Innovative Aerosystems (ISSC) Earnings Call

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DATE

Thursday, February 12, 2026 at 10:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Shahram Askarpour
• Chief Financial Officer — Jeffrey DiGiovanni
• Partner, Valem Advisors — Paul Bartolai

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TAKEAWAYS

• Revenue -- $21,800,000, representing 36.5% growth driven by increased commercial aftermarket and higher service revenue.
• Adjusted EBITDA -- $7,400,000, up 140.9%, supported by favorable revenue mix and improved operating leverage.
• Net Income -- $4,100,000 compared to $700,000 in the prior year period.
• GAAP Diluted EPS -- $0.22, increasing from $0.04 in the prior year.
• Adjusted Net Income -- $4,500,000 versus $1,600,000 last year; Adjusted Diluted EPS -- $0.25 compared to $0.09.
• Gross Profit -- $11,900,000, up 80% from $6,600,000, with Gross Margin of 54.5% versus 41.4%.
• Commercial Aftermarket Sales -- Increased $5,000,000, attributed to new product traction and stronger air transport demand.
• Product Sales -- $13,600,000, up from $10,000,000, led by aftermarket upgrades to commercial markets.
• Service Revenue -- $8,200,000, increasing from $6,000,000, mainly from IRUs and radio products; partially offset by a decline in legacy services.
• Operating Expenses -- $5,600,000, rising from $5,300,000; percentage of revenue decreased to 25.6% from 33% due to operating leverage.
• Backlog -- approximately $75,000,000 as of December 31, 2025, following approximately $19,000,000 in new orders.
• Free Cash Flow -- $7,000,000, up from $1,600,000, reflecting strong cash conversion and limited capital investment.
• Capital Expenditures -- $1,100,000, increasing from $300,000, primarily for facility expansion.
• Total Debt -- $23,800,000; Cash and Cash Equivalents -- $8,300,000; Net Debt -- $15,500,000.
• Total Cash and Credit Line Availability -- approximately $83,300,000 at quarter end.
• Net Leverage -- 0.5 times, described as modest with expanded credit facility flexibility.
• Q2 Revenue Guidance -- Projected at $20,000,000 to $22,000,000, with management expecting sequential growth through the year.
• Organic Full-Year Revenue Outlook -- Expected to be "essentially flat" due to revenue pull-forward from the F-16 program into fiscal 2025.
• F-16 Program -- Digital flight control computer production resumed; F-16 platform revenues declined $1,200,000 during manufacturing transition but are projected to ramp later this year.
• Pilatus UMS Transition -- Revenue declined $1,000,000 due to unit migration; new UMS platform production underway with mid-2026 delivery expected.
• M&A Pipeline -- Management reiterated a disciplined approach, observing an increasingly active pipeline but only pursuing acquisitions aligned with strategic objectives.
• IA NEXT Strategy -- Management aims for $250,000,000 long-term revenue and 25%-30% adjusted EBITDA margins, leveraging both organic and inorganic growth.

SUMMARY

Management confirmed manufacturing transitions and timing of F-16 and Pilatus product lines affected segment revenue during the quarter, though operational resets are set to unlock growth in the coming quarters. The company resumed full-scale production of the digital flight control computer for the F-16 program and expects recertification and production of the improved programmable display generator within the current quarter. Ongoing integration delays for F-16 subassembly insourcing were attributed to extended coordination with Lockheed Martin and the U.S. government but are anticipated to yield improved, consistent margins when implemented in late 2026.

• Askarpour noted significant traction in air transport aftermarket driven by sales of newly developed products, specifically highlighting the ICAS system and LPV upgrades for Boeing 757/767 aircraft.
• Management stated, "backlog as of December 31 was approximately $75,000,000," positioning the company for sustained order visibility.
• The UMS (Utility Management System) platform achieved test flight completion and initial production, with deliveries to Pilatus targeted for mid-year; shifting production timing caused a near-term dip in business jet revenue.
• Operating leverage benefited expense ratios despite investments in engineering, sales, and services, as lower depreciation and amortization offset some outlays.
• Pricing discipline in M&A resulted in management stepping away from prior acquisition opportunities after valuation expectations diverged from strategic fit.

