Innovative Aerosystems (NasdaqGS:ISSC) Q1 2026 Earnings call February 12, 2026 10:00 AM ET Company ParticipantsJeff DiGiovanni - CFOJosh Sullivan - Managing DirectorPaul Bartolai - PartnerShahram Askarpour - CEOConference Call ParticipantsBobby Brooks - VP and Senior Equity Research AnalystDanny Eggerichs - Equity Research AnalystOperatorGood day, and welcome to the Innovative Aerosystems first quarter fiscal 2026 financial results conference call. All participants will be in listen-only mode. Should you ne ...

Financial Data and Key Metrics Changes - The company reported GAAP net income of $68.3 million and AFFO of $99.7 million for Q4 2025 [3][4] - AFFO per share totaled $0.49, representing a 9% increase compared to Q4 2024 [14] - The company increased its 2026 AFFO per share guidance range to $1.99-$2.04, implying a growth rate of about 7% at the midpoint and 8% at the high end [6][17] Business Line Data and Key Metrics Changes - The company executed a differentiated investment strategy, sourcing 85% of $296 million in investments through existing relationships [5] - Same-store rent growth was 1.6%, with strong rent coverage of 3.6 times [6][8] - The portfolio ended the quarter with investments in 2,300 properties leased to over 400 tenants, maintaining a weighted average lease term of approximately 14 years [7] Market Data and Key Metrics Changes - The company noted a stabilization in competition, which is expected to lead to a slower decrease in cap rates than previously anticipated [24][32] - The average initial cash yield for investments was 7.7%, with a compelling GAAP yield of 9.1% [6][11] Company Strategy and Development Direction - The company aims to maintain a dominant position as a real estate capital provider to middle-market operators [4] - The focus remains on optimizing cost of capital and delivering shareholder value, with a commitment to a well-capitalized balance sheet [14][17] - The company plans to continue its investment strategy without significant changes, emphasizing relationships with existing operators [32][82] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the health of the portfolio, citing better-than-expected credit trends and a strong investment pipeline [21][22] - The company anticipates modest cap rate compression in the latter half of 2026, driven by market conditions [44][45] - Management remains cautious about the macroeconomic environment but believes the current strategy will support growth [82][84] Other Important Information - The company sold 19 properties for $48.1 million in net proceeds at a 6.9% weighted average cash yield during Q4 [9] - Tenant concentration continues to decline, with the top 10 tenants comprising only 16.5% of ABR [10] Q&A Session Summary Question: Changes in guidance range - The CFO explained that the guidance was adjusted due to better-than-expected portfolio credit trends and same-store rent growth [21][22] Question: Impact of competition stabilization - Management clarified that stabilization in competition does not imply a shift to a safer tenant base but indicates a slower decrease in cap rates [24][25] Question: Acquisition trends and drivers - Management noted that the strong start to the year in acquisitions was partly due to deal slippage from Q4 and emphasized the need for caution in interpreting early trends [30][31] Question: Portfolio credit events - Management confirmed that the only notable credit event was with American Signature, which is expected to recover within normal ranges [36][37] Question: Dividend growth expectations - The CFO indicated that while dividends are important, the decision on future increases will be made by the board, balancing current returns and retained capital [39][40] Question: Cap rate stabilization across industries - Management confirmed that cap rate stabilization is observed across all industries they invest in, with no significant deviations [32][33] Question: Future investment pipeline - Management expressed confidence in the investment pipeline, indicating that the opportunity set is not a constraint for future growth [96][97]

Financial Data and Key Metrics Changes - The company reported a 4.3% growth in same-store cash NOI and a 6.3% increase in core FFO per share for 2025 [5][11] - Core FFO per share was $0.66 for Q4 and $2.55 for the year, reflecting a 6.3% increase compared to 2024 [11] - The company incurred a cash credit loss of 22 basis points in 2025, with a retention rate of 75.8% for the quarter and 77.2% for the year [12] Business Line Data and Key Metrics Changes - In Q4, the company commenced 31 leases totaling 3 million sq ft, generating cash and straight-line leasing spreads of 16.3% and 27.4%, respectively [11] - The company achieved cash and straight-line leasing spreads of 24% and 38.2% for the year [12] - The acquisition volume for Q4 totaled $285.9 million, consisting