Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based largely on current expectations and projections about future events and trends affecting the business, are not guarantees of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. In this report, the words “anticipates,” “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “forecasts,” “expects,” “plans,” “could,” “should,” “would,” “is likely”, “projected”, “might”, “potential”, “preliminary”, “provisionally” and similar expressions, as they relate to the business or to its management, are intended to identify forward-looking statements, but they are not exclusive means of identifying them. Unless the context otherwise requires, all references herein to “IS&S,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.
All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:
● market acceptance of the Company’s ThrustSense® full-regime Autothrottle, Vmc a Mitigation, FPDS, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements;
● continued market acceptance of the Company’s air data systems and products;
● the competitive environment and new product offerings from competitors;
● difficulties in developing, producing or improving the Company’s planned products or product enhancements;
● the deferral or termination of programs or contracts for convenience by customers;
● the ability to service the international market;
● the availability of government funding;
● the impact of general economic trends, including tariffs and other trade restrictions on the Company’s business;
● disruptions in the Company’s supply chain, customer base and workforce;
● the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, of products in a timely manner;
● delays in receiving components from third-party suppliers;
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● the bankruptcy or insolvency of one or more key customers;
● protection of intellectual property rights;
● the ability to respond to technological change;
● failure to retain/recruit key personnel;
● risks related to succession planning;
● a cyber security incident;
● risks related to our self-insurance program;
● ability to successfully manage and integrate key acquisitions, mergers and other transactions, such as the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc., as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition;
● potential future acquisitions or dispositions;
● the costs of compliance with present and future laws and regulations;
● changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits; and
● other factors disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”).
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”).
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. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Objective
The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management’s perspective and should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.
Company Overview
The Company was incorporated in Pennsylvania on February 12, 1988. 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 OEMs. The Company supplies integrated FMS, FPDS, FPDS with autothrottle, air data equipment, integrated standby units, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.
The Company has continued to position itself as a system integrator, which provides the Company with the capability and potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, the DoD/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable the Company to develop high-quality products and systems, to reduce product time to market and to achieve cost advantages over products offered by its competitors.
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The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries. Occasionally, the Company sells its products directly to the DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).
In June 2023, the Company entered into the June 2023 Honeywell Agreement with Honeywell pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million.
In July 2024, the Company entered into the July 2024 Honeywell Asset Acquisition, an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell. This transaction complements the previous Honeywell license and asset acquisition completed in June 2023. Total consideration was $4.2 million in cash.
On September 27, 2024, the Company entered into the September 2024 Honeywell Agreement with Honeywell, pursuant to which Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, including a sale of certain inventory, equipment and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for consideration of $14.2 million in cash.
Following the acquisition of Honeywell’s military display generators and flight control computers business, Honeywell has continued to manufacture these products and maintain related inventory at its facilities under the September 2024 Honeywell Agreement. Revenue and costs from this production are attributed to and reported by the Company, but the Company relies on Honeywell for access to the operational and financial data needed to prepare its financial statements. The Company has limited ability to oversee the operations or verify the data received from Honeywell, making it difficult to predict revenues and gross margins. Over the coming months, the production of the military display generators and flight control computers business will cease at Honeywell facilities and transition to the Company’s facilities. During this transition process, production will be temporarily halted while the Company ramps up its production and inventory at its facilities. In anticipation of the transition, Honeywell is expected to accelerate its production of these products in the short term. This will likely lead to a spike in revenues in the short term followed by a temporary dip in revenues before revenues are normalized.
As a result, the Company anticipates revenues related to the September 2024 Honeywell Agreement will continue to fluctuate significantly over the next few quarters. The transition from Honeywell to Company facilities will involve certain risks that may impact operational performance and reported results. While the Company cannot assure that the transition will not adversely affect operations and reported results, it is committed to closely monitoring the integration process and providing updates as necessary. The Company remains confident in the long-term benefits of the Honeywell acquisitions.
Cost of sales related to product and service sales comprises materials, components and third-party avionics purchased from suppliers, direct labor and overhead costs. Many of the components are standard, although certain parts are manufactured to meet the Company’s specifications. The overhead portion of Cost of sales primarily comprises salaries and benefits, building occupancy costs, supplies and outside service costs related to production, purchasing, material control and quality control. Cost of sales also includes warranty costs.