INDUSTRY GLOSSARY

• UMS (Utility Management System): Integrated aircraft systems platform for centralized monitoring and management of flight, power, and environmental subsystems.
• IRUs (Inertial Reference Units): Avionics components providing aircraft position and attitude information by integrating accelerometer and gyroscope data.
• ICAS (Integrated Communications and Alerting System): Avionics upgrade platform delivering centralized messaging and alerting functions for cockpit crew.
• LPV (Localizer Performance with Vertical Guidance): A GPS-based approach technology supporting precision aircraft landing by providing both lateral and vertical navigation guidance.
• OEM (Original Equipment Manufacturer): Aerospace sector designation for companies that design and assemble aircraft or critical aircraft systems supplied to end customers.

Full Conference Call Transcript

Operator: Good day, and welcome to the Innovative Solutions and Support, Inc. First Quarter Fiscal 2026 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. 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 Valem Advisors. Please go ahead. Thank you. Morning, everyone, and welcome to Innovative Solutions and Support, Inc. First Quarter Fiscal 2026 results conference call. Leading the call today are our CEO, Shahram Askarpour and CFO, Jeffrey DiGiovanni.

This morning, we issued a press release detailing our fiscal 2026 first quarter operational and financial results. This release is publicly available in the Investors section of our corporate website at www.iascorp.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.

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 an update on our strategic framework, followed by a financial update from Jeffrey. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I will now turn the call over to Shahram.

Shahram Askarpour: Thank you, Paul, and good morning to everybody joining us on the call today. I am pleased to report that we delivered a strong start to our fiscal year 2026 driven by organic growth across revenue, net income, adjusted EBITDA, as well as exceptional free cash flow generation. First quarter revenue grew 37% versus the prior year period on increased commercial aftermarket demand and service activity, while adjusted EBITDA grew 141% reflecting a more favorable revenue mix and improved operating leverage consistent with our strategic focus. We continued to make important progress under our IA NEXT long-term value creation strategy during the first quarter, keeping us on track to deliver both on our near-term and long-term financial targets.

As a reminder, our IA NEXT strategy prioritizes profitable growth, sustained operational excellence, and disciplined capital allocation as key drivers of long-term value creation. This strategy forms the foundation that will enable us to deliver on our long-term target of $250,000,000 in revenue and adjusted EBITDA margins between 25% to 30% through a combination of both organic and inorganic growth. During the first quarter, we completed all required recertification and resumed full-scale production of the digital flight control computer in support of the F-16 program at our Exton facility as planned.

The recertification and resumption of production of the improved programmable display generator is planned for the current quarter and we remain optimistic regarding the long-term growth potential of this platform. The F-16 remains a critical asset for our military as well as many of our allies across the world, and we remain encouraged by the long runway of growth we see ahead. In addition, we still expect to begin insourcing the F-16 product line subassemblies in late 2026. This initiative should contribute to improved and more consistent margins related to these products moving forward. While we are excited by the opportunity for our F-16 platform, we also remain encouraged by the growth potential for our broader defense business.

We have made significant investments to position our business as a mission-critical partner within the defense supply chain and believe that our investments, certifications, and relationships, together with a strong backdrop for defense spending, stand to benefit IS&S given our deep inside-the-cockpit expertise. At a product level, we continue to advance our progress towards autonomous flight through our next-generation flight deck, Liberty, with our UMS. Recall that the UMS is an advanced aircraft systems management platform designed to monitor and control multiple aircraft subsystems, from flight controls to environmental and power systems in a unified intelligent architecture. We have completed test flights with our new UMS platform on the Pilatus PC-24 and more recently have begun unit production.

