Innovative Solutions and Support, Inc. Delivers Strong Financial Performance in Q2 2025

Innovative Solutions and Support, Inc. (IS&S), a leading provider of avionics systems and components, reported impressive financial results for the second quarter of fiscal year 2025. The company’s net sales increased by over 100% compared to the same period last year, driven by strong growth in both product and service revenues. Despite supply chain challenges and integration costs related to recent acquisitions, IS&S maintained healthy profitability, with operating margins exceeding 30%.

Revenue Growth Fueled by Acquisitions and Commercial Demand

For the three months ended March 31, 2025, IS&S reported net sales of $21.9 million, a 104.3% increase from $10.7 million in the prior-year quarter. This surge in revenue was primarily attributable to two factors:

1. Contribution from Recent Acquisitions: $10.8 million, or nearly half of total net sales, came from the company’s September 2024 acquisition of Honeywell’s military display generators and flight control computers business. This transaction, along with the previous Honeywell asset acquisitions in 2023 and 2024, have significantly expanded IS&S’s product portfolio and customer base.

2. Organic Growth in Commercial Markets: Excluding the Honeywell-related sales, IS&S’s organic net sales increased by $3.4 million, or 31.8%, driven by a $3.7 million (or 169.2%) jump in commercial air transport product sales. This growth offset declines in business aviation and military sales.

On the services side, revenue increased by $2.9 million, or 49.8%, primarily due to higher engineering development and customer support activities related to the acquired Honeywell product lines.

Profitability Remains Strong Despite Integration Costs

Despite the revenue surge, IS&S maintained solid profitability in the quarter. Gross margin was 51.4%, compared to 52.0% in the prior-year period. The slight decline was mainly attributable to changes in product mix, with the higher-margin military and commercial products accounting for a larger portion of sales.

Operating expenses as a percentage of net sales decreased significantly, from 36.7% in Q2 2024 to 19.6% in Q2 2025. This improvement was driven by:

• A 15.9% decrease in R&D spending, as the company reclassified certain R&D costs as cost of sales for engineering development contracts.
• Improved leverage of selling, general, and administrative (SG&A) expenses, which grew by only 17.4% despite the substantial revenue increase.

As a result, operating income margin expanded from 15.3% to 31.8% year-over-year. Net income for the quarter was $5.3 million, or $0.30 per diluted share, compared to $1.2 million, or $0.07 per diluted share, in the prior-year period.

Navigating Supply Chain Challenges and Integration Risks

While IS&S’s financial performance was impressive, the company faces several operational challenges that could impact future results:

1. Supply Chain Disruptions: The company noted that some of its customers had temporarily suspended product deliveries in the past due to the COVID-19 pandemic, and there is a risk of similar disruptions occurring in the future.

2. Integration Risks: The transition of the Honeywell military product lines to IS&S’s facilities involves operational risks that could temporarily disrupt production and financial performance. Honeywell will continue to manufacture these products in the short term, but the handoff to IS&S is expected to be complex.

3. Reliance on Honeywell Data: For the Honeywell military product lines, IS&S must rely on Honeywell for access to operational and financial data needed to prepare its own financial statements. This limited visibility could make it difficult for IS&S to accurately predict revenues and margins from these acquired product lines.

To mitigate these challenges, IS&S is closely monitoring the integration process and plans to provide regular updates to investors. The company remains confident in the long-term benefits of the Honeywell acquisitions, which have significantly expanded its product portfolio and customer base.

Strong Liquidity and Capital Resources Support Growth

IS&S’s balance sheet and cash flow position remain healthy, providing ample resources to fund ongoing operations and future growth initiatives. As of March 31, 2025, the company had $1.2 million in cash and cash equivalents, and $13.8 million in accounts receivable.

The company’s current ratio stood at 4.87, indicating a strong ability to meet short-term obligations. IS&S also has access to a $35 million revolving credit facility, with $7.6 million in available borrowing capacity as of the end of the quarter.

Cash flow from operations was $3.1 million for the first six months of fiscal 2025, down from $4.4 million in the prior-year period. The decrease was primarily due to changes in working capital, as the company invested in inventory and other current assets to support the higher sales volume.

Looking ahead, management believes the company’s existing cash, anticipated cash flows, and credit facility will be sufficient to meet its liquidity needs for at least the next 12 months. The company does not currently pay dividends, instead opting to reinvest earnings to fund future growth and development.

Backlog Remains Robust, Providing Visibility

IS&S ended the second quarter with a backlog of $79.6 million, down slightly from $89.2 million at the end of fiscal 2024. The backlog includes $66 million in acquired orders from the September 2024 Honeywell transaction.

Management expects to convert approximately 59% of the current backlog into revenue over the next 12 months, and 81% within the next 24 months. This provides the company with good visibility into future sales, though the backlog can be subject to modification or termination by customers.

During the quarter, IS&S announced several key contract wins and program selections that will contribute to future backlog and revenue growth, including:

• A production contract from a major aerospace company to supply 19” Multifunction Displays with Integrated Mission Computers
• Selection by the U.S. Army to install the company’s ThrustSense® Autothrottle system on their C-12 (B200) aircraft

These new awards, combined with the expanded product portfolio from the Honeywell acquisitions, position IS&S for continued success in the commercial, military, and business aviation markets.

Outlook: Navigating Integration Challenges, Positioning for Long-Term Growth

Despite the near-term operational risks associated with the Honeywell product line integration, IS&S’s strong financial performance in the second quarter of fiscal 2025 demonstrates the company’s ability to capitalize on growth opportunities in its key markets.

The recent acquisitions have significantly expanded IS&S’s product offerings and customer base, providing a foundation for sustained revenue and profitability growth. However, the company must carefully manage the integration process to ensure a seamless transition and maintain operational efficiency.

Looking ahead, investors will be closely watching IS&S’s ability to navigate supply chain disruptions, leverage its expanded product portfolio, and successfully integrate the Honeywell military product lines. If the company can effectively manage these challenges, it is well-positioned to deliver long-term value for shareholders through continued innovation, market share gains, and strategic acquisitions.