Release Date: May 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenues increased by 46% compared to the same quarter last year, indicating strong sales performance.
- Net income, excluding nonrecurring expenses, also showed an increase from the previous year, highlighting profitability improvements.
- Successful integration of Honeywell's product lines is expected to enhance financial performance and customer base expansion.
- Stable revenue and margins from large OEM contracts, such as with Pilatus, Textron, and Boeing, provide a reliable financial base.
- Innovative Solutions and Support Inc (ISSC, Financial) is actively pursuing new market opportunities, particularly in the military sector, both domestically and internationally.
Negative Points
- Delays in the completion of delivery of inventory and test equipment from the Honeywell acquisition impacted margins and revenue.
- Gross margin decreased due to increased material costs and integration challenges with the Honeywell acquisition.
- Higher expenses reported, with cost of sales and SG&A expenses both showing significant increases compared to the previous year.
- The integration of Honeywell's product lines has created production inefficiencies and is currently yielding lower margins than expected.
- The company is experiencing a transitional period with significant changes, including a new CFO and integration challenges, which could pose risks to smooth operations.
Q & A Highlights
Q: Could you provide a bit the financial expectation for 2024 fiscal year, especially I'm interested in the margins because I look at gross margin that decreased a little bit from quarter a year ago due to Honeywell products acquisition?
A: (Jeffrey DiGiovanni - Chief Financial Officer) Yes, we expect 40% growth from a year ago, including both inorganic and organic growth, as well as 75% EBITDA growth. The synergy delays with the Honeywell acquisition are currently impacting margins. As inventory and test equipment come in, we expect those margins to improve once the synergies are fully effective.
Q: What financial effect do you expect from expanding UMS to PC-24? What are the existing product lines and how do they enhance organic revenue in the foreseeable future?
A: (Shahram Askarpour - President, CEO) The UMS for PC-24 is part of a production contract with Pilatus, and we are also developing a second generation UMS. This new generation will have more powerful microprocessors and additional capabilities, making it applicable to other aircraft platforms as well. This expansion is expected to enhance our organic revenue.
Q: Could you summarize the one-time costs in the quarter and what the margins would have been without those one-time costs?
A: (Jeffrey DiGiovanni - Chief Financial Officer) The one-time costs were related to acquisition and CFO transition fees. The margin impact from the Honeywell synergies is still being quantified as we work through transition issues. Gross margins were lower due to the amortization of goodwill and higher cost of goods sold from outsourced sub-assemblies, which we plan to start manufacturing in-house to improve margins.
Q: How long will it take to burn off the Honeywell inventory that you acquired?
A: (Shahram Askarpour - President, CEO) Some of the faster-moving inventory will burn off quickly, while slower-moving inventory may remain for a few years. We expect a gradual improvement in margins as we transition to manufacturing our own sub-assemblies.
Q: When do you expect to start manufacturing the sub-assemblies in-house?
A: (Shahram Askarpour - President, CEO) We anticipate starting the in-house manufacturing of sub-assemblies by the fourth quarter and expect significant contributions to margins in fiscal 2025.
Q: After the two-day period, will the management team and the Board of Directors be eligible to buy stock, or will there be a blackout period?
A: (Shahram Askarpour - President, CEO) Two days after today, the blackout period will be over, allowing the Board of Directors and management team to purchase additional shares if they choose to.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