We expect to begin delivering the new version to Pilatus in mid-2026. As it relates to inorganic growth, we remain focused on pursuing complementary, accretive acquisitions that expand our capabilities, increase our content per aircraft, position us to realize significant recurring revenue streams, and increase our access to proprietary IP and technologies that enhance our unique value proposition. Historically, for those less familiar, our approach has centered on acquiring aerospace and defense avionics product lines or businesses with significant aftermarket potential. As we enter 2026, our acquisition pipeline has become increasingly active and we continue to evaluate a number of potential opportunities.

We remain disciplined in our approach focusing on transactions that advance our strategic objectives and we look forward to updating you on our progress. In summary, fiscal 2026 is off to a strong start with solid operating results and continued progress across our strategic initiatives. We remain committed to our long-term strategy with an ongoing focus on delivering value for our shareholders, much as we have in recent years. With that, I will now turn the call over to Jeffrey for his prepared remarks.

Jeffrey DiGiovanni: Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our first quarter performance, including a discussion of working capital, our balance sheet, and our liquidity profile at quarter end, and conclude with comments on our outlook for the business, which remains positive given current demand conditions. We generated net revenues of $21,800,000 in the first quarter, up 36.5% from the first quarter last year, driven by growth in our commercial aftermarket business and higher services revenue. As Shahram discussed, we resumed full-scale production of the digital flight control computer in support of the F-16 at our Exton facility during the first quarter.

The recertification and resumption of production of the improved programmable display generator is planned for the current quarter. That said, revenue during the first quarter was negatively impacted by this manufacturing transition, with our F-16 revenues down modestly from last year by approximately $1,200,000. However, we remain on track for a ramp in our F-16 revenues as we move through the year. Additionally, we faced some temporary headwinds in our business jet markets as we gear up to migrate Pilatus to our new UMS 2 platform, thus leading to a decline in revenues of approximately $1,000,000 during the quarter while this transition moves through production.

Product sales were $13,600,000 during the first quarter, up from $10,000,000 during the same period last year, driven primarily by stronger volumes of aftermarket product upgrades to commercial markets that include UPS and air transport. Service revenue was $8,200,000, up from $6,000,000 in the same period last year due to growth in service volumes related to the IRUs and radio products line, partially offset by a small decline with our legacy service customers. Gross profit was $11,900,000 during the first quarter, up from $6,600,000 reported in the same period last year, an increase of 80%. The strong growth was driven by increases in revenue and a more favorable mix of products within our commercial aftermarket business.

As a result, our first quarter gross margin was 54.5%, up from 41.4% in the same period last year. As we have stated in recent quarters, we continue to expect our gross margins to be in the mid-40% range over the course of the year, with some quarterly fluctuations based on mix, especially as we continue to grow our military and OEM businesses. Commercial aftermarket, which by nature has higher gross margins as compared to military and OEM businesses, increased approximately $5,000,000 over the prior year quarter. Operating expenses during 2026 were $5,600,000, an increase from $5,300,000 during the same period last year.

Despite our strong revenue growth, operating expenses as a percentage of revenue were 25.6% compared to 33% in the same period last year. The increase in operating expenses was primarily driven by investments to support growth, including additional headcount in engineering, sales, and services as we have highlighted in recent calls, offset by lower depreciation and amortization expense. Net income for the quarter was $4,100,000 as compared to $700,000 last year. GAAP earnings per diluted share of $0.22 increased from $0.04 last year. Adjusted net income, which includes the same adjustments made to adjusted EBITDA in addition to an adjustment for amortization of acquired intangibles, was $4,500,000 for the quarter as compared to $1,600,000 last year.

Adjusted earnings per diluted share of $0.25 increased from $0.09 last year. Adjusted EBITDA was $7,400,000 during the first quarter, up from $3,100,000 last year, an increase of 140.9% largely due to our revenue growth and the more favorable revenue mix. Moving on to backlog, new orders in 2026 were approximately $19,000,000 and backlog as of December 31 was approximately $75,000,000. Backlog represents the value of contracts and purchase orders less the revenue recognized to date on those contracts and purchase orders. The backlog includes committed purchases and excludes potential future sole source production orders from products developed under the company's engineering development contracts programs.

