Q3 2023 Innovative Solutions and Support Inc Earnings Call

Good day, and welcome to innovative solutions and support third quarter fiscal 2023 financial results call.

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Now I'd like to turn the conference over to Mr Sharma basketball.

Oh. Please go ahead Sir.

Good morning, this is <unk>.

<unk>, Chief Executive officer of innovative solutions and support.

Welcome to our conference call to discuss our performance for the third quarter of fiscal 2023.

Current business conditions and outlook for the coming year.

Joining me is mark <unk> our CFO .

Before we begin I'd like Mark to read the Safe Harbor statement.

Thank you, Sean and good morning, everyone.

I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods.

Forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially either better or worse than those discussed including the impact of the Honeywell product line license asset.

<unk> and other acquisitions as well as other risks and uncertainties reflected in our company's 10-K, which is on file with the SEC and other public filings.

Turn the call back to Sean.

Thank you Mike.

I'll begin today with remarks on our performance in the fiscal third order of 2023.

Followed by comments on our long term growth plan and strategy, including the recent acquisitions from honey.

I will then turn the call over to Mike, who will take us through the financials.

Revenues in the third quarter increased 15% to 8 million.

Were also up sequentially from the second quarter.

This improvement was driven by the steady contribution of our production contracts and the growth in revenue from our after market products, including our king get oral struggle.

Pablo this place for the air cargo market.

We're also generating revenues from new programs and services.

Including a new world Thrombolytic stroke installation services and block that its oral its role with the Beechcraft King get 200 or 300.

With the New York D. C has opened a new market a potentially 700 additional aircraft.

Margins were also up from a year ago, which led to another strong quarter of bottom line results.

All in all financial performance that continues to illustrate steady profitable growth.

In addition at the end.

End of the third quarter.

We lie and acquired several product lines from Honeywell Aerospace.

The products, both enhance our current offering and leverage our existing infrastructure, making this an ideal fit with the acquisition strategy we have articulated.

These products can be found on literally thousands no back row target.

Our sport and business aviation market.

We believe we have the potential to expand them into the military market as well.

This acquisition together with <unk>.

Continued strong organic revenue represent an important inflection point in our revenue growth rate.

Once fully integrated the 'twenty 'twenty four we expect these new products to drive consolidated revenue growth to approximately 40%.

And even more significant impact on earnings that'd be expect EBITDA to increase by 75%.

<unk> EPS in 2024.

These anticipated results clearly illustrate that we are committed to our strategy to better leverage our existing infrastructure.

Bearing on new revenues.

That have this timber alone.

Margin profile as our existing operation.

And that can utilize our current excess capacity.

And matter of fact, you.

The integration of these operations.

Is proceeding as planned I mean, it's on track.

Two being.

Adding to our.

To begin adding to our financial performance starting in the fourth quarter.

Although we have just completed this acquisition, we are still focused on identifying and acquiring additional products I think knowledge.

That implement that complement our existing portfolio.

I remind that youre targeting smaller bolt on acquisition.

Although around 45 million and continue to be actively engaged in evaluating potential acquisitions.

There's still another 50% excess capacity to be left right.

We anticipate generating more cash from the increased revenues combined with additional borrowing capacity, we will have more than sufficient resources to continue to implement our strategy.

Mike will walk you through more on life after the acquisition.

In addition to the progress achieved on our short term objectives. We also continue to be in.

That's a long term vision.

Our primary competitive advantage isn't cockpit automation, where we have already introduced many new technologies that reduce pilot workload.

Improved safety, most recently, our oral salt programs.

This is a stepping stone to a reduction in the number of pilots in the aircraft.

It is an area where I'd be happy to.

Difficult intellectual property.

Intimate knowledge.

Consequently, we have been increasing our research and development budget to leverage this competitive advantage and as shown by increase in our R&D spending have recently been adding new engineers for these explicit purpose.

Our research and development expenses, Mike tried to increase in future quarters.

However, this is a long term program and we believe we are responsibly managing the balance between investing for the long term, while delivering attractive returns for our shareholders then yes.

We are excited by the success, we've achieved so far this year growing organically completing them accurately acquisition investing for the future while continuing to consistently deliver quarter after quarter of strong earnings.

For over 30 years.

The reputation through the industry for developing some of the industry's most compelling price performance problems.

This remains a formula for success.

Thank you for your time and interest.

Look forward to updating you in the upcoming quarters.

Now I will turn the call over to Mike for a closer look at the numbers.

Thank you Sharon and thank you all for joining US today I will review our financial results for the third quarter fiscal 2023 ret.

Revenue growth third floor was 15% acceleration relative to the second quarter revenue growth.

This quarter, we once again generated revenues for both our stable OEM production contracts, which offer a solid base of predictable recurring revenue as well as an increase in aftermarket sales.

Revenue was also well diversified among our target commercial air transport business and military markets.

