Innovative Solutions and Support, Inc. Aktie

Greetings. Welcome to Innovative Aerosystems Second Quarter Fiscal Year 2026 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll turn the conference over to Paul Bartolai, partner at Vallum Advisors. Thank you, Paul. You may now begin.

Thank you. Good morning, everyone, and welcome to Innovative Aerosystems Second 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 second quarter operational and financial results. This release is publicly available in the Investor 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. 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'll 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.

And with that, I'll turn the call over to Shahram.

Thank you, Paul, and good morning to everyone joining us on the call today. Our positive business momentum carried into the second quarter as we reported another strong result highlighted by significant organic growth in our commercial aerospace and business aviation markets, continued strength in bookings, strong margin realization and efficient free cash flow conversion.

We were able to deliver second quarter modest organic growth, driven by growth of approximately 50% in our commercial and business aviation markets despite an unfavorable comparison to the second quarter of 2025. As a reminder, we faced an unfavorable comparison to last year due to the transition of the F-16 manufacturing to our facility in Exton. Our F-16 revenues in the second quarter of 2025 were elevated as deliveries to Lockheed were accelerated to buffer them during the transition-related manufacturing hiatus, resulting in a $7 million year-over-year decline in F-16 revenues. We anticipated lower F-16 revenues due to the IPDG-required approvals and, therefore, shifted the mix of our operation to be more commercial-centric in our commercial aftermarket sales, together with increasing volumes in business aviation.

We continue to make important progress under our IA Next long-term value creation strategy during the second quarter, highlighted by 3 new acquisitions during the quarter that further expand our base of recurring high-value aftermarket and OEM revenue across legacy and next-generation aviation platforms. Together, these transactions are projected to contribute $10 million in annual revenue with a blended gross margin profile of approximately 50%, putting us another step closer to delivering on our $250 million annual revenue target.

In February, we acquired the S-TEC autopilot product line from Moog. This was an important transaction as it brought us an established autopilot solution to integrate into our avionics cockpit solution. This was one of the key products missing in our integrated cockpit avionics platform. We could have built this on our own, but the solution from Moog gives us a recognized and trusted product.

This was followed in March with the acquisition of several product lines from Honeywell. In addition to navigation radios, multifunction displays, transponder technologies and power generation, this transaction importantly included additional autopilot solutions. Coupled with the Moog autopilot, together, these autopilot platforms significantly enhance our integrated cockpit solution and accelerate our ability to deliver autonomous solutions to our customers for both the military and commercial markets.

In aggregate, the autopilot product line acquisitions recently made established us as a major supplier of aircraft autopilots with certified and fielded solutions that range from small general aviation aircraft all the way to large Part 25 platforms, including helicopters for both military and commercial markets.

These solutions will also be integrated into our UMS platform and Liberty Flight Deck. Our full suite of avionics solutions now include advanced flight deck and mission systems, precise flight and navigation computers, autothrottles, flight control computers, mission computers, navigation and communication radios, transponders, audio systems, electrical power generation systems and proprietary software technologies targeting autonomous flight. This is an important milestone fulfilling the company's ongoing strategy to build a comprehensive avionics ecosystem that bridges legacy platform sustainment with next-generation capability development, ensuring operators can maximize aircraft availability, safety and long-term value.

As with the past transactions, these acquisitions expand our reach into new customers and platforms as well as provide an opportunity to reengineer these products and integrate them into our existing solutions to offer to new potential customers in military, business aviation and commercial air transport sectors. Our acquisition funnel remains robust, and we see additional opportunities as we continue to execute on our strategic growth initiatives.

This quarter provided clear evidence that our strategy is working as we saw the benefits of both acquisitions and strong organic growth driven by internal investments in new product development. We will remain disciplined in our approach, continuing to focus on transactions and investments that advance our strategic objectives.

I also wanted to provide a quick update on the integration of our products in support of the F-16 program. As we discussed last quarter, we completed all required recertifications and resumed full-scale production of the digital flight control computer at our Exton facility. The recertification and resumption of production of the improved programmable display generator is also now complete. We are excited to be fully up and running on these products, and we continue to be 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 around the world.

Additionally, we remain encouraged by the growth potential for our broader defense business as we experienced significant level of inquiries for cockpit upgrades and new aircraft platforms. As such, in the current political climate, we are even more encouraged by the long runway of growth we see ahead.

We have made significant investments to position our business as a mission-critical partner with the defense supply chain and believe that we stand to benefit given the strong backdrop for defense spending. At a product level, we continue to move closer to delivering the new version of our UMS platform. We expect deliveries to ramp up through the year and remain excited for the potential of our new UMS platform and our Liberty Flight Deck.

We continue to make significant investments in internal research and development as we continue to advance our progress towards autonomous flight through our next-generation Flight Deck Liberty, which employs our UMS system. Our next-generation UMS system 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.

In summary, we were pleased with our strong second quarter results that further built on our recent strong performance. We remain encouraged by the growth outlook for our business, supported by strength across our key end markets, momentum for our new products and an active acquisition pipeline. We remain committed to our strategic priorities with an ongoing focus on maximizing long-term value for our shareholders.

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 second 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 $22.4 million in the second quarter, up 2% from the second quarter last year despite the unfavorable comparison given the elevated F-16 revenues during the second quarter last year, as Shahram discussed. We anticipated a lower F-16 revenues and were able to offset the $7 million headwind by shifting our operations to be more commercial and business aviation centric, which increased roughly 50% on an organic basis. We've now completed all certifications and testing related to the digital flight control computer and the display generator in support of the F-16 program at our Exton facility. We expect manufacturing levels to normalize to support ongoing shipment levels in the third quarter of 2026.

Product sales were $14.3 million during the second quarter, up from $13.2 million during the same period last year as stronger volumes of aftermarket products, upgrades to the commercial market and sales to the business aviation market more than offset the decline in the F-16 revenues. Service revenues was $8.1 million, down modestly from $8.8 million in the same period last year due to a decline of nearly $3 million in F-16 service revenues. This was partially offset by growth in the service volumes related to the IRUs and radio product lines.

Gross profit was $11.4 million during the second quarter, up 1.5% from the same period last year. The improvement was driven by revenue growth and a favorable mix within the commercial aftermarket business, partially offset by an unfavorable comparison to last year's second quarter given the timing of expense recognition related to the F-16 transaction.

As we've discussed previously, we experienced some lumpiness in the timing of expense recognition during the manufacturing transition from Honeywell that impacted our quarterly results. As a result, our second quarter gross margin was 51.1%, down modestly compared to 51.4% last year given the difficult comparison. We continue to expect our gross margins to be in the mid-40% range over the long term with some quarterly fluctuations based on mix.

