Innovative Solutions and Support, Inc.

Good day and welcome to the Innovative Aerosystems first quarter fiscal 2026 financial results conference call. All participants will be in 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. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, partner at Vallum Advisors. Please go ahead.

Thank you. Good morning, everyone, and welcome to Innovative AeroSystems' first quarter fiscal 2026 results conference call. Leading the call today are our CEO, Sheram Ashkapur, and CFO, Jeff DiGiovanni. This morning, we issued a press release detailing our fiscal 2026 first quarter operational and financial results. This release is publicly available in the Investors Relations section of our corporate website at www.iascorp.com. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factor section of our latest reports filed with the SEC. Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call in the press release issued this morning. Today's call will begin with prepared remarks from SHRM who will provide a review of our recent business performance and an update on our strategic framework. followed by a financial update from Jeff. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Sharon.

Thank you, Paul, and good morning to everybody joining us on the call today. I'm pleased to report that we delivered a strong start to our fiscal year 2026, one driven by organic growth across revenue, net income, adjusted EBITDA, as well as exceptional free cash flow generation. First quarter revenue grew 37% versus the prior year period on increased commercial aftermarket demand and service activity, while adjusted EBITDA grew 141%, reflecting a more favorable revenue mix and improved operating leverage consistent with our strategic focus. We continued to make important progress under our IANext long-term valuation creation strategy during the first quarter, keeping us on track to deliver both on our near-term and long-term financial targets. As a reminder, our IANext strategy prioritizes profitable growth, sustained operational excellence, and disciplined capital allocation as key drivers of long-term value creation. This strategy forms the foundation that will enable us to deliver on our long-term target of 250 million in revenue and adjusted EBITDA margins between 25 to 30% through a combination of both organic and inorganic growth. During the first quarter, we completed all required recertification and resumed full-scale production of the digital flight control computer in support of the F-16 program at our external facility as planned. The recertification and resumption of production of the improved programmable display generator is planned for the current quarter, and we will continue to be optimistic regarding the long-term growth potential of this platform. The F-16 remains a critical asset for our military as well as many of our allies across the world, and we remain encouraged by the long runway of growth we see ahead. In addition, we still expect to begin insourcing the F-16 product line subassemblies in late 2026. This initiative should contribute to improved and more consistent margins related to these products moving forward. While we are excited by the opportunity for our F-16 platform, we also remain encouraged by the growth potential for a broader defense business. We have made significant investments to position our business as a mission-critical partner with the defense supply chain and believe that our investments, certifications, and relationships together with a strong backdrop for defense spending stand to benefit IA given our deep inside the cockpit expertise. At the product level, we continue to advance our progress towards autonomous flight through our next generation flight deck Liberty with our UMS. Recall that the UMS is an advanced aircraft systems management platform designed to monitor and control multiple aircraft subsystems from flight controls to environmental and power systems in a unified intelligent architecture. We have completed test flights with our new UMS platform on the Pilatus PC24 and more recently have begun unit production. We expect to begin delivering the new version to Pilatus in mid-2026. As it relates to inorganic growth, we remain focused on pursuing complementary, accretive acquisitions that expand our capabilities, increase our content per aircraft, position us to realize significant recurring revenue streams, and that increase our access to proprietary IP and technologies that enhance our unique value proposition. Historically, For those less familiar, our approach has centered on an acquiring aerospace and defense avionics product lines or businesses with significant aftermarket potential. As we enter 2026, our acquisition pipeline has become increasingly active and we continue to evaluate a number of potential opportunities. We remain disciplined in our approach focusing on transactions that advance our strategic objectives and we look forward to updating you on our progress. In summary, fiscal 2026 is off to a strong start with solid operating results and continued progress across our strategic initiatives. We remain committed to our long-term strategy with an ongoing focus on delivering value for our shareholders, much as we have in the recent years. With that, I'll turn the call over, Jeff, for his prepared remarks.

