Innovative Solutions and Support Inc (ISSC) 2023 Q4 法說會逐字稿

Welcome to the Innovative Solutions and Support fourth quarter and year end fiscal 2023 financial results conference call. (Operator Instructions) Please note this event is being recorded I would now like to turn the conference over to Shahram Askarpour, CEO. Please go ahead.

Good morning. This is Shahram Askarpour, Chief Executive Officer of Innovative Solutions and Support.

Welcome to our conference call to discuss our performance for the fourth quarter and full year of fiscal 2023, current business conditions and outlook for the coming year. Joining me is Rell Winand, our CFO.

Before we begin, I'd like relative to provide cautionary statements about forward-looking information.

Thank you, Shahram, and good morning, everyone. I would remind our listeners that certain statements made and matters discussed in the conference call today, including those about new products and operational and financial results for future periods contain forward-looking information. Forward-looking statements are subject to assumptions, risks and uncertainties that could cause actual results to differ materially either better or worse. From those discussed.

I specifically call our investors' attention to our disclaimer regarding forward-looking statements at the end of the earnings release, which was included in a Form eight K filed yesterday, which disclaimer along with other public filings referred, and it describes these assumptions, risks and uncertainties I also remind our listeners that plans and expectations we express speak only as of today's date, and listeners should not place undue reliance on any forward looking statements.

Now I'll turn the call back to Shahram.

Thank you, Rell. I will begin today with remarks on our performance in the fiscal fourth quarter and full year 2023, followed by comments on our long-term growth plan and strategy, including the recent Honeywell of products purchased and license. I will then turn the call back to Rell, who will take us through the financials.

For the quarter, revenues were up 79% with net income increasing 63% from a year ago. Our fiscal year 2023 results were driven by continued organic growth in our production contracts and aftermarket sales as well as a full quarter of Honeywell product sales, which we acquired at the end of June. As anticipated, the number of products supported our strong margins, which were up sequentially from the third quarter and similar to a year ago.

We have also continued to generate strong cash flow, which contributed to reduce the borrowings used for our June acquisitions. This strong fourth quarter led to our fifth consecutive year of revenue growth, strong cash flow and another increase in the full year. Our cash has also enabled further pay down of our borrowings in the current quarter despite the heavy one-time significant expenses incurred for auditing fees, legal expenses and costs of hiring and training, new technical personnel in relation to that acquired product.

We are fortunate to have a great relationship with our bank PNC, and they have been very supportive of our growth strategy. This week, we converted our $20 million term loan for revolving line of credit that has enabled us to reduce our total debt from $20 million to less than $12 million. It is noteworthy that we achieved the strong fourth quarter growth results despite the additional burdens on the which we operated over the past year by amending our by-laws negotiating the bank agreement as well as facilitating and subsequently integrating a substantial acquisition.

Despite these nonrecurring events, our team delivered financial performance, it maintained our track record of steady, profitable growth. Our goal now is to leverage this momentum to sustain this growth over both the near and longer term organically and through additional acquisitions. To that end, we have several plans in motion organically. We have plans to continue further product innovation and to sustain our high level of investment in research and development, especially in the area of cockpit automation that will ultimately lead to single pilot operation in large transport aircraft.

Our value proposition is to focus on products that continue to reduce pilot workload and improve safety. For instance, we plan to add capabilities to existing technologies such as our flat-panel displays to include automated emergency checklists and pilot alerting systems. We expect these technologies to serve as stepping stones that will help prepare the market for single pilot flights and then transport aircraft.

We were recently awarded a development contract for the second generation of UMS. four pillars. We expect that second generation technology will expand capabilities such as AI and improve diversity and versatility of the UMS. in the process. We anticipate this will create new platforms. It can be adopted for other aircraft and eventually constitute another step along the path to autonomous flight. In order to maintain our leadership in cargo retrofit business, we are in the process of adding new features to our products that we expect will allow increasing content and selling price protecting this business's overall revenue in the face of any potential slowdowns in the cargo conversion market.

Our overall OEM business has continued to do well with Textron, and we have continued to pursue additional platforms in the military and regional airline markets across the board. We are increasing our business development activities by working to grow our sales and marketing group, both domestically and internationally acquired Honeywell products have put us in front of a new set of buyers, which we believe our sales team can use that relationship to introduce them, so a broader range of products.

Secondly, we plan to leverage acquired technologies to enhance and expand our product offerings. As an example, with the Honeywell product lines, we are we now have our own radios and the adjacent technology capabilities we previously had to buy on the open market to integrate into our products. Acquisitions such as this are complementary to our existing product portfolio, and we'll likely accelerate our ability to develop new technologies needed or eventually achieve autonomous flight.

