Q3 2025 Innovative Solutions and Support Inc Earnings Call

Chorus Call operator: Good day and welcome to the INNOVATIVE SOLUTIONS & SUPPORT INC. third quarter fiscal 2025 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. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Speaker #1: 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 #1: To ask a question, you may press star, then one, on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded.

Speaker #1: I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Speaker #2: Thank you. Welcome to Innovative Solutions and Supports, third quarter 2025 results conference call. Leaving the call today, our CEO, Shahram Askarpour, and CFO, Jeffrey DiGiovanni.

Paul Bartolai: Thank you. Welcome to INNOVATIVE SOLUTIONS & SUPPORT's third quarter 2025 results conference call. Leading the call today are our CEO, Shahram Askarpour, and Chief Financial Officer, Jeffrey DiGiovanni. This morning, we issued a press release detailing our third quarter 2025 operational and financial results. 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. Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of our latest reports filed with the SEC.

Speaker #2: This morning, we issued a press release detailing our third quarter 2025 operational and financial results. This release is publicly available in the investor relations section of our corporate website at www.innovative-ss.com.

Speaker #2: 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 #2: Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of our latest reports filed with the SEC.

Speaker #2: Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call in the press release issued this morning.

Paul Bartolai: Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call in the press release issued this morning. Today's call will begin with prepared remarks from Shahram, who will provide a review of our recent business performance and strategic outlook, followed by a financial update from Jeff. 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.

Speaker #2: Today's call will begin with prepared remarks from Shahram Askarpour, who will provide a review of our recent business performance and strategic outlook, followed by a financial update from Jeffrey DiGiovanni.

Speaker #2: At the conclusion of these prepared remarks, we will open the line for your questions. And with that, I'll turn the call over to Shahram.

Speaker #3: Thank you, Paul, and good morning to everyone joining us on the call today. Let's begin with a high-level overview of our third quarter financial performance.

Shahram Askarpour: Thank you, Paul, and good morning to everyone joining us on the call today. Let's begin with a high-level overview of our third quarter financial performance. During the third quarter, we delivered revenue growth of 105% compared to the third quarter 2024, driven by continued momentum from new military programs, including significant growth from our F-16 product line. As Jeffrey DiGiovanni will discuss in more detail, our results did benefit from a pull forward of F-16 product line revenues ahead of the upcoming integration into our Exton, Pennsylvania plant. Our business momentum remains strong with a backlog of approximately $72 million as of June 30, 2025. Our adjusted EBITDA increased only by 43% from last year, as our strong revenue growth was impacted by lower-than-anticipated gross margins received from Honeywell on the F-16 product line due to additional costs associated with building safety stock prior to transition.

Speaker #3: During the third quarter, we delivered revenue growth of 105%, compared to the third quarter 2024, driven by continued momentum from new military programs including significant growth from our F-16 program.

Speaker #3: As Jeff will discuss in more detail, our results did benefit from a pool forward of F-16 revenues ahead of the upcoming integration into our Exxon plant.

Speaker #3: Our business momentum remains strong, with a backlog of approximately $72 million as of June 30, 2025. Our adjusted EBITDA increased only by 43% from last year, as our strong revenue growth was impacted by lower-than-anticipated gross margins received from Honeywell on the F-16 product line, due to additional costs associated with building safety stock prior to transition.

Speaker #3: As we have discussed, we fully expect our integration efforts and investments for growth to create some near-term volatility in our margin results. However, the actions we have taken are important strategic steps in advancing our long-term growth strategy. Once the transition is completed and cost efficiencies are realized, we expect improved margins in the latter quarters of fiscal 2026.

Shahram Askarpour: As we have discussed, we fully expect our integration efforts and investments for growth to create some near-term volatility in our margin results. However, the actions we have taken are important strategic steps in advancing our long-term growth strategy, and once the transition is completed and cost efficiencies are realized, we expect improved margins in latter quarters of fiscal 2026. We were pleased with our third quarter results, and we are encouraged by the continued progress on the expansion of our Exton, Pennsylvania facility and the integration of our acquired lines from Honeywell. We are excited by the long-term opportunities that will result from these investments. We continue to make progress on our key strategic objectives during the quarter, and we are confident these measures have strengthened our foundation for future growth.

