Q3 2024 Innovative Solutions and Support Inc Earnings Call
Speaker Change: and others. Thank you. Thank you.
Speaker Change: Good day and welcome to the Innovative Solutions and Support's third quarter fiscal year 2024 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.
Speaker Change: To ask a question you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, partner at Valium Advisors. Please go ahead.
Speaker Change: Thank you. Good morning, everyone, and welcome to Innovative Solutions and Support's third quarter 2024 results conference call. Leading the call today are CEO Shahram Askarpour and CFO Jeff DiGiovanni.
Speaker Change: Earlier today, we issued a press release detailing our third quarter 2024 Operational and Financial Reloads.
Speaker Change: This release is publicly available in the investor relations section of our corporate website at www.innovative-ss.com.
Speaker Change: I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements.
Speaker Change: which, by their nature, are uncertain and outside of the company's control.
Speaker Change: Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially.
Speaker Change: 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 filings with the SEC.
Speaker Change: Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued earlier today.
Speaker Change: Today's call will begin with prepared remarks from CEO , Shahram Askarpour, who will provide a review of our recent business performance and an update on the progress we have made on our strategic initiatives.
Speaker Change: including the ongoing integration of the products acquired from Honeywell last year.
Speaker Change: and some detail on our recent acquisition from Honeywell.
Speaker Change: This will be followed by a financial update from our CFO , Jeff DiGiovanni.
Speaker Change: At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Shahram.
Shahram Askarpour: Thank you, Paul, and good morning everyone joining us on the call today.
Shahram Askarpour: We are pleased that our recent positive business momentum continued during the third quarter.
Shahram Askarpour: as growth from our existing platforms and execution under our Honeywell product lines contributed to 48% year-over-year revenue growth during the third quarter.
Shahram Askarpour: It has been just over a year since we completed our initial transaction with Honeywell.
Shahram Askarpour: At that time, we laid out our expectation that once fully integrated,
Shahram Askarpour: We expected these new products.
Shahram Askarpour: combined with our legacy business to drive consolidated revenue growth of approximately 40 percent.
Shahram Askarpour: with an even more significant impact on EBITDA where we expected EBITDA to increase by 75% with accretive EPS.
Shahram Askarpour: and Michael Linacre. Thank you. Thank you.
Shahram Askarpour: Today, based on our financial results over the trailing 12 months compared with the prior period, we generated 54% growth in consolidated revenue.
Shahram Askarpour: 75% in Adjusted EBITDA and roughly 28% in EPS.
Shahram Askarpour: These results demonstrate our success in the integration of the Honeywell assets combined with the benefits of our strategic organic growth initiatives.
Shahram Askarpour: But we have more opportunities ahead in regards to our Honeywell product lines, and we continue to further execute on our integration plan.
Shahram Askarpour: We made progress during the quarter, which should drive additional benefits in the coming quarters.
Shahram Askarpour: We continue to increase the proportion of maintenance and repair work that is being handled in our external facility, which was a nice contributor to growth in the quarter.
Shahram Askarpour: Another important aspect of the Honeywell transaction is the opportunity to leverage the customer base of these acquired products.
Shahram Askarpour: The transaction brought us several new relationships with key customers.
Shahram Askarpour: We are focused on cross-selling opportunities with these new relationships, particularly with some international customers and end markets where we did not have a strong presence previously.
Shahram Askarpour: As an example, we recently completed some radio sales to a European customer during the quarter.
Shahram Askarpour: We're also happy to report that the majority of the test equipment and inventory has been delivered, and we expect the balance to be delivered in calendar 2024.
Shahram Askarpour: At the end of July , we announced the acquisition of additional product lines from Honeywell.
Shahram Askarpour: This most recent transaction builds on our deal from last year and includes communication and navigation radio product lines from Honeywell.
Shahram Askarpour: While this deal was smaller than the initial transaction,
Shahram Askarpour: The acquisition will help strengthen our offerings in key military and business aviation markets.
Shahram Askarpour: established new relationships with new key customers and importantly enables us to further leverage the capacity in our external facilities.
Shahram Askarpour: We are pleased with the progress we have achieved thus far under our Honeywell product line and we are looking forward to realizing additional synergy benefits and incremental growth opportunities in the coming quarters.
Shahram Askarpour: We continue to generate stable revenues and margins from our large OEM contracts, including Teladus.
Shahram Askarpour: for Utility Management System, or UMS, Textron, for our standby instrument and our auto throttle, and Boeing for the KC-46 and the T7 products.
Shahram Askarpour: Further to our focus on the military market, we were recently awarded a multi-million dollar contract on a foreign military platform from a major aerospace company.
Shahram Askarpour: We will supply multi-function displays with an integrated mission computer for a foreign military platform.
Shahram Askarpour: This further validates our strategy to focus on business development efforts in the military market.
Shahram Askarpour: I would now like to provide a quick overview of our strategic growth priorities and highlight some of our key accomplishments during the quarter.
Shahram Askarpour: A long-term growth strategy is focused on generating sustained revenue growth through the following five initiatives.
Shahram Askarpour: Expansion of our existing platforms.
Shahram Askarpour: New OEM and Retrofit Programs
Shahram Askarpour: Pipeline Opportunity Growth
Shahram Askarpour: New Market Opportunities and Acquisitions.
Shahram Askarpour: Our existing platforms provide meaningful growth opportunities.
Shahram Askarpour: through unit expansion on several key platforms.
Shahram Askarpour: This is a highly predictable growth driver and is driven by scheduled unit growth at key customer platforms.
Shahram Askarpour: For example, the PC-24 aircraft has been and will continue to grow, providing growth opportunities for IS&S.
Shahram Askarpour: Building on our history of innovation, new potential OEM and retrofit programs provide a significant long-term growth opportunity.
Shahram Askarpour: In particular, we are focused on growing our OEM business given the more stable and predictable nature of these contracts.
Shahram Askarpour: We benefit from deep customer relationships which has further strengthened following the Honeywell transactions.
Shahram Askarpour: This gives us the opportunity to cross-sell our broad portfolio of existing products to customers.
Shahram Askarpour: As an example, some of the radio products recently acquired from Honeywell were coupled nicely with our cockpit offerings in the C-130 platform.
Shahram Askarpour: A significant growth opportunity in the coming years will come from the potential to expand into adjacent markets.
Shahram Askarpour: One market we are particularly excited about is the military market, which is a market we are under-penetrated in today, but is a tremendous long-term opportunity.
Shahram Askarpour: We have several product platforms that are ideally situated in the military market.
Shahram Askarpour: As we already discussed, our recent contract award highlights this opportunity.
Shahram Askarpour: Additionally,
Shahram Askarpour: Our increased focus on cockpit automation that helps enhance safety and reduce pilot workload represents a significant market opportunity for IS&S
Shahram Askarpour: in both military and air transport applications.
Shahram Askarpour: We continue to generate incremental revenue by adding automation features to our military and air transport cockpit solutions.
Shahram Askarpour: We believe corporate automation represents a multi-billion dollar addressable market opportunity.
Shahram Askarpour: for the United States of America
Shahram Askarpour: Finally, an area of increasing focus is growth through strategic acquisitions.
Shahram Askarpour: [inaudible]
Shahram Askarpour: We are ideally positioned to pursue acquisitions given we have developed a growing base of recurring revenue, have strong cash flow generated from business,
Shahram Askarpour: and have a strong financial profile.
Shahram Askarpour: Our acquisition strategy remains focused on product lines in the electronic and electromechanical space with similar margin profiles to our existing business, which enable us to leverage our manufacturing capacity.
Shahram Askarpour: We look forward to updating you on our progress under our strategic growth initiatives in the coming quarters.
Shahram Askarpour: Before I turn it over to Jeff.
Jeff DiGiovanni: I would just like to conclude with a few final thoughts.
Jeff DiGiovanni: Overall, we are pleased with our third quarter results and our growth in our existing platforms and contributions from the Honeywell products enabled us to generate growth in revenue and EBITDA.
Jeff DiGiovanni: We continue to execute at a high level and based on our results during the first three quarters, together with our continued business momentum, we remain well positioned as we look towards 2025.
Jeff DiGiovanni: With that...
Jeff DiGiovanni: I turn it over to Jeff who will provide a more detailed review of our third quarter results and our financial outlook.
Jeff DiGiovanni: Jeff?