As a direct result of this acquisition, we believe that we are on pace to achieve annualized 40% top-line growth once the Honeywell integration has been fully integrated completed, those integrations are making stayed steady progress as planned this quarter and next we are moving inventory, installing the purchased equipment in our facility and training our employees, having anticipated some of the disruptions arising from the integration over the first and second quarters of FY 2024. And by customer requests, we accelerated some of the deliveries into the September 2023 quarter. Consequently, we expect results in the current quarter and the next to be weaker than the results of the Q4 2023.

As a second part of our growth strategy, we continue to evaluate other acquisitions, opportunities and plan to execute additional complementary acquisitions as these opportunities arise.

Thank you for your time and interest, and we look forward to updating you in the upcoming quarters. So I will turn the call over to Rell for a closer look at the numbers.

Thank you, Shahram, and thank you all for joining today. I will review our financial results for the fourth quarter and full year fiscal 2023. Revenue in the fourth quarter was semi -- was up 79%, primarily due to the contribution from the sales of products purchased and licensed from Honeywell. As Shahram noted, revenues in the fourth quarter included the pull forward of Honeywell products, some of which would have otherwise been delivered in the first and second quarters of 2024.

Work was accelerated in the September quarter to meet our delivery commitments before production. It was anticipated to be slowed by the movements of inventory and equipment, as well as other disruptions that are typical when undertaking an integration of this size and complexity. As a result, we expect results in the current quarter and next being weaker than the results of the Q4 2023.

Fourth quarter gross margin was 62%, a sequential improvement from the third quarter and unchanged from the same quarter a year ago. Margins reflect both the better absorption of our fixed overhead as a result of revenue growth as well as the impact of the margins of the Honeywell products. In the fourth quarter of fiscal 2023, research and development expense increased in absolute terms, consistent with our commitment to innovation, but decreased relative to sales.

As Shahram previously mentioned, we anticipate that research and development will continue to increase as the company works to develop new features and capabilities to our existing product base. As the Honeywell, product line integration continues into the spring, we expect expenses to remain somewhat above what we would see as our normalized run rate.

Fourth quarter fiscal 2023 increase in selling, general administrative expenses reflect onetime costs associated with the Honeywell transaction, including higher legal, accounting, professional fees and amortization expense. In addition, selling, general and administrative expense in the fourth quarter of fiscal 2022 was reduced by $1.2 million due to a gain on the sale of the company's PC-12 aircraft.

Interest income was up in the quarter due to an increase in interest rates on our interest-bearing cash deposits. Interest expense in the quarter reflects costs associated with the borrowings used to consummate the Honeywell transaction. We expect interest interest expense to trend down, not only as interest rates are anticipated to fall, but also due to our continued pay-down of borrowings under the terms of revolver facility.

Tax expense in the fourth quarter of fiscal 2023 was $0.7 million compared to $0.76 million in the fourth quarter of 2022. Fourth quarter net income was $2.6 million or $0.15 per share, up from $1.7 million or $0.09 per share in the fourth quarter of fiscal 2022. Backlog at September 30, 2023, was $13.5 million and new orders in the fourth quarter of fiscal year 2023 for approximately $12.7 million.

As always, quarterly orders can vary due to a number of factors are not meant to provide an indicator of future revenues. Virtually all the Honeywell revenues are from intra-quarter book-and-ship orders that are not included in the backlog. Cash at September 30, 2023, was $3.1 million, up about $500,000 from June 30.Over the three months ended September 30, 2023, we also reduced our term loan debt by $500,000.

This week, the company converted its $20 million term loan into our $30 million revolving line of credit as it was combined with the company's $10 million revolving line of credit. Under the terms of the agreement, our cash balance will be swept daily against the outstanding revolver balance, thereby reducing interest expense. This revolving line of credit is expected to allow the company greater flexibility when the next acquisition opportunity presents itself.

As previously noted, cash flow has continued to improve into the fiscal 2020 fourth quarter, including the collection of a significant amount of receivables and the sale of the company's King Air aircraft for $2.3 million. So that our current net debt position has been reduced to less than $12 million. For the year, the company generated $2.1 million of cash flow from operations.

With that, operator, we're ready for questions.

(Operator Instructions)

Theodore O'Neill, Litchfield Hills Research.

Thank you very much. A couple of a couple of questions. You may have covered this first question in your presentation, when you announced the acquisition of the Honeywell business, as I was looking through the unaudited pro forma combined statement of operation for the acquisition there wasn't anything in here for a for R & D and I was wondering what impact the acquisition is going to have R&D expense going forward and then more broadly, its impact the Honeywell integration impact on margins and SG&A.

So I guess to your first question, it's going to be very at least initially for the franchise and will only impact on the R&D and going forward as we go in to modify some of these equipment the year for this year, we're going to monetize all the designs and to make it more suitable to work closely with our equipment. It will require some R&D and those are not significant amount of dollars. So we are part of our IR&D programs that we run.