of 7 buildings with cash and straight-line cap rates of 6.4% and 7%, respectively [7][8] Market Data and Key Metrics Changes - The company expects national vacancy rates to peak in the first half of 2026, with an inflection point in the back half of the year [6] - The company anticipates 180 million sq ft of deliveries in 2026, significantly lower than the 225 million sq ft expected in 2025 [100] - The Midwest markets, particularly Minneapolis, Chicago, and Indianapolis, are showing strong demand, while Southeast port markets like Jacksonville and Savannah are experiencing weakness [68][70] Company Strategy and Development Direction - The company plans to initiate a core FFO per share range between $2.60 and $2.64 for 2026, with same-store cash NOI growth expected between 2.75% and 3.25% [14] - The company raised its dividend by 4%, the largest increase since 2014, and modified the payment cadence from monthly to quarterly [10] - The company is focusing on maintaining high occupancy levels and is optimistic about leasing activity in 2026, driven by a record amount of square footage expiring [7][21] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about economic growth and increased tenant activity, expecting net absorption to improve in 2026 [6][21] - The company is not concerned about new supply coming online, as it believes developers are prudent and that any new developments will take time to materialize [33] - Management noted that the demand from tenants is real, with a broad base of interest from various sectors, including data centers [29][31] Other Important Information - The company has a strong acquisition pipeline valued at $3.6 billion, with expectations for acquisition volume in 2026 to range between $350 million and $650 million [14][22] - The company is budgeting for 957,000 sq ft of leasing in 2026, with a significant portion expected to come from build-to-suit projects [63] Q&A Session Summary Question: Inquiry about leasing environment and occupancy guidance - Management acknowledged the potential for upside in leasing activity if the current momentum continues, despite budgeting for a 9-12 month lease-up period for assets [18][20] Question: Discussion on acquisition visibility and timing - Management indicated that while the first quarter is typically slower, they are underwriting more transactions than in the previous year, with a strong pipeline [22][23] Question: Clarification on tenant activity and demand - Management confirmed that the current tenant activity reflects real demand, with a broad base of interest from various sectors, including data centers [28][29] Question: Concerns about potential overbuilding - Management expressed confidence that new supply will be introduced prudently and not until late 2027, alleviating concerns about overbuilding [33] Question: Update on market performance and rent growth - Management noted that while some markets are performing well, overall rent growth is expected to be modest, with stronger markets seeing 2-3% growth [71][75]

Financial Data and Key Metrics Changes - Q4 revenue reached $2.17 billion, up 15% year-over-year, while full-year revenue increased by 11% [5] - EBITDA for Q4 was $653 million, a 29% increase, and full-year EBITDA was $2.42 billion, up 26% [5][10] - Operating income for Q4 was $580 million, reflecting a 34% increase, with earnings per share (EPS) of $1.05, a 42% rise for the quarter and a 40% increase for the year [5][6] - Free cash flow for the year was a record $1.43 billion, with a conversion rate of 93% of net income [5][11] Business Line Data and Key Metrics Changes - Commercial aerospace revenue grew 13% in Q4 and 12% for the full year, driven by demand for engine spares and a record backlog for new aircraft [7][8] - Defense aerospace revenue increased by 20% in Q4 and 21% for the full year, with engine spares up 32% [7][8] - Commercial transportation revenue was up 4% in Q4 but down 5% for the full year, impacted by higher aluminum costs [8] - Gas turbine revenue surged 32% in Q4 and 25% for the full year, driven by demand for electricity generation [9] Market Data and Key Metrics Changes - The commercial aerospace market is experiencing robust growth, particularly in Asia Pacific and North America, with a record OEM backlog [23] - The defense market remains strong, particularly for the F-35 program, with increasing demand for spares [25] - The gas turbine market is entering a significant growth phase, with expectations of doubling revenue from approximately $1 billion to $2 billion over the next 3-5 years [26] Company Strategy and Development Direction - The company is focused on investing for growth, with a capital expenditure of $453 million in 2025, primarily in the engines business [11][13] - Recent acquisitions, including CAM and Brunner, are aimed at enhancing product offerings and entering