Cost of sales related to Engineering Development Contracts (“EDC”) sales comprises engineering labor, consulting services and other costs associated with specific design and development projects. These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within Cost of sales, with reimbursement accounted for as a sale in accordance with the percentage-of-completion method or completed contract method of accounting. Company funded R&D expenditures relate to internally-funded efforts for the development of new products and the improvement of existing products. These costs are expensed as incurred and reported as R&D expenses. The Company intends to continue investing in the development of new products that complement current product offerings and to expense associated R&D costs as they are incurred.
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Selling, general and administrative (“SG&A”) expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting and other general corporate expenses.
The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs. Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad. 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, 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, inflation, public health crises and pandemics and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future. 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 or similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.
Environmental, Social and Governance Considerations
In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers. Management and the Company’s Board 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.
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. 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. 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 GPS receivers also facilitate reduced carbon footprint navigation. The Company also plans to enhance its focus on the environmental impact of its operations.
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 (“U.S. GAAP”). 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. Management has determined that the most critical accounting policies and estimates are those related to revenue recognition, inventory valuation and valuation of tangible and intangible assets acquired. On an ongoing basis, the Company’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. Actual results may differ from these estimates.
The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2024 contains a discussion of these critical accounting policies. See also Note 1 to the unaudited condensed consolidated financial statements for the three and six months ended March 31, 2025 as set forth herein.
In connection with June 2023 Honeywell Agreement, during the 18- month period following closing, which ended December 31, 2024, the Company received various components of PP&E. Rotables are parts that are not designed to be discarded after a certain period of use but rather are intended to be restored to a serviceable condition and reused. The Company had historically depreciated rotables PP&E on a straightline basis, over 5 years. During the second quarter of 2025, the Company updated its analysis of the
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economic lives of various owned rotable assets. As a result of this update, to better reflect the revised estimate of physical lives of rotable assets, the Company changed its useful lives estimate of rotable assets from 5 years to 10 years, effective as of January 1, 2025.
ASC 250, specifically ASC 250-10-45-17 states that, “ changes in accounting estimates should not be accounted for by restating or retrospectively adjusting the amounts reported in prior period financial statements or by reporting pro forma amounts. Instead, a change in accounting estimate should be accounted for in the period of change and prospective periods .”
Adhering to the guidance found in ASC 250, the Company recognized the change in depreciation expense of Rotable assets prospectively as of January 1, 2025. The change in accounting estimate decreased depreciation expense $0.4 million, or $ 0.02 per diluted share, for the three months ended March 31, 2025.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2025 AND 2024
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 March 31,
Six Months Ended March 31,
2025
2024
2025
2024
Net sales:
Product
60.1
%
45.6
%
61.1
%
46.5
%
Services
39.9
%
54.4
%
38.9
%
53.5
%
Total net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales:
Product
24.1
%
21.9
%
30.4
%
20.6
%
Services
24.6
%
26.1
%
22.4
%
24.0
%
Total cost of sales
48.6
%
48.0
%
52.8
%
44.6
%
Gross profit
51.4
%
52.0
%
47.2
%
55.4
%
Operating expenses:
Research and development
4.0
%
9.6
%
5.3
%
9.6
%
Selling, general and administrative
15.6
%
27.1
%
20.0
%
29.5
%
Total operating expenses
19.6
%
36.7
%
25.2
%
39.1
%
Operating income
31.8
%
15.3
%
22.0
%
16.3
%
Interest expense
(1.8)
%
(1.6)
%
(2.1)
%
(2.7)
%
Interest income
0.0
%
0.3
%
0.0
%
0.6
%
Other income
—
%
0.2
%
0.0
%
0.2
%
Income before income taxes
30.0
%
14.3
%
19.8
%
14.4
%
Income tax expense
5.7
%
3.0
%
3.8
%
3.1
%
Net income
24.3
%
11.3
%
16.0
%
11.3
%
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Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024
Historically, the Company presented Net Sales and Cost of Sales related to each of Customer service and Engineering and development contracts separately on the Consolidated Statements of Operations. For the three and six months ended March 31, 2025, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for the three and six months ended March 31, 2024. For additional information, see Note 3, Summary of Significant Accounting Policies, (“Reclassifications ”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.