Speaker #3: We were pleased with our third quarter results and we are encouraged by the continued progress on the expansion of our Exxon facility and the integration of our acquired lines from Honeywell.

Speaker #3: We are excited by the long-term opportunities that will result from these investments. We continue to make progress on our key strategic objectives, during the quarter, and we are confident these measures have strengthened our foundation for future growth.

Speaker #3: To that end, I would like to shift the discussion to an update on our progress under ISNS Next, our long-term value creation strategy. As a quick refresher, our strategy is centered on a combination of targeted commercial growth within high-value markets, improving operating leverage, and a disciplined, returns-driven approach to capital allocation.

Shahram Askarpour: To that end, I would like to shift the discussion to an update on our progress under ISNS NEXT, our long-term value creation strategy. As a quick refresher, our strategy is centered on a combination of targeted commercial growth within high-value markets, improving operating leverage, and a disciplined returns-driven approach to capital allocation. I would like to take a moment to highlight just a few of our key achievements during the quarter. Early in the quarter, we received a new engineering development and production contract for a derivative of a radio management unit we acquired as part of our first acquisition under our long-term growth strategy. We have made further progress on the expansion of our Exton, Pennsylvania facility with construction having wrapped up during the third quarter.

Speaker #3: I would like to take a moment to highlight just a few of our key achievements during the quarter. Early in the quarter, we received a new engineering development and production contract for a derivative of a radio management unit we acquired as part of our first acquisition under our long-term growth strategy.

Speaker #3: We have made further progress on the expansion of our Exxon facility, with construction heavy wrapped up during the third quarter. We expect a fit-out to be completed in early fall, at which time we can begin to take advantage of our expanded manufacturing capacity, which will increase by more than threefold.

Shahram Askarpour: We expect the fit-out to be completed in early fall, at which time we can begin to take advantage of our expanded manufacturing capacity, which will increase by more than threefold. As a reminder, we manufacture 100% of our products in our Exton, Pennsylvania facility, and this expansion is the key element of our long-term strategy to achieve revenues exceeding $250 million over the next few years. With the ongoing trade uncertainty and priorities of the current administration, we should be in an enviable position to give the likely significant push for reshoring of manufacturing and an America first mentality. Additionally, as it relates to tariffs, we are not directly impacted by the uncertain tariff environment given our U.S.-based manufacturing and vertically integrated strategy. However, we could see some impact from our foreign-based customers that are reducing their production forecasts due to potential tariff implications.

Speaker #3: As a reminder, we manufacture 100% of our products in our Exxon facility. And this expansion is the key element of our long-term strategy, to achieve revenues exceeding $250 million over the next few years.

Speaker #3: With the ongoing trade uncertainty and priorities of the current administration, we should be in an enviable position to give the likely significant push for reshoring of manufacturing and an America First mentality.

Speaker #3: Additionally, as it relates to tariffs, we are not directly impacted by the uncertain tariff environment, given our US-based manufacturing and vertically integrated strategy. However, we could see some impact from our foreign-based customers that are reducing their production forecasts due to potential tariff implications.

Speaker #3: Meanwhile, we don't expect a meaningful impact on our results and view this to be a short-term measure while political negotiations are at play. During the third quarter, we continued with the integration of our most recent acquisition from Honeywell, as we have discussed in the recent quarters, much of the spending and integration activities are being done ahead of the expected growth from these platforms.

Shahram Askarpour: Meanwhile, we do not expect a meaningful impact on our results and view this to be a short-term measure while political negotiations are at play. During the third quarter, we continued with the integration of our most recent acquisition from Honeywell. As we have discussed in the recent quarters, much of the spending and integration activities are being done ahead of the expected growth from these platforms. We anticipate the integration to be completed during our first half of fiscal 2026, and we are excited by the opportunities from this acquisition. Importantly, we were pleased with the recent closing of our new credit facility, which Jeffrey DiGiovanni will cover shortly. Deploying capital for strategic acquisitions remains a key priority, and our new credit facility, extended by JPMorgan Chase, provides us with expanded access to credit and more flexibility to accelerate our long-term growth plans.