In particular, we saw new orders from the air cargo market for commercial Air Transport Boeing 757, 706 Senate seven flat panel display conversions, an increase at our production military contract and strong auto throttle installations revenue.

New business this year.

The company completed an acquisition several Honeywell product lines on June 32020.

The company did not recognize any revenues and then they come related to those product lines in the third quarter.

Keep in mind that both quarterly financial performance and new bookings are subject to variation in the timing of purchase orders, especially with our aftermarket.

On average 40% of our revenue from aftermarket sales consequently.

The management team, we evaluate our performance on an annualized basis and we encourage our investors to do the same.

Third quarter gross margin was 59, 5% compared to 58.5 and third quarter a year ago.

This improvement in gross margin reflects better absorption of our fixed overhead as a result of revenue growth favorable product mix.

Somewhat offset by a slight increase in direct materials.

Overall for the year Martens continue to trend in line with historical averages with any fluctuation from quarter to quarter, primarily attributable to product mix as well as leveraging of our fixed manufacturing costs achieved through revenue growth we.

We don't anticipate the addition of the Honeywell product lines to have a material effect on future margins.

Operating profit in the current quarter was $1 4 million or 17, 9% of sales down.

On a relative basis from both the year ago and prior quarter, primarily due to a step up in general administrative and research and development expenses.

This quarter SG&A again include noncash stock based long term incentive compensation as well a few one time items associated with the closing of the Honeywell acquisition.

Excluding expenses for commissions and legal costs related to our new bank term loan.

In the fourth quarter overhead will include the legal accounting audit professional and other one time expenses associated with the Honeywell product line acquisition.

At the same time any of the onetime items that impacted the last few quarters, such as the immediate vesting of non cash long term incentive compensation awards have been recognized and will not impact future quarters.

Our goal is to decrease our overhead run rate to approximately 20% over time, which will be aided by the increase in revenues from the Honeywell acquisition.

That entails little incremental overhead as well as the absence of any one time items over the past few quarters.

We continue to fund research and development at higher levels than a year ago as we work on our long term vision.

This quarter, having added several new engineers dedicated to this program, we still expect to spend 13% of our revenue on R&D by the end of the year.

Interest income was up in the quarter due to an increase of interest rates on our interest bearing cash accounts. We do expect this to come down as cash balances will be lower as a result of the Honeywell acquisition.

Tax expense in the third quarter of fiscal 2023 0.4 million compare.

So the same amount in the third quarter of fiscal 2022 third quarter net income was $1 4 million or eight cents per diluted share in line with the 1.4.

Eight cents per diluted share we achieved in the third quarter of fiscal 2020.

Backlog as of June 30th 'twenty, 'twenty screen was $13 8 million in new orders in the third quarter of fiscal 2023 were approximately $6 nine.

This is a bit of a step down from the previous quarter when orders benefited from some pull forward as customers lock in August for a longer term.

As always quarterly orders can vary due to a number of factors and are not meant to provide indicators of future revenues.

Virtually all of the Honeywell revenues are from primarily intra quarter book and ship orders.

Cash on hand at June 30 of 2023 was $2 6 million after utilizing.

Approximately $16 million in the quarter for the acquisition of the Honeywell product.

In the fiscal third quarter to further strengthen our financial position and provide additional liquidity, we secured a $20 million term loan I assume that's was able to maintain a strong financial condition with sufficient cash on hand to run the operations business with ample liquidity with access to increased borrowing capacity.

Let me quickly review the Honeywell acquisition.

The purchase price was $36 million, which included inventory valued at approximately 10 million.

Equipment valued at approximately 4 million with the balance categorized as intangibles. These have been added to our balance sheet.

At June 30 of 2023.

The purchase was paid in part with 16 million of our cash with the remainder borrowed under the new term loan I. Just mentioned in addition to financing the acquisition term loan provides additional liquidity for ongoing operations and potential future acquisitions, we expect cash flow from both our existing and acquired operations to enable us to quickly reduce our borrowings.

We Nevertheless, do expect annual interest expense to be in the range of approximately $1 6 million for fiscal 'twenty.

These product lines have attractive margin profile characteristics that are similar to our current product portfolio.

This is an essential element of our strategy. Consequently, once they've been integrated into our operations in 'twenty 'twenty four we expect the transaction to materially contribute to our revenues and EBITDA revenues.

Revenues are expected to grow over 40%, while EBITDA is expected to grow roughly 75%.

We also expect the resulting EPS to be accretive in fiscal 'twenty 'twenty four with potential for additional net income increases in future years from various interactions.

For the remainder of fiscal 2023 we anticipating generating strong cash flows with similar or high higher gross margin levels as capacity utilization and operating leverage expand against a backdrop of revenue growth from organic and inorganic opportunities.

With that operator, we'd.

Like to open it up for any questions.

Thank you now begin the question and answer session.