Net sales . Net sales for the three months ended March 31, 2025 increased $11.2 million, or 104.3%, to $21.9 million from $10.7 million for the three months ended March 31, 2024. Net sales of $21.9 million for the three months ended March 31, 2025 was comprised of $11.1 million in organic Net sales and $10.8 million in Net sales related to the September 2024 Honeywell Agreement. The increase in Net sales was driven primarily by a $8.3 million, or 169.2%, increase in Product sales of which $7.9 million were derived from Honeywell military products. This quarter’s Net sales benefitted from an acceleration of the production and sales of Honeywell’s military product line in anticipation of Honeywell ceasing production at its own facilities and transitioning that production to the Company’s facilities. Net sales also benefited from an increase in commercial air transport sales of $3.7 million partially offset by $2.7 million of reduced shipsets in business aviation and $0.7 million of reduced shipsets in military. Service sales for the three months ended March 31, 2025 increased $2.9 million, or 49.8%, compared to Services sales for the three months ended March 31, 2024. The increase in service sales primarily reflects increases in engineering development services of $0.4 million and an increase in customer service sales from the product lines acquired from Honeywell of $3.0 million, partially offset by lower legacy customer service revenue of $0.5 million.
Cost of sales . Cost of sales was $10.7 million, or 48.6% of Net sales, for the three months ended March 31, 2025 compared to $5.2 million, or 48% of Net sales, for the three months ended March 31, 2024. The increase in Cost of sales was primarily the result of an increase in overall sales volume. The Company’s overall gross margin for the three months ended March 31, 2025 was 51.4% compared to 52.0% for the three months ended March 31, 2024. The decrease in overall gross margin percentage for the three months ended March 31, 2025, compared to the three months ended March 31, 2024 is primarily the result of changes in product mix. The factors that have been, and will continue to, affect the Company’s gross margin capture include depreciation resulting from recent product line acquisitions and the increased weight of military sales in the Company’s sales mix.
Research and development. R&D expense decreased $0.2 million, or 15.9%, to $0.9 million for the three months ended March 31, 2025 from $1.0 million for the three months ended March 31, 2024. As a percentage of net sales, R&D expenses decreased to 4.0% of net sales for the three months ended March 31, 2025 from 9.6% of net sales for the three months ended March 31, 2024. The decrease in R&D expenses in the quarter was primarily the result of recharacterizing $0.2 million of R&D expense as Cost of sales related to the EDC sales.
Selling, general, and administrative. SG&A expenses increased by $0.5 million or 17.4%, to $3.4 million from $2.9 million for the three months ended March 31, 2024. The increase in SG&A expense for the three months ended March 31, 2025 was primarily the result of third party and other fees of $0.1 million, $0.1 million related to the customer relationships and backlog intangible assets resulting from the combined acquisitions and $0.2 million due to employee related expenses and benefits resulting from increased headcount. As a percentage of Net sales, SG&A expenses were 15.6% for the three months ended March 31, 2025 compared to 27.1% for the three months ended March 31, 2024.
Interest income. Interest income was negligible for the three months ended March 31, 2025 and 2024, respectively.
Other income. The Company had no material other income for the three months ended March 31, 2025 and 2024, respectively.
Income taxes. Income tax expense was $1.3 million for the three months ended March 31, 2025 as compared to income tax expense of $0.3 million for the three months ended March 31, 2024. The effective tax rate for the three months ended March 31, 2025 was 19.2 % as compared to 21.2% for the three months ended March 31, 2024. The increase in income tax expense was primarily due to higher taxable earnings for the three months ended March 31, 2025, compared to the same period last year.
Net income. As a result of the factors described above, the Company’s net income for the three months ended March 31, 2025 was $5.3 million compared to net income of $1.2 million for the three months ended March 31, 2024. On a fully diluted basis, net income
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per share was $0.30 for the three months ended March 31, 2025, compared to a net income of $0.07 per share for the three months ended March 31, 2024.
Six Months Ended March 31, 2025 Compared to the Six Months Ended March 31, 2024
Net sales . Net sales for the six months ended March 31, 2025 increased by $17.9 million, or 89.1%, to $37.9 million from $20.0 million for the six months ended March 31, 2024. Net sales of $37.9 million for the six months ended March 31, 2025 was comprised of $21.2 million in organic Net sales and $16.7 million in Net sales related to the September 2024 Honeywell Agreement. The increase in Net sales was driven primarily by a $13.8 million, or 147.6%, increase in Product sales derived from the September 2024 Honeywell Agreement. and an increase in commercial air transport sales of $5.0 million, offset by $3.5 million of reduced shipsets in business aviation and $1.5 million of reduced shipsets in military. Service sales for the six months ended March 31, 2024 increased $4.0 million, or 37.4%, compared to Services sales for the six months ended March 31, 2024. The increase in service sales primarily reflects increases in engineering development services of $1.2 million and an increase in customer service sales from the product lines acquired from Honeywell of $3.8 million, partially offset by lower legacy customer service revenue of $1.0 million.