Now turning to cash flow, during the first quarter, cash flow from operations was $8,200,000 compared to $1,800,000 in the year-ago comparable period, driven by our solid operating results and financial discipline. Capital expenditures during 2026 were $1,100,000 versus $300,000 in the year-ago period. Despite the increase in capital spending, primarily related to the building expansion, compared to last year free cash flow was $7,000,000 during the first quarter, up from $1,600,000 in the previous year. Our strong free cash flow reflects the limited capital needed to grow our business, which results in strong free cash flow conversion.

At the end of 2026, we had total debt of $23,800,000 and cash and cash equivalents of $8,300,000, resulting in net debt of $15,500,000. As of 12/31/2025, we had total cash and availability under our credit line of approximately $83,300,000. Our net leverage at the end of the quarter was 0.5 times. Our modest leverage combined with our availability under our expanded credit facility gives us significant financial flexibility to execute on our strategic initiatives. Before we move into our Q&A session, I would like to provide our current thoughts around the outlook for the remainder of fiscal 2026.

As previously disclosed, we continue to expect organic revenue to be essentially flat year over year given the pull forward of revenue related to the F-16 production and service revenue from fiscal 2026 into fiscal 2025 that we discussed last quarter. When we think about our cadence for the balance of the year, we expect second quarter revenues to be in the range of $20,000,000 to $22,000,000, building steadily on a sequential basis as we move through the year. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone 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 2. To assemble our roster, the first question comes from Robert Brooks with Northland Capital Markets. Please go ahead.

Robert Brooks: Hey, good morning, team. Thank you for taking my questions. First, the organic growth you posted in the first quarter is very impressive, and I wanted to dive a little bit deeper into that. Could you discuss what products or specific aircraft retrofits drove the increase in commercial aftermarket demand and sales?

Shahram Askarpour: Sure. So in terms of this, it was mainly towards the air transport side of things. We have had some sales of products that we developed and certified roughly last year that are beginning to gain traction, like the ICAS system for the 757/767. We have developed LPV for the 757/767 as well as some software upgrades to update the magnetic variations. So it was a combination of increased sales on the air transport side from new products that we have developed over the last couple of years.

Robert Brooks: Got it. And then, following up on that, it seems like a lot of it was new demand generation, right? I guess what I am trying to get at is whether there was any pull-forward in demand, because I know, Jeffrey, you ended the remarks by saying organic revenue is expected to be flat for the full year 2026. Obviously, you just posted a great quarter of growth, so I am just trying to reconcile what happened in the first quarter and then what will play out through the rest of the year.

Shahram Askarpour: So again, last year we had significant growth in our revenue, which factors into the basis for the organic growth of this year. The first quarter was very strong on organic growth, but when we look at our business model for 2026, we still believe that our organic growth is going to be in the single digits and will be augmented by acquisitions that we are contemplating.

Robert Brooks: Got it. You mentioned you expect revenue related to the F-16 platforms to scale through the year. Is that as simple as your backlog indicating that, or is there something else driving it? You also mentioned in the press release growth opportunities related to the F-16 platform, and I was curious to hear what those growth opportunities look like.

Shahram Askarpour: For your first question, on the F-16 platform, we completed the digital flight control computer integration into our system around the end of fiscal 2025. So Q1 was a full load of digital flight control computers that we delivered to Lockheed. The integrated display generator, the IPDG, is being integrated into our system now, so we will see growth in revenue coming from that as it gets integrated and we start delivering from here. The opportunities for growth on the F-16—if you listen to Lockheed, they said they are going to build another 300 a day.

Also, we are seeing a lot of RFPs coming in from Lockheed as well as the U.S. government for subassemblies as well as full units, which indicates that there will be future growth from the F-16 platform for us.

Robert Brooks: Understood. Congrats on a great quarter. I will hop back in the queue.

Paul Bartolai: Thank you.

