Innovative Aerosystems' Q4 2025 Earnings Call: Contradictions in Gross Margins, Capital Expenditures, and Military Sales Impact

Date of Call: December 18, 2025

Financials Results

• Revenue: Q4 net revenue $22.2M, up 45% YOY; FY2025 revenue $84M, up nearly 80% YOY
• EPS: Q4 GAAP diluted EPS $0.39, up from $0.18 prior-year; FY2025 diluted EPS $0.88
• Gross Margin: Q4 gross margin 63.2%, compared to 55.4% in the prior year; FY2025 blended gross margin in the mid-40% range (~45%)

Guidance:

• Q1 FY2026 revenue expected $18M–$20M.
• Full-year gross margins expected to be in the mid-40% range (Q4 was above due to favorable mix).
• Long-term organic revenue growth target: high single-digits; FY2026 organic growth expected more modest due to F-16 pull-forward.
• Long-term adjusted EBITDA margin target 25%–30%.
• CapEx: Exton expansion complete; no major capital spend expected in 2026.
• Employee retention tax credit was a one-time benefit.

Business Commentary:

* Revenue Growth and Strategic Focus: - Innovative Aerosystems reported revenue of $22 million for Q4, up 45% year-over-year, and $84 million for the full year, up nearly 80% from the previous year. - The growth was driven by increased throughput from client programs, a favorable sales mix, and improved operating leverage, as well as strategic investments in engineering and infrastructure.

• Military Program Expansion:
• The company saw significant contributions from military programs, with revenues from the F-16 platform, along with C-130 and other Boeing products, contributing to the upside.

• This growth was supported by the integration of the F-16 program production into the Exton facility and efforts to enhance military capabilities.

• Innovation and Product Development:

• Key achievements included the successful integration of the F-16 program production and advancements in new products like the UMS2 platform and the Liberty Flight Deck.

• The company's focus on innovation and strategic investments in engineering led to these developments, positioning it for future growth in the business jet and avionics markets.

• Financial Performance and Outlook:

• Net income for Q4 was $7.1 million, or $0.39 per diluted share, with adjusted EBITDA of $9.6 million, up 71% year-over-year.
• The company anticipates steady revenue growth in fiscal 2026, with expected first-quarter revenues ranging from $18 million to $20 million, supported by a disciplined acquisition strategy and organic growth initiatives.

Sentiment Analysis:

Overall Tone: Positive

• Management called fiscal 2025 "transformational" and "outstanding," reported Q4 revenue up 45% YOY to $22.2M and Q4 adjusted EBITDA up 71% YOY to $9.6M; backlog ~ $77M and FY revenue $84M (nearly +80% YOY) underpin a positive outlook and targets for $250M revenue and 25%–30% EBITDA margins.

Q&A:

• Question from Robert Brooks (Northland Capital Markets): Is the military momentum you referenced all related to F-16s, or is there something else?
  Response: Not just F-16s — also C-130 and other Boeing platforms contributed to fourth-quarter military strength.

• Question from Robert Brooks (Northland Capital Markets): What was the non-F-16 net positive contribution to the military results?
  Response: Approximately a couple million dollars from C-130 and Boeing platforms; F-16 produced nominal service revenue (~$300k) in Q4.

• Question from Robert Brooks (Northland Capital Markets): What assumptions underpin your $250M revenue target?
  Response: Assumes high single-digit organic growth plus disciplined, accretive acquisitions to drive the balance of growth.

• Question from Robert Brooks (Northland Capital Markets): Any assumptions on margin outlook for that target?
  Response: Targeting adjusted EBITDA margins of 25%–30% long term.

• Question from Robert Brooks (Northland Capital Markets): What did customers like most about the Liberty Flight Deck?
  Response: Customers valued customizable solutions delivered with minimal NRE, enabling tailored avionics for new OEMs and hybrid-engine platforms.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): Which product lines drove the Q4 upside versus prior expectations?
  Response: Retrofit air-transport product demand (higher-margin) and a business-aviation comeback, plus ~ $1.5–2M timing/resolution of Honeywell revenue that boosted margins.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): Anything to call out on the strong orders/book-to-bill in the quarter?
  Response: Investments in the sales organization (expanded from 1 to ~6) are beginning to produce higher order flow and improved book-to-bill.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): How much of Liberty and UMS2 are built into the high-single-digit organic growth assumption?
  Response: Aftermarket certification activity could contribute as early as 2027; OEM production for Liberty/UMS2 is expected around 2030–2031, so near-term organic growth is driven by existing platforms with Liberty/UMS2 contributing later.

• Question from Sergey Glinyanov (Freedom Broker): Is Q4's much-better-than-expected gross margin solely due to sales mix or anything else, and should we expect changes next year?
  Response: Primary driver was favorable revenue mix and timing, plus ~ $2M of Honeywell-related adjustments; company expects full-year margins to normalize to mid-40% and quarter-to-quarter volatility may continue.

