Q2 2024 Innovative Solutions and Support Inc Earnings Call
Speaker Change: [music].
Hello, and welcome to the innovative solutions and support second quarter fiscal 2020 for 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.
Operator: Hello, and welcome to the Innovative Solutions and Support second quarter fiscal 2024 financial results conference call. All participants will be in listen-only mode.
Operator: 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 1 on your telephone keypad. To withdraw from the question queue, please press star, then 2. As a reminder, this conference is being recorded. I would now like to hand the call to Shahram Askarpour, CEO. Please go ahead.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then two.
As a reminder, this conference is being recorded.
Speaker Change: I'd now like to hand, the call to Sharm Oscar Park CEO. Please go ahead.
Speaker Change: Good morning. This is Sharon Masker Port Chief Executive officer of innovative solutions and support.
Shahram Askarpour: Good morning. This is Shahram Askarpour, Chief Executive Officer of Innovative Solutions and Support. Welcome to our conference call to discuss our performance for the second quarter of fiscal 2024 and current business conditions and outlook for the coming year. Current Business Conditions and Outlook for the Coming Year. Before we begin, I'd like Jeff DiGiovanni to read the Safe Harvest Statement.
Speaker Change: Welcome to our conference call to discuss our performance for the second quarter of fiscal 'twenty to 'twenty four.
Speaker Change: Current business conditions.
Well for the coming yet.
Speaker Change: Joining me is Jeff Giovanni <unk>, our new CFO.
Speaker Change: Before we begin I'd like to read the Safe Harbor statement.
Jeff DiGiovanni: Thank you, Shahram, and good morning, everyone. You should all have a copy of the press release we issued earlier today. If anyone does not have a copy, you can find the full press release on our website. Before we begin, as usual, I would like to remind everyone that this conference call contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address operating performance events or developments that we expect or anticipate to occur in the future are forward-looking.
Jeffrey Bronchick: Thank you Sharon and good morning, everyone. You should all have a copy of the press release, we issued earlier today. If anyone does not have a copy you can find the full press release on our website.
Speaker Change: Before we begin as usual I would like to remind everyone that this conference call contains certain forward looking statements.
Speaker Change: And then within the meaning of the private Securities Litigation Reform Act of 1095.
Speaker Change: All statements that address operating performance events or developments that we expect or anticipate to occur in the future are forward. Looking these forward looking statements are based on management's beliefs and assumptions and not on information currently available to our management.
Speaker Change: Our management believes that these forward looking statements are reasonable however, you should not place undue reliance on any of these forward looking statements because such statements speak only as of today's date, we do not undertake any obligation to publicly update or revise any forward looking statements whether as a result of Newark.
Speaker Change: Information future events or otherwise required by law. In addition forward looking statements are subject to risks and uncertainties that could cause actual results events and developments to differ materially either better or worse from our historical experience or present expectations or projections. These re.
Speaker Change: And uncertainties include but are not limited to those described in the reports, which we file with the SEC. In addition, I specifically call our listeners attention to our disclaimer regarding forward looking statements contained in the press release issued today with that I'll turn now the call over to Sharon.
Thank you Jeff.
Sharon Masker: I will begin today with remarks on our performance in the second quarter, followed by comments on our long term growth plan our strategy.
Sharon Masker: Including the ongoing integration of the products acquired.
Sharon Masker: From Honeywell.
Sharon Masker: I will then turn the call back to Jeff.
Jeffrey Bronchick: Will take us through the five ashes.
Jeffrey Bronchick: But before I do I want to welcome Jeff This is Giovanni so as.
Jeffrey Bronchick: And to reduce them to the investment community.
Giovanni: Jeff is a seasoned public company CFO, who joined US at the beginning of April with extensive experience in FCC filings financial reporting and acquisitions as well as capital market interactions.
Giovanni: All still highly appropriate for the CFO role and I S. M S.
We're all looking forward to his contributions in helping us build shareholder value.
Giovanni: At the same time I want to thank robin as well, helping us through this transition.