Jeff DiGiovanni: Thank you, Shahram, and good morning, everyone.
Jeff DiGiovanni: I will provide some additional details on the quarter, give an update on our working capital and free cash flow, and conclude with commentary on our balance sheet and liquidity.
Jeff DiGiovanni: Before we begin, I would like to remind everyone we will be discussing non-GAAP measures and you are encouraged to refer to the earnings release, which includes the definitions, the rationale for using them, and the reconciliations to GAAP in it.
Jeff DiGiovanni: Looking at the third quarter, total net revenues were $11.8 million, representing a 48% increase when compared to the third quarter last year.
Jeff DiGiovanni: The increase was driven by contributions from the acquired Honeywell product lines as well as growth in existing lines.
Speaker Change: We continue to see some weakness in the cargo market, but trends appear to be stabilizing and we saw some sequential growth in this market relative to the second quarter.
Speaker Change: Product sales decreased to 5.1 million during the third quarter, primarily attributed to a large order from a year ago to the commercial air transport customers.
Speaker Change: This was partially offset by an increase in shipments to general aviation and military customers.
Speaker Change: Customer support revenue was $6.4 million, an increase from $1.3 million last year, owing largely to the customer service sales from the product lines acquired from Honeywell.
Speaker Change: Gross profit was $6.3 million during the third quarter, up 33% from $4.7 million in the same period last year, driven by the contribution from the Honeywell products.
Speaker Change: Overall gross margin was 53.4% during the third quarter, up sequentially from 52% last quarter.
Speaker Change: as we continue to make progress on our Honeywell integration initiatives and further gain operating efficiencies which will continue to improve our margins.
Speaker Change: As a reminder, typically our customer-funded engineering programs erode our gross margins, given this is largely a pass-through item, and this quarter it was roughly a 150 basis point headwind.
Speaker Change: As Shahram discussed, we continue to make progress on the Honeywell integration and we did see some improvements sequentially from the second quarter with less of a drag from delays in inventory and testing equipment shipments.
Speaker Change: We are looking to gain additional efficiencies as we continue the integration of the Honeywell products, including the additional recently acquired lines, and we are targeting a return to the gross margin levels witnessed prior to the Honeywell acquisition.
Speaker Change: Research and development expense during the third quarter of 2024 was $1.1 million, an increase from $850,000 in the comparable period last year.
Speaker Change: This increase was driven by headcount growth to support our product development efforts.
Speaker Change: As a percentage of net sales, R&D expense during the third quarter decreased to 9.3% of net sales versus 10.7% last year as we gained scaled benefits.
Speaker Change: Third quarter 2024 selling general and administrative expenses were $3.1 million, an increase from $2.4 million last year.
Speaker Change: The increase in SG&A expense in the quarter was primarily the result of one-time expenses related to the acquisition and CFO transition costs.
Speaker Change: of approximately $400,000 along with amortization expense related to the customer tangible as a result of the acquired Honeywell product lines of approximately $600,000.
Speaker Change: Adjusted EBITDA was $3.1 million during the third quarter, up from $1.9 million last year due to the contribution from the Honeywell products and operating expense leverage.
Speaker Change: Adjusted EBITDA margin was 26.1% during the third quarter of 2024, up from 24% in the same period last year, owing to the operating expense leverage partially offset by lower gross margins.
Speaker Change: The third quarter net income was $1.6 million, or $0.09 per share, compared to net income of $1.4 million, or $0.08 per share, in the year-ago quarter.
Speaker Change: Moving on to backlog, new orders in the third quarter of fiscal 2024 were approximately $10.6 million and our backlog as of June 30, 2024 was $9.3 million.
Speaker Change: As a reminder, backlog includes only purchase orders in hand and excludes orders from our OEM customers under long-term programs such as Pilatus PC-24, Textron King Air, Boeing T-7 Red Hawk, and Boeing KC-46A.
Speaker Change: IS&S expects these programs to remain in production for several years and anticipates they will continue to generate future sales.
Speaker Change: Further, due to their nature, the product lines from Honeywell do not typically enter backlog.
Speaker Change: Now turning to cash flow.
Speaker Change: In the first nine months of 2024, cash flow from operations was $5.4 million, up from $900,000 in the year-ago comparable period. The improvement was driven by higher cash earnings and improved working capital efficiencies.
Speaker Change: Capital expenditures were $500,000 in the first nine months of 2024 versus $200,000 in the same period last year.
Speaker Change: As a result of these factors, free cash flow during the first three quarters of 2024 was $4.8 million, up from $800,000 last year.
Speaker Change: Total net debt as of June 30, 2024 was $9.3 million, down from $16.4 million at the end of 2023 as we utilized our strong free cash flow to quickly delever following the acquisition from Honeywell.
Speaker Change: Our net leverage at the end of the third quarter declined to 0.8x, down from 2.1x at the end of 2023, and a peak of 2.9x immediately following the Honeywell transaction.
Speaker Change: of Newton.
Speaker Change: Our total cash and availability under our credit line was $20.7 million at the end of the third quarter, which provides us ample financial flexibility to support our ongoing operations and strategic initiatives.
Speaker Change: That completes our prepared marks. Operator, we are now ready for the question and answer portion of our call.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: 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.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: Thank you very much for watching this video, and don't forget to like, share, and subscribe to our channel.
Speaker Change: Our first question comes from Sergei Glinanov with Freedom Broker. Please go ahead.
Sergei Glinanov: Hello, everyone. First of all, my congratulations about the Hannibal transaction. As far as the concerns regarding the previous deal, you had to complete the movement of the equipment to the IS&S facility in August , right? Is it completed?
Speaker Change: I'm sorry, can you repeat that? I apologize.
Speaker Change: As far as the concerns regarding the previous deal, you had to complete the movement of the equipment to the IS&S facility in August .
Speaker Change: Is it completed or you are in the process of that still?
Speaker Change: So it is substantially completed. I think in one instance...
Speaker Change: where we're destined to get
Speaker Change: We have four identical stations, we have three of them completed, and there is one that's going to...
Speaker Change: Now it's going to come in November . These are new test equipments that are being built for us. So I would say substantially we are there, as well as substantially the inventory that we need to perform on.
Speaker Change: Okay, and will it affect the margin October and next quarter?
Speaker Change: It really...
Speaker Change: shouldn't, it really shouldn't impact us because we're also training more technicians and building on them. So just having this equipment here
Speaker Change: without having trained people to run it.
Speaker Change: It doesn't necessarily help you that much either.
Speaker Change: We continue increasing the team as we plan on bringing more and more of these projects in-house.
Speaker Change: As we talked before,
Speaker Change: Honeywell had a lot of channel partners. They did a lot of outsourcing of their business to
Speaker Change: to third parties, we plan on bringing all of that in-house to help increase revenue and profitability.
Speaker Change: This kind of, right now we have, right now we've got enough test equipment to do, to deal with the matter in hand. And the other one would help us for future growth.
Speaker Change: i
Speaker Change: Okay, and...
Speaker Change: During the call regarding the new Honeywell transaction, you mentioned that IS&S has great opportunities to further net income growth after 2024 fiscal year. Do you have any thoughts about pace of sales, organic growth?
Speaker Change: We're going to continue with our organic growth. We were, prior to acquisition, I think we were running at about CAGR of 15%. You know, definitely we're going to be in double digits.
Speaker Change: We've had some...
Speaker Change: We had some rough air ahead of us with the air cargo slowing down. We were kind of...
Speaker Change: recovering from that through the military initiatives that we put together. This is the game that we've been playing for, you know, 35 years.
Speaker Change: It's, you know, when one market softens, we put our focus on another market to recover from it.
Speaker Change: So, going forward, we're going to continue growing organically in double digits. And going beyond this...
Operator: This third quarter, this school year, 2024 Financial Results Conference call, all participants will be in listen only mode. Should union 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 your telephone keypad. To destroy your question, please press star then two. Please note this event is being recorded.
Speaker Change: Third quarter, we consider the Honeywell acquisitions that we've done as part of our organic
Speaker Change: as part of our organic programs as well because they get intermingled with our own initiatives as well as the growth is going to come from
Speaker Change: The combination of both product lines.
Speaker Change: And definitely, we're going to continue to grow the business without doing any more acquisitions as well.
Paul Bartolai: I would now like to turn the conference over to Paul Bartolai, partner at Valium Advisors. Please go ahead. Thank you.