Speaker #3: We anticipate the integration to be completed during our first half of fiscal 2026, and we are excited by the opportunities from this acquisition. Importantly, we were pleased with the recent closing of our new credit facility with Jeff will cover shortly.

Speaker #3: Deploying capital for strategic acquisitions remains a key priority and our new credit facility extended by Chase Bank. Provides us with expanded access to credit and more flexibility to accelerate our long-term growth plans.

Speaker #3: Although our most recent acquisitions have been focused on complementary product lines, from large avionics suppliers we continue to evaluate opportunities to acquire smaller avionics manufacturers, where we anticipate synergies will be realized by incorporating their outsourced production in our facility.

Shahram Askarpour: Although our most recent acquisitions have been focused on complementary product lines from large avionics suppliers, we continue to evaluate opportunities to acquire smaller avionics manufacturers, where we anticipate synergies will be realized by incorporating their outsourced production in our facility. Additionally, we are also evaluating opportunities in adjacent markets that are more developmental in nature but offer unique long-term growth opportunities. Despite recent margin pressure due to the impact of the F-16 product line safety stock, we expect EBITDA and profit margins to grow steadily. We are further establishing our company as a premier systems integrator in flight navigation and precision instrumentation with cutting-edge technology. Our vertically integrated U.S.-based production provides a competitive advantage, fostering relationships with key aircraft manufacturers, operators, and defense organizations. In summary, we remain focused on the long term.

Speaker #3: Additionally, we are also evaluating opportunities in adjacent markets that are more developmental in nature but offer unique long-term growth opportunities. Despite recent margin pressure due to impact of the F-16 safety stock, we expect EBITDA and profit margins to grow steadily.

Speaker #3: We are further establishing our company as a premier systems integrator in flight navigation and precision instrumentation, with cutting-edge technology. Our vertically integrated US-based production provides a competitive advantage.

Speaker #3: Fostering relationships with key aircraft manufacturers operators and defense organizations. In summary, we remain focused on the long-term so we are encouraged by the progress we have made on our strategic priorities and remain committed to taking strategic steps to further our growth objectives.

Shahram Askarpour: We are encouraged by the progress we have made on our strategic priorities and remain committed to taking strategic steps to further our growth objectives. We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024. We are excited by everything we have accomplished and are confident we are strategically positioned to continue generating profitable growth for the future to come. With that, I'll turn the call over to Jeff for his prepared remarks.

Speaker #3: We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024.

Speaker #3: We are excited by everything we have accomplished and are confident we are strategically positioned to continue generating profitable growth in the future to come.

Speaker #3: With that, I'll turn the call over to Jeff for his prepared remarks.

Speaker #4: Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our third quarter performance including a discussion of our working capital balance sheet and liquidity profile at quarter end.

Jeffrey DiGiovanni: Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our third quarter performance, including a discussion of our working capital, balance sheet, and liquidity profile at quarter end. We generated net revenues of $24.1 million in the third quarter, more than double our revenues during the third quarter last year. The increase was driven largely by the contribution from the recently acquired F-16 product line from Honeywell, which contributed $12.6 million. Our revenues related to the F-16 products once again included some revenues that were pulled forward as Honeywell built safety stock ahead of the shift in the production to our Exton, Pennsylvania facility. As a result, we expect a temporary dip in revenues related to the F-16 product line during the fourth quarter as we complete the transition before revenues begin to ramp back up in fiscal 2026.

Speaker #4: We generated net revenues of $24.1 million in the third quarter, more than double our revenues during the third quarter last year. The increase was driven largely by the contribution from the recently acquired F-16 product line from Honeywell.