At the G&A, so G&A will be up a little bit. We're still incurring audit fees, legal fees relative this is not what it was in the fourth quarter, but it will still be somewhat a little bit elevated.

Okay, and Rell, can I read anything into the increase in accounts receivable from year over year?

Yeah. So the accounts receivable is up it all depends on when you ship things out, right? So right now, we had a lot of later shipments. We had a big quarter and the shipments went out later. And some vendors or customers are 45 days now. So that's we've been collecting at all. So that's really, as I said, helps in this in this quarter, but it's it's a little atypical for us, but it's a matter of timing.

Okay. Yes, it makes sense.

And then the customer concentration up for the year, is that share? Is that going to change much with the acquisition? (multiple speakers) top five customers.

To some extent, it will. I think there's going to be a couple of major customers being the channel partners that are going to (multiple speakers) Yes, so it will change.

[John Moran, MOD & Co].

The first question is just around the net debt number that you're reporting inter-quarter. Is that a sustainable level relative to the new size of the business absent any acquisitions or is that kind of well up and down?

It depends yes, it will go hopefully down as we generate more profitable and generate more cash is going to continue to come down. So I just gave you a snapshot of where we are relatively now. But as we generate more cash, it's going to become lower and lower to if we borrow again. But it it does sweep our account our cash and just net net net over time. So we expect it to keep decreasing.

(multiple speakers) oversimplify or two to read into it that we generated 8 million in cash since the closing of the the deal?

I agree did not

Mostly this now this quarter. Now when we collected receivables, we sold a plane. So it's really you're taking it from nine 30 right now into the now.

And meanwhile, we're spending money like drunken sailors on lawyers and like, and that's one of our peers of Honeywell's books here. I will not be accomplished.

No free lunch.

So the other question I had was around the of the backlog and new orders in there that you're reporting in the quarter for the legacy business, that does seem up fairly dramatically from where you were a year. What that's been I know it's gone up and down.

But is that is there something driving that in particular or I made it kind of the previous organic product lines, say, year to year were different this year because they got a big new contract from Carolina switch, which actually kind of guarantees us for another 15, 20 years on our platform and so many OEMs, but they give us POs in hand, they gave us POs. So so it's this is what it was this quarter.

So but that number, I don't know. I don't have it right for me. So your they were $12 million and $13 million given there was backlog backlog and new orders or something like that. I mean that was running at [seven eight nine]. That's mostly related Pilatus.

A lot of it is.

A lot of it is.

You got Sharon. I mean, it's a combination yet the volume is wireless.

Andrew Rem, Odinson Partners.

Sorry, gentlemen. Just on the kind of can you guys break out or provide a little bit more detail on the revenue how much was kind of legacy versus the Honeywell contribution?

It's kind of hard to do that on this call right now. I think our awareness becomes a bit. We'll have to bring into it. There will be there with no within as to exact contribution of the hanging wall.

You guys can break that out in the 10 K.

I think the 10 K we have to ending this year and then going forward, I believe it'll be one.

Believe it or not the auditors are still working on it. Certainly I never imagined without all.

Okay, perfect. And on R & D. Can you guys maybe just give updated guidance, but last year, I think you guys said you wanted to kind of push R & D to kind of 13%, 14% but given the honey well, it doesn't sound like it will necessarily consume a lot of R & D resources. But can you maybe just reframe how you're thinking about R&D?

Yes. So so I guess 13% of $40 million-odd is still less than 10% of $40 million-odd charge. SO as a percentage of revenue, our R&D percentage is going to go down, which are in terms of dollar value, be increasing the size of our engineering apartments and using some of some of the revenues that come from these higher flow rates to further our internal growth strategy.

Yes, so it'll grow and it'll go higher in absolute terms, but as a percentage of sales grow and it's going to be faster than the increase in the. So you'll see that relationship go down.

Okay. And then also in the queue or you guys break out some of these, what sounds like kind of either short term or one-time related items? Both in, yeah, I guess in the fourth quarter specifically.

Well, it's kind of what I said here, but yes, there will be more detail in the MD&A, you know, the comparison that will be it will be addressed scenarios.

I think the Q4 was just over $1 million of one-time expenses in this Q4.

That's really you have if you look at it as the difference in -- 1.2 back and look at it, that's really the (multiple speakers)

I can arise in the quarter that we are in. Is that going to be any better.

I will be as high it be on.

We've got more than an army of people, second charge market. Okay.

And then can you guys give an update in terms of on the integration, kind of what have you completed and what is left to do so?

