Innovative Solutions & Support Inc Q2 FY2026 Earnings Call

Greetings. Welcome to Innovative Aerosystems Second Quarter Fiscal Year 26 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please note this conference is being recorded. At this time, I will turn the conference over to Paul Bartolai, Partner at Valem Advisors. Thank you, Paul. You may now begin.

Thank you. Good morning, everyone. And welcome to Innovative Aerosystems second quarter fiscal 26 Results Conference Call. Leading the call today are our CEO, Shahram Askarpour, and CFO, Jeffrey DiGiovanni. This morning, we issued a press release detailing our fiscal 26 second quarter operational and financial results. This release is publicly available in the Investor Relations section of our corporate website 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 factors 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 Shahram, who will provide a review of our recent business performance and an update on our strategic framework, followed by a financial update from Jeffrey. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I will turn the call over to Shahram.

Thank you, Paul, and good morning to everyone joining us on the call today. Our positive business momentum carried into the second quarter as we reported another strong result highlighted by significant organic growth in our commercial aerospace and business aviation markets, continued strength in bookings, strong margin realization, and efficient free cash flow conversion. We were able to deliver second quarter modest organic growth driven by growth of approximately 50% in our commercial and business aviation markets, despite an unfavorable comparison to 2025. As a reminder, we faced an unfavorable comparison to last year due to the transition of the F-16 manufacturing to our facility in Exton. Our F-16 revenues in 2025 were elevated as deliveries to Lockheed were accelerated to buffer them during the transition-related manufacturing hiatus, resulting in a $7 million year-over-year decline in F-16 revenues. The anticipated lower F-16 revenues due to the IPTG required approvals shifted the mix of our sales to be more commercial-centric in our commercial aftermarket sales together with increasing volumes in business aviation. We continue to make important progress under our IA NEXT long-term value creation strategy during the second quarter, highlighted by three new acquisitions during the quarter that further expand our base of recurring high-value aftermarket and OEM revenue across legacy and next-generation aviation platforms. Together, these transactions are projected to contribute $10 million in annual revenue with a blended gross margin profile of approximately 50%, putting us another step closer to delivering on our $250 million annual revenue target. In February, we acquired the STEC autopilot product line from Moog. This was an important transaction as it brought us an established autopilot solution to integrate into our avionics cockpit solution. This was one of the key products missing in our integrated cockpit avionics platform. We could have built this on our own, but the solution from Moog gives us a recognized and trusted product. This was followed in March with the acquisition of several product lines from Honeywell, including navigation radios, multifunction displays, transponder technologies, and power generation. This transaction importantly included additional autopilot solutions. Coupled with the Moog autopilot, together these autopilot platforms significantly enhance our integrated cockpit solution and accelerate our ability to deliver autonomous solutions to our customers for both the military and commercial markets. In aggregate, the autopilot product line acquisitions recently made establish us as a major supplier of aircraft autopilots, with certified and fielded solutions that range from small general aviation aircraft all the way to large Part 25 platforms, including helicopters, for both military and commercial markets. These solutions will also be integrated into our UMS platform and Liberty flight deck. Our full suite of avionics solutions now includes advanced flight deck and mission systems, precise flight and navigation computers, autothrottle, flight control computers, mission computers, navigation and communication radios, transponders, audio systems, electrical power generation systems, and proprietary software technologies targeting autonomous flight. This is an important milestone fulfilling the company's ongoing strategy to build a comprehensive avionics ecosystem that bridges legacy platform sustainment with next-generation capability development, ensuring operators can maximize aircraft availability, safety, and long-term value. As with past transactions, these acquisitions expand our reach into new customers and platforms as well as provide an opportunity to reengineer these products and integrate them into our existing solutions to offer to new potential customers in military, business aviation, and commercial air transport sectors. Our acquisition funnel remains robust and we see additional opportunities as we continue to execute on our strategic growth initiatives. This quarter provided clear evidence that our strategy is working, as we saw the benefits of both acquisitions and strong organic growth driven by internal investments in new product development. We will remain disciplined in our approach, continuing to focus on transactions and investments that advance our strategic objectives. I also wanted to provide a quick update on integration of our products in support of the F-16 program. As we discussed last quarter, we completed all required recertifications and resumed full-scale production of the digital flight control computer at our Exton facility. The recertification and resumption of production of the improved programmable display generator is also now complete. We are excited to be fully up and running on these products and we 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 around the world. Additionally, we remain encouraged by the growth potential for our broader defense business as we experienced a significant level of inquiries for cockpit upgrades and new aircraft platforms. As such, in the current political climate we are even more encouraged by the long runway of growth we see ahead. We have made significant investments to position our business as a mission-critical partner within the defense supply chain and believe that we stand to benefit given the strong backdrop for defense spending. At the product level, we continue to move closer to delivering the new version of our UMS platform. We expect deliveries to ramp up through the year and remain excited for the potential of our new UMS platform and our Liberty flight deck. We continue to make significant investments in internal R&D as we continue to advance our progress towards autonomous flight through our next-generation flight deck, Liberty, which employs our UMS system. Our next-generation UMS system 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. In summary, we were pleased with our strong second quarter results that further built on our recent strong performance. We remain encouraged by the growth outlook for our business supported by strength across our key end markets, momentum for our new products, and an active acquisition pipeline. We remain committed to our strategic priorities with an ongoing focus on maximizing long-term value for our shareholders. With that, I will turn the call over to Jeffrey for his prepared remarks.

Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our second 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 $22.4 million in the second quarter, up 2% from the second quarter last year despite the unfavorable comparison given the elevated F-16 revenues during the second quarter last year as Shahram discussed. We anticipated lower F-16 revenues and were able to offset this $7 million headwind by shifting our operations to be more commercial and business aviation-centric, which increased roughly 50% on an organic basis. We have now completed all certifications and testing related to the digital flight control computer and the display generator in support of the F-16 program at our Exton facility. We expect manufacturing levels to normalize to support ongoing shipment levels in 2026. Product sales were $14.3 million during the second quarter, up from $13.2 million during the same period last year, as stronger volumes of aftermarket products, upgrades to the commercial market, and sales to the business aviation market more than offset the decline in the F-16 revenues. Service revenues were $8.1 million, down modestly from $8.8 million in the same period last year, due to a decline of nearly $3 million in F-16 service revenues. This was partially offset by growth in the service volumes related to the IRUs and radio product lines. Gross profit was $11.4 million during the second quarter, up 1.5% from the same period last year. The improvement was driven by revenue growth and a favorable mix within the commercial aftermarket business, partially offset by an unfavorable comparison to last year's second quarter given the timing of expense recognition related to the F-16 transition. As we have discussed previously, we experienced some lumpiness in the timing of expense recognition during the manufacturing transition from Honeywell that impacted our quarterly results. As a result, our second quarter gross margin was 51.1%, down modestly compared to 51.4% last year given the difficult comparison. We continue to expect our gross margins to be in the mid-40% range over the long term with some quarterly fluctuations based on mix. As our military business ramps back up, which has lower gross margins, we would expect our gross margins to normalize. However, as we have discussed, our military business has similar EBITDA margins to our other businesses given a lower SG&A burden. Operating expense during 2026 was $6.5 million, an increase of 4% from $6.3 million during the same period last year. The increase in operating expenses reflects investments in R&D in support of growth initiatives as well as one-time acquisition-related costs associated with the three recent acquisitions. Net income was $3.4 million or $0.19 per diluted share during the second quarter compared to net income of $5.3 million or $0.30 per share in the second quarter of last year. The effective tax rate was 22.6% during the second quarter, up from 19.2% during the same period last year due to the overall growth in the business. Adjusted net income, which includes the same adjustments made to adjusted EBITDA in addition to an adjustment for the amortization of acquired intangibles, was $4.8 million for the quarter as compared to $5.7 million last year. Adjusted earnings per diluted share were $0.27 versus $0.32 last year. Adjusted EBITDA was $6.8 million during the second quarter, down from $7.7 million in the second quarter of last year due to growth investments and timing of expense recognition related to the F-16 transition in the prior year period. Our R&D investments during the second quarter were up roughly $1 million versus the second quarter last year, and for the remainder of the fiscal year, we continue to expect to increase R&D spending to support our growth initiatives. Moving on to backlog, new orders in the second quarter of fiscal 26 were $24.7 million and backlog as of March 31 was approximately $87 million, an increase of approximately $7 million over the comparable period. Backlog represents the value of contracts and purchase orders less the revenue recognized to date on those contracts and purchase orders. The backlog includes committed purchases and excludes potential sole-source production orders from products developed under the company's engineering development contracts programs. Now turning to cash flow, during 2026 cash flow from operations was $10.5 million compared to $3.1 million in the year-ago comparable period, driven by our solid operating results and financial discipline. Capital expenditures during the first six months of 26 were $2.7 million versus $1.8 million for the year-ago period. Free cash flow was $7.7 million during the first half, up from $1.3 million 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 second quarter 26, we had total debt of $55.1 million and cash and cash equivalents of $6.8 million, resulting in net debt of $48.3 million. Net debt increased $22.2 million from the year-ago period despite over $35 million used for acquisitions and capital expenditures in support of the company's growth initiatives, reflecting strong operating results and strong free cash flow conversion. As of March 31, 2026, we had total cash and availability under our credit line of approximately $49.8 million. Our net leverage at the end of the quarter was 1.7x. Despite the recent acquisitions, our modest leverage combined with availability under our expanded credit facility gives us significant financial flexibility to continue executing on our strategic initiatives. Before we move into our Q&A, I would like to provide our current thoughts around the outlook for the remainder of fiscal 26. As previously disclosed, we continue to expect organic revenue growth to be essentially flat year over year given the pull forward of revenue from 2026 into 2025 related to the F-16 production and service revenue. As we look ahead, we expect third quarter revenues to be in the range of $24 to $26 million. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question comes from the line of Robert Brooks with Northland Capital. Please proceed with your questions.

