What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2022-02-11 · 83 added, 47 removed, 186 unchanged (41% of the section changed)

46 unchanged sentences

The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”).

The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint navigation.

The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation.

The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base.

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ThrustSense® also ensures aircraft envelope protection and engine protection during all phases of flight reducing pilot workload and increasing safety.

The Company has signed a multi-year agreement with Textron Aviation, Inc.

(“Textron”) to supply ThrustSense® on the King Air 360 and King Air 260.

The Company has signed a multi-year agreement with Textron to supply ThrustSense® on the King Air 360 and King Air 260.

ThrustSense® is also available for retrofit on King Airs through Textron service centers and third-party service centers.

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Such changes may cause customers to curtail or delay their spending on both new and existing aircraft.

Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, the impact of the ongoing COVID-19 pandemic, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors that affect spending behavior.

Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, the war between Russia and Ukraine and the global response to this war, the impact of the ongoing COVID-19 pandemic, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors that affect spending behavior.

Furthermore, spending by government agencies may be reduced in the future if tax revenues decline.

If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely.

For example, in the 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these deliveries subsequently resumed, there is a possibility that the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2) will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.

On the other hand, the Company believes that in adverse economic conditions, customers that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft as a cost-effective alternative, thereby creating a market opportunity for IS&S.

19 unchanged sentences

There have been no significant changes in the Company’s critical accounting policies since September 30, 2021.

See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2021 as set forth herein.

See also Note 1 to the unaudited condensed consolidated financial statements for the three and six months ended March 31, 2022 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2021 AND 2020

MARCH 31, 2022 AND 2021

The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):

Three Months Ended December 31,

Three Months Ended March 31,

Six Months Ended March 31,

Engineering development contracts

11 unchanged sentences

Income tax expense

Three Months Ended December 31, 2021 Compared to the Three Months Ended December 30, 2020

Net sales were $6,695,778 for the three months ended December 31, 2021 compared to $4,869,652 for the three months ended December 31, 2020, an increase of 37.5%.

Product sales increased $1,892,943 and EDC sales decreased $66,817 in the three months ended December 31, 2021 compared to the year ago quarter.

This increase in product sales for the three months ended December 31, 2021 primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers as well as increased shipments to Pilatus under the Company’s PC-24 contract.

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Net sales were $6,845,820 for the three months ended March 31, 2022 compared to $5,121,845 for the three months ended March 31, 2021, an increase of 33.7%.

Product sales increased $1,544,947 and EDC sales increased $179,028 in the three months ended March 31, 2022 compared to the year ago quarter.

This increase in product sales for the three months ended March 31, 2022 primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers as well as increased shipments to Pilatus under the Company’s PC-24 contract.

Cost of sales.

Cost of sales increased $424,228, or 18.4%, to $2,728,057, or 40.7% of net sales, in the three months ended December 31, 2021, compared to $2,303,829 or 47.3% of net sales, in the three months ended December 31, 2020.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

The Company’s overall gross margin was 59.3% and 52.7% for the three months ended December 31, 2021 and 2020, respectively.

The increase in gross margin percentage for the three months ended December 31, 2021 reflects manufacturing efficiencies gained due to increased sales volume and a favorable product mix.

Cost of sales increased $444,356, or 20.0%, to $2,663,210, or 38.9% of net sales, in the three months ended March 31, 2022, compared to $2,218,854 or 43.3% of net sales, in the three months ended March 31, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The Company’s overall gross margin was 61.1% and 56.7% for the three months ended March 31, 2022 and 2021, respectively.

The increase in gross margin percentage for the three months ended March 31, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, and a favorable product mix.

Research and development.

R&D expense increased $136,227, or 22.7%, to $736,525 in the three months ended December 31, 2021 from $600,298 in the three months ended December 31, 2020.

As a percentage of net sales, R&D expense decreased to 11.0% of net sales in the three months ended December 31, 2021 from 12.3% of net sales in the three months ended December 31, 2020 reflecting increased net sales in the current quarter.

The increase in R&D expense in the quarter was primarily the result of a higher proportion of efforts focused upon internal projects rather than product development programs that would be allocated to cost of sales.

R&D expense decreased $39,623, or 5.7%, to $650,031 in the three months ended March 31, 2022 from $689,654 in the three months ended March 31, 2021.

As a percentage of net sales, R&D expense decreased to 9.5% of net sales in the three months ended March 31, 2022 from 13.5% of net sales in the three months ended March 31, 2021 reflecting increased net sales in the current quarter.

The decrease in R&D expense in the quarter was primarily the result of a decrease in payroll and payroll related benefits.

Selling, general and administrative.

Selling, general and administrative expense increased by $73,828 to $1,806,982 in the three months ended December 31, 2021 from $1,733,154 in the three months ended December 31, 2020.