As our military business ramps back up, which has lower gross margins, we would expect our gross margins to normalize. However, as we have discussed, our military business has similar EBITDA margins to our other businesses given a lower SG&A burden.

Operating expense during the second quarter of 2026 was $6.5 million, an increase of -- from $4.3 million during the same period last year. The increase in operating expenses reflects investments in R&D in support of growth initiatives as well as onetime acquisition-related costs associated with the 3 recent acquisitions. Net income was $3.4 million or $0.19 per diluted share during the second quarter compared to net income of $5.3 million or $0.30 per share in the second quarter of last year. The effective tax rate was 22.6% during the second quarter, up from 19.2% during the same period last year due to the our overall growth in the business.

Adjusted net income, which includes the same adjustments made to adjusted EBITDA in addition to an adjustment for the amortization of acquired intangibles was $4.8 million for the quarter as compared to $5.7 million last year. Adjusted earnings per diluted share was $0.27 versus $0.32 last year. Adjusted EBITDA was $6.8 million during the second quarter, down from $7.7 million in the second quarter of last year due to growth investments and timing of expense recognition related to the F-16 transition in the prior year period.

Our R&D investments during the second quarter were up roughly $1 million versus the second quarter last year. And for the remainder of the fiscal year, we continue to expect to increase R&D spending to support our growth initiatives.

Moving on to backlog. New orders in the second quarter of fiscal 2026 were $24.7 million and backlog as of March 31 was approximately $87 million and an increase of approximately $7 million over the comparable period. 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 sole-source production orders from products developed under the company's engineering development contracts programs.

Now turning to cash flow. During the first half of 2026, cash flow from operations was $10.5 million compared to $3.1 million in the year ago comparable period, driven by our solid operating results and financial discipline. Capital expenditures during the first 6 months of 2026 were $2.7 million versus $1.8 million for the year ago period. Free cash flow was $7.7 million during the first half, up from $1.3 million 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 the second quarter 2026, we had total debt of $55.1 million and cash and cash equivalents of $6.8 million, resulting in net debt of $48.3 million. Net debt increased $22.2 million from the year ago period despite over $35 million used for acquisitions and capital expenditures in support of the company's growth initiatives, reflecting strong operating results and strong free cash flow conversion. As of March 31, 2026, we had total cash and availability under our credit line of approximately $49.8 million.

Our net leverage at the end of the quarter was 1.7x despite the recent acquisitions, our modest leverage, combined with availability under our expanded credit facility gives us significant financial flexibility to continue executing on our strategic initiatives.

Before we move into our Q&A, I'd like to provide a current -- our current thoughts around the outlook for the remainder of the fiscal 2026. As previously disclosed, we continue to expect organic revenue growth to be essentially flat year-over-year given the pull-forward of revenue from 2026 into 2025 related to the F-16 production and service revenue. As we look ahead, we expect third quarter revenues to be in the range of $24 million to $26 million.

That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

[Operator Instructions] And our first question comes from the line of Robert Brooks with Northland Capital.

I thought it was interesting in the commentary that you shifted operational mix away from F-16 to more commercial aftermarket business aviation. Just wanted to hear more discussion on that. The verbiage makes it seem like you -- like the verbiage makes it seem like it was one or the other. And like you kind of [ written ] you have a limiting capacity of being able to execute on F-16 orders in commercial and aftermarket. But I don't think that's the case. So I just wanted to unpack that a little bit more by what you have?

Yes. Thank you, Bobby. So effectively, we -- the approval of Lockheed for the IPDG got us to kind of the -- what was getting us to the last couple of weeks of the quarter. There's over 80 hours of testing that goes for these boxes each before we ship them. And there wasn't much we could ship when you only had a few weeks left to the end of the quarter. So in anticipation for that, we did -- we focused the production more towards the commercial deliveries that we were doing.

If we would have shipped more F-16 if the thing would have happened a little bit earlier like early in the quarter. But it wasn't either/or situation. We have capacity here well over the numbers that we're delivering right now with the infrastructure that we have. It was just the way the F-16 product lines, the amount of time it takes at the end before we can test them and ship them, that would have made it difficult to ship a lot of F-16.

In previous quarter, we shipped -- last year, we did about -- roughly about $10 million of F-16 product lines due to all the pull-ins. On average, we think every quarter, the F-16 is going to be somewhere between $3 million to $5 million a quarter going forward. And I think this quarter, we just did over $3 million. And so that was kind of a little bit of a shift in the -- going from $10 million to $3 million, and we had to kind of fill in for it.

Got it. That's helpful. And that's -- especially the clarity on the -- you had the capacity to execute on both opportunities. Shifting gears to the acquisitions that you've done in the quarter, you kind of started -- as you mentioned in the prepared remarks, you started to build a pretty unique portfolio. I was just curious to hear what has the customer reception been? Have you got an inbound after announcing these deals? Just wanted to hear what -- how customer conversations have evolved? Have new customers came into the fold because of the platform that you're accumulating? Just more color on that.

Sure. So I'll start with the acquisition we did from Moog. To the best of our understanding, their strategic objectives had shifted over time. The S-TEC product lines that they had acquired a while ago, they were kind of moving away from those product lines, their autopilot solutions that they offer in the market are more integrated into their cockpits. So they wanted to divest these product lines because they weren't really supporting the customer base with it.

After we did the acquisition, we've had significant inquiries from all over the world for people that want to buy these autopilot. This has been going on. These product lines are well established. S-TEC autopilot is well established in the general aviation and business aviation markets. So it was very positive. We got a lot of inquiries, and we're in the process of building a backlog so we can deliver on these product lines to the market.

The Honeywell product lines that we got, there is OEM contents in that. I think there's still supply -- we still supply some of these to Pilatus as well as Boeing. And so that was very positive because their experience hadn't been that great with the parts of Honeywell that produce these equipment. So we've gained a fair amount of momentum here, especially acquiring this many lines of autopilot product lines. We have acquired from Honeywell, we got the AeroCruze product line that goes in all the lower-end general aviation airplanes. And that's -- that's a good revenue generator that continues to do that. But also the next-generation that we got, which was the KFC 230, which is the new digital autopilot as well as KFC 325, which was the older generation of autopilots. Those are installed in over tens of thousands of aircraft, the KFC 325.

So there is revenue associated with maintaining and upgrading those things. The KFC 230 is going to be the workhorse for our own autopilot. It's a very capable digital autopilot that Honeywell developed like 3, 4 years ago. And so, in aggregate, it's put us in a position where we -- I would say we're probably the largest autopilot suppliers right now in the market covering the spectrum of aircraft.

That's very exciting to hear. And just last one for me is, could you compare -- can you compare your acquisition pipeline today comparatively to when you reported 1Q results? And then could you just speak towards your appetite for more, obviously, $33 million in acquisitions over the past 2 months is a healthy chunk. Do you want to get those integrated first before looking for more? Just thoughts there.