Hey. Good morning, guys, and thank you for taking my questions. Thought it was interesting the commentary that shifted operational mix away from F-16 to more commercial aftermarket and business aviation. Just wanted to hear more discussion on that.

The verbiage makes it seem like it was one or the other, but it was not an either-or situation. The approval timeline for the IPDG got us to the last couple of weeks of the quarter. There is over 80 hours of testing that goes to these boxes, each, before we ship them, and there was not much we could ship when you only had a few weeks left to the end of the quarter. In anticipation of that, we focused production more towards the commercial deliveries that we were doing. We would have shipped more F-16 if the approval had happened a little earlier in the quarter, but it was not a capacity issue; we have capacity well over the numbers we are delivering right now with the infrastructure that we have. It was the timing required for final testing prior to shipment that limited how much F-16 product we could ship in the quarter. In the prior quarter last year, we shipped roughly about $10 million of F-16 product lines due to pull-ins. On average, we think the F-16 will be somewhere between $3 to $5 million per quarter going forward. In this quarter we did just over $3 million, so it was a shift from the $10 million quarter to a more normalized $3 million level and we had to fill in the gap with commercial and business aviation volume.

Got it. That is helpful and gives especially clarity on the capacity to execute on both opportunities. Shifting gears to the acquisitions that you have done in the quarter, you started, as you said in the prepared remarks, building a pretty unique portfolio. I was just curious to hear what the customer reception has been. Have you guys been getting inbound after announcing these deals? How have customer conversations evolved? Have new customers come into the fold because of the platform you are accumulating? Just more color on that.

Starting with the Moog acquisition, to the best of our understanding, Moog's strategic objectives shifted over time and the STEC product lines were not a focus for them. Those autopilot solutions they had were more integrated into their broader cockpit offerings and they wanted to divest product lines they were not supporting. After we completed the acquisition, we have had significant inquiries from around the world for people who want to buy these autopilots. These product lines are well established—STEC autopilot is well known in the general aviation and business aviation markets—so reception has been very positive and we are building a backlog to deliver against these product lines. Regarding the Honeywell product lines we acquired, there is OEM content in that portfolio; they still supply some of these to customers such as Pilatus and Boeing. That was also positive because some customers had not been satisfied with the parts production under Honeywell, and we have gained momentum acquiring these lines. Importantly, we acquired the AeroCruise product line which goes into lower-end general aviation airplanes and is a reliable revenue generator. We also acquired the KFC 32, which is a modern digital autopilot, and the KFC 25, the older generation autopilot installed in tens of thousands of aircraft. There is recurring revenue associated with maintaining and upgrading those platforms. The KFC 32 will be the workhorse for our own autopilot offering; it is a very capable digital autopilot Honeywell developed several years ago. In aggregate, these acquisitions put us in a position where I would say we are probably the largest autopilot supplier in the market right now, covering a broad spectrum of aircraft.

That is very exciting to hear. One last for me: could you compare your acquisition pipeline today to one year ago? And could you speak toward your appetite for more acquisitions? Obviously, $33 million of acquisitions over the past two months is a healthy chunk. Are you trying to get those integrated first before looking for more? Just thoughts there.