Thank you, Sharon, and good morning to all those joining us. Today, I will provide a high-level overview of our first quarter performance, including a discussion of working capital, our balance sheet, and our liquidity profile at quarter end. and conclude with comments on our outlook for the business, which remains positive given current demand conditions. We generated net revenues of $21.8 million in the first quarter, up 36.5% from the first quarter last year, driven by growth in our commercial aftermarket business and higher services revenues. As Sharm discussed, we resumed full-scale production of the digital flight control computer in support of the F-16 at our extant facility during the first quarter. The recertification and resumption of production of the improved programmable display generator is planned for the current quarter. That said, revenue during the first quarter was negatively impacted by this manufacturing transition with our F-16 revenues down modestly from last year by approximately $1.2 million. we remain on track for a ramp in our F-16 revenues as we move through the year. Additionally, we face some temporary headwinds in our business jet markets as we gear up to migrate Pilatus to our new UMS-II platform, thus leading to a decline in revenues of approximately $1 million during the quarter while this transition moves through production. Product sales were $13.6 million during the first quarter, up from $10 million during the same period last year, driven primarily by stronger volumes of aftermarket product upgrades to commercial markets that include UPS and air transport. Service revenue was $8.2 million, up from $6 million in the same period last year due to growth in service volumes related to the IRUs and radio products line, partially offset by a small decline with our legacy service customers. Gross profit was $11.9 million during the first quarter, up from $6.6 million reported in the same period last year, an increase of 80%. The strong growth was driven by increases in revenue and a more favorable mix of products within our commercial aftermarket business. As a result, our first quarter gross margin was 54.5%, up from 41.4% in the same period last year. As we have stated in recent quarters, we continue to expect our gross margins to be in the mid-40% range over the course of the year, with some quarterly fluctuations based on mix, especially as we continue to grow our military and OEM businesses. Commercial aftermarket, which by nature has higher gross margins as compared to military and OEM businesses, increased approximately $5 million over the prior year quarter. Operating expenses during the first quarter of 2026 was $5.6 million, an increase from $5.3 million during the same period last year, despite our strong revenue growth. Operating expenses as a percentage of revenue were 25.6% compared to 33% the same period last year. The increase in operating expenses was primarily driven by investments to support growth, including the additional headcount in engineering sales and services, as we have highlighted in recent calls, offset by lower depreciation and amortization expense. Net income for the quarter was $4.1 million as compared to $700,000 last year. Gap earnings per diluted share of 22 cents increased from 4 cents last year. Adjusted net income, which includes the same adjustments made to adjusted EBITDA, in addition to an adjustment for Amortization of acquired intangibles was $4.5 million for the quarter as compared to $1.6 million last year. Adjusted earnings per diluted share of $0.25 increased from $0.09 last year. Adjusted EBITDA was $7.4 million during the first quarter, up from $3.1 million last year, an increase of 140.9% largely due to our revenue growth and the more favorable revenue mix. Moving on to backlog. New orders in the first quarter of fiscal 2026 were approximately $19 million, and backlog as of December 31st was approximately $75 million. Backlog represents the value of contracts and purchase orders, lest a revenue recognized to date on those contracts and purchase orders. The backlog includes committed purchases and excludes potential future sole source production orders from products developed under the company's engineering development contracts programs. Now turning to cash flow. During the first quarter, cash flow from operations was $8.2 million compared to $1.8 million in the year-ago comparable period, driven by our solid operating results and financial discipline. Capital expenditures during the first quarter of 2026 were $1.1 million versus $300,000 in the year-ago period. Despite the increase in capital spending, primarily related to the building expansion compared to last year, free cash flow was $7 million during the first quarter up from 1.6 in the previous year. Our strong free cash flow reflects the limited capital needed to grow our business, which results in strong free cash flow conversion. At the end of the first quarter of 2026, we had total debt of $23.8 million, and cash and cash equivalents of 8.3 million, resulting in net debt of 15.5 million. As of December 31st, 2025, we had total cash and availability under our credit line of approximately 83.3 million. Our net leverage at the end of the quarter was 0.5 times. Our modest leverage combined with our availability under our expanded credit facility gives us significant financial flexibility to execute on our strategic initiatives. Before we move into our Q&A session, I'd like to provide our current thoughts around the outlook for the remainder of fiscal 2026. As previously disclosed, we continue to expect organic revenue to be essentially flat year over year, given the pull forward of revenue related to the F-16 production and service revenue from fiscal 26 into fiscal 2025 that we discussed last quarter. When we think about our cadence of the balance of the rest of the year, we expect second quarter revenues to be in the range of $20 to $22 million, building steadily on a sequential basis as we move through the year. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

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're 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 comes from Bobby Brooks with Northland Capital Markets. Please go ahead. Hey, good morning, team.

Thank you for taking my questions. First, the organic growth you guys posted in the first quarter, very impressive. And I wanted to dive a little bit deeper onto that. Could you just discuss what products or kind of specific aircraft retrofits drove the increase in commercial aftermarket demand and sales?

Sure. So in terms of the – this was all mainly towards the air transport side of things. So we've had – There were products that we had developed that were certified roughly last year that are beginning to take some grounds here, like the ICAST system for the 75767. We've developed the LPV for the 75767, as well as some software upgrades to update the magnetic variations. So it was a combination of increased sales on the air transport from new products that we've developed over the last couple of years.

Got it. And then kind of following up on that, so it seems like these were, a lot of it was new demand generation, right? And I guess what I'm trying to get at is, Was there any pull forward in demand? Because I know, Jeff, you kind of ended the remarks with saying organic revenue expected to kind of be flat for the full year, fiscal year six. Obviously, you just posted a great quarter of growth. So just trying to reconcile maybe what happened in the first quarter and then what's going to play out for the rest of the year.

So that – Again, last year, we had a significant growth in our revenue, which backs into the basis for the organic growth of this year. The first quarter was very strong on the organic growth. But when we look at our business model for 2026, we still believe that organic growth is going to be somewhere on a single digit and, you know, will be augmented by some acquisitions that they're contemplating.