So we've -- obviously, we've expanded our engineering group as well as contracts and program management group to be able to more easily transfer these technologies into our organizations and do a build. We are at a position now where we're still looking at acquisitions. We've got the dry powder to go do that. Obviously, product line acquisitions are good, but we would only do that if they're strategic to us. We're also looking at acquiring businesses that complement us. And that's an active -- we've got a pretty active pipeline. And we will continue to evaluate. And if we find things that are of interest to us and they're profitable and the good businesses, we will acquire them.

Congrats on a good quarter.

Our next questions are from the line of Greg Palm with Craig-Hallum.

I'm curious, Shahram, you talked a little bit about the defense market and some of the opportunities that may or may not be emerging in light of the positive backdrop. Maybe you can expand a little bit on kind of what you're seeing pipeline and kind of what you're excited about over the next couple of years?

Yes. I mean in terms of the -- I mean -- I mean, you see what the news is out there and the investment that our government is planning to make in the defense area. And there's a lot of aging aircraft that reside in our -- within the DoD and the funding they're making available to do upgrades to all of these airplanes. There is very, very large programs out there, things like the KC-135, there is -- which is -- there's hundreds of those, about 600 of them out there. So there's a lot of inquiries going on right now. But also we talked about this over a year ago. When we did the acquisition on the F-16, it put us at the table with the decision makers at Lockheed Martin. They're very impressed with the way we've integrated and delivering these equipment to them. And that has opened a lot of new doors for us.

So we're discussing a lot of other unrelated to F-16 programs as well as upgrades for the F-16 looking into the future. So we see a lot of positive feedback that we've had on how we executed on integration of the defense contracting organization into our organization. And we're upbeat about the future revenues we're going to get from it.

Yes. Okay. That sounds good. And as it relates to F-16, and maybe you can tie this out to what's baked into the guide for the current quarter, but does it assume -- I assume it's probably some sequential improvement in F-16, but does it imply kind of a normalization of revenues? Or are we still in a ramp-up phase? And if that's not the case, when does F-16 get to more of a normalized run rate?

I think we're there now. Moving forward, like I said, we're looking at about nominally $3 million to $5 million F-16 business a quarter. It's -- again, there is so much you can produce on that product line in a quarter because of the amount of time it takes to put these boxes through the required testing. And once that -- we are up and running now, that's kind of going to be the run rate for it.

Okay. I guess last one in light of kind of a pickup in some recent acquisition activity, what's your appetite going forward? And how does the pipeline specifically look versus maybe previous quarters?

Actually, pipeline looks very good. It's -- Honeywell is obviously, they're splitting the company at end of this quarter. So for this quarter, we haven't seen any product divestitures. That was at least related to us. But I'm pretty sure once that's over with, they will divest additional product lines that they've indicated planning to do so. Some of those are of interest to us. But we've now obviously opened up our aperture quite a lot. And we're looking at a lot of other companies' divestitures. And some of them are just product lines, some of them are divisions, which we find interesting, and we're looking at those.

Our next questions are from the line of Sergey Glinyanov with Freedom Brokers.

so many talks about F-16 program and now they are aware of redesign issues. Just wondering, could it impact on your revenue next couple of quarters or maybe it doesn't matter what's happening with the program overall?

Sorry, can you repeat that?

Yes, sure. So we are aware of F-16 redesign issues. Could this impact on your revenue next couple of quarters? Or it doesn't matter what's happening in this program overall and you can deliver anyway your products?

So this is Jeff. What I think you're asking is does that impact the fluctuation in the F-16 is going to go forward. And the answer to that is right now, it's up and running, the IPDG line is up and running. And that's where we're expecting a roughly $3 million to $5 million on a quarterly basis because, again, the amount of time to test the equipment in the chambers, it's 80 hours. So that takes just the amount of time how much we can deliver. The backlog is still there for the -- keep that in mind for the F-16. So there's still a plenty amount of backlog to be built over the next few years.

Okay. Got it. Maybe I missed some point about your recent acquisitions. So maybe you can put some color on what portion of revenue will bring these new acquisitions?

Yes. As we said, it's about $10 million a year in revenue for the acquisitions that we just did.

Okay. And the last one is in terms of your acquisition pipeline or recent acquisitions. On your commercial side, do you expect your revenue mix will shift toward products rather than services in the long term?

Yes. And that's an ongoing thing. I think the original acquisitions that we did 3 years ago, it, kind of, increased our services significantly from what it was before. We were doing like roughly about $4 million or $5 million in services, and then it became $25 million in services. But as we've done additional acquisitions and as we are developing our next-generation cockpits and platforms, that mix is changing. As a percentage, our production is getting larger than our -- than the way that the services are growing.

Thank you. At this time, this concludes our question-and-answer session. I'll turn the floor back to management for closing comments.

Thank you, operator, and thank you all for your time and interest in Innovative Aerosystems. Have a great day.

Thanks.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect your lines at this time, and have a wonderful day.

Good day, and welcome to the Innovative Aerosystems First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Paul Bartolai, partner at Vallum Advisors. Please go ahead.

Thank you. Good morning, everyone, and welcome to Innovative Aerosystems First 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 first quarter operational and financial results. This release is publicly available in the Investor 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. 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 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 everybody joining us on the call today. I'm pleased to report that we delivered a strong start to our fiscal year 2026, one 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 continue to make important progress under our IA Next, long-term valuation 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 million 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 will continue to be 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 in-sourcing 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 with the defense supply chain and believe that our investments, certifications and relationships, together with a strong backdrop for defense spending stand to benefit IA given our deep inside the cockpit expertise.

At the 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 that 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 the recent years.

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 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 $21.8 million in the first quarter, up 36.5% from the first quarter last year, driven by growth in our commercial aftermarket business and higher services revenues.

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 $1.2 million. 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 million during the quarter, while this transition moves through production.

Product sales were $13.6 million during the first quarter, up from $10 million during the same period last year, driven primarily by stronger volumes of aftermarket product upgrades to commercial market that include UPS and air transport. Service revenue was $8.2 million, up from $6 million 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 $11.9 million during the first quarter, up from $6.6 million 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 million over the prior year quarter.

Operating expenses during the first quarter of 2026 was $5.6 million, an increase from $5.3 million 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 the 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 $4.1 million 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 $4.5 million for the quarter as compared to $1.6 million last year. Adjusted earnings per diluted share of $0.25 increased from $0.09 last year. Adjusted EBITDA was $7.4 million during the first quarter, up from $3.1 million last year, an increase of 140.9%, largely due to our revenue growth and a more favorable revenue mix.