Cost of sales . Cost of sales was $20.0 million, or 52.8% of Net sales, for the six months ended March 31, 2025 compared to $8.9 million, or 44.6% of Net sales, for the six months ended March 31, 2024. The increase in Cost of sales was primarily the result of an increase in overall sales volume. The Company’s overall gross margin for the six months ended March 31, 2025 was 47.2% compared to 55.4% for the six months ended March 31, 2024. The decrease in overall gross margin percentage for the six months ended March 31, 2025, compared to the six months ended March 31, 2024 is primarily the result of changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs associated with the September 2024 Honeywell Agreement. The factors that have been, and will continue to effect the Company’s gross margin capture include depreciation resulting from recent product line acquisitions and the increased weight of military sales in the Company’s sales mix.
Research and development. R&D expense increased less than $0.1 million, or 2.2%, to $2.0 million for the six months ended March 31, 2025 from $1.9 million for the six months ended March 31, 2024. As a percentage of net sales, R&D expenses decreased to 5.3% of net sales for the six months ended March 31, 2025 from 9.6% of net sales for the six months ended March 31, 2024. The decrease in R&D expense as a percent of sales for the six months ended March 31, 2025 compared to the same period last year was primarily the result of recharacterizing $0.4 million of R&D expenses as Cost of sales related to the EDC sales.
Selling, general, and administrative. SG&A expenses increased $1.7 million or 28.0%, to $7.6 million from $5.9 million for the six months ended March 31, 2024. The increase in SG&A expense for the six months ended March 31, 2025 was primarily the result of increases in professional services fees and other related fees of $0.3 million primarily due to acquisition related expenses and corporate initiatives. In addition, the Company incurred increased depreciation and amortization expenses of $0.6 million related to the customer relationships and backlog intangible assets resulting from the combined acquisitions and $0.6 million due to employee related expenses and benefits resulting from increased headcount. As a percentage of Net sales, SG&A expenses were 20.0% for the six months ended March 31, 2025 compared to 29.5% for the six months ended March 31, 2024.
Interest income. Interest income was negligible for the six months ended March 31, 2025 and decreased by $0.1 million as compared to the six months ended March 31, 2024. The decrease in interest income was primarily the result of a general decrease in interest rates as compared to the six months ended March 31, 2024.
Other income. The Company had no material other income for the six months ended March 31, 2025 and 2024, respectively.
Income taxes. Income tax expense was $1.5 million for the six months ended March 31, 2025 as compared to income tax expense of $0.6 million for the six months ended March 31, 2024. The effective tax rate for the six months ended March 31, 2025 was 19.3% as compared to 21.5% for the six months ended March 31, 2024. The increase in income tax expense was primarily due to a higher taxable earnings for the six months ended March 31, 2025, compared to the same period last year.
Net income. As a result of the factors described above, the Company’s net income for the six months ended March 31, 2025 was $6.1 million compared to net income of $2.3 million for the six months ended March 31, 2024. On a fully diluted basis, net income per share was $0.34 for the six months ended March 31, 2025, compared to a net income of $0.13 per share for the six months ended March 31, 2024.
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Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
As of
As of
March 31,
September 30,
2025
2024
Cash and cash equivalents
$
1,225,648
$
538,977
Accounts receivable
$
13,823,088
$
12,612,482
Current assets
$
41,461,571
$
34,685,698
Current liabilities
$
8,515,313
$
7,265,254
Contract liability
$
731,793
$
340,481
Other non-current liabilities
$
27,858,040
$
28,478,352
Quick ratio (1)
1.77
1.81
Current ratio (2)
4.87
4.77
Six Months Ended March 31,
2025
2024
Cash flow activities:
Net cash provided by operating activities
$
3,129,364
$
4,416,839
Net cash (used in) provided by investing activities
(1,817,015)
1,917,162
Net cash (used in) provided by financing activities
(625,678)
(8,857,115)
(1) Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities.
(2) Calculated as: current assets divided by current liabilities.
The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations, supplemented with our revolving credit facility. Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments. The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months. Apart from what has been disclosed in this Management’s Discussion and Analysis, 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. The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board.
Debt Facility
In connection with the June 2023 Honeywell Agreement, the Company entered into a term loan with PNC Bank for $20.0 million to fund a portion of the June 2023 Honeywell Agreement. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024, Note 20, “ Loan Agreement ” for further details. In addition to providing for the Term Loan, The Loan Agreement, together with a corresponding Line of Credit Note in favor of PNC, executed on May 11, 2023, provides for the senior secured Revolving Line of Credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 2028.
On December 19, 2023, the Company and PNC entered into the Restated Loan Amendment and the corresponding Restated Line of Credit Note and Restated Rider, to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028. The proceeds of the Restated Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendments and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.
On September 30, 2024, in connection with the July 2024 Honeywell Asset Acquisition and the September 2024 Honeywell Agreement, the Company entered into the Loan 2024 Amendment with PNC, which amends certain terms of the Loan Agreement to increase the line of credit with PNC. Concurrently with the Loan 2024 Amendment, the Company entered into (i) A&R Revolving Line of Credit Note, and (ii) A&R Rider. The A&R Revolving Line of Credit Note provides for a senior secured revolving line of credit in an aggregate principal amount of $35,000,000, with an expiration date of December 19, 2028 (the “Revolving Line of
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Credit”). The interest rate applicable to loans outstanding under the Revolving Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the A&R Revolving Line of Credit Note. The A&R Rider provides for how PNC will make advances to the Company under the Revolving Line of Credit.
As of March 31, 2025, the outstanding balance drawn on the A&R Revolving Line of Credit was $27,401,323 with an effective interest rate of 5.9 percent. As of March 31, 2025, the Company had availability of $7,598,677 under the A&R Revolving Line of Credit.
Future Funding Requirements
The Company’s existing cash balances, anticipated cash flows from operations and current banking facility are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months, which include funding requirements for working capital, construction in process related to progress payments in support of the Company’s facilities expansion as well as computer software integration associated with the Company’s Netsuite ERP system.
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.
The Company did not pay cash dividends in fiscal years 2023 or 2024. The Company intends to retain future earnings, if any, to finance the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any dividend in the future will be at the discretion of the Board and will depend on then-existing conditions, including our operating results, financial condition, business prospects and other factors the Board may deem relevant.
Operating activities
Net cash provided by operating activities was $3.1 million for the six months ended March 31, 2025 and consisted primarily of funding from net income of $6.1 million and changes in working capital.
Investing activities
Net cash used in investing activities was $1.8 million for the six months ended March 31, 2025 and consisted of expenditures related to additions and improvements in the Company’s facilities and purchases of equipment and computer hardware.
Financing activities
Net cash used in financing activities was $0.6 million for the six months ended March 31, 2025 and consisted of payments against the Company’s line of credit.
Summary
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. IS&S has experienced increases in expenditures since its inception and anticipates that expenditures will continue in the foreseeable future. The Company believes that its cash and cash equivalents will provide sufficient capital to fund operations for at least the next twelve months. However, the Company may need to develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies, or respond to unanticipated requirements or developments. If insufficient funds are available, the Company may not be able to introduce new products or compete effectively.
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Backlog
Three Months Ended
Six Months Ended
March 31, 2025
Backlog, beginning of period
$
80,756,933
$
89,232,576
Plus: bookings during period, net
20,777,796
28,270,882
Less: sales recognized during period
(21,936,214)
(37,904,943)
Backlog, end of period
$
79,598,515
$
79,598,515
Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders. The backlog excludes potential future sole-source production orders from products developed under the Company’s engineering development contracts (“EDC”) programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King Air 260 ThrustSense® Autothrottle programs. Although the Company believes that the orders included in backlog are firm, most of the backlog involves orders that can be modified or terminated by the customer.
At March 31, 2025, our backlog was $79.6 million compared with $89.2 million at September 30, 2024. Backlog at March 31, 2025 included $66.0 million of acquired backlog as a result of the September 27, 2024 acquisition. Backlog is converted into sales in future periods as work is performed or deliveries are made. We expect to recognize approximately 59% of our backlog over the next 12 months and approximately 81% over the next 24 months as revenue, with the remainder recognized thereafter.
During fiscal 2024, we made important progress on our commercial growth strategy highlighted by several key awards and contract wins across our commercial, military and business aviation markets. In October 2024, we announced our ThrustSense® Autothrottle system was selected by the US Army to be installed on their C-12 (B200) aircraft equipped with ProLine21 avionics suites®. Deliveries of the IS&S ThrustSense Autothrottle system for this application began in September 2024, with ongoing installations anticipated. In August 2024, we received a multi-million dollar production contract from a major aerospace company to supply our 19” Multifunction Display (MFD) with Integrated Mission Computer. This order marks our latest OEM contract and builds on existing programs with Pilatus for the PC-24, Textron for the King Air 260/360 and Boeing for the KC-46A, KC-767 and the T-7A.
Off-Balance Sheet Arrangements
The Company has no relationships with unconsolidated entities or financial partnerships, such as Special Purpose Entities or Variable Interest Entities, established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.