Speaker Change: But we, you know, we're constantly evaluating other acquisitions.
Paul Bartolai: Good morning everyone and welcome to Innovative Solutions and Supports, third quarter, 2024 Results Conference call. Leaving the call today, our CEO, Shahram Askarpour and CFO, Jeff DiGiovanni. Earlier today, we issued a press release detailing our third quarter, 2024 operational and financial reloads. This release is publicly available in the investor relations section of our corporate website at www.innovative-ss.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.
Speaker Change: And we're going to move forward with that.
Speaker Change: Pete.
Speaker Change: In terms of product development initiatives, we're focused on that part of the business as you saw. We saw increase in R&D expenses, not as a percentage of sale, but in materiality.
Speaker Change: and we continue growing our team.
Paul Bartolai: 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 considerations of historical non-gap financial measures in the press release issued earlier today. Today's call will begin with prepared remarks from CEO, Shahram Askarpour, who will provide a review of our recent business performance and an update on the progress we have made on our strategic initiatives, including the ongoing integration of the products acquired from Honeywell last year and some detail on our agenda.
Speaker Change: to allow us
Speaker Change: to allow us to develop further new products. Again, as I mentioned, cockpit automation is a significant market that we're looking at over the next several years.
Speaker Change: And there's incremental revenues to gain from that, and we're developing, continue to develop products that would help us get there to that goal. And that gives us further organic growth.
Speaker Change: and many more. Thank you. Thank you.
Paul Bartolai: At the conclusion of these prepared remarks, we will open the line for your questions.
Speaker Change: Thank you very much for joining us today.
Speaker Change: Great. How additional acquisition could reflect in CapEx?
Speaker Change: How would you...
Speaker Change: How would additional acquisitions impact CAPEX?
Speaker Change: Yeah.
Speaker Change: Beyond, yeah, so if we look at...
Shahram Askarpour: With that, I'll turn the call over to Shahram. Thank you Paul and good morning everyone joining us on the call today. We are pleased that our recent positive business momentum continued during the third quarter as growth from our existing platforms and executions under our Honeywell power lines contributed to 48% year-over-year revenue growth during the third quarter.
Speaker Change: Beyond where we are and kind of the matter at hand on maybe the next acquisition we do.
Speaker Change: To do further acquisitions beyond that, we would have to increase the size of our factory floor, which we've been putting plans together. We have planning permissions here to build another 40,000 square foot of factory space.
Speaker Change: And we're looking at doing that in order to get us beyond the $100 million revenue in the next several years.
Shahram Askarpour: It has been just over a year since we completed our initial transaction with Honeywell. At that time, we laid out our expectation that once fully integrated, we expected these new products combined with our legacy business to drive consolidated revenue growth of approximately 40% with an even more significant impact on EBITDA, where we expected EBITDA to increase by 75% with a creative EVF. Today, based on our financial results over the trailing 12 months compared to the prior period, we generated 54% growth in consolidated revenue, 75% in adjusted EBITDA and roughly 28% in EPS.
Speaker Change: Great. And last question.
Speaker Change: When a decline in product sales could turn into a growth path, could it happen in the next or first quarter of the next financial year?
Speaker Change: So it's hard to predict the future. As you know, we're in a funny year this year with all the elections going on.
Speaker Change: There are several things that are happening internationally.
Speaker Change: We've managed to navigate those waters year after year. We've developed new products that haven't hit the market yet.
Speaker Change: And we believe that the cargo market, we're seeing signs of it picking up a little bit as well.
Shahram Askarpour: These results demonstrate our success in the integration of the Honeywell assets combined with the benefits of our strategic organic growth initiatives. But we have more opportunities ahead in regards to our Honeywell product lines and we continue to further execute on our integration plan. We make progress during the quarter, we should drive additional benefits in the coming quarters. We continue to increase the proportion of maintenance and repair work that is being handled in our external facility, which was a nice contributor to growth in the quarter.
Speaker Change: So, I mean, last quarter we had, we actually shipped in the air transport, products in the air transport. And so, you know, we're optimistic that things would continue on the path of recovery.
Speaker Change: It's hard to predict the future.
Relland Winand: www.InnovativeSolutions.com
Speaker Change: Okay, thanks a lot.
Speaker Change: Our next question comes from Doug Ruth with Lenox Financial Services. Please go ahead. Good morning. I want to offer my congratulations on the order that you announced yesterday. I was wondering if you could provide some more details. Tell us more about it.
Shahram Askarpour: Another important aspect of the Honeywell transaction is the opportunity to leverage the customer base of these acquired products. The transaction brought us several new relationships with key customers. We are focused on cross-selling opportunities with these new relationships, particularly with some international customers and end markets where we did not have a strong presence previously. As an example, we recently completed some radio sales to a European customer during the quarter. We are also happy to report that the majority of the test equipment and inventory has been delivered and we expect the balance to be delivered in calendar 2024.
Speaker Change: So I guess the announcement we made, we were going to put a lot more in that announcement. Obviously, our
Speaker Change: The customer was reluctant to agree to us putting a lot more color into it, and it's because they haven't announced the program themselves, but it is a very large aerospace company. We got the contract.
Speaker Change: It's a military product, it's a...
Speaker Change: It's a mission display integrated with a mission computer in one unit.
Speaker Change: And I guess the award value is...
Shahram Askarpour: At the end of July, we announced the acquisition of additional product lines from Honeywell. This most recent transaction builds on our deal from last year and includes communication and navigation radio product lines from Honeywell. While this deal was smaller than the initial transaction, the acquisition will help strengthen our offerings in key military and business aviation markets. Established new relationships with new key customers and importantly enables us to further leverage the capacity in our external facility.
Speaker Change: Another thing that they didn't want us to announce, but it's well into the several million dollars.
Speaker Change: We intend to deliver on some of it in the fourth quarter.
Speaker Change: And, but you will, I guess you will see that number, it will reflect in a backlog because
Speaker Change: Once we've booked it now, so now it's in our backlog. Right. So Doug, we booked it, you know, this period being Q4, so when we put out the K, it would be disclosed in the backlog period.
Shahram Askarpour: We are pleased with the progress we have achieved thus far under our Honeywell product lines and we are looking forward to realizing additional synergy benefits and incremental growth opportunities in the coming quarter. We continue to generate stable revenues and margins from our large OEM contracts, including the LATUS for utility management system or UMS, Textron for standby instruments on our OEM and Boeing for the KC-46 and the T-7 Pro. Further to our focus on the military market, we've recently awarded the multi-million dollar contract on a foreign military platform from a major aerospace company. We will supply a multifunction display with an integrated mission computer for a foreign military platform. This further validates our strategy to focus on business development efforts in the military market.
Speaker Change: Okay.
Speaker Change: Unfortunately, yeah, our customer didn't really want us to put too much details around it. I think they're still negotiating with their customer, my guess.
Speaker Change: One of the other parts of the Honeywell acquisition was that you had acquired quite a bit of inventory.
Speaker Change: And how is that going, possibly, it seemed like you indicated that maybe it was more inventory than maybe you...
Speaker Change: Desire to Have. How are you doing with what was acquired and...
Speaker Change: And how are you doing with, you know, in effect using it in your operations?
Speaker Change: So, I don't know.
Speaker Change: Why you think that indicates that we have more inventory that we deserve to have.
Speaker Change: So the second acquisition that we did has about $2.5 million worth of inventory.
Shahram Askarpour: I would now like to provide a quick overview of our strategic growth priorities and highlight some of our key accomplishments during the quarter. A long-term growth strategy is focused on generating sustained revenue growth through the following five initiatives. Expansion of our existing platforms, UOM and Retrofit programs, Pipeline Opportunity Growth, New Market Opportunities and Acquisitions. Our existing platforms provide meaningful growth opportunities through unique expansion on several key platforms. This is a highly predictable growth driver and is driven by scheduled unit growth at key customer platforms.
Speaker Change: A lot of the inventory that we get on these programs is what they call the specs units, which are
Speaker Change: which are units that we would own, but when things fail in an aircraft, we will rent it out as a loaner.
Speaker Change: and we get the income for it.
Speaker Change: Sorry.
Speaker Change: You can look at it like you're the Hertz Rent-A-Car.
