This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Welcome to the Innovative Solutions and Support Fourth Quarter and Year-End Fiscal 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sharam Azkabar, CEO. Please go ahead.
spk04: Good morning. This is Shahram Azkapur, Chief Executive Officer of Innovative Solutions and Support. Welcome to our conference call to discuss our performance for the fourth quarter and full year fiscal 2023, current business conditions, and outlook for the coming year. Joining me is Raoul Renant, our CFO. Before we begin, I'd like Raoul to provide cautionary statements about forward-looking information.
spk01: Thank you, Sharon, and good morning, everyone. I would remind our listeners that certain statements made and matters discussed in the conference call today, including those about new products and operational and financial results for future periods, contain forward-looking information. The forward-looking statements are subject to assumptions, risks, and uncertainties that could cause actual results to differ materially, either better or worse from those discussed. I specifically call our listeners' attention to our disclaimer regarding forward-looking statements at the end of the earnings release, which was included in a Form 8-K filed yesterday. Which disclaimer, along with other public filings referred in it, describes these assumptions, risks, and uncertainties? I also remind our listeners that plans and expectations we express speak only as of today's date, and listeners, should not place undue reliance on any forward-looking statements. Now I'll turn the call back to Sharon.
spk04: Thank you, Ralph. I will begin today with remarks on our performance in the fiscal fourth quarter and full year 2023, followed by comments on our long-term growth plan and strategy, including the recent Honeywell products purchased and licensed. I will then turn the call back to Ralph who will take us through the financials. For the quarter, revenues were up 79%, with net income increasing 63% from a year ago. Our fiscal year 2023 results were driven by continued organic growth in our production contract and aftermarket sales, as well as a full quarter of Honeywell product sales which we acquired at the end of June. As anticipated, the Honeywell products supported our strong margins, which were up sequentially from the third quarter and similar to a year ago. We have also continued to generate strong cash flow, which contributed to reduce the borrowings used for our June acquisitions. This strong fourth quarter led to our fifth consecutive year of revenue growth, strong cash flow, and another increase in the full year earnings. Our cash has also enabled further pay down of our borrowings in the current quarter, despite the heavy one-time significant expenses in care for auditing fees, legal expenses, and cost of hiring and training new technical personnel in relation to the acquired products. We are fortunate to have a great relationship with our bank, PNC, and they have been very supportive of our growth strategy. This week, we converted our $20 million term loan to a revolving line of credit that has enabled us to reduce our total debt from $20 million to less than $12 million. It is noteworthy that we achieved the strong fourth quarter growth results despite the additional burdens under which we operated over the past year by amending our bylaws, negotiating a bank agreement, as well as facilitating and subsequently integrating a substantive acquisition. Despite these non-recurring events, our team delivered financial performance that maintained our track record of steady, profitable growth. Our goal now is to leverage this momentum to sustain this growth over both the near and longer term organically and through additional acquisitions. To that end, we have several plans in motion. Organically, we have plans to continue further product innovation and to sustain our high level of investment in research and development, especially in the area of cockpit automation that will ultimately lead to single pilot operations in large transport aircraft. Our value proposition is to focus on products that continue to reduce pilot workload and improve safety. For instance, we plan to add capabilities to existing technologies, such as our flat panel displays, to include automated emergency checklists and pilot alerting systems. We expect these technologies to serve as stepping stones that will help prepare the market for single pilot flights in air transport aircraft. We were recently awarded a development contract for the second generation of UMS for Pilatus. We expect that second generation technology will expand capabilities such as AI and improve the versatility of the UMS. In the process, we anticipate this will create new platforms that can be adopted for other aircraft and eventually constitute another step along the path to autonomous flight. In order to maintain our leadership in cargo retrofit business, we are in the process of adding new features to our products that we expect will allow increasing content and selling price. protecting this business's overall revenue in the face of any potential slowdowns in the cargo conversion market. Our order file OEM business has continued to do well with Textron, and we have continued to pursue additional platforms in the military and regional airline markets. Across the board, we are increasing our business development activities by working to grow our sales and marketing group both domestically and internationally. The acquired Honeywell products have put us in front of a new set of buyers, which we believe our sales team can use that relationship to introduce them to our broader range of products. Secondly, we plan to leverage acquired technologies