Innovative Solutions and Support(ISSC) - 2021 Q4 - Annual Report

PART I Business Innovative Solutions and Support, Inc. (IS&S) integrates, designs, manufactures, and services advanced avionics for OEM and retrofit markets, with FPDS as a key product and significant customer concentration Overview IS&S integrates, designs, and services avionics equipment for retrofit and OEM markets, offering cost-effective solutions across aviation sectors with key products like ThrustSense® Autothrottle - The company operates as a systems integrator for air data, engine display, standby, primary flight guidance, autothrottles, and cockpit display systems for both retrofit and OEM markets[28] - IS&S has received FAA certification for its ThrustSense® Autothrottle for King Air retrofit and has a multi-year supply agreement with Textron for King Air 360 and 260 models[33] - The company's customer base includes OEMs, commercial air transport, corporate/general aviation, the DoD, and foreign militaries[37] Strategy The company aims to be a leading cockpit information systems supplier by leveraging its ThrustSense® autothrottle, focusing on cost-effective retrofits, expanding flat panel display market presence, and increasing international sales - Introduce and capitalize on being the first to market with the ThrustSense® turboprop autothrottle system[48] - Focus on cost-effective retrofitting of existing aircraft with modern avionics like COCKPIT/IP® FPDS, FMS, and ISU systems[48] - Expand presence in the flat panel display market, leveraging the COCKPIT/IP® system's advantages in cost, weight, and functionality[48][50] - Increase international sales by adding personnel and obtaining EASA approvals for products like the FPDS for B757/B767 aircraft[52] Products IS&S offers advanced avionics, with Flat Panel Display Systems (FPDS) as the largest revenue source, alongside the innovative ThrustSense® Autothrottle, Flight Management Systems, and Integrated Standby Units Revenue by Product Line (as % of Total Sales) | Product Line | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Flat Panel Display Systems (FPDS) | 88% | 80% | 90% | | Air Data Systems and Components | 12% | 20% | 10% | - The ThrustSense® Autothrottle, certified for King Air and Pilatus PC-12 aircraft, offers automated power control, engine protection, and Vmca protection in multi-engine aircraft[69] - The Utilities Management System (UMS) for the Pilatus PC-24 integrates over 20 aircraft systems, including navigation, landing gear, and environmental controls, into a centralized processing unit[75][76] Customers The company serves diverse customers including government, commercial airlines, and OEMs, but revenue is highly concentrated, with Pilatus and Textron being the largest in FY2021 Top Customer Revenue Concentration | Fiscal Year | Top Customers | % of Total Revenue | | :--- | :--- | :--- | | 2021 | Pilatus, Textron | 20%, 17% | | 2020 | Pilatus, Dayton T. Brown, Inc., Kalitta Air | 33%, 12%, 10% | | 2019 | Pilatus, Air Transport Services Group Inc. | 25%, 14% | Backlog The company's backlog significantly increased to $9.1 million in FY2021, driven by new bookings, with only 4% expected beyond fiscal 2022 Backlog Changes (in USD) | | Sep 30, 2021 | Sep 30, 2020 | | :--- | :--- | :--- | | Beginning Backlog | $3,640,637 | $5,896,163 | | Net Bookings | $28,525,744 | $19,339,673 | | Sales Recognized | ($23,044,796) | ($21,595,199) | | Ending Backlog | $9,121,585 | $3,640,637 | - The backlog increase of $5.5 million was primarily due to a $5.5 million increase in FPDS backlog[86] - The backlog excludes potential future orders from key EDC programs, including the Pilatus PC-24, KC-46A, and Textron King Air ThrustSense® programs[86] Human Capital As of September 30, 2021, IS&S had 85 employees, none unionized, with good relations, and implemented COVID-19 safety protocols - As of September 30, 2021, the company had 85 employees (83 full-time)[108] - None of the employees are represented by a labor union or subject to a collective bargaining agreement[108] Risk Factors The company faces significant risks including new product market acceptance, contract termination, fixed-price contract exposure, customer concentration, government spending reliance, competition, and general operational challenges - IS&S-Specific Risks include dependence on new product market acceptance, customer contract terminations, cost overruns on fixed-price contracts, reduced government spending, loss of key customers, and intense competition[119][122] - General Risks include the ongoing COVID-19 pandemic, rapid technological change, reliance on third-party suppliers, cybersecurity threats, intellectual property protection, and failure to retain key personnel[122] - Revenue is concentrated with a limited number of customers, with the top five accounting for 59% of revenue in fiscal year 