We have expanded our engineering group as well as our contracts and program management groups to more easily transfer these technologies into our organization and execute integration. We are in a position now where we are still looking at acquisitions and we have the dry powder to do that. Product-line acquisitions are attractive but we will only pursue them if they're strategic to us. We are also looking at acquiring businesses that complement us; that is an active pipeline. We have a pretty active funnel and will continue to evaluate opportunities. If we find targets that are interesting, profitable, and good businesses, we would acquire them. We are focused on integrating what we have acquired, but our appetite remains for strategic acquisitions.

Thank you. Our next questions are from the line of Greg Palm with Craig-Hallum. Please proceed with your questions.

Yes. I am curious, Shahram, you talked a little bit about the defense market and some of the opportunities that may be emerging in light of the positive backdrop. Maybe you can expand a little bit on what you are seeing in the pipeline and what you are excited about over the next couple of years?

In terms of the defense market, you see what's in the news and the investment our government is planning to make in defense. There are a lot of aging aircraft within the DOD and funding available to perform upgrades across fleets. There are very large programs out there; for example, KC-135 upgrades—there are hundreds, roughly 600 of those aircraft—so there is a great deal of customer inquiry at the moment. When we did the acquisition on the F-16 work, it put us at the table with decision makers at Lockheed Martin. They were impressed with the way we integrated and delivered equipment to them, and that has opened many new doors. We are discussing other F-16-related programs as well as broader upgrade opportunities. We see positive feedback on how we executed the integration of the defense contracting organization into our company, and we are upbeat about the future revenues we expect from that channel.

Okay. That sounds good. As it relates to F-16 and tying this to what is baked into the guide for the current quarter, does it assume some sequential improvement in F-16, or are we still in a ramp-up phase? When does F-16 get to a more normalized run rate?

We are there now. Moving forward we are looking at about nominally $3 to $5 million of F-16 business per quarter. There is a limit to how much product we can produce in a quarter because of the amount of time it takes to put these boxes through required testing—about 80 hours of chamber testing—so that dictates how much we can deliver. Now that production is up and running again, that is the expected run rate.

Okay. I guess last one: in light of a pickup in recent acquisition activity, what is your appetite going forward and how does the pipeline specifically look versus previous quarters?

The pipeline is very good. Honeywell is splitting parts of their company, and we expect additional product divestitures over time, some of which are of interest to us. We've opened up our aperture quite a bit and are looking at many potential divestitures—some product lines, some divisions—that could complement our strategy. We are evaluating those opportunities actively.

Our next question is from the line of Sergey Glinyanov with Freedom Brokers. Please proceed with your questions.

Good day, gentlemen. There has been a lot of talk about the F-16 program and redesign issues. Just wondering, could that impact your revenue over the next couple of quarters, or does it not matter what is happening with that program overall?

Sergey, can you repeat that?

Yes. Sure. So we are aware of F-16 redesign issues. Will this impact your revenue over the next couple of quarters, or does it not matter what is happening with the program overall and whether you can deliver your products anyway?

What I think you are asking is whether the fluctuation in F-16 activity will continue going forward. The line is up and running now. The IPDG line is up and running and we are expecting roughly $3 to $5 million on a quarterly basis because, again, the amount of time to test the equipment in the chambers is about 80 hours, so that dictates the amount of product we can deliver in a quarter. The backlog is still there, so keep in mind there is a plentiful amount of backlog to be built over the next few years.

Okay. Got it. Maybe I missed some point about your recent acquisitions. Could you put some color on what portion of revenue these new acquisitions will bring?

As we said earlier, the recent acquisitions are projected to contribute about $10 million in annual revenue.

And last one: in terms of your acquisition pipeline or recent acquisitions, on your commercial side do you expect your revenue mix will shift toward products rather than services?

In the long term, yes. Historically, our acquisitions three years ago increased our services significantly—from roughly $4 to $5 million up to about $25 million in services—but as we have completed additional acquisitions and as we develop our next-generation cockpits and platforms, that mix is changing. Over time production and product revenue will become a larger percentage relative to services.

Thank you. At this time, this concludes our question-and-answer session. I will turn the floor back to management for closing comments.

Thank you, operator. And thank you all for your time and interest in Innovative Aerosystems. Have a great day. Thanks.

Thank you. And gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect your lines at this time and have a wonderful day.