Good afternoon, everyone. My name is John Franzreb. I'm an analyst here at Sidoti & Company. Our next presentation of the day is Innovative Solutions and Support, ticker ISSC. For those who are not familiar with the company, Innovative manufactures flight navigation systems and instrumentation. We are fortunate to have with us CEO Shahram Askarpour and CFO Jeff DiGiovanni. They will have a presentation. Following that presentation, there'll be an opportunity to ask questions. If you have a question, please put it in the Q&A box, and I'll present it to management. With that said, gentlemen, thanks for being with us. The floor is yours.
Yep. Thank you, John. Good afternoon. I'm Shahram Askarpour, CEO of IS&S, and today I'm pleased to introduce our new CFO, Jeff DiGiovanni. Jeff joined us last month and is a great addition to our management team with his solid experience in public company financials and tenure as a strategic CFO. Here's a summary of what we are covering today. IS&S was founded in 1988 on the idea that aircraft operators will frequently upgrade their avionics as electronic technology grows. We are an IP-rich company that generates an average of seven patents per year to protect our inventions and product technologies, and have developed a management team with significant experience and tenure. We serve three market segments with our products, being business aviation, air transport, and military. We also provide avionics and new aircraft production, which we refer to as OEM, as well as aftermarket or retrofit.
This past year, we successfully acquired certain inertial communication and navigation product lines from Honeywell, which I will discuss in more detail in a few minutes. Historically, our growth strategy has been mainly focused on organic product development. For example, we initially developed and certified the Utility Management System for the Pilatus PC-24, and we plan to utilize this existing certified system as our platform for autonomous flight. We're also leveraging our strong financial position and our underutilized infrastructure to augment the successful organic growth with targeted product acquisitions that help accelerate our growth, as our current production infrastructure can support double our sales with little CapEx requirement. In the past six years, we have had top-line CAGR of greater than 15%.
As a result of our organic growth strategy, we have a rich product portfolio that has been designed and certified to the highest level of safety, or Level A, and is utilized in some of the world's most prestigious aircraft, such as the Pilatus PC-24. We are vertically integrated in our facility in Exton, Pennsylvania. We internally perform all aspects of product development and qualification. We manufacture all products, including all subassemblies, in-house. We have an automated Surface Mount Technology laboratory that produces all our electronic circuit cards. We machine our own mechanical parts. We even paint our equipment in-house, and our direct cost of labor is less than 5% of our revenue. We achieve this through innovation in product design and automation in the factory.
The reduced labor content is what allows us to achieve attractive gross margins, as well as enable us to significantly increase our revenue without significant increase in skilled labor. As we continue to further integrate the acquired Honeywell products and take advantage of synergies within our operations, we believe to achieve the historical 60% gross margins on those as well. So our organic growth will include expansion of the UMS, auto throttle, flight and navigation computers, and our standby instruments to other OEM platforms. Our organic growth will also continue through our aftermarket solutions that replace other obsolete and inadequate systems in all three market segments with the addition of the helicopter platforms. The acquisition strategy is to incorporate established cockpit and cabin product lines in our production facility, gaining significant operating leverage.
Our air transport and military transport cockpit systems are installed on thousands of aircraft, such as Boeing 737, 757, 767, and Lockheed C-130, L-100, and P-3s, and continue to expand. We're also expanding our display product market by addressing the business aviation and helicopter markets. Also, our UMS and auto throttle product lines have provided us with unique actuation and monitoring technology that is the engine for our near-term organic growth strategy. We are currently in discussion with other aircraft manufacturers to incorporate our UMS product lines into their various platforms, as well as expanding the platforms for our auto throttle product line. Our early products mainly consisted of individual primary flight instruments designed for military aircraft, such as our highly reliable and accurate air data computers that sense and compute aircraft speed and altitude, as well as engine instruments that measure and display critical aircraft engine parameters.