Moving on to backlog. New orders in the first quarter of fiscal 2026 were approximately $19 million and backlog as of December 31 was approximately $75 million. 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 $8.2 million compared to $1.8 million in the year ago comparable period, driven by our solid operating results and financial discipline. Capital expenditures during the first quarter of 2026 were $1.1 million 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 million during the first quarter, up from $1.6 million 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 the first quarter of 2026, we had total debt of $23.8 million and cash and cash equivalents of $8.3 million, resulting in net debt of $15.5 million. As of December 31, 2025, we had total cash and availability under our credit line of approximately $83.3 million. Our net leverage at the end of the quarter was 0.5x. 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'd 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 '26 into fiscal 2025 that we discussed last quarter. When we think about our cadence of the balance of the rest of the year, we expect second quarter revenues to be in the range of $20 million to $22 million, 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 Instructions] The first question comes from Bobby Brooks with Northland Capital Markets.

First, the organic growth you guys posted in the first quarter, very impressive. And I wanted to dive a little bit deeper on to that. Could you just discuss what products or kind of specific aircraft retrofits drove the increase in commercial aftermarket demand and sales?

Sure. So in terms of the -- this was all mainly towards the air transport side of things. So we've had some sales of our -- the products that we had developed that were certified roughly last year, that are beginning to take some grounds here like the EICAS system for the 757/67. We've developed LPV for the 757/67 as well as some software upgrades on to update the magnetic variations. So it was a combination of increased sales on the air transport from new products that we've developed over the last couple of years.

Got it. And then kind of following up on that. So it seems like these were -- a lot of it was new demand generation, right? And I guess what I'm trying to get at is, was there any pull forward in demand? Because I know, Jeff, you kind of ended the remarks with saying organic revenue expected to kind of be flat for the full year [ 2026 ]. Obviously, you just posted a great quarter of growth. So just trying to reconcile maybe what happened in the first quarter and then what's going to play out for the rest of the year?

So -- again, the -- when we -- last year, we had a significant growth in our revenue, which backs into the basis for the organic growth of this year. The first quarter was very strong on the organic growth. But when we look at our business model for 2026, we still believe that our organic growth is going to be somewhere on a single digit and will be augmented by some acquisitions that we're contemplating.

Got it. And then you mentioned how you expect -- in the press release, expected revenue related to F-16 platforms to kind of scale through the year. Is that as simple as that your backlog indicates that? Or is there something else driving? You also mentioned in the press release growth opportunities related to the F-16 platform. And I was just curious to hear kind of what those growth opportunities look like.

So for your first question, the -- on the F-16 platform, we completed the digital flight control computer integration into our system around the end of last -- end of 2025 -- financial year 2025. So Q1 was a full load of digital flight control computers that we delivered to Lockheed. The integrated display generator, the iPDG is -- we are -- it's being integrated into our system here now. And 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, there is -- I mean, if you listen to Lockheed, they say they're going to build another 300 of these. And also, what we're seeing is that we're seeing a lot of RFP 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.

Understood. Congrats on a great quarter.

The next question comes from Greg Palm with Craig-Hallum Capital Group.

This is Danny Eggerichs on for Greg today. Maybe just hitting on the quarter, having provided guidance with just a couple of weeks left in the quarter and then kind of seeing upside that we saw there. Any way to dig in further on maybe what you saw in the last few weeks and maybe what surprised you to the upside there?

You mean in terms of what we said last time and what we hit?

Yes, exactly.

Timing of shipments. Sometimes it was just timing of a couple of shipments came in. The POs came in sooner than we expected from some of the customers as they were clearing at year-end, their year-end.

Okay. Got it. That makes sense. And then maybe if we can hit on some defense outside of that F-16 progress on some other programs out there or leads or what gets you excited for 2026 on the defense side?

So there's a fair amount of opportunities that are coming out right now. There's a lot of RFPs that are coming up for upgrade of various platforms. I -- for competitive reasons, I don't want to go too much into details of it. But needless to say that our aircrafts within our DoD, some of them are getting longer in the tooth, and they need upgrades done to them. And it seems like that the budget is being approved to provide those upgrades. So we see a lot of opportunities there. On some of the platforms, we actually -- we are on a bid with multiple prime integrators, which kind of indicates whoever wins, we will have some content.

Okay. That's very helpful. Maybe I'll just hit one on M&A. Now with kind of the CapEx cycle winding down and a nice quarter of free cash flow here as well. And I think last quarter, it sounded like the pipeline was robust and maybe there was a couple of opportunities that were pretty close. So any change in thinking there? Is there any acceleration in kind of the pipeline and maybe expecting something here in the near term?

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

The next question comes from Joshua Sullivan with JonesTrading.

Just on the integration of the F-16 components at Exton, you guys completed the expansion there. Can you just give us some color on how that integration has come along, particularly as you're looking at other platforms or products to bring in-house, maybe where were you ahead of schedule just on that expansion and now bringing in products. Just curious how that whole process is coming along.

So the F-16 actually took longer than it was planned for. Again, we're kind of 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 stock before they would allow Honeywell to ship the test equipment to us. And that took longer than it was originally anticipated by Honeywell and us.

But in general, having been through a number of these things, they get planned for 5 to 6 months, and it typically takes roughly more like 9 months. And that's not from our side, it really is from the side of the larger organizations that we acquire these products from, and it takes them longer to close out their books and ship equipment to us.

Just maybe switching gears, you talked a bit about autonomous flight there in the remarks. What are you seeing from market interest on UMS? And where do you want to take the line on automation? And then on the regulatory environment, as we start to think about things like drones, where are you guys thinking in terms of that market?

Well, look, it's -- the regulatory environment has kind of been -- had its ups and downs. I mean NASA came out a couple of years ago, they said by 2027, they are going to allow Part 25 airplanes fly with one pilot. And then there was a pushback from the pilot organizations and pilot unions, which companies like Boeing and Airbus kind of backed away from that date. But it's something that is going to happen. The timing of it is -- it really is not that far out, but it's got to happen.

What we're seeing is a lot of interest in cockpit automation. Eventually, once the regulations change, that would result in one pilot flying the airplane. From operators and the airlines, they would love that because it saves them roughly about $1 million on an airplane per year. But again, regulations have to change. The pilot unions have to come on board. And -- but meanwhile, we're seeing a lot of interest in levels of automation that leads to that.

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

Thank you, operator, and thank you, everybody, for supporting us and attending our call. I look forward to share some more information with you in the near term.

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

Good day, and welcome to the Innovative Aerosystems Fourth Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, partner at Vallum Advisors. Please go ahead.