Shahram Askarpour: For example, the PC24 aircraft has been and will continue to grow providing growth opportunities for ISNS. Building one on history of innovation, new potential OEM and Retrofit programs provide a significant long-term growth opportunity. In particular, we are focused on growing our OEM business, given the more stable and predictable nature of these contracts. We benefit from deep customer relationships which has further strengthen following the Honeywell transactions. This gives us the opportunity to cross-sell our growth for the portfolio of existing products to customers.
Speaker Change: and we rent out these units and we get the revenue for it. And some of it is inventory that we can go ahead and sell. For example, in the Q2, we sold some of that inventory to a European customer.
Speaker Change: We sold some radio inventory to them.
Speaker Change: and then we have
Speaker Change: We've got an international sales team now that's supporting all of these activities.
Speaker Change: That sounds positive. Now, you know, look, you deserve a lot of credit for the sequential improvement.
Speaker Change: in the margins.
Speaker Change: Do you have some internal goals for what might happen in the fourth quarter?
Speaker Change: Yeah, so Doug, I mean, we're always constantly looking at the margins, how to increase it, I would think a couple things, what happened in the margin, we talked about the little headwind around
Speaker Change: The NRA says about 150 basis points. Also, when you look at our margins quarter or year over year, what was impacting it was our increase in
Shahram Askarpour: As an example, some of the radio products recently acquired from Honeywell will couple nicely with our cockpit offerings in the C-130 platform. A significant growth opportunity in the coming years will come from the potential to expand into adjacent markets. One market we are particularly excited about is the military market, which is a market we are under penetrated in today, but is a tremendous long-term opportunity. We have several product platforms that are ideally situated in the military market.
Speaker Change: depreciation expense because of our PP&E that went up and also with the Honeywell transaction
Speaker Change: So there was another, I would say, roughly 150 to 200 basis points there. So when you look at...
Speaker Change: Those two factors, the NRA and that, our margins are getting to 56 to 57% margins. And keep in mind, as now the test equipment's here...
Speaker Change: the efficiencies will start coming in too further with our workforce to repair and fix these units more efficiently and effectively. So our goal is to always look to increase those margins.
Speaker Change: I mean always when you when you hiring new technicians and training them
Shahram Askarpour: As we already discussed, our recent contract award highlights this opportunity. Additionally, our increased focus on cockpit automation that helps enhance safety and reduce pilot workload represents a significant market opportunity for ISNS in both military and air transport applications. We continue to generate incremental revenue by adding automation features to our military and air transport cockpit solutions. We believe cockpit automation represents a multi-billion dollar, addressable market opportunity.
Speaker Change: And...
Speaker Change: to become effective. And these are the equipment that we acquired from Honeywell. They're sophisticated equipment, like the initial reference units are.
Speaker Change: Like
Speaker Change: They're as sophisticated as you can get in the aerospace area.
Speaker Change: It's not like you're going to get technicians off the street and they're going to hit the ground running.
Speaker Change: And you'll have some, you do your hiring, some of them you get rid of within the next couple of months because they don't hack it. So there's inefficiencies.
Speaker Change: that all of that reflects in our gross margins.
Shahram Askarpour: Finally, an area of increasing focus is growth through strategic acquisitions. We are ideally positioned to pursue acquisitions given we have developed a growing base of recurring revenue, have strong cash flow generated from business, and have a strong financial profile. Our acquisition strategy remains focused on product lines in the electronic and electromechanical space with a similar margin profile store existing business which enables us to leverage our manufacturing capacity.
Speaker Change: Well, you also had talked about that there was this new product development.
Speaker Change: and that was affecting the gross margins. So are some of these products that were developed, are they being marketed for sale? So that would seem to help the margins going forward as well.
Speaker Change: Yes, now what Jeff was referring to, and I'll be a little bit more specific.
Speaker Change: That, that, that would...
Shahram Askarpour: We look forward to updating you on our progress and our strategic growth initiatives in the coming quarters.
Jeff DiGiovanni: Establish us for the next 30 years of developing the next generation of these computers to pay ladders.
Shahram Askarpour: Before I turn it over to Jeff, I would just like to conclude with a few final thoughts. Overall, we are pleased with our third quarter results at our growth in our existing platforms and contributions from the Honeywell product enabled us to generate growth in revenue and EBITDA. We continue to execute at a high level and base on our results during the three quarters together with our continued business momentum. We remain well-positioned as we live towards 2025.
Jeff DiGiovanni: In a lot of instances, we would go ahead and do that development.
Speaker Change: In-house, and because we're investing into the future. In this case, Pilatus was, they were nice enough to actually give us some funding to help with the development of it.
Speaker Change: And then when it comes to, the minute you get some funding...
Speaker Change: from a customer.
Speaker Change: You get into revenue recognition, and if the engineering cost ends up going a little bit more than what you had estimated, then it starts getting into eroding your margins.
Jeff DiGiovanni: With that, I turn it over to Jeff who will provide a more detailed review of our third quarter results and our financial outlook. Jeff? Thank you, Sharon.
Speaker Change: If we weren't getting paid from the customer, you would have seen all of those in our IR&D, and it wouldn't have affected our margins.
Speaker Change: I'd still rather get some money from a customer if we can.
Doug Ruth: Yeah, so Doug, it's really the way we recognize the NRE contracts, to Sharon's point. You do, you look at your cost to complete, and if any changes in terms of sometimes you might hit a snag, the engineer might hit a snag, and the estimate changes, you kind of have to look at the contract and revalue it, and that's what happened this quarter.
Jeff DiGiovanni: Good morning, everyone. I would provide some additional details on the quarter, given not to add on our working capital and free cash flow and conclude with comments here on our balance sheet and liquidity. Before we begin, I would like to remind everyone we will be discussing non-GAP measures and you are encouraged to refer to the earnings release which includes the definitions, the rationale for using them and the reconciliation to gap in it.
Speaker Change: Okay, I think you deserve a lot of credit. There's material improvement, you know, in the one-quarter results and I appreciate you answer my questions and I'm excited to see what happens in the next quarter.
Jeff DiGiovanni: Looking at the third quarter, total net revenues were 11.8 million representing a 48 percent increase when compared to the third quarter last year. The increase was driven by contributions from the Quad Honeywell product lines as well as growth in existing lines. We continue to see some weakness in the cargo market, but trends appear to be stabilizing and we saw some sequential growth in this market relative to the second quarter. Product sales decreased to 5.1 million during the third quarter, primarily attributed to a large order from a year ago to the commercial Air Transport Customs.
Dr.: Thank you, Doug. Thank you.
Speaker Change: Our next question comes from Andrew Rem with Otis and Partners. Please go ahead.
Andrew Rem: Good morning, gentlemen. I really appreciate the additional color on the gross margin. That's kind of where I was.
Andrew Rem: But I did want to ask maybe just one follow-up to beat the gross margin of course here, but so you've got three test units in and you have all the technicians you need for those three, is that correct?
Jeff DiGiovanni: Customers. This was partially offset by an increase in shipments to general aviation and military customers. Customers' support revenue was $6.4 million and increased from $1.3 million last year, owing largely that a customer service sales from the product lines acquired from Honeywell. Rose Prophet was $6.3 million during the third quarter, up 33% from $4.7 million in the same period last year, driven by the contribution from the Honeywell products. Overall, Rose Margin was 53.4% during the third quarter, up sequentially from 52% last quarter, as we continue to make progress on our Honeywell integration initiatives and further gain operating efficiencies, which will continue to improve our margins.
Speaker Change: Yes, and we continue hiring more technicians and training them, as well as putting in a second shift.
Speaker Change: So.
Speaker Change: Yeah our goal is for 2024 to have the second shift up and running. You know we have to have a supervisor, we have to have a quality person on that second shift, so they have to really be trained during the first shift to be able to move over, which takes some time.
Speaker Change: Okay so then when you get the the fourth test unit can we assume that you'll have the technicians necessary to staff that one as well?
Speaker Change: Yes.
Speaker Change: That's our goal.
Speaker Change: Okay. And then...
Speaker Change: Looks like on the pre-trade inventory that's come down nicely from the beginning of the year. Will that go up with the recent Huntingwell acquisition or is that heading to zero?
Jeff DiGiovanni: As a reminder, typically our customer funded engineering programs erode our gross margins, given this is largely a pass through item and this quarter it was roughly a 150 basis point headwind. As Shahram discussed, we continue to make progress on the Honeywell integration and we did see some improvements sequentially from the second quarter with less of a drag from delays in inventory and testing equipment shipments. We are looking to gain additional efficiencies as we continue the integration of the Honeywell products, including the additional recently acquired lines and we are targeting a return to the gross margin levels witnessed prior to the Honeywell acquisition.