• Question from Sergey Glinyanov (Freedom Broker): Will revenue be smoother over the next four quarters after recent acquisitions/transitions?
  Response: Management declined to provide multi-quarter revenue guidance, reiterating focus on the multi-year $250M target instead.

• Question from Sergey Glinyanov (Freedom Broker): Thoughts on capital expenditures next year after the Exton expansion?
  Response: Exton expansion capex is complete; no major increases in capital expenditures are expected in 2026.

• Question from Sergey Glinyanov (Freedom Broker): Is the employee retention tax credit a recurring benefit?
  Response: No — the employee retention tax credit recognized in Q4 was a one-time benefit.

Contradiction Point 1

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

Is sales growth due solely to F-16 programs, or are there other factors affecting military sales? - Robert Brooks (Northland Capital Markets, Research Division)

2025Q4: We've also reserved at the end of 2025 for a potential $25 million gross margin shortfall due to a lack of input pass-through and a resulting favorable sales mix. Our expectation is we'll resolve this in 2026, adding back to 2026 revenue. So I think the gross margin is back in line in the mid-40s. - Jeffrey DiGiovanni(CFO)

What is your normalized gross margin rate given the F-16 impact? - Jeffrey Wallin Van Sinderen (B. Riley Securities)

2025Q3: Our expectation is in the mid-40s for our gross margins, depending on the mix of our products. Military products have lighter gross margins, so the mix is important to consider. - Jeffrey DiGiovanni(CFO)

Contradiction Point 2

Capital Expenditures

It involves changes in financial planning, specifically regarding capital expenditures, which are important for understanding the company's growth strategy and financial health.

Will capital expenditures remain steady next year? - Sergey Glinyanov (Freedom Broker, Research Division)

2025Q4: The Exton facility expansion is completed, capital expenditures are not expected to significantly change in 2026. - Jeffrey DiGiovanni(CFO)

Given the $100 million credit facility providing headroom, are you prioritizing acquisitions to leverage your Exton facility? - Gowshihan Sriharan (Singular Research)

2025Q3: We have now $100 million capacity in the 2025 credit facility, which we'll use to fund the Exton expansion, and we expect to occupy the whole facility by the end of this quarter, adding capacity. - Jeffrey DiGiovanni(CFO)

Contradiction Point 3

Military Sales Impact and Contribution

It highlights differing perspectives on the contribution and impact of military sales on overall revenue, which is crucial for understanding the company's growth strategy and market focus.

Are sales driven solely by F-16 programs or other factors? - Robert Brooks (Northland Capital Markets, Research Division)

2025Q4: The strength in military sales is not just from F-16 programs. We also see impact from C-130 and Boeing products. F-16 had limited revenue in Q4, with only $300,000 in service revenue. - Jeffrey DiGiovanni(CFO)

What percentage of your quarterly sales were to the Department of Defense? - Doug Ruth (Lenox Financial Services)

2025Q2: At least 40% of sales were to the Department of Defense. - Jeff DiGiovanni(CFO)

Contradiction Point 4

Gross Margin Performance and Stability

It involves differing statements about the stability and factors influencing gross margins, which are critical for financial forecasting and investor expectations.

Is the gross margin improvement due to sales mix or other factors? - Sergey Glinyanov (Freedom Broker, Research Division)

2025Q4: Gross margins are volatile, especially during transitions. Q4 saw a high margin due to favorable sales mix, while Q3 was lower due to issues resolved later. Overall, margins align with our mid-40% target range. - Jeffrey DiGiovanni(CFO)

Given the sequential rebound in gross margins, will margins stabilize at these levels, or will a shift in product mix toward military create a headwind for FY '25? - Gowshi Sri (Singular Research)

2025Q2: Gross margins are volatile due to product mix, and it's difficult to predict. Emphasis is on EBITDA and profit margins, and we expect growth in these areas. - Shahram Askarpour(CEO)

Contradiction Point 5

Military Sales and Program Impact

It involves the company's sales and revenue streams, particularly related to military programs, which can impact business performance and investor expectations.

Are military sales strength driven solely by F-16 programs, or are there other factors? - Robert Brooks (Northland Capital Markets, Research Division)

2025Q4: The strength in military sales is not just from F-16 programs. We also see impact from C-130 and Boeing products. F-16 had limited revenue in Q4, with only $300,000 in service revenue. - Jeffrey DiGiovanni(CFO)

How will the PC-24 production increase affect the backlog, and when will auto-throttles significantly contribute to revenue? - David Campbell (Thompson, Davis & Company)

2019Q4: Virtually none of the PC-24 production increase is in the backlog. We have older contracts for military applications. - Geoffrey Hedrick(CEO)