Innovative Solutions and Support, Inc.

Greetings, and welcome to the Innovative Solutions and Support, Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Linacree, Chief Financial Officer. Thank you, Michael. You may begin.

Thank you, operator, and good afternoon, everyone. I would remind our listeners that certain matters discussed in the conference call today, including information about 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 it over to our CEO, Sharam Azcapul.

Thank you, Mike, and good afternoon, everyone. I will begin today with remarks on our performance in fiscal 2022, followed by comments on the upcoming year and our long-term growth strategy. I will then turn the call over to Mike, who will take us through the details. Fiscal 2022 marked a strong year of financial performance, revenues up 20.4% to $27.7 million compared to fiscal 2021. Higher revenue compared to the prior year was attributed to underlying end market support in commercial aviation, general aviation, and defense end markets. During the year, we delivered on several programs, which included the foreign C-130 program, commercial air transport cockpit conversion programs, our Pilatus PC-24, Textron, King Air Autothrall, and the KC-46A. Fortunately, our sales were driven by growth-based success across our portfolio of products. As we have stated in the past, our winning formula starts with excellent products in attractive growing markets. This effort is supported by more than 500 cockpit upgrades in 757, 767, and 737 platforms, combined with a rapidly growing presence in general aviation. Sending to our gross profit, the increased gross profit to $60.7 million in 2022, an increase of over 30% compared to fiscal 2021. We significantly outpaced our revenue growth during the period as we gained operating leverage on higher overall sales. As a percentage of sales, gross margin increased 406 basis points, 60.1%. For the full year, operating expenses achieved leverage with a decrease at percent of sales, 34.1% in 2022, compared to 38.5% in 2021. During the year, there were some one-time costs related to legal and professional fees, which were offset by the gain on the sale of a PC-12 aircraft. Going forward, as we continue to benefit from higher sales, we also anticipate we will be able to gain further leverage on our operating expense structure. We believe these results reflect the success of our innovative products in the market and our dedication to excellence in delivering for our customers. I'm grateful to our team for their diligence as they drive results for all our stakeholders. With regards to the orbital aftermarket opportunities, we have completed all certification activities with the FAA, and yesterday we received our STC for the G1000 cockpit King Airs. It has opened up a market size of additional 700 King Airs. Next, I'd like to further expand on some of our short- and long-term opportunities that we believe are in front of us. As we expand our product portfolio and add incremental volume into our existing platforms, we gain operating leverage on incremental sales. This is further underscored by more than 460 status points improvement in gross margin of revenue growth of 20% year-over-year. To increase our asset utilization, we intend to fill incremental volume both organically and inorganically. On the organic side, we have made a strategic decision to increase annual R&D spend and invest in expansion of our portfolio of products and platforms we sell. As a result, fiscal 2023 We anticipate our total R&D spend to approximate 13% of sales, as compared to around 10% in fiscal year 2022. Cockpit automation remains the focus area for us, as demonstrated with the development of OroTrol for King Air, PC-12, and the Eclipse. We plan to continue strategic growth our autothrottle platforms. Beyond autothrottle, we are planning to invest in additional cockpit automation. By utilizing our existing product portfolio and expanding it to other areas of flight automation, we can bring value through enhancing safety and reducing operating costs for end customers. In terms of inorganic opportunities, we have assembled an internal business development team to sue product line type acquisitions that complement our existing portfolio. We expect to be able to fund full-time acquisitions through cash on balance sheet and free cash flow from operations to exceed $6 million in fiscal 2022. Additionally, we currently have no debt and are evaluating options to utilize the strength of our balance sheet to add the total liquidity available to deploy for this initiative. Taken together, we believe we can grow ourselves, increase our asset utilization, and drive incremental margin to the overall business. At full capacity, we believe our infrastructure can support a meaningful increase to our operating results and total free cash generation. To conclude, we believe that our performance in fiscal 2022 captured top-line growth and demonstrated the strong operating leverage opportunity in our business. We are laser-focused on growing our business portfolio to increase utilization, and drive incremental margin and profit. Thank you for your time and interest. We look forward to updating you with further details in the coming quarters. Now I will turn the call over to Mike for a closer look at the numbers.