Speaker Change: No, so a couple things within prepaid. It's really the inventory that we paid and we're still
Speaker Change: You know, waiting to get back, and that's where UC went down, because we got a lot of that inventory in today.
Speaker Change: from when the quarter closed.
Speaker Change: So, our goal is really to keep working with Honeywell to get the new contract in, that inventory in before September 30th, but if it doesn't happen, you'll see some of that amount in prepaid inventory.
Speaker Change: And then if I was understanding your commentary correctly, Shahram, you basically have a rental fleet and that part of that is what's considered inventory, is that correct?
Jeff DiGiovanni: Research and development expense during the third quarter of 2024 was 1.1 million and increased from 850,000 in the comparable period last year. This increase was driven by headcount growth to support our product development efforts. As a percentage in net sales are in the expense during the third quarter decrease to 9.3% of net sales versus 10.7% last year as we gain scale benefits. Third quarter 2024 selling general administrative expenses were 3.1 million and increased from 2.4 million last year.
Shahram Askarpour: So we have some of the units that we, I would say a good size of the units that we receive in the finished goods units.
Shahram Askarpour: are used in the kind of specs pool where if somebody's equipment fails on the airplane, we will send them a loaner while that unit comes back and gets repaired.
Shahram Askarpour: And that's typically something that you charge for the service.
Shahram Askarpour: and
Shahram Askarpour: So that's kind of, that's what I was describing. Yes, so Andrew, so we typically always have...
Jeff DiGiovanni: The increase in SGNA expense in the quarter was primarily the result of one time expenses related to the acquisition and CFO transition costs of approximately 400,000, along with amortization expense related to the customer tangible as result of the acquired Honeywell product lines of approximately 600,000. Adjusted EBITDA was 3.1 million during the third quarter, up from 1.9 million last year due to the contribution from the Honeywell products and operating expense leverage. Adjusted EBITDA margin was 26.1% during the third quarter of 2024, up from 24% in the same period last year, owing to the operating expense leverage partially offset by lower gross margins.
Andrew: Those units, they're in fixed assets, they get depreciated, what we call rotables.
Andrew: So, right now, too, we're also assessing the amount of volume we need with these customers so we can have an efficient...
Andrew: number of units on hand. We don't wanna have too many and not too little. So if there's excess in some part numbers, they're the ones we're gonna try to sell in the marketplace with our international sales teams.
Andrew: So more to come as we learn more and assess these units.
Speaker Change: All right and then on the multi-million dollar military contract what is the duration of that?
Speaker Change: And that's another thing we were told not to, but it's summarized in two or three years.
Speaker Change: Okay so several million dollars over two to two to three years.
Jeff DiGiovanni: The third quarter net income was 1.6 million or 9 cents per share compared to net income of 1.4 million or 8 cents per share in the year ago quarter. Moving on to backlog, new orders in the third quarter of fiscal 2024 were approximately 10.6 million, and our backlog as of June 30, 2024 was 9.3 million. As a reminder, backlog includes only purchase orders in hand and excludes orders from our OEM customers under long-term programs such as Pilatus PC-24, Textron King Air, Boeing T-7 Red Hawks, and Boeing KC-46A.
Janice Byron: John , is that alright?
Speaker Change: Okay, and then in the fourth quarter last year, you guys did basically $13 million in
Speaker Change: and Revenue, because that was the first quarter you got. Huntingwell, Huntingwell came in much stronger than expected. Is it fair to assume that that will be a difficult comp and as a result we shouldn't look for kind of year-over-year growth in the fourth quarter?
Speaker Change: So it's.
Speaker Change: Again, I think we've talked about this every quarter. That fourth quarter had a lot of pull-ins in it from Honeywell.
Jeff DiGiovanni: ISNS expects these programs to remain a production for several years and anticipate they will continue to generate future sales. Further, through their nature, the product lines from Honeywell do not typically enter backlog. Now, turning to cash flow. In the first nine months of 2024, cash flow from operations was 5.4 million up from 900,000 in the year ago comparable period. The improvement was driven by higher cash earnings and improved working capital efficiencies.
Speaker Change: We've got about, I would say...
Speaker Change: Roughly $6 million revenue.
Speaker Change: in a quarter from Honeywell because of the anticipation of the transition period. They pulled in and delivered a lot to the customers.
Speaker Change: So I wouldn't want to set any expectations.
Speaker Change: That's, that, that, that, that, that,
Speaker Change: There's nothing else to pull in.
Jeff DiGiovanni: Capital expenditures were 500,000 in the first nine months of 2024 versus 200,000 in the same period last year. As a result of these factors, free cash flow during the first three quarters of 2024 was $4.8 million up from 800,000 last year. Total net debt as a June 30, 2024 was $9.3 million down from $16.4 million at the end of 2023, as we utilized our strong free cash flow to quickly de-lever following the acquisition from Honeywell.
Speaker Change: Right, okay.
Speaker Change: Okay.
Speaker Change: Our next question comes from Chip Ruth, Ruby Asset Management. Please go ahead.
Chip Ruth: Good morning, and thanks for taking my call. Congratulations on the execution and the cash flow and the deleveraging. It does really set you guys up for growth, which is...
Chip Ruth: Where my two questions lie, and I'll ask them both and then you can address them. One, the military is encouraging to see, especially the contract that you got. And I'm just curious...
Jeff DiGiovanni: Our net leverage at the end of third quarter declined to 0.8 times down from 2.1 times at the end of 2023 and a peak of 2.9 times immediately following the Honeywell transaction. Our total cash and availability under our credit line was $20.7 million at the end of the third quarter, which provides us ample financial flexibility to support our ongoing operations and strategic initiatives.
Speaker Change: . . . . . . . . .
Speaker Change: Typically, military takes a long time. It takes qualification.
Speaker Change: maybe it's design in. So maybe you could talk about is this order that you've got more of a one-off or do you think you can take some takeover business like this?
Speaker Change: is you look to grow military, and we could see significant growth from other deals in the military, or will it be longer kind of designed in?
Speaker Change: type business. And so that's one, the military. Two, you mentioned more M&A, and you've been successful. So just wondering what criteria you might look at for as far as size of deals.
Jeff DiGiovanni: That completes our prepared marks.
Operator: 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 at then-1 on your telephone keypad. If you are using a speaker phone, 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.
Speaker Change: Do you think you'll buy product lines like you did with Honeywell or whole companies?
Speaker Change: And will you maintain the accretive nature of deals like you did with Honeywell, the significant accretion? And I'll leave it at those two. Thanks.
Speaker Change: So, with regard to the military,
Operator: At this time, we will pause momentarily to assemble our roster.
Speaker Change: We put the focus on about...
Speaker Change: I guess it was about the time where I took over as CEO , I started
Sergei Glynanov: Our first question comes from Sergei Glynanov with Freedom Broker. Please go ahead. Hello everyone.
Speaker Change: Putting a lot more focus into the military market, we actually went and hired a
Shahram Askarpour: First of all, my congratulations about the Honeywell transaction. As far as the concerns regarding to previous view, you have to complete the movement of the equipment to the ISNS facility in August right. Is it completed? I'm sorry, can you repeat that? I apologize. Oh, as far as the concerns are gotten to previous deal, you had the completed movement of the two-day ISMS facility in August. Is it completed or you are in the process of that deal?
Speaker Change: retired Marine, U.S. Marine pilot.
Speaker Change: to help us to help us sell and then as we as we moved on we kept on additionally strengthening that the sales and marketing efforts on the military military platforms.
Speaker Change: We've got a lot of pokers in that fire.
Speaker Change: So, this was the first one that bear fruit. I'm hopeful that, you know, we will be getting additional. I mean, there's a lot of spending internationally on the military market.
Speaker Change: and you know, hopefully we get our fair share of that.
Shahram Askarpour: So it is substantially completed. I think in one instance, we are destined to get four identical stations. You have three of them completed and there is one that's going to, now it's going to come in November. These are new test equipment that are being built for us. So I would say substantially we are there as well as substantially the inventory that we need to perform. Okay, and will it affect Margin, October and next quarters?
Speaker Change: With regards to the strategy...
Speaker Change: for Acquisition is as I articulated earlier.
Speaker Change: Our preference.