new markets [30][87] - The company aims to maintain a strong balance sheet while deploying capital for growth opportunities and returning value to shareholders through buybacks and dividends [75] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the growth of commercial aerospace and defense markets, citing a strong backlog and increasing demand for new aircraft builds [23][24] - The gas turbine market is expected to see significant growth due to rising electricity demand, particularly from data centers [26] - The company anticipates that 2026 will show continued growth, with revenue guidance of $9.1 billion and EBITDA of $2.76 billion [29] Other Important Information - The company redeemed all outstanding shares of preferred stock for $55 million, simplifying its capital structure [12] - The company completed the annuitization of the U.K. pension plan, reducing gross pension obligations by $128 million [21] Q&A Session Summary Question: Future growth expectations for engine products - Management sees robust growth in commercial aerospace, defense, and gas turbines, with significant investments planned to support this growth [35][39] Question: Margin sustainability and factors affecting it - Management indicated that while margins are currently high, predicting future margins is challenging due to various factors, including new hires and capital investments [46][49] Question: Capital deployment strategy regarding M&A and buybacks - Management stated that they can pursue both M&A and share buybacks simultaneously, with a disciplined approach to capital allocation [72][75] Question: Potential for gas turbine revenue to exceed commercial jet engine revenue - Management does not foresee gas turbine revenue surpassing commercial jet engine revenue but acknowledges significant growth in both sectors [80] Question: Insights on recent acquisitions and market opportunities - The CAM acquisition expands the company's capabilities in fittings and couplings, while the Brunner acquisition enhances its product offerings in the fasteners market [87][90]

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Financial Data and Key Metrics Changes - Fourth quarter revenue increased by 17% year-over-year and 9% sequentially, driven by stabilization in industrial demand and growth in medical and advanced applications [5][10] - Full-year revenue grew by 3%, marking the first full-year revenue growth since 2021 [6] - GAAP gross margin was 36.1%, while adjusted gross margin was 37.6%, impacted by planned inventory management and tariffs [21][22] - GAAP net income was $13 million or $0.31 per diluted share, with adjusted net income at $20 million, resulting in earnings per diluted share of $0.46 [23] Business Line Data and Key Metrics Changes - Materials processing revenue increased by 17% year-over-year, with stable demand in welding and increased demand in battery and additive manufacturing applications [5][18] - Medical sales grew by 21% year-over-year, driven by new product traction and a major customer win [8][9] - Revenue from applications outside of materials processing increased by 15%, with significant growth in medical and advanced applications [18] Market Data and Key Metrics Changes - North America sales increased by 21% sequentially and 23% year-over-year, driven by higher revenue in cutting, cleaning, medical, and advanced applications [19] - Europe sales increased by 8% sequentially and 7% year-over-year, with strong growth in additive manufacturing and cleaning [19] - Asia revenue improved by 5% sequentially and 19% year-over-year, primarily due to higher welding sales in China [20] Company Strategy and Development Direction - The company is focusing on strengthening its position in core industrial applications while penetrating new non-industrial markets [12] - Growth initiatives in medical, micromachining, and defense are key investment priorities, with expectations for continued momentum into 2026 [11][12] - The company aims to expand its addressable market by integrating laser technology with applications expertise to address complex customer challenges [13] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding improving market conditions and customer demand, despite ongoing macroeconomic uncertainties [10][11] - Strong bookings in Q4 resulted in a book-to-bill ratio above one, indicating positive demand trends [10][26] - The company plans to maintain a balanced capital allocation strategy, investing in growth while returning capital to shareholders [25] Other Important Information - The company received FDA clearance for a next-generation urology system, enhancing its medical product offerings [9] - The cleanLASER acquisition has generated revenue synergies and contributed to growth in the cleaning segment [14][15] - The company has authorized a new $100 million share repurchase program to continue returning