to enhance and expand our product offerings. As an example, with the Honeywell product lines, we now have our own radios and adjacent technology capabilities we previously had to buy on the open market to integrate into our products. Acquisitions such as this are complementary to our existing product portfolio and will likely accelerate our ability to develop new technologies needed to eventually achieve autonomous flight. As a direct result of this acquisition, we believe that we are on pace to achieve annualized 40% top-line growth once the Honeywell integration has been fully integrated. Those integrations are making steady progress. As planned, this quarter and next, we are moving inventory, installing the purchased equipment in our facility, and training our employees. Having anticipated some of the disruptions arising from the integration over the first and second quarters, of FY 2024, and by customer requests, we accelerated some of the deliveries into the September 2023 quarter. Consequently, we expect results in the current quarter and the next to be weaker than the results of the Q4 2023. As the second part of our growth strategy, we continue to evaluate other acquisitions opportunities and plan to execute additional complementary acquisitions as these opportunities arise. Thank you for your time and interest. We look forward to updating you in the upcoming quarters. I will turn the call over to Burrell for a closer look at the numbers.
spk01: Thank you, Sherm, and thank you all for joining today. I will review our financial results for the fourth quarter and full year of fiscal 2023. Revenue in the fourth quarter was up 79% primarily due to the contribution for the sales of products purchased and licensed from Honeywell. As Sharon noted, revenues in the fourth quarter included the pull forward of Honeywell products, some of which would have otherwise been delivered in the first and second quarters of 2024. Work was accelerated in the September quarter to meet our delivery commitments before production was anticipated to be slowed by the movements of inventory and equipment, as well as other disruptions that are typical when undertaking an integration of this size and complexity. As a result, we expect results in the current quarter and the next to be weaker than the results of the Q4 2023. Fourth quarter gross margin was 62%, a sequential improvement from the third quarter and unchanged from the same quarter a year ago. Margins reflect both the better absorption of our fixed overhead as a result of revenue growth as well as the impact of the margins of the Honeywell products. In the fourth quarter of fiscal 2023, research and development expense increased in absolute terms, consistent with our commitment to innovation, but decreased relative to sales. As Sharon previously mentioned, we anticipate that research and development will continue to increase as the company works to develop new features and capabilities to our existing product base. As the Honeywell product line integration continues into the spring, we expect expenses to remain somewhat above what we would see as our normalized run rate. The fourth quarter fiscal 2023 increase in selling general administrative expenses reflect one-time costs associated with the Honeywell transaction, including higher legal, accounting, professional fees, and amortization expense. In addition, selling general and administrative expense in the fourth quarter fiscal 2022 was reduced by $1.2 million due to a gain on the sale of the company's PC-12 aircraft. Interest income was up in the quarter due to an increase in interest rates on our interest-bearing cash deposits. Interest expense in the quarter reflects costs associated with the borrowings used to consummate the Honeywell transaction. We expect interest expense to trend down not only as interest rates are anticipated to fall, but also due to our continued pay down of these borrowings under the terms of revolver facility. Tax expense in the fourth quarter of fiscal 2023 was 0.7 million compared to 0.76 million in the fourth quarter of 2022. Fourth quarter net income was 2.6 million or 15 cents per share up from 1.7 million or nine cents per share in the fourth quarter of fiscal 2022. Backlog at September 30th, 2023 was 13.5 million, and new orders in the fourth quarter of fiscal year 2023 were approximately 12.7 million. As always, quarterly orders can vary due to a number of factors that are not meant to provide an indicator of future revenues. Virtually all the Honeywell revenues are from inter-quarter book and ship orders that are not included in the backlog. Cash at September 30, 2023 was $3.1 million of about $500,000 from June 30. Over the three months ended September 30, 2023, we also reduced our term loan debt by $500,000. This week, the company converted its $20 million term loan into a $30 million revolving line of credit as it was combined with the company's $10 million revolving line of credit. Under the terms of the agreement, our cash balance will be swept daily against the outstanding revolver balance thereby reducing interest expense. This revolving line of credit is expected to allow the company greater flexibility when the next acquisition opportunity presents itself. As previously noted, cash flow has continued to accrue into the fiscal 2024 quarter, including the collection of a significant amount of receivables and the sale of the company's King Air aircraft for 2.3 million, so that our current net debt position has been reduced to less than 12 million. For the year, the company generated $2.1 million of cash flow from operations. With that, operator, we're ready for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Theodore O'Neill from Litchfield Hill Research. Please go ahead.