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We will pause momentarily to assemble the roster.

First question.

B from Tim Moore.

Please go ahead.

Thanks, and congratulations on a strong and impressive.

Organic sales growth in the quarter in your core business and Mike. Thanks for the color on the September quarter Comms.

Commentary that's appreciate it.

Yeah, maybe let me sure I'm I got a question for you is there any update on the U M. F. I know you gave comments on the King Air Auto throttle progress and the great progress a flop.

All of your panels for air cargo, but just wonder if theres any update on the M as or even more thrust sense auto throttle incoming inquiries or interest by new possible customers or them trying it out.

Sure Yeah, I mean that the your message is that.

It is a long term program there are actually in the process of that.

Developing the next generation of that.

That product line.

In partnership with a lot of us.

Yeah with regards to Europe , so where we're.

We're looking to get additional platforms actually solved yet.

Yeah.

In the regional airline markets that rearing current.

Conversations, but but.

For the preliminary.

With regards to that.

But kind of the market that we're in on the on the King Air side.

We are expanding our sales activities internationally.

And.

Good good.

Good interest.

Interest coming from from.

Organizations across the world on the on the 10 gig platforms obviously.

As more and more aircraft.

As Jeff is produced by Textron that'd be the odorless following that.

Some of these some of these.

Customers, who already have existing fleets and they they look into upgrading their existing aircraft two to bring them in line with the new aircraft.

That they've taken delivery itself, so what so the prospects look promising.

Great that's very helpful.

Insights and details and just related to that you started to touch on it maybe with king.

King Air going nationally, but could you maybe talk a little bit about.

The change or the enhancement and business development opportunities and our innovative solutions I recall, maybe you added a VP of sales about a year ago and it sounds like there's some really good development opportunities to cross sell with Honeywell and penetrate.

Both of your sides better is there any kind of progress or tactics, you're thinking about for that.

Yeah, I mean, if you just added another.

Your technical sales as well to.

Two our business development activities.

To to increase obviously with the acquisition of debt.

Product lines from Honeywell.

We need to strengthen our.

Our sales force a lot of a lot of.

International sales are a go.

The result from the Honeywell acquisition, so with that well.

Hi, there.

Yeah, hi themselves glad full time in the year.

In the yeah yeah.

Australia, New Zealand area that would also support.

Some of our some of our.

South East Asia.

Region.

We are also looking at strengthening our partnership in Europe .

Yeah, and I'm doing conversations actually are.

Our new VP of sales is actually in Europe . This week.

To talk about partnerships as well as.

What I'm finding get a place where we would get maybe inventory some equipment in Europe to support.

These new product lines that that that quite so well.

We're busy growing our.

Sales and marketing group as well as our customer service and customer support group.

Uh huh.

So it's exciting times for us.

Wow, that's a that's a great update really at that added color on our sales and technical team development build out I mean, you have such a good opportunity set I'm glad you're investing the proper hiring.

Just a quick question you know your core business from what I recall, Mike mentioned that's.

Pre acquisition Honeywell and pre license was about 40% aftermarket what was the pro forma makes me and it was Honeywell a bit more book and ship.

Is it higher aftermarket and do you think the company's overall mix will be about 50% aftermarket.

Ah, yes, but we've also been there we're also busy.

Yeah.

With the OEM to get new OEM content there.

Yeah, we certainly got a another OEM program, which we haven't been able to.

Ounce yet.

Because the because the aircraft hasn't been announced.

So so with that but that's about it yeah routes in terms of production revenues, but but but you you know I I like the I like the mixture of.

Yeah, you know 40 40 20. It is good because obviously on the aftermarket margins are better than Oh, yeah.

So so we will rebuild.

The OEM side.

Side of it too to get us.

To get us to back to 40 40 20.

Yeah.

Yeah and I.

Screw made maybe the next acquisition that we do will have some more OEM content, so on it and and that would help as well.

Well that's interesting thanks for sharing that color and looking forward to that next OEM Award announcement and the aircraft gets announced and then my last question is I know this is probably not a fair question.

Realize it's only six weeks into the acquisition of the some Honeywell products and the license deal, but given that the teams out there very quickly and I think they were there first week of July .

And it did experience from the heritage that they have with the Honeywell lines.

He is the integration going and the progress with the new team.

Just kind of curious about that.

Actually right, it's progressing well.

Well according to our plan so we're.

Right.

We are fortunate that the that.

The team at Honeywell I've been very cooperative.

Very good relationship with them has been very supportive of this August they want this to be successful.

Again this acquisition wasn't about the the highest bid that was was about who is actually going to be able to work well with honeywell and they're accustomed to.

Two two.

You'll have a successful transition and we were chosen based on that and I mean.

Everything is progressing well and they continue executing.

Great. That's that's wonderful well thanks for them and that's it for my questions I'll follow up with Mike offline later on.

Thanks, Tim.

Yeah.

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