Speaker #4: Which contributed $12.6 million. Our revenues related to the F-16 products once again included some revenues that were pooled forward as Honeywell built safety stock ahead of the shift in the production to our Exxon facility.

Speaker #4: As a result, we expect a temporary dip in revenues related to the F-16 product line during the fourth quarter as we complete the transition before revenues begin to ramp back up in fiscal 2026.

Speaker #4: Product sales were $16.6 million during the third quarter, up significantly from $5.1 million last year, driven primarily by the recently acquired military product line.

Jeffrey DiGiovanni: Product sales were $16.6 million during the third quarter, up significantly from $5.1 million last year, driven primarily by the recently acquired military product line. Service revenue was $7.5 million, owing largely to customer service sales from the product lines acquired from Honeywell, including $1 million associated with the F-16 program. Gross profit was $8.6 million during the third quarter, up 37% from $6.3 million in the same period last year, driven by the strong revenue growth partially offset by lower gross margins on the acquired F-16 product line from Honeywell, as well as higher depreciation expense resulting from the Honeywell acquisitions, duplicate costs in support of the migration of the recent Honeywell acquisition, and continued investments in growth initiatives, as Shahram discussed. Our third quarter gross margin was 35.6% down from 53.4% in the same period last year.

Speaker #4: Service revenue was $7.5 million owing largely to customer service sales from the product lines acquired from Honeywell. Including $1 million associated with the F-16 program.

Speaker #4: Gross profit was $8.6 million during the third quarter, up 37% from $6.3 million in the same period last year. This growth was driven by strong revenue growth, partially offset by lower gross margins on the acquired F-16 product line from Honeywell, as well as higher depreciation expense resulting from the Honeywell acquisition's duplicate costs in support of the migration of the recent Honeywell acquisition and continued investments and growth initiatives, as Shahram discussed.

Speaker #4: Our third quarter gross margin was $35.6% down from $53.4% in the same period last year. The decline from last year was driven by lower than anticipated gross margins received from Honeywell as we have discussed this is a gross margin of less than 25% in the F-16 revenues.

Jeffrey DiGiovanni: The decline from last year was driven by lower than anticipated gross margins received from Honeywell. As we have discussed, this is a gross margin of less than 25% in the F-16 revenues, which impacted our overall margins. As we have stated in recent quarters, the potential exists for our gross margins to be lumpy in the near term as we continue to integrate the Honeywell product lines into our facilities. This can be due to a variety of factors, including duplicate costs as we prepare to integrate these products, the hiring and training of engineers and staff to support these products. As we saw this quarter, the cost to build stock to ensure a smooth transition. Additionally, as we discussed previously, as it relates to the product mix, generally, military sales carry a lower average gross margin versus commercial contracts.

Speaker #4: Which impacted our overall margins. As we have stated in recent quarters, the potential exists for our gross margins to be lumpy in the near term, as we continue to integrate the Honeywell product lines into our facilities.

Speaker #4: This can be due to a variety of factors, including duplicate costs as we prepare to integrate these products, the hiring and training of engineers, and staff to support these products.

Speaker #4: And as we saw this quarter, the cost to build stock to ensure a smooth transition. Additionally, as we discussed previously as it relates to the product mix, generally military sales carry a lower average gross margin versus commercial contracts.

Speaker #4: However, importantly, there are minimal operating expenses associated with these contracts, so the incremental EBITDA margins are strong. Similar to last quarter, this dynamic was fully evident in our third quarter results, as we saw very strong operating expense leverage in the quarter.

Jeffrey DiGiovanni: However, importantly, there is minimal operating expense associated with these contracts, so the incremental EBITDA margins are strong. Similar to last quarter, this dynamic was fully evident in our third quarter results, as we saw very strong operating expense leverage in the quarter. Operating expense during the third quarter of 2025 was $5.1 million, an increase from $4.2 million last year, despite the significant growth in revenue. The increase in operating expense was driven by approximately $200,000 of incremental depreciation and amortization, $600,000 in employee-related costs, and $100,000 of acquisition one-time expenses. Operating expenses represented 21% of revenue during the third quarter, a significant decline from 36.1% in the third quarter of last year, highlighting opportunity for improved operating leverage as the business scales. Net income for the quarter was $2.4 million, as compared to $1.6 million last year. GAAP earnings per share of $0.14 increased from $0.09.