Giovanni: It's been another busy and exciting quarter at <unk>.
Giovanni: Yes.
Revenues were up 46% with net income excluding the nonrecurring expenses also up from a year ago.
Giovanni: We remain on pace to meet our goal of significantly growing both the top and bottom line this year.
Giovanni: We continue to progress with Honeywell integration.
Giovanni: Most of the radio business has been in transition and we are now handling the new maintenance and repair cost of export.
Giovanni: We expect to complete the integration.
Giovanni: For reference when this business before the end of the summer.
Giovanni: There have been some delays in completion of delivery of inventory and test equipment purchase.
Giovanni: However, we believe that once the integration is fully complicated completed.
Giovanni: There will be likely.
Giovanni: Yeah.
Giovanni: Attunity to improve even more upon financial performance of the acquired products and.
Giovanni: To leverage inherited relationships.
Giovanni: Oh penetration with new customers.
We continue to generate stable revenues.
Giovanni: And margins from our large OEM contracts that allowed us for utility management systems or U S.
Giovanni: <unk> strong first time buyer instrument in auto throttle.
Giovanni: Boeing for the KC 46, and the T seven products.
Giovanni: Since its inception.
<unk> has built a reputation in the industry for its portfolio of IP rich avionics technology.
Giovanni: This spirit of innovation to develop superior technologies is in the company's DNA.
Giovanni: It is the cornerstone.
Giovanni: Over a long long term growth strategy.
Consequently, it is no surprise, we remain extremely active on the development side.
Giovanni: Research and development activities. This quarter include both customer funded and internal programs.
Giovanni: On the funding side expect to be testing the second generation your mess with pillar in the near term.
Giovanni: This is a new generation platform and we believe has the potential to be extended into adjacent markets.
Giovanni: This contract is another testament to our ability to provide state of the art safe and reliable products and services to the industry.
Giovanni: Recently, we've been adding new incremental cockpit automation upgrades to our product portfolio enhance safety and reduce pilot workload.
Giovanni: And these have also added to our revenues.
As we replace obsolete cockpit technology with our product lines you focus on cockpit automation features that enable future single pilot operations.
We believe that once the certification authorities approved single pardon operation in part 25 aircraft.
Giovanni: Our proven technologies will allow us to retrofit those aircraft at an attractive price for the market.
Giovanni: We expect that the air cargo operators will become the early adopters.
Giovanni: We're also ramping up our business development efforts.
Giovanni: The addition of the Honeywell global business development team.
Giovanni: Philippines plans to extend our network into new international markets.
Giovanni: We anticipate the Honeywell development team will help us develop new relationships around the world.
Giovanni: Relevant market segments.
Giovanni: Lately, we have experienced increased interest for our product lines in the military sector.
Giovanni: Both domestic and internationally.
Giovanni: I believe that in the near term some of our organic growth will be military market oriented.
Giovanni: In order to execute our long term plan and realize the attractive returns on an after market strategy for autonomous flight.
Giovanni: <unk> developed an accelerated growth strategy, consisting of growth by acquisition and modest organic growth.
Giovanni: The Honeywell acquisition has demonstrated that we can generate the cash flow to support this strategy.
Giovanni: Having reduced our borrowing by approximately $10 million in just the first six months after closing.
Giovanni: Together with a growing base of recurring revenue.
Giovanni: Also have a model that we believe will support our strategy.
Giovanni: Do you think the time is right in the market.
Giovanni: Consequently, we will continue to opportunistically evaluate and execute additional complementary acquisitions should appropriate opportunities arise.
Speaker Change: Thank you for your time and interest and we look forward to updating you in the upcoming quarters.
Speaker Change: I will now turn the call over to Jeff.
Jeffrey Bronchick: Closer look at the numbers.
Jeffrey Bronchick: Thank you Sharon and thank you all for joining today before reviewing our financial highlights for the second quarter I would first like to say that I'm glad to be part of the I S. N. S team at this very exciting time in the Companys growth I am confident that I can contribute to our efforts to build shareholder value based on my over 25 years.