spk08: Thank you very much. A couple of questions. And you may have covered this first question in your presentation when you announced the acquisition of Honeywell Business. As I was looking through the unaudited pro forma combined statement of operation for the acquisition, there wasn't anything in here for R&D. And I was wondering what impact the acquisition is going to have on R&D expense going forward. And then more broadly, its impact, the Honeywell integration impact on margins at SG&A.
spk04: So I guess to your first question, it's going to be very, at least initially for the first year, it's going to have a little impact on the R&D. Going forward, as we're going to modify some of these equipment that the, let me put this, we're going to modify some of the designs to make it more suitable to work closely with our equipment. It will require some R&D, and those are not significant amount of dollars. They'll be part of our IR&D programs that we run.
spk01: The G&A? Yeah, so G&A will be up a little bit. We're still incurring audit fees, legal fees relative to this. It's not what it was in the fourth quarter, but it will still be somewhat a little bit elevated, yes.
spk08: Okay. Ed, can I read anything into this increase in accounts receivable from year over year?
spk01: Yeah. So the accounts receivable, it all depends on when you ship things out, right? So we had a lot of later shipments. We had a big quarter, and the shipments went out later. And some vendors or customers are 45 days, you know, so that's. We've been collecting it all. So that's really, as I said, helped in this quarter. But it's a little atypical for us, but it's a matter of timing.
spk08: Okay. Yeah, it makes sense. And then the customer concentration for the year, is that going to change much with the acquisition?
spk04: Concentration of the customers?
spk08: Yeah, yeah, like your top five customers.
spk04: Yeah, to some extent it will. I think there's going to be a couple of major customers being the channel partners that we're going to get a lot of business from. So it will change.
spk08: Okay. All right. Thanks very much.
spk04: Thank you. Thank you.
spk03: The next question comes from John Moran with Roboti Inco. Please go ahead.
spk09: Hi, thank you. The first question is just around the net debt number that you're reporting in our quarter. Is that a sustainable level relative to the new size of the business, absent any acquisitions, or is that going to go up and down?
spk01: It depends. It'll go hopefully down as we're profitable and generate more cash. it's going to continue to come down. So I just gave you a snapshot of where we are relatively now. But as we generate more cash, it's going to become lower and lower until we borrow again. But it does sweep our account, our cash, and it's just net, net, net all the time. So we expect it to keep decreasing.
spk04: Yeah, I'm going to be sorry. Am I oversponsored? Sorry, John?
spk09: I'm sorry, so am I oversimplifying it to read into it that you've generated $8 million in cash since the closing of the deal?
spk04: We did not generate $8 million.
spk01: Well, mostly this now, this quarter now, right? We collected receivables. We sold a plane. So it's really you're taking it from 930 into the now, into the now, yeah.
spk04: And meanwhile, we're spending money like drunken sailors on lawyers and accountants. Three years of Honeywell's books. Honeywell's a big company. No free lunch.
spk09: The other question I had was around the backlog and new orders that you're reporting in the quarter for the legacy business. That does seem... up fairly dramatically from where you were a year, you know, just what that's been. I know it's gone up and down, but is there something driving that in particular?
spk04: I mean, it's kind of the previous organic product line. You know, year to year, this year, Because they got a big new contract from Pilatus, which actually kind of guarantees us for another 15, 20 years on that platform.