Speaker Change: is to get product lines.
Speaker Change: in the similar product lines in the electronics or electromechanical field that we can integrate here in our factory floor. Not necessarily just from Honeywell, but from other large companies.
Speaker Change: They tend to be less risky and more predictable.
Speaker Change: Uh...
Speaker Change: However, we also do look at
Speaker Change: Whole businesses, kind of smaller businesses, I like to see an accretive business, I don't like to buy into speculations.
Shahram Askarpour: It really shouldn't impact us, because we are also training more technicians and building on them. So just having this equipment here without having trained people to run it doesn't necessarily help you that much either. We will continue increasing the team as we plan on bringing more and more of these projects in-house. As we talked before, Honeywell had a lot of channel partners. They did a lot of outsourcing of their business to third parties.
Speaker Change: So that's it.
Speaker Change: That's my view of it.
Speaker Change: and
Speaker Change: If we can find small, bolt-on businesses that would generate, immediately generate revenue, EBITDA, and are accretive, we will move on with them and with their integration. They're just harder to come by.
Speaker Change: Yeah, we're being very disciplined on, you know, our capital, what we're using to make sure that any kind of product acquisition or business is accretive. So that's really our goal. So it's a very diligent process.
Speaker Change: Yeah, I like the sound of that.
Shahram Askarpour: We plan on bringing over that in-house to help increase revenue and profitability. This kind of, right now we have, right now we have got enough test equipment to deal with the matter in hand. And the other one would help us for future growth. Okay, and during the call, we are going into new Honeywell transaction. You mentioned that I assume that it's a great opportunity to further make income growth after 2024 fiscal year.
Speaker Change: So, and then the last question, you talk about bringing more lines into your existing facilities and then maybe putting some CapEx out in the future.
Speaker Change: Do you have, or how do you think about where you are in capacity utilization today? You know, how much can revenue grow with your current footprint? And I know you're talking about doing a second shift in some of your...
Speaker Change: lines, you know, how far can we grow before you really need to put more brick and mortar in the ground?
Speaker Change: I think in terms of, so there is two ways of looking at growing. If we do bring in product lines which are completely new, now we did.
Speaker Change: Two completely new product line acquisitions from Honeywell.
Shahram Askarpour: Do you have any thoughts about ways of sales organic growth? So we are going to continue with our organic growth. I think we are running out of about some rough ahead of us with the air cargo slowing down. We are kind of recovering from that through the military initiatives that we put together. This is the game that we have been playing for 35 years. When one market suffers, we focus on another market to recover.
Speaker Change: That, that takes footprint.
Speaker Change #100: So...
Speaker Change #101: to
Speaker Change #102: We can probably bring you...
Speaker Change #103: One more product line, brand new product line, and handle it with our existing footprint.
Speaker Change #103: But we can grow our existing.
Speaker Change #103: product lines that we have. And even if we do, say if I do an acquisition of a product line of cockpit displays which is similar to cockpit displays that we have, I don't necessarily need a lot more footprint.
Speaker Change #103: So the answer is it really depends and because of that we've put in planning permission to expand the building.
Shahram Askarpour: So going forward, we continue growing organically in double digits and going beyond this third quarter, we consider the Honeywell Acquisitions that we've done as part of our organic, as part of our organic programs as well, because they get intermingled with our own initiatives as well as the growth is going to come from the combination of both product lines and we're going to continue growing the business without doing any more Acquisitions as well, but we constantly evaluating other Acquisitions and we're going to move forward with that. In terms of product development initiatives, we're focused on that part of the business as you saw, we saw increased in R&D expenses, not as a percentage of sale, but in materiality.
Speaker Change #103: both in terms of
Speaker Change #103: holding larger amount of inventory.
Speaker Change #103: as well as expanding the factory floor where we could bring brand new product lines in here.
Speaker Change #103: If we move ahead with that, it will probably be about a year before we can have the addition here up and running. The CAPEX requirement for that is roughly going to be around $5 million.
Speaker Change #103: And we will get some help from the state of Pennsylvania, as well as our local government, to help towards some of that.
Speaker Change #103: Nothing significant, but there's stuff that we've been talking to. So we're certainly looking at that in order to help us grow. I mean, I like to grow this over the next several years well beyond the $100 million in revenue.
Shahram Askarpour: And we continue growing our team to allow us to develop further new products, again, as I mentioned, confident automation is a significant market that we're looking at over the next several years. And there's incremental revenues to gain from that and we're developing, continue to develop products that would help us get there to that goal, and that gives us further organic growth.
Speaker Change #103: So we need that expansion.
Speaker Change #103: Yeah, so Chip, the way we even looked at the expansion too is, you know, we have some redundancies out.
Chip Ruth: And, you know, various facilities, we can consolidate them into one place. When I see, you know, those redundancy storage units and things like that, that kind of...
Jeffrey DiGiovanni: and Jeffrey DiGiovanni.
Jeffrey DiGiovanni: Great. Sounds good, guys. Thank you.
Speaker Change #105: Again, if you have a question, please press star, then 1. Our next question comes from Gaushi Sriaharn with Singular Research. Please go ahead.
Shahram Askarpour: Great. How additional acquisition could reflect in CapEx? How would additional Acquisitions impact CapEx? Yes, yes, so if we look at beyond where we are and kind of the matter in hand on maybe the next acquisition we do, to do further Acquisitions beyond that, we would have to increase the size of our factory floor, which we've been putting plants together. We have planning permissions here to build another 40,000 square foot of a factory space and we're looking at doing that in order to get us beyond a hundred million dollar revenue in the next several years.
Goushi Sreeharan: Good morning. Can you hear me?
Goushi Sreeharan: Yes.
Gaushi Sriaharn: Thank you for taking my questions.
Gaushi Sriaharn: The first question is regarding the military retrofit opportunities. Could you provide insight into whether the margin profile for these contracts are comparable to those in the commercial sector? I know you've talked about the kind of initial investments you've made in terms of hiring and staffing.
Gaushi Sriaharn: And also, if the new administration decides to scale back on its commitment to NATO, would that have any impact on your near-term operations?
Speaker Change #108: So, in terms of margin profiles, they are similar to our existing product margin profile.
Speaker Change #109: With regards to a changing administration,
Shahram Askarpour: Great. And last question, when it declined in product sales, could turn into growth plus? Could it happen in the next or first quarter of the next financial year? So it's hard to predict the future, as you know, we're in a funny year this year with all the elections going on and several things that are happening internationally. We've managed to navigate those waters, year after year, developed new products that haven't hit the market yet.
Speaker Change #110: I mean, I don't...
Speaker Change #111: I don't foresee a reduction in military spending based on what you see happening around the world.
Speaker Change #112: But we also have tapped into a lot of...
Speaker Change #112: Foreign military.
Speaker Change #112: organizations.
Speaker Change #114: Again, we hired a sales team from Honeywell that dealt with our international business.
Speaker Change #114: And we're seeing a lot of opportunities coming in from foreign militaries as well. So I'm very optimistic on the military side.
Shahram Askarpour: And we believe that the cargo market, we're seeing signs of it flicking up a little bit as well. So I mean last quarter, we had actually shipped in the air transport products in the air transport. And so, you know, we're optimistic that things would continue on the path of recovery, but you're hard to predict the future.
Speaker Change #115: And, yeah, I know you mentioned on your last call about some...
Speaker Change #116: Some delayed information from Honeywell …. Could you give us an update on the status of the drawings and design information from Honeywell and how is that affecting your timeline for initiating in house assembly production and is the fiscal 25 timeline still a realistic timeframe for transition?
Speaker Change #117: I believe so, yes. I think all the transitions are going to happen in calendar 24, based on what I've seen so far.
Sergei Glynanov: Okay, thanks a lot.
Doug Ruth: Our next question comes from Doug Ruth with Linux Financial Services. Please go ahead. Good morning. I want to offer my congratulations on the order that you announced yesterday. I was wondering if you could provide some more details. Tell us more about it.
Speaker Change #117: and so...
Speaker Change #117: You know, we should be able to, in calendar 25, be able to be fully operational and be able to take care of all the advantages we can.
Speaker Change #118: Okay. And I know in the past, one of the interesting or the most exciting part of your growth story is the autonomous flight opportunity.