capital to shareholders [25] Q&A Session Summary Question: Thoughts on cutting revenue stability and long-term growth targets - Management noted that cutting revenue has stabilized and is expected to grow alongside investments in core markets [32][33] Question: Update on Directed Energy investment and market interest - Management reported strong customer interest in the Crossbow system for military and civilian applications, with plans for future product enhancements [37][38] Question: Margin improvement and revenue levels for fixed cost absorption - Management indicated that revenue levels above $270 million would help improve gross margins, with ongoing cost reduction initiatives in place [40][41] Question: Plans for investment in Directed Energy applications - Management confirmed a roadmap for increasing power levels in Directed Energy products, targeting smaller class drones [45] Question: Expectations for new medical products in 2026 - Management anticipates significant growth in medical sales, with new product launches planned for 2026 [46][47] Question: Competitive environment updates, especially in Asia - Management stated that pricing pressures are minimal in differentiated markets, with strong demand in battery and advanced applications [62] Question: Variability in bookings by region - Management reported broad-based order activity, with North America and Asia showing strong performance, while Europe is improving [68]

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Financial Data and Key Metrics Changes - In 2025, the company achieved record financial results with Distributable Earnings before realizations of $5.4 billion, representing an 11% increase over the prior year, and total Distributable Earnings of $6 billion [7][15] - The total net income for the year was $3.2 billion, with Distributable Earnings per share of $2.27 before realizations and $2.54 including realizations [15] - The company raised $112 billion of capital during the year, with fee-bearing capital increasing by 12% to over $600 billion, driving a 22% increase in Fee-Related Earnings to $3 billion [15][16] Business Line Data and Key Metrics Changes - The Asset Management business generated $2.8 billion of Distributable Earnings, or $1.17 per share, reflecting strong investor demand for fund offerings [15] - The Wealth Solutions business delivered $1.7 billion of Distributable Earnings, a 24% increase over the prior year, driven by $20 billion of annuity sales and improved profitability in the P&C business [16][24] - Operating businesses generated Distributable Earnings of $1.6 billion, supported by strong fundamentals across the platform, with Renewable Power and Transition and Infrastructure businesses seeing a 14% increase in Operating Funds from Operations [17] Market Data and Key Metrics Changes - The market environment showed strong business fundamentals, with improved capital markets and increased transaction activity, leading to expectations that real assets will continue to outperform [8][11] - In the real estate sector, nearly 17 million square feet of office leases were signed globally, with net rents averaging 18% higher than expiring leases [18] - The company’s Super Core and Core Plus portfolios finished the year with over 95% occupancy, poised for robust NOI growth in 2026 [19] Company Strategy and Development Direction - The company is focused on streamlining and consolidating its market capitalizations, with plans to merge Brookfield Corporation with its sister insurance entity, BNT, to enhance growth potential [12][13] - The strategic initiatives advanced in 2025 are expected to fuel meaningful momentum, with a strong capital base of $180 billion and significant access to capital [22][14] - The company aims to maintain a long-term focus on value creation, emphasizing the importance of avoiding disruption to the compounding process [9][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver financial results and compound value for shareholders, anticipating 2026 to be another strong year [14] - The company highlighted the importance of maintaining excess capital to navigate market cycles and capitalize on investment opportunities [10] - Management noted that the current market sentiment is beginning to realign with strong underlying fundamentals, particularly in real estate [11] Other Important Information - The company returned $1.6 billion to shareholders in 2025 through dividends and share buybacks, repurchasing over $1 billion of Class A shares at a significant discount to intrinsic value [21] - A 17% increase in the quarterly dividend to $0.07 per share was declared, reflecting a commitment to returning capital to shareholders while maintaining a low payout ratio [23][66] Q&A Session Summary Question: Scaling the P&C business and its profitability - Management discussed the repositioning of