Operator: The next question comes from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

Greg Palm: Yes, thanks. This is Danny Eggerich on for Greg today. I appreciate you taking the questions. Maybe just hitting on the quarter—you had provided guidance with just a couple weeks left in the quarter and then saw the upside that we saw there. Any way to dig in further on what you saw the last few weeks and what surprised you to the upside?

Jeffrey DiGiovanni: You mean in terms of what we said last time and what we hit? Timing of shipments sometimes—POs came in sooner than we expected from some customers as they were clearing their year-end.

Greg Palm: Okay, got it. That makes sense. Then if we can hit on some defense outside of the F-16, any progress on other programs or leads, or what gets you excited in 2026 on the defense side?

Shahram Askarpour: There is a fair amount of opportunities coming out right now. There are a lot of RFPs coming up for upgrades of various platforms. For competitive reasons, I do not want to go too much into details, but needless to say that some aircraft within our DoD are getting longer in the tooth and they need upgrades. It seems like the budget is being approved to provide those upgrades, so we see a lot of opportunities there. On some of the platforms, we are on a bid with multiple prime integrators, which indicates whoever wins, we will have some content.

Greg Palm: That is very helpful. Maybe one on M&A: now with the CapEx cycle winding down and a nice quarter of free cash flow, and I think last quarter it sounded like the pipeline was robust and there were a couple opportunities that were pretty close. Any change in thinking there? Is there any acceleration in the pipeline and maybe expecting something in the near term?

Shahram Askarpour: We are expecting a couple of things in the near term. There were opportunities in the previous quarter and the one before that as well. From a strategic standpoint, they were not completely aligned with our strategic objectives, and when the price went up a little bit, we walked away from it.

Greg Palm: Alright, understood. I will leave it there. Thanks.

Jeffrey DiGiovanni: Thank you.

Operator: The next question comes from Josh Sullivan with JonesTrading. Please go ahead.

Josh Sullivan: Hey, good morning.

Jeffrey DiGiovanni: Good morning.

Josh Sullivan: On the integration of the F-16 components at Exton, you completed the expansion there. Can you give us some color on how that integration has come along, particularly as you are looking at other platforms or products to bring in-house? Maybe where you were ahead of schedule on that expansion and now bringing in products? I am curious how that whole process is coming along.

Shahram Askarpour: The F-16 actually took longer than planned. We are at the tail end of these things. A lot of it, especially on the F-16, because you had Lockheed Martin involved and the U.S. government involved, they wanted certain assurances to have enough safety measures before they would allow Honeywell to ship the test equipment to us. That took longer than originally anticipated by Honeywell and us. In general, having been through a number of these, they get planned for five to six months, and it typically takes roughly more like nine months.

That is not from our side; it really is from the side of the larger organizations that we acquired these products from, and it takes them longer to close out their books and ship equipment to us.

Josh Sullivan: Switching gears, you talked a bit about autonomous flight in the remarks. What are you seeing from market interest on UMS, and where do you want to take the line on automation? On the regulatory environment, as we start to think about things like drones, where are you thinking in terms of that market?

Shahram Askarpour: The regulatory environment has had its ups and downs. EASA came out a couple of years ago and said by 2027 they are going to allow Part 25 airplanes to fly with one pilot, and then there was a pushback from the pilot organizations and pilot unions, which companies like Boeing and Airbus backed away from that date. It is something that is going to happen. The timing is not that far out, but it is going to happen. We are seeing a lot of interest in cockpit automation. Eventually, once the regulations change, that would result in one pilot flying the airplane.

From the operators and the airlines, they would love that because it saves them roughly about $1,000,000 per airplane per year. But again, regulations have to change, and the pilot unions have to come on board. Meanwhile, we are seeing a lot of interest in levels of automation that lead to that.

Jeffrey DiGiovanni: Great. Thank you for the time.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Shahram Askarpour for any closing remarks.

Shahram Askarpour: Thank you, operator, and thank you everybody for supporting us and attending our call. We look forward to sharing more information with you in the near term.

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

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