Innovative Solutions and Support(ISSC) - 2025 Q1 - Quarterly Report

Financial Performance - For the three months ended December 31, 2024, total net sales increased, with product sales at 62.5% and service sales at 37.5% compared to 47.5% and 52.5% respectively in 2023[150] - Gross profit margin decreased to 41.4% in 2024 from 59.3% in 2023, indicating a significant decline in profitability[150] - Operating income fell to 8.4% in 2024 from 17.4% in 2023, reflecting challenges in maintaining profitability[150] - Net income decreased to 4.5% in 2024 compared to 11.4% in 2023, highlighting a decline in overall financial performance[150] - Net income for the three months ended December 31, 2024 was $0.7 million, down from $1.1 million in the same period of 2023, with diluted net income per share decreasing to $0.04 from $0.06[160] Sales and Cost Analysis - The cost of sales for products rose to 39.2% from 19.1%, while service costs decreased slightly to 19.4% from 21.6%, leading to a total cost of sales of 58.6% in 2024 compared to 40.7% in 2023[150] - Cost of sales was $9.4 million, or 58.6% of net sales, for the three months ended December 31, 2024, compared to $3.8 million, or 40.7% of net sales, for the same period in 2023, resulting in a gross margin decrease to 41.4% from 59.3%[153] - Operating expenses as a percentage of net sales decreased to 33.0% in 2024 from 42.0% in 2023, with research and development expenses at 7.0% and selling, general and administrative expenses at 26.0%[150] - Selling, general, and administrative expenses rose by $1.2 million, or 38.3%, to $4.2 million, accounting for 26.0% of sales compared to 32.3% in the prior year[155] Acquisitions and Strategic Initiatives - The company completed the acquisition of certain assets from Honeywell for a total consideration of $35.9 million in June 2023, followed by additional acquisitions totaling $4.2 million in July 2024 and $14.2 million in September 2024[135][136][137] - The strategic acquisitions from Honeywell are expected to enhance the company's offerings in air transport, military, and business aviation markets, potentially leading to cost synergies[138] - The company announced a multi-million dollar production contract for its 19" Multifunction Display with Integrated Mission Computer, enhancing its commercial growth strategy[178] Research and Development - The company continues to focus on research and development, with plans to invest in new product development while expensing associated R&D costs as incurred[140] - Research and development expenses increased to $1.1 million for the three months ended December 31, 2024, representing 7.0% of net sales, down from 9.7% in the same period of 2023[154] Market and Operational Risks - The company operates in a competitive environment, facing risks related to market acceptance of its products and potential economic downturns affecting customer spending[124][143] - The Company is exposed to market risks primarily due to changes in interest rates, with a hypothetical 1% increase potentially affecting interest income and cash flows by approximately $5,030 for the three months ended December 31, 2024[180] Backlog and Revenue Recognition - The company's backlog at December 31, 2024 was $80.8 million, down from $89.2 million at September 30, 2024, with $74.3 million of acquired backlog from a recent acquisition[177] - The company expects to recognize approximately 65% of its backlog as revenue over the next 12 months and about 98% over the next 24 months[177] Financial Position and Controls - Cash and cash equivalents increased to $604,561 as of December 31, 2024, compared to $538,977 as of September 30, 2024, while net cash provided by operating activities was $1.8 million[161][171] - The Company has no off-balance sheet arrangements or relationships with unconsolidated entities[179] - The Company's disclosure controls and procedures were evaluated as effective as of December 31, 2024, ensuring timely and accurate reporting[181] - There were no changes in the Company's internal control over financial reporting that materially affected its operations during the fiscal quarter ended December 31, 2024[182] - The Company is subject to various legal proceedings, but does not believe any pending matters will materially affect its financial position[183]