So one of the product lines is completely here. We've got our people trained and we are actually performing on, and that's on the radio side from the IOU side, we're going to do that in the transfer of all the equipment and the training and all of that it's going to occur after the holiday. And the reason for that is that that product line is mainly for the air transport market. And the airlines nerves were very nervous in doing that and in November, December time period because they felt that it may impact their ability to.

So we work our team works on a daily basis with the Honeywell integration team, and we evaluate each one of these requests from the customers on a daily basis to make sure there's no disruption to the operation. Obviously, this slowdown and that we have that occurred during this quarter because on the radio side, when you think about it. They had to pack all of these test equipment, inventory them, make sure they have a right shift them here, unpack them here.

That has to be regarded idea. We have to have the team come here and make sure everything works right onto another final stage of drilling into Aviva during that period. Nothing happens.

This is why the pull forward in Q4 think.

So I mean, the same thing is going to happen next quarter in the year, your January to March quarter with the IOUs stuff where again, they have to be passed and set up. All the centers are items. That's the process.

Doug Ruth, Lenox Financial Services.

Good morning. Congratulations on a strong quarter. I have three questions. What is the company's relationship now with the Hendrick family?

I suppose they have been independent. It trusts that are managed by different people within the Henry family that each on some number of shares here and there. So I'm the trough of the year. The state also own some shares, but none of them are, I guess, significant enough to have of reporting.

Yes, they're below the requirement on them, they're below the threshold and all managed by different people. So that's the way it is.

But there's no representation on the Board of Directors, and they're not that there's not much of a there's not too much of a relationship with any family member at this point then?

No, (technical difficulty) or the representatives on the Board.

And then the second question is the relationship with the large shareholder, Christopher Harborne born on his is he involved as you asking for a board seat? Or is there any interaction with the Company and his entity? (technical difficulty) Hello.

No, no, yes, no, no, it hasn't been very much a business relationship that while the Company may well supplier to a minimum. And we and I have every confidence in this business always because I'm okay.

Okay. And then the final question, how are the Board members and the management team. Are you folks eligible to buy stock at this point in time? Or are you are you in a blackout period, maybe you could offer some advice there?

The blackout periods. So 50 days before the end of the quarter because this blackout period and then you can back out period, it's not yet the third business day earnings lateness, we don't want to go over them again so that you don't get a little more accurate.

Roger Goldman, Private Investor.

Hi, guys. First of all, congratulations on a really well done. Seems like it's going exactly according to the way you told us it would go and in that connection, any surprises. So far with the inner integration, either good news or bad news?

Surprises from from my end, you're navigating a large company and the leverage has crept up.

It's a challenge.

I knew it was going to be a challenge, but you know it internal communications regarding hydro, well, you're talking to a group of people that you signed an agreement with and we all understand what this, but then at the end of the day, you're getting information from some guys down there somewhere and then a they have their own opinion yet.

Yes, a lot of levels may take some of the higher financing than a lot of lessons here this summer on aggregates that, you know, in better ways of making this happen smoothly. Having said that we were told by folks at Honeywell that this has been by far the smoothest transition that they've done any of these situations.

So relative I guess.

Yes, yes, yes. Well, you know, a lot of people and companies have made a lot of money doing just what you're doing, which is unencumbering a division from all of the corporate. I don't want to say nonsense, but the global corporate structure inherent in being a small division of a big company and sometimes there are financial surprises, sometimes good, sometimes bad. And with that that don't rise to the level of well, we've got to redo the contract or we've got to walk away. But nonetheless, they're kind of shocking. And what I'm what I'm hearing you say is it's more difficult managerially, but financially it right on target.

We have not had any negative surprises on that.

Okay. That's that's a good way to say, and I hear you second, secondly, just that I think the bank I was going to ask you a question about the bank financing. It sounds like you're generating a ton of cash and you're using it to pay down a ton of debt. The bank would be cooperative if you made another acquisition. And then net debt went up again substantially.

It's a question of conversation with them and they would then they would be very happy to provide a space on the EBITDA of the next business that we have are right. You're to see our plan is standalone. And for that EBITDA, that then later on, we can convert a deal to line it up. They've been burned on our So they've been very supportive.

And you're going to save probably $0.5 million to $1 million bucks in interest this year. So good job on that comes. And do you have do you feel that you have the management to make another acquisition in the next year?

Yes, we do.

I was hoping for a really simple answer like that banks then. And last question is I know Mike left anything there we should know?

I think related to the company, it was a process of Xenogen.

Okay. All right, good. And thanks for stepping back and run. And this is a this is a critical critical time for the Company. Critical critical time.

Anyway, just want to end by saying, as you guys know, I've been a first, my dad and now my sister and I've been long longtime shareholders, and this is what we've been hoping for for years and years. So just well done well, but you guys are on your way to something really building a fabulous company here.

Thank you for your support.

Thank you very much and have a good Happy Holidays.

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.