Innovative Solutions & Support 2026 Q3 Earnings Call

Thank you. Good morning, everyone, and welcome to Innovative Aerosystems' third quarter fiscal 2026 results conference call. Leading the call today are our CEO, Shahram Askarpour, and CFO, Jeff DiGiovanni. This morning, we issued a press release detailing our fiscal 2026 third quarter operational and financial results. This release is publicly available in the investors relations 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. Our management believes that these forward-looking statements are reasonable. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of today's date.

We do not undertake any obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events, and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in the reports which we file with the SEC. 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. During the call, we will reference certain non-GAAP financial measures.

The reconciliation of these measurements to the most directly comparable measured, calculated in accordance with GAAP, is provided in the press release, which is also available on our website. 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 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.

Thank you, Paul, and good morning to everyone joining us on the call today. During the third quarter, the IA team delivered another strong operational and financial performance, driven by continued organic growth, improved margin realization, and free cash flow conversion. Importantly, beyond our strong financial performance, we made meaningful progress advancing the key strategic priorities that we believe will drive sustainable long-term value creation. These progress points include some recent developments such as the acquisition of Aydin Displays and a new OEM contract with a leading developer of electric vertical takeoff and landing aircraft, which represents the first major award based on our Liberty Flight Deck. I will discuss each of these important items later in my remarks. We are excited by the strong momentum in our business, and we are confident we are well-positioned for a solid finish to fiscal 2026 while building momentum into fiscal 2027.

I will now discuss third quarter results in greater detail. Despite a difficult prior year comparison, I am pleased to state that we were able to generate approximately 11% revenue growth in the third quarter, highlighting what remains a period of increased demand across our commercial aftermarket and business aviation markets. Our disciplined execution, combined with a more favorable business mix and improved operating leverage, contributed to third quarter net income of $4.5 million or $0.25 per diluted share compared to $0.14 a year ago. Gross margin of nearly 52% compared to 36% last year, and adjusted EBITDA growth of approximately 75% from a year ago, highlighting the strength and scalability of our business model.

These results reflect our disciplined execution of IA NEXT, our long-term value creation strategy focused on organic growth through innovation and integrated solutions, operational excellence, and disciplined returns-focused capital allocation. I will now provide additional details on our recent progress and the strategic priorities that will drive our performance going forward. In July, we announced the acquisition of Aydin Displays, a leading developer and manufacturer of rugged display technologies serving defense, industrial, and other mission-critical aerospace applications. Aydin is located right up the road from Exton in Birdsboro, PA, and currently supports over 20 military platforms across more than 80 countries. Aydin brings with it a least vertical integrated manufacturing facility. Together with our Exton facility, we will be able to serve our customers more efficiently and further grow our business with the expanded footprint.

Aydin enhances our display technology capabilities, bringing us additional engineering talent, proven display technologies, and a respected product portfolio that aligns closely with our integrated avionics solutions. Aydin further strengthens our position in our traditional military avionics markets through exposure to new defense platforms. Additionally, the acquisition expands our military business into naval and ground programs, and also diversifies our business into industrial applications, including the medical instrument market. This is our first acquisition of an operating business and demonstrates the broadening scope of our M&A strategy beyond the product line acquisitions we have historically pursued. Looking ahead, we will continue to target aerospace and defense component product lines and businesses with significant aftermarket potential for proprietary content, above-market growth, strong cash generation, and profitability. Our acquisition pipeline remains very active.

As we build the business through accretive acquisitions, we also remain highly focused on continuing to drive organic growth through new product introductions, cross-selling initiatives, and contract wins. To that end, in August, we announced an exciting new contract win with a leading Japanese developer of eVTOL aircraft. Under the agreement, IA will develop the main display and avionics architecture for an eVTOL aircraft program. This is the first OEM program based on our Liberty Flight Deck, highlighting the growing commercial validation of our technology. We expect early engineering work to begin in Q4 2026, with initial production targeted for late 2027. We currently expect to progress towards full production during 2028, support of customers targeted 2028 full-scale commercial launch. The program currently holds a total of over 400 eVTOL orders from partners in Japan and overseas.

The advanced air mobility market represents one of the most exciting frontiers in aviation, and our flexible integrated avionics platforms are ideally suited for this market. This program reflects our continued focus on developing next-generation systems that enable safer, smarter, and more capable flight across both traditional and emerging aviation platforms. As previously discussed, we completed the development and certification of the UMS version 2. Production began in June of this year, and Q3 revenues benefited from this product line. The radio management unit contract with L3Harris is at its final certification phase, and production deliveries will commence in Q1 of our fiscal 2027. The KC-767 contract with Boeing is progressing per plan, and production deliveries will commence in Q2 of our fiscal 2027. In addition to progress on our strategic initiatives, we recently made meaningful strides in our corporate rebranding and efforts to expand market visibility.

Last October, we announced our rebranding to Innovative Aerosystems, a pivotal step in our broader strategic evolution. Building on that momentum, we are pleased to announce our planned Nasdaq ticker symbol change to IA, better aligning our public market identity with our corporate name, brand, and long-term strategy. The company will cease trading under the Nasdaq ticker symbol ISSC and begin trading under the symbol IA, effective at the U.S. market open on August 18th. To mark this milestone, members of our leadership team will be in New York to ring the Nasdaq closing bell on August 18th. Additionally, on June 29, IA was added as a member of the U.S. Small Cap Russell 2000 Index as part of the 2026 Russell Indexes reconstitution.

This is an important milestone in our company's evolution and is a direct reflection of the important progress we have made against our strategic priorities and long-term investments we have been making scale our business. In summary, we are excited by our strong third-quarter results, as well as the important progress towards our strategic plan. Based on our strong business momentum and successful execution, we are confident we remain well on track to achieve our long-term $250 million revenue target. As before, we remain focused on our strategy, energized by the opportunities ahead, and committed to creating long-term value for our shareholders in the years ahead. With that, I'll turn the call over to Jeff for his prepared remarks.

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 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 $26.7 million in the third quarter, up approximately 11% from the third quarter last year, driven by another quarter of strong organic growth in our commercial aviation and business jet markets, partially offset by an elevated prior year comparison within our F-16 business. As a reminder, in the third quarter of 2025, F-16 revenues were $12.6 million, as there was a pull forward of revenue due to the transition of manufacturing into an Exton facility, as compared to $5.7 million in the current quarter.

Excluding the F-16 revenue from both periods and the new acquisitions, our business grew by over 40% during the third quarter. Product sales were $17.5 million during the third quarter, up from $16.6 million during the same period last year, driven by strong sales into our commercial and business aviation markets. Service revenues were $9.2 million, up from $7.5 million in the same period last year due to growth in service volumes related to the IRUs and autopilot product lines. Gross profit was $13.8 million during the third quarter, up 61% from $8.6 million in the same period last year. The improvement was driven by revenue growth and a favorable sales mix given the strong commercial aftermarket growth. As we have discussed previously, we experienced some lumpiness in the timing of expense recognition during the manufacturing transition from Honeywell that impacted our quarterly results.