2021, posing a risk if key customers are lost or their financial condition deteriorates[131] - As of September 30, 2021, only 4% of the company's backlog was expected to be filled beyond fiscal 2022, indicating dependence on near-term orders[134] Properties The company owns a 45,000 sq ft facility in Exton, PA, and leases two hangars in Delaware for approximately $53,000 annually - The company owns a 45,000 square foot facility in Exton, Pennsylvania, with approval for a 20,400 square foot expansion[172] - IS&S leases two aircraft hangars in New Castle County, Delaware, on a month-to-month basis, with an annual lease expense of approximately $53,000[174] Legal Proceedings The company is involved in ordinary course legal proceedings, but management does not expect a material impact on financial results or position - The Company does not believe any currently pending legal proceedings will have a material effect on its results of operations or financial position[175] Mine Safety Disclosures This item is not applicable to the company - Not applicable[176] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "ISSC", and it paid special cash dividends of $0.50 and $0.65 per share in fiscal 2021 and 2020, respectively - The company's common stock trades on the NASDAQ Global Select Market under the symbol "ISSC"[178] Special Cash Dividends Declared | Declaration Date | Amount per Share | Total Payment | Payment Date | | :--- | :--- | :--- | :--- | | Dec 10, 2020 | $0.50 | ~$8.6 million | Dec 30, 2020 | | Sep 4, 2020 | $0.65 | ~$11.2 million | Oct 1, 2020 | Selected Consolidated Financial Data The company's FY2021 net sales were $23.0 million with net income of $5.1 million, while total assets decreased to $27.1 million due to cash reduction and dividend payments Selected Statement of Operations Data (in thousands, except per share data) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $23,045 | $21,595 | $17,573 | | Gross profit | $12,782 | $11,802 | $9,896 | | Operating income | $3,901 | $2,745 | $1,529 | | Net Income | $5,065 | $3,270 | $1,850 | | Diluted EPS | $0.29 | $0.19 | $0.11 | Selected Balance Sheet Data (as of Sep 30, in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $8,266 | $12,604 | $22,417 | | Working capital | $15,218 | $19,473 | $27,739 | | Total assets | $27,086 | $41,546 | $38,557 | | Total shareholders' equity | $24,585 | $27,769 | $36,208 | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 net sales increased 6.7% to $23.0 million, gross margin improved to 55.5%, and net income rose to $5.1 million, significantly impacted by a $1.1 million tax benefit and $19.8 million in dividend payments Results of Operations FY2021 net sales grew 6.7% to $23.0 million, gross margin improved to 55.5%, and net income increased to $5.1 million, largely due to a $1.1 million income tax benefit - FY2021 net sales increased 6.7% to $23.0 million from $21.6 million in FY2020, driven by higher shipments for OEM general aviation programs and retrofit displays for commercial transport customers[200] - Gross margin for FY2021 was 55.5%, up from 54.7% in FY2020, attributed to favorable product mix and leverage from higher revenues[201] - FY2021 net income was $5.1 million, compared to $3.3 million in FY2020, largely due to an income tax benefit of $1.1 million from the release of a valuation allowance for deferred tax assets[205][206] Liquidity and Capital Resources The company's cash and cash equivalents decreased to $8.3 million by September 30, 2021, primarily due to $19.8 million in dividend payments, despite generating $4.6 million from operations Cash Flow Summary (in millions) | Activity | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $4.6 | $2.2 | $2.1 | | Net cash used in investing activities | ($0.3) | ($0.1) | ($0.1) | | Net cash used in financing activities | ($19.8) | ($0.7) | $0.0 | - Cash used in financing activities in FY2021 was $19.8 million, consisting primarily of dividend payments[227] - The company declared and paid two special cash dividends: $0.65/share (total ~$11.2 million) paid in Oct 2020 and $0.50/share (total ~$8.6 million) paid in Dec 2020[219][220] Critical Accounting Policies Critical accounting policies involve significant estimates for revenue recognition (product at shipment, EDC over time), income taxes (deferred tax asset realizability), and inventory valuation - Revenue from products (100% of revenue in FY2021) is recognized at a point in time, typically upon shipment, while EDC contract revenue is recognized over time using a cost-to-cost input measure[236] - For income taxes, the company released the valuation allowance against all federal and most state deferred tax assets in FY2021, concluding they are more likely than not to be realized[241] - Inventory is valued at the lower of cost (FIFO) or net realizable value, with write-downs for obsolescence based