Shahram Askarpour: So I guess the announcement we made, we were going to put a lot more in that announcement. Obviously, our customer was reluctant to agree to ask for a lot more color into it. And it's because they haven't announced the program themselves. But, but it is a very large aerospace company because the contract for it's a military product. It's a mission display integrated with a mission computer in one unit. And then they get I guess the award value is another thing that they didn't want us to announce. But it's well into the several million dollars. All right.
Speaker Change #119: Could you outline the kind of key industry milestones that investors should be aware of, along with the timelines for those milestones for this opportunity to transform into a significant growth engine?
Speaker Change #120: Well, I think...
Speaker Change #121: Right now, in terms of...
Speaker Change #122: In terms of industry, as always, JASA is ahead of the FAA with these things.
Speaker Change #122: And...
Speaker Change #123: There were whispers that maybe by 2030 that they would go into the first phase of autonomy on the air transport side of it.
Shahram Askarpour: Are you waiting to just like how much might flow in the fourth quarter, for example? We intend to deliver on some of it in the fourth quarter. But you will, I guess you will see that number. It will reflect in the backlog because once we've booked it now, so now it's in our backlog. Right. So we've booked it, you know, this period being Q4. So when we put out the K, it would disclose in the backlog period. Okay. All right.
Speaker Change #123: In terms of IS&S, the opportunities that...
Speaker Change #123: we have, which are kind of...
Speaker Change #123: closer in terms of in terms of the vision is what is on the military side because that
Speaker Change #123: There are movements and developments within the military side of things where they could benefit from some of these and we continue communicating.
Shahram Askarpour: Unfortunately, yeah, our customer didn't really want us to put too much details around it. I think that's the negotiating with the customer. My guess. Okay.
Speaker Change #123: with those folks to to be able to
Shahram Askarpour: One of the other parts of the Honeywell acquisition was that you had acquired quite a bit of inventory. And how is that going possibly it seemed like you indicated that maybe it was more inventory than maybe you desired to have? How are you doing with what was acquired and how are you doing with in effect using it in your operations? So, I don't know why you think that indicated we have more inventory that we desired to have.
Speaker Change #123: utilize some of these capabilities in some of the aircraft. As well as, as I said, the roadmap to getting there
Speaker Change #123: includes a lot of, includes a lot of small steps of incremental automations in the cockpit.
Speaker Change #123: Those features as we develop, we offer them to our to our baseline of customers and that brings in revenue for us.
Speaker Change #124: Okay. Thank you, guys. That's all I have for now.
Speaker Change #125: This concludes our question and answer session.
Shahram Askarpour: But, but they didn't. So the second acquisition that we did has about two and a half million dollars of inventory in Israel. A lot of these, a lot of the inventory that we get on these on these programs is what they call the specs units, which are units that we would, that we would own. But when things fail in an aircraft, we would rent it out as a loaner and we get the income for it.
Speaker Change #126: I would like to turn the conference back over to management for any closing remarks.
Speaker Change #127: Thank you, operator, and thank you all for your time and interest in IS&S.
Speaker Change #128: If you don't speak during the quarter, we look forward to speaking to you again on our next quarterly call.
Speaker Change #129: Have a good day.
Speaker Change #129: and many more. Thank you. Thank you.
Speaker Change #130: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change #131: I'll see you in the next video, I'll see you in the next video.
Shahram Askarpour: So it's look at it like you're the Hertz rent a car. And we rent out these units and we get a revenue for it. And some of it, some of it is inventory that we can go ahead and sell. For example, in the Q2, we sold some of the inventory to a European customer, we sold some radio inventory to them. And we have, we've got an international sales team that supporting all of these activities.
Jeff DiGiovanni: That sounds positive. Now, you know, what do you deserve a lot of credit for the sequential improvement in the margins? Is there, do you have some internal goals for what might happen in the fourth quarter? Yeah, so Doug, I mean, we're always constantly looking at the margins, how to increase it. I would think a couple of things, what happened in the margin. We talked about the little headwind around the NRA. So that's about 150 basis points.
Jeff DiGiovanni: Also, when you look at our margins quarter or year over year, what was impacting it was our increase in depreciation expense because of our PPE. We need to went up and also with the Honeywell transaction. So there was another, I would say roughly 150 to 200 basis points there. So when you look at those two factors, the NRA and that our margins are getting to 56 to 57% margins. And keep in mind, as now the test equipment here, the efficiencies will start coming into further with our workforce to repair and fix these units more efficiently effectively.
Jeff DiGiovanni: So our goal is to always look to increase those margins. I mean, all the new hiring new technicians and training them to become effective. And these are the equipment that be acquired from Honeywell. There is sophisticated equipment like the initial reference units are like there as sophisticated as you can get in the aerospace area. It's not like you're going to get technicians off the street and they're going to hit the ground running.
Jeff DiGiovanni: And you'll have some, you do your hiring, some of them you get rid of within the next couple of months because they don't hack it. So there's inefficiency that all of that reflects in our growth margins.
Shahram Askarpour: Well, you also had talked about that there was this new product development and that was affecting the growth margins. So are some of these products that were developed, are they being marketed for sales so that that would seem to help the margins going forward as well. Yes, now, but what Jeff was referring to and I'll be a little bit more specific. For example, we're developing a second generation of our flight control computer or what we call the UMS for the PC24 aircraft.
Speaker Change #131: © BF-WATCH TV 2021 © BF-WATCH TV 2021
Shahram Askarpour: That that that would establish us for the next 30 years of developing the next generation of these computers to pay ladders. In a lot of instances, we would go ahead and do that development in house and because we're investing into the future. In this case, the lattice was there were there were nice enough to actually give us some funding to help with the development of it. And then when it comes to the minute you get some funding from a customer, you get into revenue recognition.
Shahram Askarpour: And if the engineering cost ends up going a little bit more than what you have estimated, then it starts getting into your margin. If you weren't getting paid from the customer, you would have seen all of those in our IR and D and you wouldn't have affected our margin. So I still rather get some money from the customer. Yes, it's really the way we recognize the NRE contracts that the Sharon's point.
Shahram Askarpour: You do you look at your cost of complete and if any changes in terms of sometimes you might hit a snag. The engineer might hit a stagnant estimate changes you kind of have to look at the contract and revalue it and that's what happened this quarter.
Doug Ruth: Okay, I think you deserve a lot of credit. There's material improvement, you know, in the one quarter results and I appreciate your answer to my questions. And I'm excited to see what happens in the next quarter. Thank you, Donald. Thank you.
Andrew Ram: Our next question comes from Andrew Ram with Otis and partners. Please go ahead. Good morning, gentlemen. I really appreciate the additional color on the gross margin. That's kind of where I was going. But I did want to ask maybe just one follow should beat the gross margin, of course, but so you've got three test units in and you have all the technicians you need for those three. Is that correct? Yes, let me continue harder and more technician on training them.
Andrew Ram: And as well as putting in a second shift. So our goal is for 2024 to have the second shift up and running. You know, we have to have a supervisor. We have to have a quality person on that second shift. So they have to really be trained during the first shift to move over, which is take some time. Okay, so then when you get the fourth test unit, can we assume that you'll have the technicians necessary to tap out as well?
Andrew Ram: Yes, that's our goal. Okay, and then looks like on the pre-paid inventory, that's come down nicely from the beginning of the year. Will that go up with the recent Honeywell acquisition? Or is that heading to zero? No, so a couple of things with some pre-paid. It's really the inventory that we paid and we're still waiting to get back. And that's where you see went down because we got a lot of that inventory and today off from the quarter close.
Andrew Ram: So our goal is really to keep work with Honeywell to get the new contract in that inventory and before September 30th. But if it doesn't happen, you'll see some of that amount and pre-paid inventory. And then if I was understanding your commentary correctly from it, you basically have a rental fleet and that part of that is what's considered inventory is correct. So we have some of the units that I would say a good size of the units that receive in the finished goods units are used in the kind of specs pool.
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Andrew Ram: So where if somebody's a corporate fairs on the airplane, we will send them a loaner while that unit comes back and gets repaired. And that's typically something that you charge for the service. And so that's kind of that's that's what I was describing. Yes, so we typically always have those units that are in fixed assets that get depreciate what we call roadables. So right now too, we're also assessing the value, the amount of volume we need with these customers.
Andrew Ram: So we can have the efficient number of units on hand. We don't want to have too many and not too little. So if there's access in some part numbers, there are the ones we're going to try to sell in the marketplace with our international sales. Teams. So, more to come as, you know, we learn more and assess these units.