Speaker #4: Operating expense during the quarter of 2025 was $5.1 million and increased from $4.2 million last year despite the significant growth in revenue. The increase in operating expense was driven by approximately $200,000 of incremental depreciation and amortization, $600,000 in employee-related costs, and $100,000 of acquisition of one-time expenses.

Speaker #4: Operating expenses represented 21% of revenue during the third quarter, a significant decline from 36.1% in the third quarter of last year. This highlights the opportunity for improved operating leverage as the business scales.

Speaker #4: Net income for the quarter was $2.4 million compared to $1.6 million last year. GAAP earnings per share of $0.14 increased from $0.09. EBITDA was $4.3 million during the third quarter, up from $2.7 million for an increase of 62.7%, largely due to our revenue growth and operating expense leverage.

Jeffrey DiGiovanni: EBITDA was $4.3 million during the third quarter, up from $2.7 million, or an increase of 62.7%, largely due to our revenue growth and operating expense leverage, partially offset by the lower gross margins. Moving on to backlog. New orders in the third quarter of fiscal 2025 were $17 million, and backlog as of June 30 was $72 million. The backlog includes only purchase orders in hand and excludes additional orders from companies owing them customers under long-term programs, including Pilatus PC-24, Dextron King Air, Boeing T-7 Red Hawk, the Boeing KC-46A, and the F-16 Lockheed Martin. We expect these programs to remain in production for several years and anticipate they will continue to generate future sales. Further, due to their nature, the customer service lines do not typically enter backlog. Now, turning to cash flow.

Speaker #4: Partially offset by the lower gross margins. Moving on to backlog, new orders in the third quarter of fiscal 2025 were $17 million, and backlog as of June 30th was $72 million.

Speaker #4: The backlog includes only purchase orders in hand and excludes additional orders from companies OEM customers under long-term programs. Including Pilatus PC24, Textron Kingair, Boeing T7 Redhawk, the Boeing KC-46A, and the F-16 Woodlockheed Martin.

Speaker #4: We expect these programs to remain in production for several years and anticipate they will continue to generate future sales. Further, due to their nature, the customer service lines do not typically enter backlog.

Speaker #4: Now turning to cash flow. During the nine months ended June 30, 2025, cash flow from operations was $10.3 million compared to $5.4 million in the year-ago comparable period.

Jeffrey DiGiovanni: During the nine months ended June 30, 2025, cash flow from operations was $10.3 million compared to $5.4 million in the year-ago comparable period, due to our solid operating results. Capital expenditures during the nine months ended June 30 were $5.5 million versus $500,000 in the year-ago period. The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton, Pennsylvania facility. Despite the increase in spend of over $5 million when compared to the nine months last year, we were still able to generate free cash flow, $4.8 million, during the nine months ended June 30, 2025, which is in line with our previous year. As of June 30, 2025, we had total long-term debt of $23.3 million and cash in cash equivalents of $600,000, resulting in net debt of $22.7 million.

Speaker #4: Due to our solid operating results, capital expenditures during the nine months end of June 30th were $5.5 million versus $500,000 in the year ago period.

Speaker #4: The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exxon facility. Despite the increase in spend of over $5 million when compared to the nine months last year, we were still able to generate free cash flow of $4.8 million during the nine months end of June 30th, 2025, which is in line with our previous year.

Speaker #4: As of June 30, 2025, we had total long-term debt of $23.3 million and cash and cash equivalents of $600,000, resulting in net debt of $22.7 million.

Speaker #4: Net debt was down 3.5 million from the end of the second quarter 2025, despite elevated capital expenditures related to the Exxon expansion project. Reflecting the strong operating results and disciplined financial management.