on historical usage and future demand forecasts[248] Quantitative and qualitative disclosures about market risk The company's primary market risk is interest rate changes affecting income from cash equivalents, with a hypothetical 1% rate increase yielding an $88,000 income increase in FY2021 - The company's main market risk is interest rate changes on its cash equivalents (money market funds)[254] - A hypothetical 1% increase in interest rates would have increased fiscal 2021 interest income by approximately $88,000[254] Financial statements and supplementary data This section presents the company's audited consolidated financial statements for FY2019-2021, including balance sheets, income statements, cash flows, and notes, with an unqualified opinion from Grant Thornton LLP Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued an unqualified opinion on the company's consolidated financial statements for the three years ended September 30, 2021, confirming fair presentation in accordance with U.S. GAAP - The auditor, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements for the three years ended September 30, 2021[260] - The auditor determined that there were no critical audit matters arising from the current period audit[264] Consolidated Financial Statements The consolidated financial statements show FY2021 total assets of $27.1 million, net sales of $23.0 million, net income of $5.1 million, and a $15.5 million net cash decrease due to dividends Consolidated Balance Sheet Highlights (as of Sep 30, 2021) | Account | Amount (USD) | | :--- | :--- | | Total Current Assets | $17,690,411 | | Total Assets | $27,086,000 | | Total Current Liabilities | $2,472,239 | | Total Liabilities | $2,500,919 | | Total Shareholders' Equity | $24,585,081 | Consolidated Statement of Operations (FY 2021) | Account | Amount (USD) | | :--- | :--- | | Total Net Sales | $23,044,796 | | Gross Profit | $12,781,630 | | Operating Income | $3,900,979 | | Net Income | $5,064,902 | Notes to Consolidated Financial Statements Notes detail significant customer concentration (Pilatus 20%), revenue recognition, income tax accounting (including $2.0 million valuation allowance release), share-based compensation, and $2.1 million in purchase commitments - In FY2021, the largest customer, Pilatus, accounted for 20% of total revenue, with sales to government contractors and agencies approximately 18% of total sales[280][281] - The company released its valuation allowance against most deferred tax assets in FY2021, resulting in a net deferred tax asset of $1,063,822 at year-end, compared to a net liability of $129,689 in 2020[348][350] - As of September 30, 2021, the company had 100,000 stock options outstanding under its 2019 Plan with a weighted-average exercise price of $7.10, and 689,147 securities remaining available for future issuance[371][407] Controls and procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2021, with no material changes during the quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2021[395] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of September 30, 2021[398] PART III Directors, executive officers and corporate governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement - This information is incorporated by reference from the Company's Proxy Statement[402] Executive compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement - This information is incorporated by reference from the Company's Proxy Statement[403] Security ownership of certain beneficial owners and management and related stockholder matters Security ownership information is incorporated by reference from the Proxy Statement, detailing 100,000 outstanding stock options and 689,147 securities available for future issuance Equity Compensation Plan Information (as of Sep 30, 2021) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 100,000 | $7.10 | 689,147 | | Not approved by security holders | — | — | — | | Total | 100,000 | $7.10 | 689,147 | Certain relationships and related transactions and director independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's Proxy Statement - This information is incorporated by reference from the Company's Proxy Statement[409] Principal accounting fees and services Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement - This information is incorporated by reference from the Company's Proxy Statement[410] PART IV Exhibits, financial statement schedules This section lists documents filed as part of the Form 10-K, including financial statements and key exhibits like corporate governance documents and certifications - The report includes financial statements as detailed in Item 8[413] - Exhibits filed with the report include corporate governance documents, equity compensation plans, and required CEO/CFO certifications[413] Form 10-K Summary No Form 10-K summary is provided - None[418]