the P&C business to generate strong profits and the potential for M&A opportunities as markets soften, with a target of $20 billion-$25 billion of float by the end of the decade [32][35] Question: Decision to simplify the structure and collapse BNT - Management explained that the decision to streamline and simplify the structure is based on the evolution of public markets and the growth potential of the insurance business, aiming to fully benefit from the broader capital base [38][41] Question: Outlook for the Carry into 2026 - Management indicated a strong pipeline for monetizations and expects an increase in Carry realizations in the second half of the year, with good valuations for assets being brought to market [62][63] Question: Dividend increase and its implications - Management clarified that the 17% dividend increase is not a shift in strategy but a result of share splits and a low payout ratio, maintaining a focus on reinvesting capital back into the business [66][67]

Financial Data and Key Metrics Changes - The company reported net revenues of $21.8 million in Q1 2026, representing a 36.5% increase from the same period last year, driven by growth in the commercial aftermarket business and higher service revenues [10][12] - Adjusted EBITDA grew 140.9% to $7.4 million, up from $3.1 million last year, largely due to revenue growth and a more favorable revenue mix [15][16] - Gross profit increased to $11.9 million, an 80% rise from $6.6 million in the prior year, resulting in a gross margin of 54.5%, up from 41.4% [12][14] Business Line Data and Key Metrics Changes - Product sales reached $13.6 million, up from $10 million, primarily due to stronger volumes of aftermarket product upgrades [11] - Service revenue increased to $8.2 million from $6 million, driven by growth in service volumes related to specific product lines [12] Market Data and Key Metrics Changes - New orders in Q1 2026 were approximately $19 million, with a backlog of about $75 million as of December 31, 2025 [16] Company Strategy and Development Direction - The company is focused on its IA Next long-term value creation strategy, which emphasizes profitable growth, operational excellence, and disciplined capital allocation [4][5] - The long-term target includes achieving $250 million in revenue with Adjusted EBITDA margins between 25%-30% through both organic and inorganic growth [5] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth potential of the F-16 platform and broader defense business, citing significant investments and a favorable backdrop for defense spending [6][7] - The company expects organic revenue to be flat year-over-year due to prior revenue pull-forwards, with second-quarter revenues projected between $20 million and $22 million [19] Other Important Information - Cash flow from operations was $8.2 million, compared to $1.8 million in the previous year, indicating strong financial discipline [17] - The company had total debt of $23.8 million and cash and cash equivalents of $8.3 million, resulting in a net debt of $15.5 million [18] Q&A Session Summary Question: What drove the increase in commercial aftermarket demand and sales? - The increase was mainly driven by new products developed for the air transport sector, including the ICAT system and software upgrades for the 757 and 767 [21][22] Question: Was there any pull forward in demand? - Management indicated that while the first quarter showed strong organic growth, they expect organic growth for the full year to be in the single digits, augmented by potential acquisitions [23][24] Question: What are the growth opportunities related to the F-16 platform? - Growth opportunities include the integration of new components and an increase in requests for proposals from Lockheed and the U.S. government for subassemblies and full units [25][26][27] Question: What surprised the company to the upside in the last quarter? - The upside was attributed to the timing of shipments, with some purchase orders arriving sooner than expected [31][33] Question: What is the outlook for defense programs outside of the F-16? - Management noted numerous opportunities for upgrades to various platforms, with a positive budget outlook for these upgrades [34] Question: Is there any acceleration in the M&A pipeline? - The company is expecting a couple of near-term opportunities, although some previous opportunities were not aligned with strategic objectives [36] Question: How is the integration of F-16 components progressing? - The integration took longer than planned due to requirements from Lockheed Martin and the U.S. government, but overall, the process is ongoing [41][43] Question: What is the market interest in UMS and automation? - There is significant interest in cockpit automation, with potential regulatory changes expected to allow for one-pilot operations in the future [45][46]