spk01: And some of the OEMs give us POs in advance.
spk04: And they gave us POs. So this is what it was this quarter.
spk09: I'm sorry. But that number... I don't have it right in front of me. So they were $12 and $13 million. I can't remember what's backlog and new orders or something like that. I mean, that was running at $789. That's mostly related to Pilatus?
spk01: A lot of it is.
spk04: A lot of it is.
spk01: Not all of it, of course. Okay.
spk04: Okay, great. Thank you.
spk01: You got text, Ron. I mean, it's a combination, but the volume is modest.
spk09: Great. Thank you very much.
spk04: Thanks. Yeah, we have the C-130 stuff in there.
spk03: The next question comes from Andrew Rem with Odinson Partners. Please go ahead.
spk07: Good morning, gentlemen. Just on the kind of, can you guys break out or provide a little bit more detail on the revenue? How much was kind of legacy versus the Honeywell contribution?
spk04: It's kind of hard to do that on this call right now. I think our, it comes up. Yeah, we'll have to break it down. There will be notes in there as to exact contribution of the Honeywell. Okay.
spk07: You guys can break that out in the 10Ks.
spk01: That's where it's going to go. Yeah. I think the 10K, we have to end it this year, and then going forward, I believe it will all be one. Believe it or not, the artists are still working on it.
spk04: Okay. I never imagined it would be that hard.
spk07: Everything's hard. Okay. Okay, perfect. On R&D, can you guys maybe just give updated guidance? Last year, I think you guys said, you wanted to kind of push R&D to kind of 13, 14%. But given the Honeywell, it doesn't sound like it will necessarily consume a lot of R&D resources. But can you maybe just reframe how you're thinking about R&D?
spk04: Yeah, so I guess 13% of 20-odd million is... is still less than 10% of 40-odd million. So as a percentage of revenue, our R&D percentage is going to go down, but in terms of dollar value, we're increasing the size of our engineering department and using some of the revenues that come from these hybrid products to further our internal growth strategy.
spk01: Yeah, so it'll grow, it'll go higher in absolute terms, but as a percentage of sales grow, that's going to be faster than the increase. So you'll see that relationship go down.
spk07: Okay, and then also in the queue, will you guys break out some of these, what sounds like kind of either short-term or one-time related items, both in, yeah, but I guess in the fourth quarter specifically?
spk01: Well, it's kind of what I said here, but yeah, a little bit more detail. In the MD&A, you know, the comparison, it'll be addressed in there, yes.
spk04: I think the Q4 was just over a million dollars of these one-time expenses in this Q4.
spk01: That's really, if you look at it, that's the difference. If you add 1.2 back and look at it, that's really the fallout.
spk04: Yeah, it's about a million dollars. And I can imagine the quarter that we're in is not going to be any better either. It won't be as high. It'll be more than an army of people sitting here charging.
spk07: Okay, and then can you guys give an update in terms of on the integration, kind of what have you completed and what is left to do?
spk04: Sure. So one of the product lines is completely here. We've got our people trained, and we're actually performing on it. And that's on the radio side. On the IRU side, we're going to do that in the transfer of all the equipment and the training and all of that, it's going to occur after the holidays. And the reason for that is that that product line is mainly for the air transport market. And the airlines were very nervous in doing that In in November December time period because they felt that it may impact their busy period So we work our team works on a daily basis with the Honeywell integration team and we We evaluate each one of these requests from the customers On a daily basis to make sure there's no disruptions in the operation obviously this slow down that occurred during this quarter because on the radio side, when you think about it, they had to pack all of these test equipment, inventory them, make sure they were right, ship them here, unpack them here. They had to be set up here. We had to have their team come here, make sure everything works right, and do another final stage of training to our people. During that period, nothing happened.
spk01: This is why the pull forward in Q4.
spk04: So the same thing is going to happen next quarter in the January to March quarter with the IRU stuff. Again, they have to be packed and set up over here. That's the process.
spk07: Okay. All right. Well, great quarter, gentlemen. Thanks a lot. Thank you. Thank you.