As a percentage of net sales, selling, general and administrative expenses decreased to 27.0% of net sales in the three months ended December 31, 2021 from 35.6% of net sales in the three months ended December 31, 2020.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees, trade show expenses, payroll and payroll related benefits.

Selling, general and administrative expense increased by $122,682 to $1,724,800 in the three months ended March 31, 2022 from $1,602,118 in the three months ended March 31, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 25.2% of net sales in the three months ended March 31, 2022 from 31.3% of net sales in the three months ended March 31, 2021 reflecting increased net sales in the current quarter.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees.

Interest income.

Interest income decreased by $783 to $96 in the three months ended December 31, 2021 from $879 in the three months ended December 31, 2020, mainly a result of decreased cash balance in the current year period compared to the same period in the prior year.

Interest income increased by $194 to $346 in the three months ended March 31, 2022 from $152 in the three months ended March 31, 2021, mainly a result of increased cash balance in the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and decreased by $154 to $16,238 in the three months ended December 31, 2021 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and decreased by $5,816 to $11,555 in the three months ended March 31, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the three months ended December 31, 2021 was $307,490 as compared to an income tax expense of $9,497 for the three months ended December 31, 2020.

The effective tax rate for the three months ended December 31, 2021 was 21.3% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax rate for the three months ended December 31, 2020 was 3.8% and differs from the statutory tax rate primarily due to net operating loss realization due to an increase in pretax book income and the release of the valuation allowance.

The income tax expense for the three months ended March 31, 2022 was $390,110 as compared to an income tax expense of 20,165 for the three months ended March 31, 2021.

The effective tax rate for the three-month period ended March 31, 2022 was 21.4% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax expense rate for the three-month period ended March 31, 2021 was 3.2% and differs from the statutory tax rate primarily due to net operating loss utilization related to the increase in pretax book income.

This loss utilization both decreased the deferred tax asset and the valuation allowance.

For the three months ended December 31, 2020, the valuation allowance decreased by approximately $40,000.

The Company reported net income for the three months ended December 31, 2021 of $1,133,058 compared to net income of $240,145 for the three months ended December 31, 2020.

On a diluted basis, the net income per share was $0.07 for the three months ended December 31, 2021 compared to net income per share of $0.01 for the three months ended December 31, 2020.

A full valuation allowance exists on all deferred tax assets.

For the three months ended March 31, 2021, the valuation allowance decreased by approximately $140,000.

The Company reported net income for the three months ended March 31, 2022 of $1,429,570 compared to net income of $608,577 for the three months ended March 31, 2021.

On a diluted basis, the net income per share was $0.08 for the three months ended March 31, 2022 compared to net income per share of $0.04 for the three months ended March 31, 2021.

Six Months Ended March 31, 2022 Compared to the Six Months Ended March 31, 2021

Net sales were $13,541,598 for the six months ended March 31, 2022 compared to $9,991,497 for the six months ended March 31, 2021, an increase of 35.5%.

Product sales increased $3,437,890 and EDC sales increased $112,211 in the six months ended March 31, 2022 compared to the same period in the prior year.

This increase in product sales for the six months ended March 31, 2022 primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers as well as increased shipments to Pilatus under the Company’s PC-24 contract.

Cost of sales.

Cost of sales increased $868,584, or 19.2%, to $5,391,267, or 39.8% of net sales, in the six months ended March 31, 2022, compared to $4,522,683 or 45.3% of net sales, in the six months ended March 31, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the six months ended March 31, 2022 compared to the six months ended March 31, 2021.

The Company’s overall gross margin was 60.2% and 54.7% for the six months ended March 31, 2022 and 2021, respectively.

The increase in gross margin percentage for the six months ended March 31, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, and a favorable product mix.

Research and development.

R&D expense increased $96,604, or 7.5%, to $1,386,556 in the six months ended March 31, 2022 from $1,289,952 in the six months ended March 31, 2021.

As a percentage of net sales, R&D expense decreased to 10.2% of net sales in the six months ended March 31, 2022 from 12.9% of net sales in the six months ended March 31, 2021 reflecting increased net sales in the current period compared to the same period in the prior year.

The increase in R&D expense in the period was primarily the result of a lower proportion of efforts focused upon product development programs that were allocated to cost of sales in the period rather than internal projects.

Selling, general and administrative.

Selling, general and administrative expense increased by $196,510 to $3,531,782 in the six months ended March 31, 2022 from $3,335,272 in the six months ended March 31, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 26.1% of net sales in the six months ended March 31, 2022 from 33.4% of net sales in the six months ended March 31, 2021 reflecting increased net sales in the period compared to the same period in the prior year.

The increase in selling, general and administrative expense in the period was primarily the result of an increase in professional fees.

Interest income.

Interest income decreased by $589 to $442 in the six months ended March 31, 2022 from $1,031 in the six months ended March 31, 2021, mainly a result of decreased cash balance in the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and decreased by $5,970 to $27,793 in the six months ended March 31, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the six months ended March 31, 2022 was $697,600 as compared to an income tax expense of $29,662 for the six months ended March 31, 2021.