Got it. And then, you know, you mentioned how you expect, in the press release, expected revenue related to S16 platforms to kind of scale through the year. Is that as simple as that? your backlog indicates that, or is there something else driving? You also mentioned in the press release growth opportunities related to the S16 platform, and I was just curious to hear kind of what those growth opportunities look like.

So, for your first question, On the S16 platform, we completed the digital flight control computer integration into our system around the end of last, end of 2025, financial year 2025. So Q1 was a full load of digital flight control computers that we delivered to Lockheed. The integrated display generator, the IPDG, It's being integrated into our system here now. And so we will see growth in revenue coming from that as it gets integrated and we start delivering from here. The opportunities for growth on the F-16, there is, I mean, if you listen to Lockheed, they say they're going to build another 300 of these. And also, what we're seeing is that we're seeing a lot of RFP coming in from Lockheed as well as the U.S. government for sub-assemblies as well as full units, which indicates that there will be, you know, future growth from the F-16 platform for us.

Understood. Congrats on the great quarter alternative queue. Thank you.

The next question comes from Greg Palm with Craig Callum Capital Group. Please go ahead.

Yeah, thanks. This is Danny Egerich on for Greg today. Appreciate you taking the questions. Maybe just hitting on the quarter, you know, having provided guidance with just a couple weeks left in the quarter and then You know, kind of seeing the upside that we saw there. Any way to dig in further on maybe what you saw the last few weeks and maybe what surprised you to the upside there?

You mean in terms of what we said last time and what we hit? Yeah, exactly. Timing of shipments. Sometimes, you know, it was just timing a couple shipments came in. The POs came in sooner than we expected from some of the customers as they were clearing their year end.

Okay, got it. That makes sense. And then maybe if we can hit on some defense outside of that F-16, you know, progress on some other programs out there or leads or what gets you excited for 2026 on the defense side?

So there's a fair amount of opportunities that are coming out right now. There's a lot of RFPs that are coming up for upgrade of various platforms. For competitive reasons, I don't want to go too much into details of it, but needless to say that our aircrafts within our DoD, some of them are getting longer in the tooth, and they need upgrades done to them. And it seems like that the budget is being approved to provide those . So we see a lot of opportunities there. On some of the platforms, we actually, we're on a bid with multiple integrators. which kind of indicates whoever wins will have some content.

Okay. That's very helpful. Maybe I'll just hit one on M&A now with kind of the CapEx cycle winding down and, you know, a nice quarter of free cash flow here as well. And I think last quarter it sounded like the pipeline was robust and maybe there was a couple opportunities that were pretty close. Any change in thinking there? Is there any acceleration in the pipeline and maybe expecting something here in the near term?

We are expecting a couple of things in the near term, yes. There were opportunities in the previous quarter and the one before that as well. I think from a strategic standpoint, They were not completely aligned with our strategic objectives. And then when the price went up a little bit, we kind of walked away from it.

All right. Understood. I will leave it there. Thanks.

The next question comes from Josh Sullivan with Jones Trading. Please go ahead. Hey, good morning.

Morning. Just, you know, on the integration of the F-16 components at Exton, you guys completed the expansion there. Can you just give us some color on how that integration has come along, particularly as you're looking at other platforms or products to bring in-house? You know, maybe where were you ahead of schedule, you know, just on that expansion and now bringing in products? Just curious how that whole process is coming along.

So the F-16 actually took longer than – It was planned for. Again, we're kind of at the tail end of these things. A lot of it, especially on the F-16, because you had Lockheed Martin involved and the U.S. government involved, they wanted certain assurances to have enough safety stuff before they would allow Honeywell to ship the test equipment to us. And that took longer than it was originally anticipated by Honeywell and us. But in general, having been through a number of these things, they get planned for five to six months, and it typically takes, you know, roughly more like nine months. From our side, it really is from the side of the larger organizations that we acquire these products from, and it takes them longer to close out their books and ship equipment to us.

Just maybe switching gears, you know, you talked a bit about autonomous flight there in the remarks. You know, what are you seeing from market interest on UMS you know, where do you want to take the line on automation and then on the regulatory environment, you know, as we start to think about things like drones, you know, where are you guys thinking in terms of that market?

Look, it's the regulatory environment has kind of been, had its ups and downs. I mean, NASA came out a couple of years ago. They said by 2027, They are going to allow part 25 airplanes fly with one pilot. And then there was a pushback from the pilot organizations and pilot unions, which companies like Boeing and Airbus kind of backed away from that date. But it's something that is going to happen. The timing of it is really, it's not that far out, but it's got to happen. What we're seeing is a lot of interest in cockpit automation. Eventually, once the regulations change, that would result in one pilot flying the airplane. From operators and the airlines, they would love that because it saves them Roughly about a million dollars an airplane per year. But again, regulations have to change. The pilot unions have to come on board. But meanwhile, we're seeing a lot of interest in levels of automation that leads to that.

Great. Thank you for your time. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Sheram Azkapur for any closing remarks.

Thank you, operator, and thank you, everybody, for supporting us and attending our call. Look forward to share some more information with you in the .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.