Thank you. Good morning, everyone, and welcome to Innovative Aerosystems Fourth Quarter and Full Year Fiscal 2025 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 2025 fourth quarter and full year operational and financial results. This release is publicly available in the Investor 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. 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 report 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, including our accomplishments during fiscal 2025 and our key strategic priorities for fiscal 2026, 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. Fiscal 2025 was another transformational year for the entire organization, highlighted by continued disciplined execution on our strategic priorities, culminating in outstanding fourth quarter and full year performance.

In October, in connection with our ongoing transformation, we rebranded to Innovative Aerosystems, a move that better reflects our strategic focus on engineering, manufacturing and supplying advanced avionic solutions for commercial, business and military aviation markets.

Our new brand identity underscores our unique capability to integrate next-generation avionics with intelligent system design, delivering innovative mission-critical aerospace solutions. As Innovative Aerosystems, we remain committed to powering progress across the industry's most prominent legacy fleets and emerging next-generation platforms.

Entering fiscal 2026, we are executing against a clearly defined go-to-market strategy centered on integrating intelligent system design in advanced avionics to deliver differentiated solutions that improve performance and have safety and reduced operational complexity for commercial and defense aerospace customers.

We ended the year on a strong note, with fourth quarter revenue increasing 45% year-over-year to $22 million. The combined benefit of increased throughput from client programs, a more favorable sales mix and improved operating leverage resulted in fourth quarter net income of $7.1 million or $0.39 per diluted share, adjusted EBITDA of $9.6 million, an increase of 71% versus the prior year.

For the full year, we generated revenue of $84 million, up nearly 80% from the previous year. Our fiscal 2025 net income was $15.6 million or $0.88 per diluted share. Adjusted EBITDA was $25 million, up just over 80% from last year despite significant investments we made to position the company for its next phase of growth, including the expansion of our engineering team, enhancements to our sales organization, investments in infrastructure and systems to support our defense customers and the integration of our F-16 platform production into our Exton facility. I will discuss each of these in more detail shortly.

To that end, I will now provide an update on our progress on the IA Next, our long-term value creation strategy. Our IA Next strategy prioritizes profitable growth, sustained operational excellence and disciplined capital allocation as key drivers of long-term value creation. This framework is the mechanism by which we intend to deliver on our long-term target of $250 million in revenue and adjusted EBITDA margins of between 25% to 30%, driven by a combination of organic and inorganic growth. Our strong fiscal 2025 results are a direct reflection of the execution of these key strategic initiatives.

I will now discuss some of our key accomplishments during the year and highlight our focused priorities for the year ahead. Let's begin with a review of our growth initiatives, which focus on new product development, cross-selling of key solutions, expansion of our military capabilities and enhancements to our integrated avionics cockpit solution.

An important milestone we achieved during 2025 was the successful completion of the integration of the F-16 program production into our Exton facility. We have completed all required recertifications and resumed full-scale production of the digital flight control computer earlier this month. The recertification and resumption of production of the improved programmable display generator is planned for the next month. We have a strong backlog of demand for our new products used in the F-16 and are encouraged by the growth potential here. The F-16 remains a workhorse for our military as well as many of our allies around the world, and we are encouraged for the long runway growth we see ahead.

In addition to the attractive growth opportunities related to this platform, during 2026, we plan to begin in-sourcing F-16 product line subassembly. This initiative, combined with the elimination of the duplicative costs we incurred 2025 as we migrated the F-16 program production into our facility, should lead to improved and more consistent margins related to these products moving forward.

Capitalizing on our legacy of engineering excellence, new product development is a critical aspect of our growth strategy. So we were pleased by the significant progress we made during 2025.

In the year ahead, we intend to advance our progress towards autonomous flight within the business jet market through the next-generation UMS2 platform. This reengineered platform enables the integration of artificial intelligence in the cockpit, significantly enhancing level of cockpit automation. We have completed test flights on the Pilatus PC-24, and we'll be delivering a new version to Pilatus in June 2026.

Another important area of new product focus during 2025 has been our new Liberty Flight Deck. This is a customer-centric, customizable design that can be tailored for virtually any type of aircraft, including large passenger and cargo planes, business jets and military aircraft. We unveiled the Liberty Flight Deck at the National Business Aviation Association Show in October of this year, and the customer feedback was very positive. In the coming year, we will continue with our Liberty avionics certification activities with a goal of 2027 for first certification. Our new Liberty offering can significantly reduce workload in cockpits by using automation to enhance safety and deliver substantial cost savings for Part 25 aircraft operators.

The meaningful progress we achieved on new products is a direct result of the recent investments we have made in our engineering department and the core competencies of innovation and engineering expertise. Our engineering organization is a vertically integrated multidiscipline team that brings mechanical, electrical, software and systems engineering together under one roof. This structure enables agile decision-making, tight collaboration and full control over every stage of product development. IA maintains an independent verification and validation group that ensures strong design integrity and compliance throughout the development cycle in compliance with certification requirements to meet the highest level of safety.

Our engineering team uses modern fully integrated development tools and employs state-of-the-art microprocessors and FPGA technology. The department has also invested as unitizes an internal AI-based development infrastructure, which hosts a knowledge-based AI model that optimizes documentation, supports training initiatives and facilitates cross-department product queries.

We have expanded our engineering team by more than 50% in each of the last couple of years, with engineering personnel representing 1/3 of our total headcount at year-end. Management and the core engineering team have been with the company for over a decade on average, contributing to stability, deep product knowledge and continuity.

We view our R&D capabilities to be critical to achieving our long-term growth objectives, and we plan to make additional investments in our engineering headcount in fiscal 2026. Importantly, we maintain an excellent engineering retention rate, supported by an engaging and challenging work environment. Unique initiatives such as sponsoring private pilot training, ensure engineers gain first-hand understanding of the pilot and avionics environment. Our engineering team has demonstrated its agility and innovation with programs like the new Liberty Flight Deck, and consistently shows the willingness to take on ambitious project and new technologies that strengthen the company's competitive position like multi-core processing technology.

With a strong talent pipeline, unparallel vertical integration and a culture that embraces challenging projects and new technologies, our culture of innovation serves as a key driver of the company's continued growth and competitive advantage. We look forward to updating you on the continued progress on our UMS2 and Liberty platforms as well as additional innovation and new technologies in the future as we continue to enhance our integrated cockpit avionics solutions and move closer to autonomous flights.

During 2025, we also laid groundwork for the expansion of our military business, which we view as an important future growth driver. We made important investments that strengthen our security and accounting services to become compliant with the Defense Federal Acquisition Regulation Supplement, or DFARS requirements. These are necessary improvements as we continue to bid on larger DoD programs.

And finally, as it relates to our growth strategy, all of this is supported by the recently completed expansion of our Exton facility. We tripled the production capacity of our facility in 2025, positioning us to scale production over the coming years. Looking ahead, we now have the people, tools and capabilities in place to execute on our growth strategy.