Jeffrey Bronchick: As both a consultant to as well as the CFO of a publicly traded company.
Jeffrey Bronchick: I'll begin with an overview of our second quarter results as Sharon indicated our topline finish with double digit growth versus the prior year, which was consistent with our expectations total net revenues for the second fiscal quarter of 2024 were $10 7 million, representing a 46, 3% increase.
Jeffrey Bronchick: <unk> when compared with the $7 3 million for the second fiscal quarter 2023.
Jeffrey Bronchick: Total revenues for the six months ended March 31, 2024 were $20 million, representing a $44 seven.
<unk> increased when compared with the $13 9 million for the six months ended March 31, 2023 <unk>.
Jeffrey Bronchick: Product sales decreased $1 million or 17, 7% and customer service increased $3 7 million or 265, 4% as compared to the year ago quarter. The decrease in product sales for the three months ended March 31, 2024 was primarily result of reduced shipments of display.
Jeffrey Bronchick: As for retrofit programs to commercial air transport customers, partially offset by an increase in shipments of displays to general aviation and military customers.
Jeffrey Bronchick: Increase in customer service, primarily reflects customer service sales at a product lines acquired from Honeywell.
Jeffrey Bronchick: <unk> sales increased 700000 compared to the year ago quarter, reflecting increased E D C business.
Jeffrey Bronchick: For the first six months ended March 31, 2020 for product sales decreased $1 7 million or 15, 5% in customer service sales increased $6 9 million or 279, 9% as compared to the prior quarter.
Jeffrey Bronchick: The decrease in product sales for the six months ended March 31st 2024 was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers, partially offset by an increase in shipments of displays it is general aviation and military customers increasing customer churn.
Jeffrey Bronchick: This primarily reflects customer service sales other product lines from Honeywell, EDC sales increased $1 million or 282% compared to the prior quarter, reflecting increased EDC business.
Jeffrey Bronchick: From an expense standpoint cost of sales increased by $2 6 million or 98, 3% to $5 2 million or 48% of net sales in the three months ended March 31, 2024, compared to $2 6 million or 35, 4% of net sales in the three months ended March 31.
Jeffrey Bronchick: One 2023.
Jeffrey Bronchick: The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 cost of sales increased by $3 5 million.
Jeffrey Bronchick: Our 65, 8% to $8 9 million or 44, 6% of net sales in the six months ended March 31, 2024, compared to $5 4 million or 38, 9% of net sales in the six months ended March 31 2023.
Jeffrey Bronchick: The company's overall gross margin was 52% and 64, 6% for the three months ended March 31, 2024, and 2023, respectively and was 55, four and 61, 1% for the six months ended March 31, 'twenty 'twenty, four and 2023 respective.
Jeffrey Bronchick: Lee.
Jeffrey Bronchick: This decrease in overall gross margin percentage is primarily attributable to the increased material costs attributable to product mix along with the digital.
Jeffrey Bronchick: The late synergies.
Jeffrey Bronchick: With the Honeywell transaction for the acquired product lines.
Jeffrey Bronchick: As Sharon briefly mentioned the Honeywell integration continued in the second quarter, creating some production inefficiencies. In addition, some of the inventory and test equipment deliveries, we expected were somewhat delayed.
Jeffrey Bronchick: Which negatively impacted not only our margins, but overall our revenues as well so while the Honeywell products are expected to have margins in line with our historical averages. They are currently a bit lower.
Jeffrey Bronchick: Wherever as Sharon mentioned, we believe once the integration is complete their performance will improve.
Jeffrey Bronchick: Research and development expense was 1.0 million an increase of $100000 of 19% in the three months ended March 31, 2024 from 900000 in the three months ended March 31, 2023, R&D expenses were $1 9 million and <unk>.
Jeffrey Bronchick: Increase of 400000 or 25, 7% in the six months ended March 31, 2024 from $1 5 million in the six months ended March 31, 2023. This increase in R&D expenses, where we're.