In the early 2000s, there was a mandate by the FAA to reduce vertical separation of aircraft from 2,000 ft to 1,000 ft when flying at and above 29,000 ft. The IS&S air data products met and exceeded the accuracy requirements. We shared the market with two larger competitors, and yet captured over 60% of the world's business aircraft, generated $100 million in cash, and invested that money over the years to grow our product portfolio. Today, our product portfolio ranges from integration of individual instruments inside a large LCD display, adding high-performance navigation systems for highly integrated cockpit solutions, to highly accurate flight and navigation sensing computers. In the last 10 years, we have been developing products for flight controls, such as our UMS and our auto throttle product lines that have provided us with unique actuation and monitoring technology.
Last year, we completed the acquisition of these products from Honeywell Aerospace. The products acquired include communication, navigation, and inertial reference systems that both enhance our current offerings and leverage our existing infrastructure, making this an ideal fit with the acquisition strategy we have articulated. Over the past several months, we have integrated these products into our operations and are in the process of optimizing our execution to bring the full potential of these products into fruition. I would now like to talk about our long-term growth strategy. The future of aviation is in autonomous flight, with the two major milestones being first, reduce the pilot count to one, and second, to eliminate the pilots in the aircraft. Our focus is on the lucrative near-term opportunity of reducing the pilot count on Part 25 aircraft.
That is, aircraft with gross weight of over 12,500 lb, which covers most of the multi-engine aircraft out there. These aircraft are required to fly with two or more pilots on board. The business case is compelling. Starting at larger business aircraft, such as the Citation XLS and above, where the ROI is less than two years, to passenger and cargo airline operators, where a typical passenger airliner has an average of 10-16 full-time pilots on staff per aircraft, and the ROI is less than a year. Reducing that count to half is a highly attractive proposition for all operators of Part 25 airplanes. The aircraft operators have been demanding a solution that reduces the pilot count from two to one, and certification authorities are reacting to that demand.
We look at the initial phase of flight autonomy to be one pilot in the aircraft with a fully autonomous system capable of performing all phases of flight and ground activities. The automated system communicates with the ground station that includes pilots monitoring many aircraft and assisting the flying pilot through the automated flight system. We plan to reach this by incremental supply of cockpit automation to the industry that helps reduce pilot workload and enhance safety, and allows us to generate steady revenue from these incremental offerings on the path to the pilot reduction. What is our advantage over the competition? Two product lines developed by IS&S are the existing certified equipment that enable phase one operation of autonomous flight, being our integrated cockpit system and the utility management system.
So our integrated cockpit system is a central display and control hub for all aircraft functionalities, including a highly accurate navigation computer. The system provides pilot commands in a digital format to all aircraft subsystems, making it ideal for automation of the pilot activities. The utility management system monitors and controls all aircraft functions and subsystems by directly monitoring sensors, as well as driving and monitoring the position of actuators that control the flight path. This is the basis for phase I of flight automation. Both systems have been successfully fielded on business jet aircraft for many years. Here's the timeline to be market ready. As I mentioned, phase I is an achievable and highly lucrative proposition for the market, and we are well positioned with our technology to take advantage of this opportunity.
Also, as part of the development activities on this roadmap, we will be offering incremental enhancements to our airline customers, such as automated checklists and monitoring systems that help reduce pilot workload and enhance safety. Jeff will now give further details on our financials.
Thank you. Good afternoon. First, I'd like to say how excited I am to have joined IS&S as CFO and to work with Shahram on his long-term vision and strategy. Now, with that, I will really discuss the financial highlights and, more importantly, some key metrics of our business as you consider this investment opportunity. Sales growth has been consistent over the last 4 years with a CAGR of 15%, which really underscores the strength of our platforms while we continue to work on new product development. Acquiring new customers through sales and marketing, as well as penetrating growing sales with existing customers.
Operating income has increased significantly, benefiting by the overall continued growth in sales volumes over the last five years, as you can see. With increased sales and production utilization, the incremental margin drops right to the bottom line, further fueling the operating income leverage we have. Our operating income has grown over a 37% CAGR, which is a testament to the underlying value of this business. At the end of 2023, I mean, at the end of June 2023, we acquired several Honeywell product lines. These product lines have attractive margin profile characteristics that are similar to our current portfolio, which is an essential element of our strategy. This acquisition opens the doors for other product acquisitions and customers that will enable us to leverage our facilities and add more volumes as we continue to pursue our strategy.