Now turning to our pursuit of operational excellence. We made key investments during 2025 that should position the company for solid operating leverage in the coming years as we focus our goal of delivering adjusted EBITDA margins between 25% to 30% over the longer term. During 2025, we completed the integration of our NetSuite ERP system, which provides a platform to efficiently scale our business. This new system will allow us to utilize more robust data to support actionable business decisions.

Additionally, we have made further investments in infrastructure and systems to support our growth aspirations. With the infrastructure already in place, we expect only modest increase in operating costs moving forward, allowing for operating leverage as we grow.

And finally, as it relates to balance sheet optionality, we continue to add available liquidity to support both organic growth and strategic acquisitions in the years ahead. An important accomplishment in support of our growth strategy was the recent closing of our new 5-year $100 million committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The new facility provides an additional $65 million in liquidity versus our previous $35 million facility, and an option, subject to certain conditions, to request up to $25 million in additional loan commitments under an accordion feature in the agreement, bringing the total potential facility to $125 million. This facility provides the improved flexibility required to execute on our long-term growth strategy.

In addition to the investments in organic growth I have already discussed, we remain focused on supplementing our growth strategy through strategic acquisition. Our disciplined acquisition strategy centers on acquiring aerospace and defense component product line or businesses with significant aftermarket potential and proprietary content and processes. We are focused on acquisition of product lines and businesses that have above-market growth potential, are strongly cash generative and are profitable.

The aerospace supply chain is highly fragmented with many components supplied by smaller, privately-owned businesses that in turn sell to system integrators, Tier 1 or Tier 2 manufacturers or large OEM participates. We continue to see significant opportunities for further consolidation of this supply chain.

Before I hand the call over to Jeff, I want to welcome Richard Silfen to our Board of Directors as an independent director. Richard is currently General Counsel of Hildred Capital Management, a private equity firm that specializes in control-oriented transactions in lower middle market company. Before joining Hildred, Richard was a partner and Co-Chair of Mergers and Acquisitions at Duane Morris, a multinational law firm. With Richard's appointment, the Board has expanded to 7 directors.

In summary, as we enter fiscal 2026, we're well positioned to benefit from the foundation investments we've made across the organization during the last several years. Our team continues to execute at a high level and market trends remain favorable and our financial position is solid, all of which position us to deliver another year of profitable growth. We are energized by the opportunities ahead of us and remain committed to advancing our long-term strategic initiatives while maintaining a focus on delivering value for our shareholders.

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 fourth quarter performance, including a discussion of our working capital, balance sheet and liquidity profile at quarter end, and wrap up with some comments on our outlook for the new fiscal year.

We generated net revenues of $22.2 million in the fourth quarter, up 45% from the fourth quarter last year. The strong growth came despite the expected pause in F-16 production we discussed last quarter as we completed the transition of this production into our Exton facility. Consistent with our prior expectations, production related to the F-16 began to ramp back up during December, and we expect to return to normal production levels in the first half of fiscal 2026.

Revenues during the fourth quarter benefited from increased volumes in the air transport market and business aviation. Product sales were $14.3 million during the fourth quarter, up from $9.8 million during the same period last year, driven primarily by strong demand in the air transport sector. Service revenue was $7.9 million, owing largely to customer service sales from the Honeywell product lines, including $300,000 associated with the F-16 program and an increase of $1.3 million in nonrecurring engineering services.

Gross profit was $14.1 million during the fourth quarter, up from $8.5 million reported in the same period last year, an increase of 65%. Strong growth was driven by the increase in revenue and a more favorable revenue mix, including the benefit of high-margin sales in the air transport market. As a result of the favorable sales mix, our fourth quarter gross margin was 63.2%, up from 55.4% in the same period last year. As we have stated in recent quarters, we continue to expect our gross margins in the future to be in the mid-40% range given our expected mix of revenue going forward. With the integration of the Honeywell product line into our facilities, we expect less volatility in our gross margins relative to what we saw in 2025. We could still see some quarterly variation based on our revenue mix, especially as we continue to grow our military and OEM businesses, but we still expect full year gross margins to be within our targeted range.

As a quick reminder, military sales carry a lower average gross margin compared to commercial contracts. However, importantly, there is minimal operating expense associated with these contracts, resulting in incremental EBITDA margins.

Operating expense during the fourth quarter of 2025 was $5.8 million, an increase from $4.2 million during the same period last year. The increase in operating expense was driven by investments to support growth, including additional headcount and engineering sales and services.

Net income for the quarter was $7.1 million as compared to $3.2 million last year.

GAAP earnings per diluted share of $0.39 increased from $0.18 last year.

Adjusted EBITDA was $9.6 million during the fourth quarter, up from $5.6 million last year, an increase of 71%, largely due to our revenue growth and a more favorable revenue mix.

During the fourth quarter, we recognized a $1.8 million gross benefit related to the employee retention tax credit, a refundable payroll tax credit enacted under the Cares Act and subsequent legislation. The benefit relates primarily to qualifying wages paid during the period and was recognized during the quarter upon confirmation of eligibility.

Moving on to backlog. New orders in the fourth quarter of fiscal 2025 were approximately $27 million and backlog as of September 30 was approximately $77 million. The backlog includes only purchase orders in hand and excludes additional orders from the company's OEM customers under long-term programs, including Pilatus PC-24, Textron King Air, Boeing T7 Red Hawk and the Boeing KC-46A and the F-16 with Lockheed Mark. 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. For the full year ended September 30, 2025, cash flow from operations was $13.3 million compared to $5.8 million in the year ago comparable period due to our solid operating results. Capital expenditures during the fiscal 2025 were $6.5 million versus a little over $600,000 in the year-ago period. The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton facility. Despite the increase in capital spending compared to last year, we were still able to generate free cash flow of $6.8 million during fiscal 2025, up from $5.1 million in the previous year.

As of September 30, 2025, we had total debt of $24.4 million and cash and cash equivalents of $2.7 million, resulting in net debt of $21.7 million. As of September 30, 2025, we had total cash and availability under our line of credit of approximately $77.7 million. Our leverage at the end of the quarter was 0.9x. Our modest leverage, combined with availability under our expanded credit facility, gives us significant financial flexibility to execute on our strategic initiatives.

Before we move into Q&A session, I'd like to provide our thoughts around the outlook for our business entering 2026. As we have discussed during fiscal 2025, our results benefited from the pull forward of revenues related to the F-16 platform as we prepared for the transfer of production into our Exton facility. Additionally, our fiscal 2025 results also included some service revenues for the F-16 platform that we do not expect to repeat in fiscal 2026. Excluding these factors, we estimate IA generated high single-digit year-over-year organic revenue growth in fiscal 2025 and believe this to be a reasonable annual organic growth run rate for the business on a normalized basis over time. However, when we look at fiscal 2026, we expect organic revenue to grow more modestly relative to our longer-term target given the pull forward of revenue related to the F-16 production and service revenue from fiscal 2026 into fiscal 2025, which was expected.