Jeffrey Bronchick: We're driven due to higher salaries and benefits due to higher head count as a percentage of net sales R&D expense decreased to nine 6% of net sales for the three months ended March 31 2024.
Jeffrey Bronchick: And lastly on the expense side, selling general and administrative expenses were $2 9 million an increase of 500000 or 18, 9% in the three months ended March 31, 2024 from $2 4 million in the three months ended March 31 2023.
Selling general and administrative expenses were $5 9 million, an increase of $1 2 million or 25, 6% in the six months ended March 31, 2024 from $4 7 million in the six months ended March 31 2023.
Jeffrey Bronchick: The overall increase in selling general and administrative expenses in the quarter ended March 31, 2024. It was primarily the result of our investment in additional sales personnel to help drive increased sales. In addition to increase was largely driven by an increase in legal and other professional fees that are onetime in nature relate.
Jeffrey Bronchick: Do you see the acquisition CFO transition and other these cost approximately $200000 and 600000 for the three and six months ended March 31 2024. In addition, SG&A was negatively impacted by approximately 200000 and 500000 for the drain six months.
Jeffrey Bronchick: And at March 31, 2024, respectively relating to the amortization of the customer relationship related to the Honeywell acquisition.
Jeffrey Bronchick: Interest expense was 171000 in the quarter down significantly on a sequential basis from the first quarter as we paid down our borrowings under our line of credit agreement, we use cash collections to reduce debt at the end of every day. So we don't hold much cash in the balance sheet for modeling purposes, I would continue to expect to.
Jeffrey Bronchick: Interest expense decreased in future quarters.
Jeffrey Bronchick: For the second quarter, we reported net income of $1 2 million or seven cents per share compared to net income of $1 3 million or seven cents per share.
Jeffrey Bronchick: Year ago quarter. The difference is primarily attributable to nonrecurring items previously discussed in the quarter, coupled with the added amortization of customer relationship intangible acquired from the Honeywell transaction, which was 268000, therefore, excluding these onetime nonrecurring expenses.
Jeffrey Bronchick: <unk> and the amortization expense, our profitability increase from the year ago quarter move.
Jeffrey Bronchick: Moving on to the backlog new orders in the second quarter of fiscal 2024 were approximately $6 6 million and our backlog as of March 31, 2024 was $10 4 million backlog includes only purchase orders in hand, and excludes orders from our OEM customers under long term pro.
Jeffrey Bronchick: Grams, such as Polaris PC 24, Textron King Air Boeing T seven Red Hawk, and Boeing KC 46, a ice and S. Expects these programs to remain in production for several years and anticipate they will continue to generate future sales.
Jeffrey Bronchick: Further due to their nature the product lines from Honeywell do not typically enter backlog.
Jeffrey Bronchick: I'll turn to our cash flow and liquidity in the first half of 2024 cash flow from operations increased from $2 2 million in the year ago comparable period to $4 4 million, primarily due to changes in working capital and higher cash earnings.
Jeffrey Bronchick: Our year to date cash inflows from investing activities were reflective of the cash in late from the proceeds of $2 2 million from the sale of the Companys, Karen King Air aircraft.
Jeffrey Bronchick: Our year to date cash outflows from financing activities were $8 9 million and consisted of payments against the company's line of credit.
Speaker Change: I'd like to close by thanking all our teams for their hard work and commitment and with that let me turn it over to the operator to begin Q&A.
Speaker Change: Thank you very much.
I'll now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question you May press Star then tail.
We will pause momentarily to assemble our roster.
Speaker Change: Today's first question comes from Sergey <unk> with Freedom Financial Global. Please go ahead.
Sergey: Oh Hello, everyone. The.
Sergey: The first question is for Jeff.
Sergey: They put away and meet the financial expectations for 2020 for fiscal year lease.
Sergey: And then just state.
Speaker Change: <unk> a question I look at the gross margin that decreased a little bit from water a year ago.