The effective tax rate for the six-month period ended March 31, 2022 was 21.4% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax expense rate for the six-month period ended March 31, 2021 was 3.4% and differs from the statutory tax rate primarily due to net operating loss utilization related to the increase in pretax book income.

This loss utilization both decreased the deferred tax asset and the valuation allowance.

A full valuation allowance exists on all deferred tax assets.

For the six months ended March 31, 2021, the valuation allowance decreased by approximately $180,000.

The Company reported net income for the six months ended March 31, 2022 of $2,562,628 compared to net income of $848,722 for the six months ended March 31, 2021.

On a diluted basis, the net income per share was $0.15 for the six months ended March 31, 2022 compared to net income per share of $0.05 for the six months ended March 31, 2021.

Liquidity and Capital Resources

9 unchanged sentences

Current ratio (3)

Three Months Ended December 31,

Cash flow activites:

Net cash provided by operating activites

Net cash used in investing activites

Net cash used in financing activites

Six Months Ended March 31,

Cash flow activities:

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

(1) Excludes contract liability

15 unchanged sentences

Operating activities

Net cash provided by operating activities for the three-month period ended December 31, 2021 resulted primarily from funding from net income of $1,133,058 and a decrease in accounts receivable of $325,121.

Net cash provided by operating activities for the three-month period ended December 31, 2020 resulted primarily from a decrease in accounts receivable of $1,824,582, offset by a decrease in accrued expenses of $228,820.

Net cash provided by operating activities for the six-month period ended March 31, 2022 resulted primarily from funding from net income of $2,562,628 and a decrease in deferred income taxes of $527,141.

Net cash provided by operating activities for the six-month period ended March 31, 2021 resulted primarily from a decrease in accounts receivable of $1,521,544 and funding from net income of $848,722.

Investing activities

Net cash used in investing activities was $77,348 for the three-month period ended December 31, 2021 and consisted primarily of the purchase of laboratory test equipment.

Net cash used in investing activities was $72,846 for the three-month period ended December 31, 2020 and consisted primarily of the purchase of computer, production and laboratory test equipment.

Net cash used in investing activities was $84,358 for the six-month period ended March 31, 2022 and consisted primarily of the purchase of laboratory test equipment.

Net cash used in investing activities was $299,028 for the six-month period ended March 31, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.

Financing activities

Net cash used in financing activities was $0 for the three-month period ended December 31, 2021.

Net cash used in financing activities was $19,788,092 for the three-month period ended December 31, 2020 and consisted primarily of dividends paid.

Net cash used in financing activities was $0 for the six-month period ended March 31, 2022.

Net cash used in financing activities was $19,788,092 for the six-month period ended March 31, 2021 and consisted primarily of dividends paid.

Future capital requirements depend upon numerous factors, including market acceptance of the Company’s products, the timing and rate of expansion of business, acquisitions, joint ventures and other factors.

3 unchanged sentences

If insufficient funds are available, the Company may not be able to introduce new products or compete effectively.

Impact of the Russia and Ukraine War

We are closely monitoring Russia's invasion of Ukraine, which remains an evolving and uncertain situation.

Neither Russia nor Ukraine represents a material portion of our business, and therefore, the war thus far has not had a significant effect on our results of operations.

Additionally, the war has not significantly affected our ability to source supplies or deliver our products and services to our customers.

However, the implications of this war may expand beyond its current scope, potentially resulting in significant adverse impacts on our business.

Impact of the COVID-19 Pandemic

2 unchanged sentences

The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations.

However, with the omicron variant and the possibility of the emergence of other new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations.

However, with the possibility of the emergence of new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations.

Furthermore, the significant market turbulence and disruption caused by the COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes.

3 unchanged sentences

Management and the Company’s Board of Directors are committed to identifying, assessing, and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.

Among the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent.

We are committed to recruiting, motivating and developing a diversity of talent.

We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor.

2 unchanged sentences

Historically, a majority of the Company’s sales have come from the retrofit market, in which the Company, by making upgrades to improve the functionality and safety of existing machinery, facilitates the re-use and recycling of aircraft and equipment that might otherwise be scrapped as obsolete.

The Company’s Global Positioning System (“GPS”) receivers also facilitate reduced carbon footprint navigation.

The Company’s GPS receivers also facilitate reduced carbon footprint navigation.

The Company also plans to enhance its focus on the environmental impact of its operations.

Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders.

Backlog activity for the three-month period ended December 31, 2021:

Backlog activity for the three-month period ended March 31, 2022:

Three Months Ended

December 31, 2021

Six Months Ended

March 31, 2022

Backlog, beginning of period

2 unchanged sentences

Backlog, end of period

At December 31, 2021, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At March 31, 2022, the majority of the Company’s backlog is expected to be filled within the next twelve months.

To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis