What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-14 compared with 2022-08-12 · 43 added, 93 removed, 173 unchanged (44% of the section changed)

17 unchanged sentences

● the availability and efficacy of vaccines (including vaccine boosters) and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2);

● the impact of general economic trends on the Company’s business, including as a result of the COVID-19 pandemic;

● the impact of general economic trends on the Company’s business,

● disruptions in the Company’s supply chain, customer base and workforce, including as a result of the COVID-19 pandemic;

16 unchanged sentences

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect

events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events.

The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events.

forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information.

43 unchanged sentences

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 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.

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, rising interest rates, 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.

14 unchanged sentences

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of these condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

On an ongoing basis, IS&S management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

3 unchanged sentences

There have been no significant changes in the Company’s critical accounting policies since September 30, 2022.

See also Note 1 to the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2022 as set forth herein.

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

JUNE 30, 2022 AND 2021

DECEMBER 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 June 30,

Nine Months Ended June 30,

Three Months Ended December 31,

Engineering development contracts

11 unchanged sentences

Income tax expense

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

Net sales were $6,935,976 for the three months ended June 30, 2022 compared to $6,180,183 for the three months ended June 30, 2021, an increase of 12.2%.

Product sales increased $596,467 and customer service sales increased $358,048 in the three months ended June 30, 2022 compared to the year ago quarter.

This increase in product sales for the three months ended June 30, 2022 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers as well as additional volume sold to Pilatus under the Company’s PC-24 contract.

Cost of sales.

Cost of sales increased $53,781, or 1.9%, to $2,879,462, or 41.5% of net sales, in the three months ended June 30, 2022, compared to $2,825,681 or 45.7% of net sales, in the three months ended June 30, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The Company’s overall gross margin was 58.5% and 54.3% for the three months ended June 30, 2022 and 2021, respectively.

The increase in gross margin percentage for the three months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Research and development.

R&D expense decreased $29,586, or 4.6%, to $676,381 in the three months ended June 30, 2022 from $646,795 in the three months ended June 30, 2021.

As a percentage of net sales, R&D expense decreased to 9.8% of net sales in the three months ended June 30, 2022 from 10.5% of net sales in the three months ended June 30, 2021 reflecting increased net sales in the current quarter.

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

Selling, general and administrative.

Selling, general and administrative expense increased by $182,095 or 12.0% to $1,694,233 in the three months ended June 30, 2022 from $1,512,138 in the three months ended June 30, 2021.

As a percentage of net sales, selling, general and administrative expenses remained consistent on a quarterly basis to prior year.

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

Interest income.

Interest income increased by $10,322 to $10,429 in the three months ended June 30, 2022 from $107 in the three months ended June 30, 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 increased by $4,377 to $21,608 in the three months ended June 30, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the three months ended June 30, 2022 was $358,763 as compared to an income tax benefit of $1,473,014 for the three months ended June 30, 2021.

This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the three-month period ended June 30, 2022 was 20.9% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax benefit rate for the three-month period ended June 30, 2021 was 121.4% and differs from the statutory tax rate primarily due to the release of the valuation allowance for deferred tax assets.

This release both increased the deferred tax asset and removed the valuation allowance.

The Company reported net income for the three months ended June 30, 2022 of $1,359,174 compared to net income of $2,685,921 for the three months ended June 30, 2021.

On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2022 compared to net income per share of $0.16 for the three months ended June 30, 2021.

Nine Months Ended June 30, 2022 Compared to the Nine Months Ended June 30, 2021

Net sales were $20,477,574 for the nine months ended June 30, 2022 compared to $16,171,680 for the nine months ended June 30, 2021, an increase of 26.6%.

Product sales increased $3,618,631, customer service increased $773,773 and EDC sales decreased ($86,510) in the nine months ended June 30, 2022 compared to the same period in the prior year.

This increase in product sales for the nine months ended June 30, 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.

Three Months Ended December 31, 2022 Compared to the Three Months Ended December 30, 2021

Net sales were $6,516,256 for the three months ended December 31, 2022 compared to $6,695,778 for the three months ended December 31, 2021, a slight decrease of 2.7% .

Product sales decreased by $522,126, EDC sales increased $366,899, Customer Repair revenue saw a modest decrease of $24,295 for the three months ended December 31, 2022.

The increase in EDC sales was driven by two new Research & Development projects.

The decrease in product sales was a function of lower aftermarket sales orders to commercial air transport customers .

The sales decrease was partially offset by an increase in the OEM business, in which demand remained strong during Q1.

Cost of sales.

Cost of sales increased $922,365, or 12.6%, to $8,270,729, or 40.4% of net sales, in the nine months ended June 30, 2022, compared to $7,348,364 or 45.4% of net sales, in the nine months ended June 30, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.

The Company’s overall gross margin was 59.6% and 54.6% for the nine months ended June 30, 2022 and 2021, respectively.

The increase in gross margin percentage for the nine months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Cost of sales increased $64,395, or 2.4%, to $2,792,452, or 42.9% of net sales, in the three months ended December 31, 2022, compared to $2,728,057 or 40.7% of net sales, in the three months ended December 31, 2021.

The increase in cost of sales was primarily the result of slightly higher direct material costs.

The Company’s overall gross margin was 57.1% and 59.3% for the three months ended December 31, 2022 and 2021, respectively.

Research and development.

R&D expense increased $126,190, or 6.5%, to $2,062,937 in the nine months ended June 30, 2022 from $1,936,747 in the nine months ended June 30, 2021.

As a percentage of net sales, R&D expense decreased to 10.1% of net sales in the nine months ended June 30, 2022 from 12.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales in the current period compared to the same period in the prior year.

Also driving the expense lower as a percentage of sales as of June 30, 2022 was a lower proportion of efforts focused upon product development programs.

R&D expense decreased $66,080, or 9.0%, to $670,445 in the three months ended December 31, 2022 from $736,740 in the three months ended December 31, 2021.

As a percentage of net sales, R&D expense decreased to 10.3% of net sales in the three months ended December 31, 20221 from 11.0% of net sales in the three months ended December 31, 2021.

The decrease in R&D expense in the quarter was primarily the result of $57,406 of R&D expense being moved to Cost of Sales related to the EDC sales.

Total R&D with the EDC related labor costs amounted to $727,851, which is 11.2% and comparable to R&D as a percent to sales in prior year.

Selling, general and administrative.

Selling, general and administrative expense increased by $378,605 to $5,226,015 in the nine months ended June 30, 2022 from $4,847,410 in the nine months ended June 30, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 25.5% of net sales in the nine months ended June 30, 2022 from 30.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales and leveraging of fixed costs in the period compared to the same period in the prior year.

The overall increase in selling, general and administrative expense in the period was primarily the result of professional fees, adding FTE’s, and the resumption of sales and business development expenses as a result of returning to more normal business conditions post COVID.

Selling, general and administrative expense increased by $454,881 to $2,261,863 in the three months ended December 31, 2022 from $1,806,982 in the three months ended December 31, 2021.

As a percentage of net sales, selling, general and administrative expenses increased to 34.7% of net sales in the three months ended December 31, 2022 from 27.0% of net sales in the three months ended December 31, 2021.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in non-cash long-term incentive compensation, professional & legal fees, and employee relocation costs.

Interest income.

Interest income increased by $9,733 to $10,871 in the nine months ended June 30, 2022 from $1,138 in the nine months ended June 30, 2021, mainly a result of increased cash balance in the current year period compared to the same period in the prior year.

Interest income increased by $115,796 to $115,892 in the three months ended December 31, 2022 from $96 in the three months ended December 31, 2021, mainly a result of increased cash on the balance sheet, increased interest rates and re-allocating funds into higher yielding investments compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and decreased by $1,593 to $49,401 in the nine months ended June 30, 2022 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and increased by $1,957 to $18,196 in the three months ended December 31, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the nine months ended June 30, 2022 was $1,056,363 as compared to an income tax benefit of $1,443,352 for the nine months ended June 30, 2021.