Speaker Change: Due to Honeywell products acquisition, Thank you Brian.
Brian: Yes, so I think sharron laid out expectations of 40% growth from a year ago.
Brian: And that included both inorganic and organic as well as 75% EBITDA growth.
Speaker Change: Right now, it's Sharon mentioned, we experienced some synergy delays with the Honeywell acquisition, which is negatively impacting those margins as the inventory and the test equipment comes in we would expect those margins to improve once the synergies are in full effect.
Speaker Change: Okay and that's it.
Sharon Masker: Question for Sharon.
Sharon Masker: Or what financial effect degree from U M. S expanded to B C 24, do you expect.
Sharon Masker: Are they existing product lines.
Sharon Masker: Organic revenue in foreseeable future. Thank you.
Sharon Masker: Yeah.
Sharon Masker: Yes so.
Speaker Change: Yeah on the <unk>, So right now I mean, we continue with a production contract.
So that's for the PC 24 severe Ah.
Speaker Change: Delivering those and that platform is growing since.
Speaker Change: Aircraft has been a very successful platform.
Speaker Change: On top of that.
Speaker Change: Gave us.
Speaker Change: <unk> contract.
Speaker Change: To make the second generation.
Speaker Change: Of the U S.
Part of what we're doing on the second generation Urs is adding a lot more powerful microprocessors.
Speaker Change: And.
Speaker Change: Improving on the on the performance of their equipment as well as opening it up for what we call.
Speaker Change: Strays to add another channel of processing that would make it a lot more expandable into adjacent platforms.
Speaker Change: We plan on utilizing that platform.
For our future development.
Speaker Change: Including autonomous flight.
Speaker Change: And.
Speaker Change: This contract from Polaris is allowing us to a 222 <unk>.
Expand the capabilities of.
Speaker Change: The product line.
We were hoping that that that Oh.
Speaker Change: Also in the business aviation side that the new platform.
Speaker Change: Because of its.
Speaker Change: Additional capabilities.
Speaker Change: B b more applicable to other aircraft platforms as well.
Speaker Change: Okay. Thanks Bill speakers.
Speaker Change: Thank you as a reminder, if you'd like to ask a question. Please press Star then one.
Speaker Change: The next question comes from Doug Ruth with Lenox Financial services. Please go ahead.
Doug Ruth: Good morning.
Doug Ruth: But you can you give us a summary, what what were the one time cost.
Doug Ruth: In the quarter and what do you think the margin for the bank.
Doug Ruth: Would they have been if you did not have those one time costs.
Doug Ruth: So Doug this is Jeff so why regarding the onetime costs are in SG&A. So those one time costs or some acquisition related cost legal fees.
Jeffrey Bronchick: Associated with the acquisition as well as the CFO transition.
Doug Ruth: Fee, you'll see that more disclosure in our 10-Q that is going to come out later this week in terms of the margin impact with the synergies of Honeywell, we can't quantify it at this time, because we're still working through some of the.
Transition issues.
Speaker Change: A word about that.
Speaker Change: Correct.
Speaker Change: The gross margins there is there is two.
Speaker Change: There is two.
Speaker Change: Things contributing to the lower gross margin number one is that currently we as you know we.
Speaker Change: We acquired a large amount of inventory from Honeywell on both product lines.
Speaker Change: There was something like it.
Speaker Change: Three and a half million dollar of goodwill.
That was the that was tax related by our.
Speaker Change: Earlier accountants.
Speaker Change: That.
Speaker Change: It's being amortized over already inventory so the cost of goods sold.
Speaker Change: Today, as we bleed off that inventory.
Speaker Change: It appears to be higher than the normal. So that's one contributor the second contributor is that wrong.
Speaker Change: We acquired these private clients from hardware Honeywell does not build any sub assemblies.
Speaker Change: Outsource all of those sub assemblies.
Speaker Change: Third party vendors are.
Speaker Change: Our plan.
Speaker Change: During this initial period is to continue down that path.