Andrew Ram: All right, and then I'm going to the multi million dollar military contract. What is the duration of that? And that's what I was told not to, but, but, but it's some of us in two or three years. Okay, so it's several million dollars over two to three years. That's about right. Okay, and then in fourth quarter last year, you guys did basically 13 million in revenue. Because that was the first quarter you got.
Andrew Ram: Honeywell Honeywell came in much stronger than expected. Is it fair to assume that that will be a difficult comp and as a result, we shouldn't look for kind of year over year growth in the in the fourth quarter. So, so it's the again, as I haven't talked about is every quarter that fourth quarter had a lot of pull-ins in it from from a Honeywell. I mean, we got about I would say roughly six million dollar revenue in a quarter from Honeywell because of the anticipation of the transition period. They pulled in and delivered a lot to to the customers. So I I wouldn't want to set any expectations that that that there's nothing else to pull in. Right, okay. Okay.
Chip Ruby: Our next question comes from chip. Ruby asset management. Please go ahead.
Chip Ruby: Good morning and thanks for taking my call. Congratulations on the execution in the cash flow and the dev leveraging. It does really set you guys up for growth, which is where my two questions lie and I'll ask them both and then you can address them. One, the military is encouraging to see, especially the contract that you got and I'm just curious. Typically, military takes a long time. It takes qualification. Maybe it's designed in.
Chip Ruby: So maybe you could talk about is this order that you've got more of a one offer? Do you think you can take some takeover business like this? Is you look to grow military and we could see significant growth from from other deals in the military or will it be longer kind of designed in? Right business and so that's one the military to you mentioned more M&A and you've been successful. So just wondering what criteria you might look at for as far as size of deals.
Chip Ruby: Do you think you'll buy product lines like you did with Honeywell or whole companies? Will you maintain the accretive nature of deals like you did with Honeywell, the significant accretion and I'll leave it those tips. Thanks. So, so with regards to the military, we put the focus on about, I guess it was about the time where I took over from as CEO, I started putting a lot more focus into the military market.
Chip Ruby: We actually went and hired a retired Marine, US Marine pilot to help us to help us out. And then as we as we moved on, we kept on additionally strengthening the sales and marketing efforts on the military, military platforms. We've got a lot of focus in that fire. So, this was the first one that that that bear fruit. I'm hopeful that that, you know, we will be getting additional, I mean, there's a lot of spending internationally on the military market and hopefully we get our fair share of that.
Chip Ruby: With regards to the strategy for acquisition, as articulated earlier, our preference is to get product lines in the, you know, similar product lines in the electronics or electro mechanical field that we can integrate here in our factory floor. Not necessarily just from Honeywell, but from other large companies. They tend to be less risky and more predictable. However, we also do look at, do look at whole businesses, kind of smaller businesses. I like to see an accretive business.
Chip Ruby: I don't like to buy into speculations. So, that's my view of it. And if we can find small bolt-on businesses that would generate, immediately generate revenue, EBITDA and our accretive, we will move on with their integration. They're just harder to combine. Yeah, we're being very disciplined on our capital what we're using to make sure that any kind of product acquisition or business is accretive. So, that's really our goal. So, it's a very diligent process.
Chip Ruby: Yeah, I like the sound of that. And then the last question, you talk about bringing more lines into your existing facilities and then maybe putting some catbacks out in the future. Do you have, or how do you think about where you are in capacity utilization today? How much can revenue grow with your current footprint? And I know you're talking about doing a second shift in some of your lines. How far can we grow before you really need to put more brick and mortar in the ground?
Chip Ruby: I think in terms of, so there is two ways of looking at growing, if we do bring in product lines which are completely new, now we did two completely new product line acquisitions from Honeywell, that takes footprint, so to, we can probably bring in one more product line, brand new product line, and handle it with our existing footprint, but we can grow our existing product lines that we have, and even if we do say if I do an acquisition of a product line of cockpit displays, which is similar to cockpit displays that we have, I don't necessarily need a lot more footprint, so the answer is, it really depends, and because of that, we've put in, we've put in planning permission to expand the building, both in terms of holding larger amount of inventory, as well as expanding the factory floor, where we could bring brand new product lines in here, and if we move ahead with that, it's about, you know, probably about, about a year before we can have the, the addition here, up and running, the capital requirement for that is roughly, it's going to be around $5 million, and we will get some help from the state of Pennsylvania, as well as our local government to help towards that, not nothing significant, but there's stuff that we've been talking to. So we're certainly looking at that, in order to help us grow.
Chip Ruby: I like to grow this over the next several years, well, beyond $100 million in revenue, so we need that expansion. The way we even look at the expansion too, is, you know, we have some redundancies out, and you know, various facilities, we can consolidate them into one place, when I see, you know, those redundancy storage units and things like that, to kind of get the cost reductions down, and when you look at the money spent, how do we finance it, you know, we're working with the state and locals to get, you know, a profitable financing in our, in our current bank, to work with.
Operator: Great, sounds good, guys, thank you. Again, if you have a question, please press star then one.
Gowshi Sriohan: Our next question comes from Gowshi, Sriohan, with singular research.
Gowshi Sriohan: Please go ahead.
Shahram Askarpour: Good morning. Can you hear me? Yes. Thank you for taking my questions. The first question is regarding the military retrofit opportunities. Could you provide insight into whether the margin profile for these contracts are comparable to those in the commercial sector? I know you've talked about the kind of initial investments you've made in terms of hiring and staffing, and also if the new administration decides to scale back on its commitment to NATO, would that have any impact on your new term up?
Shahram Askarpour: So, so in terms of margin profiles, they are similar to our margin profile, to our existing administration. I mean, I don't, I don't foresee a reduction in military spending based on, you know, what you see is happening around the world, but we also, we also have tapped into a lot of foreign military organizations with the new, you know, we, again, we hired, we hired the sales team from Honeywell that dealt with their international business.
Shahram Askarpour: And we're seeing a lot of opportunities coming in from, from foreign militaries as well. So, I, I'm really optimistic on the, on the military side. And I know you mentioned on your last call about some delayed information from Honeywell. Could you give us an update on the status of the drawings and design information from Honeywell and how's that affecting your timeline for initiating in house, in house assembly production? And, and is that physical 25 timeline still kind of the realistic timeframe for transition?
Shahram Askarpour: I believe so, yes. I think all the transition is going to happen in calendar 24, based on what I've seen so far. And so, you know, we should, we should be able to in in calendar 25, be able to be fully operational and be able to take care of all the advantages we can.
Shahram Askarpour: Okay, and I know in the past, you know, one of the interesting or the more exciting part of your road story is the autonomous flight opportunity. Could you outline the kind of key industry milestones that investors should be aware along with the timelines for those milestones to, for this opportunity to transform into a significant growth engine? Well, I think right now in terms of in terms of industry and I've always y'all saw it as the head of the FAA with these things.
Shahram Askarpour: And they there were experts that maybe by by 2030 that they would they would go into the first phase of autonomy on the on the air transport side of it. So, so that's kind of where we're really looking up potential, you know, over the next five or six years that that we'll see some of that some of that materializing. In terms of ISNS, the opportunities that we have, which are kind of closer in terms of the vision is what is on the military side because there is movement and developments within the military side of things where they could benefit from some of these.
Shahram Askarpour: And we continue communicating and spreading our vision with those folks to be able to utilize some of these capabilities in some of the across. As well as I said, the roadmap to getting there includes a lot of, includes a lot of small steps of incremental organizations in the cockpit. Those features as we develop, we offer them to our baseline of customers and that brings in revenue for us.
Gowshi Sriohan: Okay, thank you guys, that's all I had for now.
Shahram Askarpour: Disconclusive our question and answer session. I would like to turn the conference back over to management for any closing remarks. Thank you operator and thank you all for your time and interest in ISNS. If you don't speak during the quarter, we look forward to speaking to you again on our next quarterly call. Have a good day.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now just connect. Thank you. Ed Sheeran, Ed Sheeran, Ed Sheeran, Douglas Ruth, Roger Goldman[inaudible] Roger Goldman, Douglas Ruth, Roger Goldman, Douglas Ruth Roger Goldman, Douglas Ruth, Roger Goldman, Douglas Ruth, Roger Goldman, Douglas[inaudible] Roger Goldman, Douglas Ruth, Roger Goldman, . .