Looking ahead, as we build off a higher base of revenue, we intend to drive the next phase of growth through a combination of market share gains, new product development, expanded capabilities and disciplined inorganic growth. When we think about the cadence of fiscal 2026, we expect first quarter revenues to be in the range of $18 million to $20 million, building steadily on a sequential basis as we move throughout the year.

That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

[Operator Instructions] Our next question comes from Bobby Brooks with Northland Capital Markets.

So terrific 4Q results, and you had mentioned that the strength in sales is driven by some momentum in the military programs. Is it right to assume that when you're referencing that, it's really all related to the work with the F-16s, or is there something else?

No, it's not just the F-16, there's also -- we do work with the C-130 and other Boeing products programs. So that's kind of where we saw some of the fourth quarter impact.

Okay. So it was not just the F-16. Could you maybe help frame what was non -- for the military results, what was non-F-16 net positive?

Yes. So it's probably a couple of million dollars in there for the C-130 and Boeing platforms in the military programs. And the F-16 really had nominal revenues in for the fourth quarter. There's probably about close to a little over $300,000 of service revenue that hit this period on the F-16 and -- as we expected. We didn't expect any revenue in production for the F-16 in Q4.

Got it. And then it's great to see you guys put out this 2029 targets. I was curious to hear, and I'm sorry if I missed this earlier in the call, but was curious to hear your assumptions underpinning that outlook?

Yes. Our $250 million revenue target assumes we're able to generate organic growth in high single digits range with the balance really driven by disciplined acquisition strategy. It's important to note that we believe our acquisition strategy could be accretive to our longer-term organic growth expectations given our expanded cockpit aviation solution, which will allow us to increase cross-selling and the broader market opportunities.

Got it. And then any comments -- assumptions on the margin outlook there?

Yes. So we're projecting margins in the range of -- EBITDA margins 25% to 30%, in that target range.

Yes. But like just curious like what the assumptions are underpinning you guys had in that target?

Yes, a lot of the platforms and a lot of, I would say, the operating expenses we have here today, so a lot of it we're going to be driving through the growth in EBITDA margins with that future growth. And we're looking to invest in R&D. So you'll see revenue go up and some of the R&D go up for these programs. That's why we're in the 25% to 30% EBITDA margin range.

All right. I appreciate that. And just last question for me. You had mentioned the Liberty Flight Deck was really well received by both current and potential customers. I was just curious to hear what do they like most about it? Is it maybe lower cost than the alternatives out there? Or is there some type of proprietary tech embedded that gives you an edge? Just curious to hear that.

So I think talking in general, where the avionics market has gone is now being dominated -- especially on the business aviation is being dominated by Garmin and to some extent, Honeywell and Rockwell Collins, all of which will give you a solution that they have. Our solution, we provide the solution to the customer of what they want, not what we have. And that was very well received because we also demonstrated that we can do that without significant NRE requirements. And that was very well received.

I think we did have an agreement put in place with one new customer that -- it was a memorandum of agreement that is we're going to be negotiating the details of the contract. And we've also seen additional customers that have strong, good interest. We're in negotiations with 2 or 3 of those customers to -- with regards to the Liberty Flight Deck.

What we see in the market is that the trend of industry going towards new OEMs coming along with the new engine technologies bring a lot of hybrid engines for carbon emission reduction, and that's driving a whole new groups of aircraft OEMs coming into the market, which they need customization because of the special needs of their airplanes. And we see an opportunity for us to grab that all by the horn and dominate that market.

Our next question comes from Greg Palm with Craig-Hallum Capital Group.

Congrats on a good way to close out the year. Maybe we can start with, I just wanted to dig into that fiscal Q4 results just a little bit more. I mean, I think you mentioned air cargo, business jet, but was there specific product lines that contributed to the upside relative to maybe your prior expectations?

So our prior expectations, a couple of things. One, when we look at what occurred over the quarter, as we mentioned before, we always have a lot of volatility, I think, when we're in these transitional periods with Honeywell. When we got their revenue reports and things like that, my team digs through them, challenges those questions and margins. We knew Q3 looked a little off. We got that resolved by the end of this year, fiscal year, and that was probably about another $1.5 million, roughly $2 million there, which went right to margins. So when you look at overall margin kind of, I would say, for the full fiscal year, you're in that 45% margin, but Q4 was high and Q3 was low, again a little bit there.

And in terms of the air transport, we just saw more demand in the retrofit market, which typically has higher margins. And we saw comeback in business aviation as well.

Got it. Okay. And then the -- in terms of the orders number, I mean, that was a really good number in the quarter as well, a book-to-bill well over 1. Anything to necessarily or specifically call out there?

No, I think as we make investments in our sales teams, we're starting to see some of the fruits of those labors where the sales folks are now out there trying to generate these sales for us. It just takes -- these kind of sales, it's a longer lead time. So we went from having 1 person back in 2023 to about a sales team of about 6 today.

Got it. Okay. And then I want to spend a minute on this targeted organic growth rate. I think you said high single-digit sort of on a normalized basis. I mean how much of Liberty and UMS2 is built into that because both of these seem like pretty significant opportunities that could contribute a lot more than high single-digit growth. And I guess we're probably talking out a few years, but I just wanted to kind of get your sense on the contribution potential of that.

Yes. So on the OEM side of the Liberty cockpit, which includes the UMS2 as part of it, we're looking at 2030, 2031 for those new platforms to get into production. On the aftermarket side, we're going to see things hopefully as early as 2027, where we will have our initial certifications in the aftermarket side of -- on the business jet side of things. Organic growth in -- at least in the next few years is going to come from several platforms that we've already -- we're already seeing growth in those. Being on the air transport side, on the aftermarket side, we're beginning to see some of our product lines taking further legs into other platforms. For example, we were never that successful on the 737 business with our cockpit solutions, but we're seeing an uptick in that on the 737 side. On the C-130 side, on the military side, we're seeing some -- a lot of increased interest and mainly because the competitors we had in the past in those platforms, mainly being Collins and Honeywell, Honeywell's kind of doesn't have much to offer on their platform anymore. And Rockwell Collins hasn't done the investments.

So we're seeing a lot of the countries, which don't have the kind of budgets to spend on Rockwell Collins solutions as they sell to the U.S. Air Force, coming and looking at lower-cost solutions like we have. And so we're seeing an uptick in a lot of areas that's going to drive our organic growth.

