Innovative Aerosystems - IA

The business model is largely buying older, unwanted product lines from the likes of Honeywell and converting into a higher margin business for themselves.
A roll up.

The F-16 flight control computer is the clearest example IA has already executed on.

## The story of one orphan line

The F-16 Fighting Falcon first flew in 1974. Over 4,600 have been built. Roughly 3,100 older models are still flying worldwide, and Lockheed has about 110-120 new Block 70/72 jets in backlog.

Every one of those jets has a flight control computer and a display generator inside the cockpit. For decades, Honeywell manufactured and serviced both. Each unit is a small, specialized electronics assembly — circuit cards, processors, connectors — built to military specifications and qualified by Lockheed before it can ship.

**Here's the problem from Honeywell's perspective.** These two product lines together probably generated $10-15M of annual revenue. Honeywell does roughly $37 billion a year. That means the F-16 flight computer is approximately 0.03% of Honeywell's business. It requires a dedicated assembly line, dedicated engineering support, dedicated quality staff, dedicated military qualification documentation, and a dedicated customer relationship with Lockheed — all for a rounding error on the income statement.

Meanwhile, Honeywell is chasing next-generation programs worth billions — unmanned aircraft systems, advanced avionics for the F-35, connected aircraft platforms. Every engineer maintaining the F-16 line is an engineer not working on a future program. Every square foot of factory floor running 1970s-era flight computers is a square foot not building tomorrow's products.

So Honeywell sells the product line. They sell it to IA at roughly 0.5x annual revenue — the cheapest deal IA has done — because Honeywell was making less than 25% gross margins on it. At those margins, the line was barely worth running.

## What IA does with it

IA moves the work to Exton, Pennsylvania. They bring the circuit card assembly in-house rather than subcontracting it. They optimize the manufacturing flow for a small dedicated team rather than a giant conglomerate's overhead structure. Gross margins go from below 25% to approximately 50%.

**And here's the permanent part.** IA now holds the exclusive license for both the flight control computer and the display generator. Every F-16 that flies — all 3,100 legacy jets plus 110-120 new builds — needs these components serviced, repaired, and replaced through IA. Nobody else can legally supply them without spending years and millions on requalification with Lockheed and the military customer. The economics of doing so make no sense — you'd spend $15-20M to compete for a $10-15M annual market that IA already owns.

So IA collects repair, overhaul, and spare parts revenue on every F-16 in service, globally, for as long as the aircraft type flies. The F-16 is expected to remain in active service into the 2060s in many air forces. That's potentially 35+ more years of recurring revenue from a single acquisition that cost less than one year of sales.

## Why Honeywell doesn't regret it

Honeywell's customers — the same air forces and Lockheed Martin — still get their F-16 parts serviced. They don't care whether the box says Honeywell or IA, as long as it's qualified and ships on time. Honeywell freed up engineering resources for billion-dollar programs. And Honeywell maintains the broader relationship with those customers for the big stuff — radar, engines, next-gen platforms. Everyone wins.

That's the arbitrage. Honeywell sees a distraction. IA sees a 35-year annuity.

IA has done this seven times since June 2023 — five with Honeywell — across F-16 systems, inertial reference units, autopilots, and communication equipment. Each one follows the same pattern: mature platform, small revenue, high certification barrier, decades of remaining service life, and a seller who'd rather focus on the future.

You know them?!
Yup, should be an exciting revenue generator.

The way the math works they’ll probably need to make another 95mm or so in acquisitions in the next couple of years to reach the 250mm revenue target.

KRMN has a nearly identical plan, but IA has a much cheaper valuation right now.