This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the nine-month period ended June 30, 2022 was 21.2% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax benefit rate for the nine-month period ended June 30, 2021 was 69.0% and differs from the statutory tax rate primarily due to the release of the valuation allowance for deferred tax assets.

This release both increased the deferred tax asset and removed the valuation allowance.

The Company reported net income for the nine months ended June 30, 2022 of $3,921,802 compared to net income of $3,534,643 for the nine months ended June 30, 2021.

On a diluted basis, the net income per share was $0.23 for the nine months ended June 30, 2022 compared to net income per share of $0.21 for the nine months ended June 30, 2021.

The income tax expense for the three months ended December 31, 2022 was $226,933 as compared to an income tax expense of $307,490 for the three months ended December 31, 2021.

The effective tax rate for the three months ended December 31, 2022 was 24.5%, compared to 21.3% for the three months ending December 31, 2021.

The Company reported net income for the three months ended December 31, 2022 of $698,651 compared to net income of $1,133,058 for the three months ended December 31, 2021.

On a diluted basis, the net income per share was $0.04 for the three months ended December 31, 2022 compared to net income per share of $0.07 for the three months ended December 31, 2021.

Liquidity and Capital Resources

9 unchanged sentences

Current ratio (3)

Nine Months Ended June 30,

Three Months Ended December 31,

Cash flow activities:

1 unchanged sentence

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

(1) Excludes contract liability

7 unchanged sentences

Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020.

The total dividend payment was approximately $11.2 million.

On December 10, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on December 30, 2020 to shareholders of record as of the close of business on December 21, 2020.

The total dividend payment was approximately $8.6 million.

The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.

The ongoing COVID-19 pandemic is a significant event, driver of market trends, and source of uncertainty that may have a material impact on the Company’s liquidity, financial condition, capital resources, cash flows or operating results.

In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.

Operating activities

Net cash provided by operating activities for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3,921,802, a decrease in accounts receivables of $1,042,975 and a decrease in deferred income taxes of $785,737.

Net cash provided by operating activities for the nine months ended June 30, 2021 resulted primarily from funding from net income of $3,534,643 and an increase in contract liability of $1,215,329, the majority of this increase in contract liability is from one customer

offset by an increase in deferred income taxes of $1,461,617, primarily due to the release of the valuation allowance against all of the Company’s federal and some state deferred tax assets.

Net cash provided by operating activities for the three-month period ended December 31, 2022 resulted primarily from funding from net income of $698,651, a decrease in accounts receivables of $980,938 and an increase in income taxes payable of $511,622.

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.

Investing activities

Net cash used in investing activities was $161,230 for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Net cash used in investing activities was $324,025 for the nine months ended June 30, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.

Net cash used in investing activities was $32,716 for the three-month period ended December 31, 2022 and consisted primarily of the purchase of manufacturing test equipment and production machinery.

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.

Financing activities

Net cash provided by financing activities was $17,154 for the nine-month period ended June 30, 2022 and consisted of proceeds from the exercise of stock options.

Net cash used in financing activities was $19,771,082 for the nine-month period ended June 30, 2021 and consisted primarily of dividends paid.

Net cash provided by financing activities was $408,846 for the three-month period ended December 31, 2022 and consisted of proceeds from the exercise of stock options.

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

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

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.

IS&S will continue to monitor the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels.

The Company could face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce in the future due to the direct and indirect effects of the COVID-19 pandemic.

Environmental, Social and Governance Considerations

3 unchanged sentences

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

All qualified applicants receive consideration for employment without

regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.

All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.

The nature of our business also supports long-term sustainability.

3 unchanged sentences

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 June 30, 2022:

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

Three Months Ended

Nine Months Ended

June 30, 2022

December 31, 2022

Backlog, beginning of period

2 unchanged sentences

Backlog, end of period

At June 30, 2022, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At December 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