Jeffrey DiGiovanni: Net debt was down $3.5 million from the end of the second quarter 2025, despite elevated capital expenditures related to the Exton expansion project, reflecting the strong operating results and disciplined financial management. As of June 30, 2025, Innovative Solutions & Support Inc. had total cash in availability under its line of credit of approximately $12.3 million. Our net leverage at the end of the quarter was 1.1 times. As Shahram Askarpour mentioned, on July 18, 2025, we entered in a new five-year, $100 million committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The credit agreement replaces our existing $35 million line of credit. The new facility provides an additional $65 million in expanded liquidity and an option subject to certain conditions to request up to $25 million in additional loan commitments under an accordion feature in the credit agreement.

Speaker #4: As of June 30, 2025, ISNS had total cash and availability under its line of credit of approximately $12.3 million. Our net leverage at the end of the quarter was 1.1 times.

Speaker #4: As Shahram mentioned, on July 18th, 2025, we entered in a new five-year $100 million committed credit agreement with a lending syndicate led and arranged by JP Morgan Chase.

Speaker #4: The credit agreement replaces our existing $35 million line of credit. The new facility provides an additional $65 million in expanded liquidity and an option subject to certain conditions to request up to $25 million in additional loan commitments under an accordion feature in the credit agreement.

Speaker #4: This improved flexibility better enables us to execute on our long-term growth strategy. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of the call.

Jeffrey DiGiovanni: This improved flexibility better enables us to execute on our long-term growth strategy. That completes our prepared marks. Operator, we are now ready for the question and answer portion of the call.

Speaker #1: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Chorus Call operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Van Zinderen with B. Riley Securities. Please go ahead.

Speaker #1: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Speaker #1: The first question comes from Jeff Van Cinderen with B. Riley Securities. Please go ahead.

Speaker #5: Hi, good morning everyone. I just wanted to touch a little bit on the gross margin outlook given the F-16 impact. What do you think is a normalized gross margin rate for you?

Jeff Van Zinderen: Hi, good morning everyone. I just wanted to touch a little bit on the gross margin outlook given the F-16 impact. What do you think is a normalized gross margin rate for you?

Speaker #5: So, hi, this is Jeff. You know, when we look ahead, our expectations are in the mid-forties, what we said before, depending on the mix of our products.

Jeffrey DiGiovanni: This is Jeff. When we look ahead, our expectations are in the mid-40s, what we said before, depending on the mix of our products. As you look at military, it is lighter gross margins. It really depends on the mix, but we are gauging in the mid-40s.

Speaker #5: As you look at military, it's, it's, it's lighter gross margins. So, it really depends on the mix. But, you know, we're gauging in the mid-forties.

Speaker #5: Okay. And then, I realize you have a new, facility, just wondering, what the targeted net leverage ratio, you're comfortable with at this point? Overall, depending on the size of the acquisition, we're comfortable around a net leverage ratio around three.

Jeff Van Zinderen: Okay. I realize you have a new facility. Just wondering what the targeted net leverage ratio you're comfortable with at this point.

Jeffrey DiGiovanni: Overall, depending on the size of the acquisition, we are comfortable around a net leverage ratio around 3.

Speaker #5: Okay. And that is, as a follow-up to that, can you speak a little bit more about your acquisition strategy? Do you have a pipeline?

Jeff Van Zinderen: Okay. As a follow-up to that, can you speak a little bit more about your acquisition strategy? Do you have a pipeline? How are you approaching targets? Are they typically more auction situations? Are they mostly Honeywell? Any other color on that would be helpful.

Speaker #5: How are you approaching targets? Are they typically more auction situations? Are they mostly Honeywell? Just any other color on that would be helpful. So in terms of, in terms of, yeah, we do have a pipeline, some of them are, are acquisitions that we are looking at potentially doing from Honeywell.

Shahram Askarpour: In terms of acquisitions, we do have a pipeline. Some of them are acquisitions that we are looking at potentially doing from Honeywell. Those are typically auctions. We are also looking at a number of smaller avionics companies that we are engaged in dialogue with. We are looking at probably doing some acquisitions of that nature if we can agree on a price that suits IS&S.

Speaker #5: Those are typically auctions. We also were looking at a number of smaller avionics companies that we are engaged in dialogue with.

Speaker #5: And, and we're looking at, probably doing some acquisitions of that nature. if we can agree on, on a price that, that, that, that suits ISNS.

Speaker #5: Okay. Fair enough. Thanks for taking my questions. Thank you. Thank you.

Jeff Van Zinderen: Okay. Fair enough. Thanks for taking my questions.

Jeffrey DiGiovanni: Thank you.

Shahram Askarpour: Thank you.

Speaker #1: Again, if you have a question, please press star then one. The next question comes from Gauchi Sri with Singular Research. Please go ahead.

Chorus Call operator: Again, if you have a question, please press star then one. The next question comes from Gowshi Sri with Singular Research. Please go ahead.

Speaker #6: Good morning. Can you hear me?

Gowshi Sri: Good morning. Can you hear me?

Speaker #5: Yes. Yes.

Jeffrey DiGiovanni: Yes.

Speaker #6: Star: Good morning, guys. My first question is, you mentioned the F-16 safety stock deliveries pulled forward into Q3. Will you reduce revenues from the line for the next two quarters?

Gowshi Sri: Yes.

Jeffrey DiGiovanni: Good morning, guys. The first question is, you mentioned the F-16 product line safety stock deliveries pulled forward into Q3 will reduce revenues from the line for the next two quarters. Can you help us frame the magnitude of that dip and whether there are other programs in the backlog that are positioned to compensate for it? Also, the Q3 product sales came in sequentially above Q2. Was this entirely due to the pull forward, or were there other program wins or price mix factors that lifted the product revenue?

Speaker #6: Can you help us frame the magnitude of that dip, and whether there are other programs in the backlog that are positioned to compensate for it?

Speaker #6: also, the Q3 product sales, came in sequentially above Q2. Was this, was this entirely due to the pool forward or were there other program wins or price mix factors that lifted the product, product revenue?

Speaker #5: Yeah, sorry, I can take a little bit of that. So, sequentially, a lot of it was through the F-16 and the pool forward. When we look ahead, as the equipment's getting transitioned to ISNS currently right now in our factory, you know, we're expecting nominal F-16 revenue for Q4 and Q1 potentially.

Jeffrey DiGiovanni: Yeah, sure. I can take a little bit of that. Sequentially, a lot of it was through the F-16 product line and the pull forward. When we look ahead, as the equipment is getting transitioned to Innovative Solutions & Support Inc. currently right now in our factory, we are expecting nominal F-16 product line revenue for Q4 and Q1 potentially. The equipment has got to be set up, it has got to be certified, it has got to be calibrated. We are working through that process as we speak.

Speaker #5: Because the equipment's gotta be set up, it's gotta be certified, it's gotta be calibrated. So we're working through that process as we speak.

Speaker #6: Okay, and my second question.

Jeffrey DiGiovanni: Okay. My second question is, I know the management has emphasized EBITDA margins as the key profitability metric. Given the Q3 gross margins, could you provide some context as to how you're thinking about the trajectory in gross margins over the next few quarters? Are there any structural or short-term factors that we should watch out that might lead to further compression from here, or do you believe that major headwinds have now played out? Any color on how quickly operational efficiencies or mixed changes might stabilize the margins would be helpful in modeling. Thank you.

Speaker #5: is, you know, I, I know the management has emphasized EBITDA margins as, as the key buffer to build to metric. But given the, the Q3, gross margins, could you provide some context as to how you're thinking about the trajectory in gross margins over the next few quarters?

Speaker #5: Are there any structural or short-term factors that could, that you, we should watch out that might lead to further compression from here or do you believe that major headwinds have now played out, any, any color on how quickly operational efficiencies or mix changes might stabilize the margins would be helpful in modeling?

Speaker #5: Thank you. Sure. So when we look at, you know, our gross margins, that's why we've been guiding conservatively throughout the year due to the lumpiness of the product mix.

Jeffrey DiGiovanni: Sure. When we look at our gross margins, that is why we have been guiding conservatively throughout the year due to the lumpiness of the product mix, more importantly, the F-16 product line. When we look forward, we are engaging in that 45% range for gross margins. That is kind of the target we are focused on.

Speaker #5: More importantly, the F-16. So, you know, when we look forward, we're engaging in that 45% range for gross margins. That's kind of the target we're focused on.

Speaker #6: Okay. Are you seeing any changes in defense budgets that might impact backlog execution in the next 6 to 12 months?

Jeffrey DiGiovanni: Okay. Are you seeing any changes in defense budgets that might impact backlog execution in the next 6 to 12 months?

Speaker #5: I think what we're seeing is, is, is a lot of, positive, positive feedback that we're getting from our defense contractors. as I just mentioned, we, we recently received the contract that was, partially partially, military program, which is based on a commercial platform.

Shahram Askarpour: I think what we are seeing is a lot of positive feedback that we are getting from our defense contractors. As I just mentioned, we recently received a contract that was partially a military program, which is based on a commercial platform. We should be seeing an increased level of interest from all aspects of the government and the military side of the business. Very encouraging.

Speaker #5: But, but we're, we're seeing an increased level of interest, from all aspects of, of, of the government and the military side of the business.

Speaker #5: Very encouraging. Okay. Any, any breakdowns into that backlog? Were there, were there some of that contained any multi-year military commercial, multi-year military retrofits? So, obviously that backlog includes some of the F-16 backlogs that, that, that we inherited, from Honeywell.

Jeffrey DiGiovanni: Okay. Any breakdown into that backlog, whether some of that contains any multi-year military commercial, multi-year military retrofits?

Shahram Askarpour: That backlog includes some of the F-16 product line backlogs that we inherited from Honeywell. There is a small amount of it for these multi-year programs because typically, we only put things in a backlog where we have a purchase order with a delivery date on it. Some of the long-term agreements do not; they are kind of forecast, and that we do not put in a backlog.

Speaker #5: but, but there is, there is a small amount of it, for, for these multi-year, programs. Because typically we only put things in the backlog where we have, a purchase order with a delivery date on it.

Speaker #5: And, some of the long-term agreements don't, they, they kind of forecast. and that we, we don't put in the backlog.

Speaker #6: Okay. And just one last question. With that $100 million credit facility, giving you sec, giving you significant headroom, are you prioritizing, acquisitions to, fully leverage your Exxon facility?

Jeffrey DiGiovanni: Okay. I guess my last question, with that $100 million credit facility giving you significant headroom, are you prioritizing acquisitions to fully leverage your excellent facilities? Is that how we're supposed to think about it?

Speaker #6: Is that how we're supposed to think about it?

Speaker #5: organic growth is, is, is a significant part of our growth strategy. it's, obviously acquisitions, you, you, you, you see quick, you, you see quick results.

Shahram Askarpour: Organic growth is a significant part of our growth strategy. It's, obviously, acquisitions; you see quick results when you do an acquisition. Organic growth, it's more of a long-term objective, but certainly, a lot of that capacity will be taken with our organic growth.

Speaker #5: When you do an acquisition. organic growth, it's, it's more of a long-term objective. But, you, you know, certainly a lot of that capacity will be taken with our, with our organic growth.

Speaker #6: Gotcha. Thank you. Thank you, guys. That's all I had. Oh, thanks.

Jeffrey DiGiovanni: Gotcha. Thank you. Thank you, guys. That's all I had. Bye.

Speaker #1: I would like to turn the conference back over to Shahram Askarpour for any closing remarks.

Chorus Call operator: I would like to turn the conference back over to Shahram Askarpour for any closing remarks.

Speaker #5: Thank you, operator, and thank you all for your time and interest in ISNS. have a good day.

Shahram Askarpour: Thank you, operator, and thank you all for your time and interest in IS&S. Have a good day.

Chorus Call operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.