Revenues are expected to grow 40% while favorably impacting our metrics in 2024. In addition to cash on hand on our balance sheet, we also have a line of credit with a bank to borrow up to $30 million to support our strategic growth plans. This management team and the whole IS&S team has already delivered, and I'm excited as we take the next steps in our strategic growth plan. With that, we will open the floor to questions.
Oh, okay. If you have a question, please put it in the question and answers section, and I'll present it to management. I'd like to kick it off here, gentlemen, with the way you just ended it, Jeff, a little bit about an update maybe on the Honeywell acquisition. Is it fully integrated? What's the status of that purchase?
Yeah. So the product is actually integrated. All of them are integrated in our facility. We have our technicians trained. The equipment is here, and we're working on it. We're not at full capacity yet. There are two other pieces of test equipment that are due to arrive in June and August, which would give us kind of we'll kick it up to higher levels of production. In terms of margin strategy, Honeywell typically buys all of their subassemblies from third-party vendors. Our in-house strategy has always been to manufacture everything in-house. And that's how we get great gross margins. So one of the things that we'll be doing over the next year is to start integrating the build of these subassemblies also into our own factory so we can gain better margins on these product lines and get to kind of the 60% line where our organic products are.
Understood. And what's your appetite for additional acquisitions, or do you think it'd be best to go through a digestive period before you go looking again to add onto the portfolio?
Yeah, I think we're kind of there with the digestive period. And from here on, it's more like doing the normal thing that we do for our own product lines. On these product lines, it's to increase profitability on them and, again, integrate some of the production of the subassemblies in-house. So we're ready. We're ready to execute on the next acquisition. The bank, we've had meetings with our bank, and they're happy to lend us. I mean, on this acquisition, we paid out the debt in less than by half in less than a year, which is which the bank is very happy with. So we can borrow money to do the next acquisition. I'm not going to do an acquisition unless I find something that's very attractive.
Last time, it took me about a year and a half to do one, and everybody complained, saying, "You talk about it, but you haven't done one." But we wait for the right one that fits our definition of the products that we would acquire, as well as it's low risk, like the one we just did now.
Okay. Let's go to the audience here. The question about the success or potential success of self-driving tractor trailers, does that help validate the use of the one-pilot versus two-pilot autonomous flights?
Yeah. I mean, you can look at the success of elevators. They used to have a guy that drove them up and down for you. And now you just press the button. So I think everything eventually will get there. But I think that the single-pilot is you look at it, 90% of the airplanes out there today fly with single-pilot. But the Part 25 airplanes are designed to be flown by two pilots. So to modify them to be flown by the single-pilot, that's kind of the art that we bring in when the certification authorities allow that to happen. And as I suggested, the business case is compelling for the airlines to do that.
Can I just, as a follow-up question to that, I'm curious about, does the rapid adoption of AI change maybe the expectations of autonomous flight?
Aviation is a very conservative industry. I think we are a long way from AI being proven enough to be able to allow it to fly aircraft by itself, unmonitored by a human. I mean, it's a developing technology. I remember when I was at college over 40 years ago, I studied cybernetics. It was one of the electives. To be quite honest with you, the theory and the ideas are still that old. All that has become more capable is we can stuff more transistors in a chip. It's still got a long way to go before it reaches a maturity that you're going to trust the life of 400 passengers to it.
Back to the audience, question about your mix between commercial, business, and military aircraft.
So, typically, historically, when you look at our revenues, it's been around the third and the third on average. But then from year to year, we get the mix, which is significantly different. I think last few years, for us, it's been dominated with business aviation and air transport. With the slowdown in the upgrades for the cargo and increase in military spending, we're going to be seeing more being between military and business aviation. That's kind of the mix we see. It's going to be more dominant there. And maybe for a while, air transport is going to be at a lower because the upgrades are getting fewer, the full cockpit upgrades. And those are the big-ticket items. And they've been replaced with incremental upgrades that we give in terms of technology and cockpit automation.
The revenues are going to be, in a way, overpowered by the revenues we're going to see on the military side.
Another question from the audience about acquisitions. What kind of product lines would you be interested in acquiring if you go back into the M&A market?