Now prior to doing these acquisitions, we were growing somewhere in double digits, mid-teens organic growth. When you do $26 million in revenue, growing it organically by 15% doesn't require a lot of additional revenue to come in. When you're doing $100 million in revenue, obviously, that organic growth becomes hard to achieve in double digits. That's why we're seeing that long term, single-digit organic growth is -- high single-digit organic growth is what we're striving for.

Our next question comes from Sergey Glinyanov with Freedom Broker.

So my congratulations on really successful quarter and the year. And my question is gross margin is much better than expected. You've achieved such a low product cost level, which is the same a year ago. Whether it's only due to sales mix or there is anything else? Should we expect any substantial changes in next year?

So when we look at gross margins, as we said before, there's a lot of volatility, especially when you're doing transitions, product mix, especially with the governmental programs. That's kind of why we look at it from a whole year basis versus quarter-over-quarter because it's timing of also product wins and production. So when you look at the full year, we're in the mid-40s, and that's kind of what we projected a few months ago to say we're in the mid-40s. Q4 was over 60% and Q3 was under 40%. That -- there was a little bit, I would say, of a shift in terms of when we got the revenue and the information on the F-16, the margins were lower. Again, my team challenges and then we go back and forth, but that takes time and sometimes there's nothing there. This time, we had a resolution and we worked through with that with Honeywell. And there's probably about close to almost $2 million in changes there, which affects the margin quarter-over-quarter. So when you take that out, it's kind of, I would say, consistent between those quarters, but again, blended on the mid-40s.

Okay. Got it. And what should we expect revenue in the next 4 quarters? I mean will it be smoother and even in trajectory than a year ago in terms of previous acquisitions, et cetera?

Yes. Unfortunately, we don't give that forward-looking guidance. We're trying to stay on the target of focusing on the $250 million revenue growth for the next few years to get there.

Okay. Maybe you can share your thoughts about capital expenditures in the next year after Exton facility expansion is finalized?

So I mean the Exton facility has been finalized. That spend is all done. We're not expecting major shifts in capital expenditures in 2026.

Okay. And I think the last question is, you emphasize the employee retention tax credits was accretion. Is it onetime benefit or we can expect it in next year?

No, that was a onetime benefit. So the company filed under the Employee Retention Credit Act a few years ago. I guess with some changes in the government and the process, we got those checks, the money back in during this period, and that's when you take credit for it. That's why we called it out because it's a onetime event that's not going to occur again.

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

Well, thank you very much everybody for attending our conference call. Have nice holidays, and enjoy the season. Thank you.

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

Good day, and welcome to the Innovative Solutions & Support Third Quarter Fiscal 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Thank you. Welcome to Innovative Solutions & Support's Third Quarter 2025 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 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.

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. And with that, I'll turn the call over to Shahram.

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 program. As Jeff will discuss in more detail, our results did benefit from a pull forward of F-16 revenues ahead of the upcoming integration into our Exton 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. 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 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.

To that end, I would like to shift the discussion to an update on our progress on the IS&S Next, our long-term value creation strategy. As a quick refresher, our strategy centers 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 facility with construction having wrapped up during the third quarter. 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 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. Meanwhile, we don't expect a meaningful impact on our results. I 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 Jeff will cover shortly. 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 plan. 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 impact of the F-16 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 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. 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.

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 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.

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. 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, and as we saw this quarter, the cost to build 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. However, importantly, there is 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 a very strong operating expense leverage in the quarter.

Operating expense during the 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 of onetime expenses. Operating expenses represented 21% of revenue during the third quarter as 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. 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' OEM customers under long-term programs, including Pilatus PC-24, Textron King Air, Boeing T-7 Red Hawk, the Boeing KC-46A and the F-16 with 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. During the 9 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 9 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 facility. Despite the increase in spend of over $5 million when compared to the 9 months last year, we were still able to generate free cash flow of $4.8 million during the 9 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 and cash equivalents of $600,000, resulting in net debt of $22.7 million. 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, IS&S 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 1.1x. As Shahram mentioned, on July 18, 2025, we entered in a new 5-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. 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.

[Operator Instructions] The first question comes from Jeff Van Sinderen with B. Riley Securities.

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?

This is Jeff. So when we look ahead, our expectation is in the mid-40s what we said before depending on the mix of our products. As you look at military, it's lighter gross margins so it really depends on the mix both, we're gauging in the mid-40s.

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 3.

Okay. And then as a follow-up to that, can you speak a little bit more about acquisition strategy? Do you have a pipeline? 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, yes, we do have a pipeline. Some of them are acquisition that we're looking at potentially doing from Honeywell. Those are typically auctions. We also were looking at a number of smaller avionics companies that we're engaged in dialogue with. And we're looking at probably doing some acquisitions of that nature if we can agree on a price that suits IS&S.

[Operator Instructions] The next question comes from Gowshi Sri with Singular Research.

Can you hear me?

Yes.

Yes.

My first question is you mentioned the F-16 safety stock deliveries pulled forward into Q3 will reduce revenues from the line for the next 2 quarters. Can you help us frame the magnitude of that vehicle 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 it entirely due to the pull forward or were there other program wins or price/mix factors that lifted the product revenue?

Yes, so I could take a little bit of that. So sequentially, a lot of it was through the F-16 and the pull forward. When we look ahead and as the equipment is getting transitioned to IS&S currently right now in our factory, we're expecting nominal F-16 revenue for Q4 and Q1 potentially because the equipment has got to be set up. It's got to be certified. It's got to be calibrated. So we're working through that process as we speak.

Okay. And my second question is, I know the management has emphasized EBITDA margins as the key profitability metric. But 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 could -- 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 mix changes might stabilize the margins would be helpful in modeling.

Sure. So when we look at our gross margins, that's why we've been guiding conservatively throughout the year due to the lumpiness of the product mix, more importantly, the F-16. So we look forward, we're gauging in that 45% range for gross margins. That's kind of the target we're focused on.

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

I think what we're seeing is a lot of positive feedback that we're getting from our defense contractors. I should just mention, we recently received a contract that was partially a military program, which is based on the commercial platform. But we're seeing an increased level of interest from all aspects of the government and the military side of the business. Very encouraging.

Okay. Any breakdown into that backlog, whether some of that contains any multiyear or military commercial -- multiyear military retrofits?

So obviously, that backlog includes some of the F-16 backlog that we inherited from Honeywell, but there is a small amount of it for these multiyear programs because typically, we only put things in the backlog where we have a purchase order delivery date on it. And some of the long-term agreements don't -- the kind of forecast and that we don't put it in backlog.

Okay. And just my last question. With that $100 million credit facility giving you significant headroom, are you prioritizing acquisitions to fully leverage your Exton facility? Is that how we're supposed to think about it?

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.

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

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

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