spk03: The next question comes from Doug Root with Lanix Financial Services. Please go ahead.
spk05: Good morning. Congratulations on the strong quarter. I have three questions. What is the company's relationship now with the Hendrick family?
spk04: that are managed by different people within the Hedricks family that each own some number of shares. And the state also owns some shares, but none of them are, I guess, significant enough to have a reporting requirement on them. They're below the threshold. And they're all managed by different people. So that's the way it is.
spk05: There's no representation on the board of directors, and there's not too much of a relationship with any family member at this point then?
spk04: No. board or be represented on the board.
spk05: All right. And then the second question is the relationship with the large shareholder, Christopher Harborne. Is he involved? Is he asking for a board seat or is there any interaction with the company and his entity?
spk09: Hello?
spk04: No, he hasn't. We have a business relationship with one of his companies. We have a supplier to it. But if we ever have any conversation, it's always regards to that.
spk05: Okay. And then the final question. Are the board members and the management team, are you folks eligible to buy stock at this point in time? Or are you in a blackout period? Maybe you could offer some advice there.
spk02: In the blackout period, so 15 days before the end of the quarter is the blackout period. And then you can, the blackout period is lifted the third business day at the earnings beginning.
spk03: The next question comes from Roger Goldman, who's a private investor. Please go ahead.
spk00: Hi, guys. First of all, congratulations. Really well done. This seems like it's going exactly according to the way you told us it would go. In that connection, any surprises so far with the integration, either good news or bad news?
spk04: Surprises from my end, it's, you know, navigating a large company and the level of commitment is a challenge. I knew it was going to be a challenge, but it's, you know, it's internal communications within Honeywell. You're talking to a group of people that you sign an agreement with and we all understand what it is. But then at the end of the day, you're getting information from some guy down there somewhere and they have their own opinion.
spk00: Yeah.
spk04: A lot of levels. It takes a little bit harder, but I think we've learned a lot of lessons here. This time around, out of this, you know, in better ways of making this happen smoothly. Having said that, we're told by folks at Honeywell that this has been by far the smoothest transition that they've done on any of these messages. It's all relative, I guess. It's all relative.
spk00: Yep, yep. Yeah, well, you know, a lot of people in companies have made a lot of money doing just what you're doing, which is unencumbering a division from all the corporate, I don't want to say nonsense, but all the corporate structure inherent in being a small division of a big company. And sometimes there are financial surprises, sometimes good, sometimes bad. that don't rise to the level of, oh, we've got to redo the contract or we've got to walk away. But nonetheless, they're kind of shocking. And what I'm hearing you say is it's more difficult managerially, but financially it's right on target.
spk04: We have not had any negative surprises.
spk00: Okay. That's a good way to say it. I hear you. Um, second, secondly, um, just, uh, I, I think the bank, I was going to ask you a question about the bank financing. Um, it sounds like you're generating a ton of cash and you're using it to pay down a ton of debt. Um, the bank would be cooperative if you made another acquisition and, and that, that went up again, substantially.
spk04: Yes, actually conversation with them. And they would be very happy to provide us, based on the EBITDA of the next business that we would buy. Right. For that EBITDA that then later on we can convert it into the line of credit. Yep, they've been very supportive. So they've been very supportive.
spk00: Right. And you're going to save probably half a million to a million bucks in interest this year. So good job on that. And do you feel that you have the management to make another acquisition in the next year?
spk04: Yes, we do.
spk00: Okay. I was hoping for a really simple answer like that. Thanks. And last question is I know Mike left. Anything there we should know?
spk04: Nothing related to the company. It was a personal decision.
spk00: Okay. All right. Good. And thanks for stepping back in, Ron. This is a critical time for the company, critical, critical time. Anyway, I just want to end by saying, as you guys know, I've been a first my dad and now my sister and I have been long-time shareholders, and this is what we've been hoping for for years and years. So just well done, well done. You guys are on your way to something really, building a fabulous company here.
spk01: Thank you for your support. Thank you very much. Have a good one. Happy holidays.
spk03: This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
Disclaimer