boeing KC-46A, Pilatus PC-24 and the King Air
• are beginning to market the autothrottle to Textron and other OEMs for twin jets – so so beyond twin turboprop aircraft
• from QA: also do single engine airplanes, finding that military and air transports
• said in Q&A they are in advanced discussions with other OEMs and military
• Pilatus program remains on-track to deliver 50 aircraft this year – that woud be about $2.75mm for the Pilatus
• they are already on 100 Pilatus manufactures
• seeing steady demand for flat panel displays from air cargo companies buying 757 and 767 and converting them
• KC-46 program, which is also a production contract, continues to make contribution
• the one questioner seems to suggest that new production from the King Air isn’t very much – says King Air has been around for 30 years, doesn’t know how many new King Airs will be produced
• large market for King Air is not ongoing production, it is the 5,000 units out there – and points out these are valuable aircraft, not “single engine piper cubs” – the piper cub is a small 1-2 seater, vs a King Air is this:
• new King Air 360 is a fast airplane – and older airplanes are getting upgraded with new engines
• FAA said they lose 100 lives a year and that the safety feature on the autothrottle will save those
• they shipped 13 units for King Air in the quarter
• the company is built on retrofit, in the past did: $150 million on the KC-135 program. RVSM for over 60% of the world market
• according to one questioner – they are doing “pretty aggressive hiring”
• Textron retrofit business could be more than the OEM business – sounds like it should be – the 5,000 aircraft out there are all operating, they are significant investments, retrofit cost is small compared to the expensiveness of the airplane
• have not sold one retrofit yet and market opportunity is $250mm to $300mm – this is King Air only, we are not talking the existing Pilatus retrofit opp
• should know in 1-2 quarters how they are penetrating retrofit market

While I imagine the stock still doesn’t screen that well because they haven’t hit any inflection, this is aerospace so there would be a perception that this will get hit by commercial air travel recession (it will not) and it remains a small company ($120mm market cap).  But the business is as well placed as it could be.  Unless they are lying about the opportunity I don’t see what derails this.