Speaker Change: As we move along.
Speaker Change: And the integration completes.
Speaker Change: We will be building majority of those sub assemblies in house.
Speaker Change: That would allow us to reach the 60% gross margins that we get today as we get rid of our own product lines because as you can imagine your cost of cost of goods sold is much higher when you outsource those solve assemblies yeah capabilities. This year.
Factory to build our own save some.
Speaker Change: Okay, how long will it take to burn off the all of the Honeywell inventory that you were acquired.
Speaker Change: So obviously some of the some of the.
Speaker Change: Some of the year.
Speaker Change: Faster moving inventory or burn off quicker.
Some of the slower burn inventory of oil remain for full for a few years in the books.
Speaker Change: But I think it's going to be a gradual.
Speaker Change: <unk> jewelry improvement as we are as well.
Speaker Change: Bleed that off.
Speaker Change: But I think the big the big.
Part of it is going to be as soon as we're in the position that we can start building our own solve assemblies yet.
Speaker Change: To do that we're still waiting for some information some drawings and and designing formation from army raw.
Speaker Change: That's due to arrive sometime soon.
Speaker Change: Allow us to then use those two sub assemblies in house.
Brian when you think about the current.
Speaker Change: The second quarter periods, adding 331 is that the low period for the for the gross margin that you.
Speaker Change: It be reasonable to think that in the third quarter that the gross margin might improve.
Speaker Change: The gross margin contributed to the Honeywell products.
Speaker Change: Some of it will improve because efficiencies in.
And our production floor as well so when we look at the second quarter and the first quarter. These were transition quarters. So in some ways. We had set up a set of technicians, yes.
Speaker Change: Performing tasks.
Speaker Change: While they are being trained.
Speaker Change: As well as Honeywell was also executed impartially on behalf of some of these things so so.
Speaker Change: Doors.
Margins will improve as we move forward due to some of that.
Speaker Change: Improvement of margin.
Speaker Change: <unk> significantly improving margin that we will see a jump coming in is going to be when we actually start manufacturing the sub assemblies in house and that will gradually happen over the next year.
Speaker Change: Now when you look at the third quarter is it will you be able to make any of the sub assemblies or is that too too soon of a time period.
Speaker Change: Would you be looking more towards the fourth quarter to be able to make some of the sub assemblies.
Speaker Change: I think that's going to be looking towards the fourth quarter as well as.
Speaker Change: Main contributions they are going to comment.
Speaker Change: Fiscal 2025.
Speaker Change: Okay. Now my second question, which is my last question is is the management team and our the board of directors.
Speaker Change: After the two day period would they be would with the management team and the board of directors would they be eligible to buy some stock.
Speaker Change: That time period.
Speaker Change: Sure absolutely.
Speaker Change: Blackout period.
Speaker Change: No I think I believe is like two days after today.
Speaker Change: Blackout period will be over so if any of the if any of the board of directors.
Speaker Change: Like too.
Speaker Change: Purchase additional shares under the managed within the management team they can do that.
Speaker Change: Obviously, I think a big a big.
Speaker Change: <unk> portion of our management teams.
Speaker Change: Income.
Speaker Change: Is that is tied into rsum.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Significant amount of taxes that you would have to pay out of your own pocket.
Speaker Change: Yes.
Speaker Change: The management team has not been selling our issues. Unlike some other companies to pay the taxes for it so yes. So that's.
Speaker Change: That kind of ties up all that at least on my part it ties up all my yeah, all Mike available cash is to pay 40% taxes.
Speaker Change: Yeah.
Speaker Change: The IRS shoes.
Speaker Change: But I think.
Yeah, our stock right now is that.
Hi, this is very very attractive price okay.
Speaker Change: Alright, well, thank you for answering the questions and.
Speaker Change: I'm optimistic about the company's future.
Speaker Change: Thank you Sabra.
Sabra: Thank you very much.
Speaker Change: This concludes our question and answer session as well as the conference.
Speaker Change: Thank you for attending today's presentation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.