Yeah. So again, similar product lines that avionics, cockpit avionics, or cabin avionics electronics is kind of where our interest resides. We have a very capable engineering department here. We have a very capable factory here. And our focus is on those product lines. So to us, those are the lowest risk in terms of utilizing your existing sales force or augmenting it with new sales force. Those areas are areas that we know. We know the customers. So those kind of product lines are what we're looking for. Honeywell, every quarter, they divest some product lines. We look at them, and when we find something interesting, we may do another acquisition from them.
But there's also a lot of, as you see, these larger companies merge together in our industry, which is a lot of that happening. It gets followed by divestiture of some of the product lines that it's no longer strategic for them. And sometimes those are good for us. So we would acquire them.
Fair enough. A question from the audience about how do you scale up your business? You have a very nice growth profile and margins, but what's the pathway to, say, $100 million in revenue?
So the pathway to the $100 million of revenue, we will continue to grow organically by 10%-15% a year. And again, I like to grow it, including acquisition, by about 40%-50% a year. And so that's kind of I think if we're successful on that track, within less than two years, we should be at $100 million in revenue.
Question is - read this slowly - "The last several years, the company has talked about large retrofit potential of your auto throttle, but seems to have taken longer than you expected to unfold. Can you talk about an updated strategy, or is the potential for adding new OEMs the way to go?
So the auto throttle, we developed that. I mean, we were fortunate to get selected by Textron on the OEM King Airs. And that's been a very successful program for us. On the aftermarket, the adoption has not been at the rate that we were originally hoping for. And I guess when the interest rate went up and kind of the capital market got tighter, that people became even more reluctant to spend money on the upgrade of their King Airs with the auto throttle. We do have a lot of interest on the military side. I mean, one of the contracts that we got selected for in partnership with Textron was the U.S. government's METS program, which is the Multi-Engine Training System. We're on that. I mean, developed specialized software for that that they're utilizing there.
There are other platforms, military platforms, that we are currently working with some of the folks there to take advantage of the technologies we developed on the auto throttle.
Question for the audience on the expected 40% growth this year. How much is organic versus acquired?
So again, our organic growth is somewhere between 10%-15%. And the acquisition, this has been a transition year on the acquisition side. So we're not going to see the full potential of the acquisition we did with Honeywell in our fiscal 2024, which is about four months of it or four or five months of it is left now. So we're not going to see the full potential of it there. But I think that's kind of where right now we see things to be.
Okay. One last question. Can you talk a little bit about the cyclicality and market dynamics that you're currently seeing in the commercial and military markets?
So yeah, I'm going to kind of digress a little bit here because I remember a couple of weeks ago, we had a call with one of our investors, and he said that, "Well, your revenue has historically been very cyclical. And how do we know that you're not at the top of that curve now?" So about 12 years ago, I became President of IS&S. We put a strategy in place to compensate for that cyclicality of being an aftermarket retrofit business. It was to increase the content in the OEM side to take a lot of that guesswork out of the business. The aftermarket business is always very cyclical because you win one big program, you perform on it, and then it goes down until you win another big program to catch up. The OEM business is a lot more predictable year after year.
You know how many you're going to ship. You know how much revenue you're going to get. So prior to this acquisition, about 60% of our revenue was predictable because of all the OEM programs we brought in over the last 10 years. And because also, the customer service side of the business is also very predictable in terms of how much business you get in a year. With the acquisition of Honeywell, I think that 60% predictability is more towards 75% now because there is a lot of, in a way, OEM because we sell parts and spares to channel partners and operators, as well as the rest of it goes within the customer service. And so the predictable portion of our business has improved significantly with this acquisition.
This is why we look at all of these things when we look at an acquisition: does it improve the predictability of our revenue? Does it fall within our portfolio of products within our customer base, which gives us better visibility and lowers the risk of things not happening the way you expected them?
All right, gentlemen. Looks like we're not only out of time, but we've gotten a little bit into overtime. Any closing comments?
Jeff?
I think it's just really thanking everybody for their time. We're really excited about what the future of IS&S holds. Any further questions, please reach out to myself or Shahram, and we could have further dialogue.
Okay, gentlemen. Thank you for being with us today at the Sidoti & Company Conference. Hope everyone has a great day.
Thank you all. Take care.
Thank you.