Q4 2022 Innovative Solutions and Support Inc Earnings Call

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.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host.

Michael when it crazy cheap.

Chief Financial Officer. Thank you Michael you may begin.

Thank you operator, and good afternoon, everyone.

I'd 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.

It is on file with the SEC.

Other public filings now I'll turn it over to our CEO Sharon basketball.

Thank you, Mike and good afternoon, everyone.

I will begin today with remarks on our performance in fiscal 'twenty to 'twenty two.

Following my comments on the upcoming year.

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 financial performance with revenues up 24% to $27 7 million compared to fiscal 2021.

Unearned revenue compared to the prior year.

So underlying end market support in commercial aviation General Aviation and defense end markets.

During the year, we delivered on several programs, which included a foreign C 130 program.

I'm not sure transport cockpits conventional programs.

Pilatus PC 24.

Textron King get what's wrong.

The KC 46.

Fortunately I sales were driven by broad 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 is not that is supported by.

Our more than 500 cockpit upgrades and 757767 737 platforms combined with a rapidly growing presence in general aviation.

Turning to our gross profit.

Kris gross profit to.

To $60 7 million in 2022 I.

An increase of over 30% compared to fiscal 2021.

It's significantly outpaced our revenue growth during the period as we gain operating leverage on higher overall sales.

As a percentage of sale gross margin increased 406 basis points to 61%.

For the full year operating expenses.

The cheap leverage decreased as a percent of sales to 34, 1% and 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.

One for one as you continue to benefit from higher sales.

Also anticipate we will be able to gain further leverage in 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 almost all aftermarket opportunities.

Have completed all certification activities with the FAA and yesterday, we received the Rfps seafood G 1000 cockpit King airs.

It has opened up a market size of additional 700 king guests.

Yeah.

Next I'd like to Fedex plan for some of our short and long term opportunities that we believe are in front of us.

That's just expands our product portfolio.

Incremental volume into our existing platforms.

Beginning operating leverage on incremental sales.

This is further underscored by more than 460 basis point improvement in gross margin of revenue growth of 20% year over year.

Yes.

We will create the Rockford utilization, we intend to fill incremental volume book organically and Inorganically.

On the organic side.

<unk> made the strategic decision to increase annual R&D spend I mean, that's an expansion of our portfolio of products.

<unk> reset.

As a result in fiscal 2023.

Anticipate our total R&D spend to approximate 15% of sales as compared to around 10% in fiscal year 'twenty to 'twenty two.

Cockpit automation remains a focus area for us as demonstrated with the development of orbital for Kinga <unk> audio clips.

Do you plan to continue strategic growth of our own platforms.

The alcohol withdrawal.

Planning to invest in additional cockpit automation.

By utilizing our existing product portfolio.

Handing it to other areas of fly cargo motion, we can bring value through enhancing safety and reducing operating cost for and Cox from us.

Hum inorganic opportunities, we have assembled and tested our business development team to pursue product line type acquisitions.

Complement our existing portfolio.

Do you expect to be able to fund.

Bolt on acquisitions through cash on balance sheet and free cash flow from operations.

You exceeded $6 million in fiscal 'twenty to 'twenty two.

Additionally, the economy have no debt.

And are evaluating options to utilize the strength of our balance sheet too.

<unk> to.

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 to support a meaningful increase to our operating results our total free cash generation.

To conclude we believe that our performance in fiscal 2020 to capture topline growth and demonstrated the strong operating leverage opportunity in our business.

We are laser focused on growing our business portfolio.

Increased utilization and drive incremental margin and profit.

Thank you for your time and interest 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 Charlotte and thank you all for joining US today I'll review, our financial results for the fourth quarter of fiscal 2022 and briefly recap our fiscal 2022 financial results.

Revenues increased five 7% to $7 3 million in the fourth quarter compared to $6 9 million.

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 program.

The company also saw continued improvement in commercial sales on flat panel displays for retrofit programs for 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 <unk> products to continue to generate customer service revenues going forward.

New orders in the fourth quarter were approximately $6 5 million in backlog as of September 30th 2022 was 11 8 million.

We include only purchase orders in hand from the Palatis PC 24, Textron King Air and the KC 46, a long term program and our total backlog.

We anticipate that these programs will remain in production for about a decade and you can continue to add to production sales are already included in the backlog.

Okay.

Current backlog includes a large contract with one of our general aviation Oems that is locking in their supply chain beyond their normal advance for it.

Not all of our long term OEM production contracts conclude.

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 benefit from generating higher revenue on our fixed cost platform and a favorable product mix.

Our optimized operating model with relatively lower employee head count 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 for $2 2 million in the fourth quarter compared to 2.1.

Prior year fourth quarter.

So an increase in legal and professional fees, which were offset by the gain on a PC 12 aircrafts.

R&D expenses were around 9% of revenue as a result of lower head count 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 <unk> 7 million versus <unk> 4 million in the prior fiscal year quarter.

Fourth quarter net income was $1 6 million or <unk> <unk> per share compared to $1 5 million or.

<unk> 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 24% year over year to 20 to $27 7 million.

Net income for fiscal 'twenty, two reached another record of $5 5 million or <unk> 32 per share compared to $5 1 million or 29 cents.

<unk> 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.

<unk> 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 our net income differential of $2 9 million from 2021% to 2022.

On a GAAP basis full year net income was $5 5 million or.

<unk> 32 per diluted share compared to $5 1 million or <unk> 29 per diluted share.

Net income would've been five six or <unk> 32 per.

Per diluted share compared to $3 one or.

Or <unk> 18 per diluted share a year ago with a normalized tax rate.

<unk> continues to maintain a solid financial position with significant liquidity.

In addition, the company is debt free.

<unk> 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 airplanes.

We had $17 $3 million of cash on hand at fiscal year end September 30.

Looking forward to fiscal 2023, we anticipate that operating cash flow and cash on hand 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 one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May Press Star two 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.

Keith.

One moment, please while we poll for questions.

As a reminder, it is star one to ask a question.

Yeah.

Yeah.

It looks like we have no questions at this time.

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

Okay.

Yes.

Yeah.

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