Thank you, Shahram, and thank you all for joining us today. I review our financial results for the fourth quarter of fiscal 2022 and briefly recap our fiscal 2022 financial results. Revenues increased 5.7% to $7.3 million in the fourth quarter compared to $6.9 million in the fourth quarter a year ago. Growth in revenue was driven by our commercial and military businesses on the product side as well as customer service. The increase in revenue during the fourth quarter was in part due to strong military sales related to our C-130 programs. The company also saw continued improvement in commercial sales on flat panel displays for retrofit programs to commercial air transport customers. Customer service revenue rose to $1.1 million mainly due to increases in repair work from the Department of Defense. We expect our growing portfolio of installed IS&S products to continue to generate customer service revenues going forward. New orders in the fourth quarter were approximately 6.5 million, and backlog as of September 30, 2022, was 11.8 million. We include only purchase orders in hand from the Pilatus PC24, Textron King Air, and the KC46A long-term programs in our total backlog. We anticipate that these programs will remain in production for about a decade and should continue to add to production sales already included in the backlog. The current backlog includes a large contract with one of our general aviation OEMs that is locking in their supply chain beyond their normal advance order. Not all of our long-term OEM production contracts include backlogs. Escalation clauses that provide for the passing along of a portion of cost increases incurred as a result of inflationary pressures. Fourth quarter gross margin expanded by almost 400 basis points to 61.5% compared to last year. Operating leverage improved significantly as we benefited from generating higher revenue on our fixed cost platform and a favorable product mix. Our optimized operating model relatively lower employee headcount is well positioned to support and maintain our attractive margin profile as we continue to grow our revenue and earnings over time. Total operating expense were $2.2 million in the fourth quarter compared to $2.1 in the prior year fourth quarter. We saw an increase in legal and professional fees, which were offset by the gain on a PC-12 aircraft. R&D expenses were around 9% of revenue as a result of lower headcount and fewer R&D projects, including those related to STC certification. We expect to target around 13% of revenue for R&D in 2023. Tax expense in the fourth quarter was $0.7 million versus $0.4 million in the prior fiscal year quarter. Fourth quarter net income was $1.6 million, or $0.09 per share, compared to $1.5 million, or $0.09 per share in the fourth quarter of fiscal 2021. Moving to a brief recap of our fiscal 2022 results, fiscal 2022 was our fourth consecutive year of revenue growth, with revenues up 20.4% year-over-year to $27.7 million. Net income for fiscal 22 reached another record of 5.5 million or 32 cents per share compared to 5.1 million or 29 cents per share in fiscal 2021. Note that profitability in fiscal 2022 exceeded fiscal 2021, which at that point in time was our most profitable year in more than a decade. As we highlighted during our fiscal 2021 financial results, Net income was aided by a $1.1 million tax benefit from the release of deferred tax valuation allowances in the third quarter of fiscal 2021. There was no such corresponding benefit in fiscal 2022, which coupled with the tax expense of $1.8 million drove a net income differential of $2.9 million from 2021 to 2022. On a gap basis, full year net income was $5.5 million, or 32 cents per diluted share compared to 5.1 million or 29 cents per diluted share. That income would have been 5.6 or 32 cents per diluted share compared to 3.1 or 18 cents per diluted share a year ago with a normalized tax rate. IF&S continues to maintain a solid financial position with significant liquidity. In addition, the company is debt-free which provides us with strong financial flexibility. We generated $6.1 million of cash from operating activities for fiscal year 2022. Net cash flow from investing activities in the fourth quarter was supported by the sale of the PC-12 airplane. We had $17.3 million of cash on hand at fiscal year end September 30th. Looking forward to fiscal 2023, we anticipate that operating cash flow and cash on hand will reflect the payment of taxes, our continued investment in engineering development, both R&D and engineering development contract programs, as well as capitalizing on potential inorganic opportunities. With that, operator, we are ready for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

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This would conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.