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DATE
Thursday, August 14, 2025 at 10 a.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Shahram Askarpour
Chief Financial Officer — Jeff DiGiovanni
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RISKS
Gross margin contracted to 35.6% in fiscal Q3 2025 (period ended June 30, 2025), down from 53.4% a year earlier, due to "lower than anticipated gross margins received fromHoneywell(NASDAQ: HON) on the F-16 product line" and ongoing integration costs.
Management acknowledged a "temporary dip in revenues related to the F-16 product line during the fourth quarter" as F-16 production transitions to the Exton facility.
Capital expenditures totaled $5.5 million for the nine months ended June 30, 2025, compared to $500,000 in the prior-year period, primarily due to Exton facility expansion.
CEO Shahram Askarpour noted, "we could see some impact from our foreign-based customers that are reducing their production forecast due to potential tariff implications," indicating potential near-term volatility.
TAKEAWAYS
Revenue-- $24.1 million in net revenues for fiscal Q3 2025, representing a 105% increase over the prior-year period, driven by the F-16 product line acquired from Honeywell and military program momentum.
F-16 Contribution-- $12.6 million in revenue from the F-16 product line, with management highlighting "some revenues that were pulled forward" due to Honeywell safety stock activities ahead of the production transition.
Product and Service Sales-- $16.6 million in product revenue and $7.5 million in service revenue, with $1 million of service revenue attributed to F-16 programs; higher product revenue primarily reflects military product lines.
Gross Profit-- $8.6 million, up 37% from $6.3 million a year earlier, but gross margin declined to 35.6% from 53.4% a year earlier, predominantly due to less than 25% gross margin on F-16 sales and higher depreciation linked to acquisition integration.
EBITDA-- EBITDA was $4.3 million, rising 62.7% compared to $2.7 million in fiscal Q3 2024, reflecting strong operating expense leverage despite lower gross margin.
Operating Expense-- $5.1 million, up from $4.2 million a year earlier; operating expenses declined as a percentage of revenue to 21% from 36.1% a year earlier.
Backlog-- $72 million backlog as of June 30, 2025, with multi-year military and commercial programs not fully reflected in backlog as of June 30, 2025, as only purchase orders with set delivery dates are included.
Cash Flow and Capital Expenditures-- Operating cash flow of $10.3 million and free cash flow of $4.8 million for the nine months ended June 30, 2025, despite capex rising to $5.5 million (from $500,000) for the Exton expansion during the same period.
Debt and Liquidity-- Net debt decreased by $3.5 million to $22.7 million as of June 30, 2025, with net leverage at 1.1x as of June 30, 2025, and cash plus credit availability totaling $12.3 million.
Credit Facility-- New five-year, $100 million committed credit agreement withJPMorgan Chase(NYSE: JPM), replacing the previous $35 million line, entered into on July 18, 2025, expanding liquidity by $65 million and enabling up to an additional $25 million via an accordion feature in the new credit agreement.
Gross Margin Outlook-- CFO Jeff DiGiovanni stated, expects gross margin to vary in the mid-forties percent range, depending on the product mix, targeting a normalized gross margin of around 45% as integration stabilizes, with management indicating this as their target range following the integration of acquired product lines.
Manufacturing Capacity Expansion-- Completion of Exton facility expansion is expected to increase manufacturing capacity by more than threefold, with fit-out on track for early fall.
Growth Targets-- Management reaffirmed being "on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024."
SUMMARY
Innovative Solutions and Support(ISSC -33.05%) reported results driven by the Honeywell F-16 acquisition and strong momentum in military programs, while near-term gross margin compression and a temporary F-16 revenue dip were directly addressed as transitional and expected as part of the integration of the Honeywell F-16 product line. The company’s recently expanded $100 million credit facility, along with strong cash generation despite substantial capital outlays for facility expansion, equips management with the balance sheet flexibility needed to pursue further organic and inorganic growth, with robust U.S.-based production mitigating direct tariff risks and positioning Innovative Solutions and Support favorably for potential reshoring trends.
CEO Askarpour noted, "manufacture 100% of our products in our Exton facility," positioning Innovative Solutions and Support to benefit from domestic supply chain priorities.
Organic growth remains central to the long-term strategy, even as management continues "to evaluate opportunities to acquire smaller avionics manufacturers."
The fit-out of the expanded Exton facility is set for early fall, after which production capacity will more than triple, providing significant scalability for pending and future contracts.
INDUSTRY GLOSSARY
Safety Stock: Extra inventory built ahead of supply chain transitions to ensure uninterrupted delivery, particularly during shifts in manufacturing arrangements.
Accordion Feature: An option in a debt agreement allowing the borrower to request an increase in the total commitment, subject to lender approval, without renegotiating the base facility.
Vertically Integrated: A production strategy wherein a company controls multiple stages of its value chain internally, from manufacturing to delivery, minimizing reliance on external suppliers.
Full Conference Call Transcript
Shahram Askarpour: Thank you, Paul, and good morning to everyone joining us on the call today. Let's begin with a high-level overview of our third quarter financial performance. During the third quarter, we delivered revenue growth of 105% compared to the third momentum from new military programs, including significant growth from our F-16 program. As Jeff will discuss in more detail, our results did benefit from a pull forward of F-16 revenues ahead of the upcoming integration into our Exton plan. Our business momentum remains strong with a backlog of approximately $72 million as of 06/30/2025.
Our adjusted EBITDA increased only by 43% from last year as our strong revenue growth was impacted by lower than anticipated gross margins received from Honeywell on the F-16 product line due to additional costs associated with building safety stock prior to transition. As we have discussed, we fully expect our integration efforts and investments for growth to create some near-term volatility in our margin results. However, the actions we have taken are important strategic steps in advancing our long-term growth strategy. Once the transition is completed, and cost efficiencies are realized, we expect improved margins in latter quarters of fiscal 2026.
We were pleased with our continued progress on the expansion of our Exton facility and the integration of our acquired lines from Honeywell. We are excited by the long-term opportunities that will result from these investments. We continue to make progress on our key strategic objectives during the quarter, and we are confident these measures have strengthened our foundation for future growth. To that end, I would like to shift the discussion to an update on our progress on the ISNS NEXT. Our long-term value creation strategy is on a combination of targeted commercial growth within high-value markets, improving operating leverage, and a disciplined returns-driven approach to capital allocation.
I would like to take a moment to highlight just a few of our key achievements during the quarter. Early in the quarter, we received a new engineering development and production contract for a derivative of a radio management unit we acquired as part of our first acquisition under our long-term growth strategy. We have made further progress on the expansion of our Exton facility with construction having wrapped up during the third quarter. We expect the fit-out to be completed in early fall, at which time we can begin to take advantage of our expanded manufacturing capacity, which will increase by more than threefold. As a reminder, we manufacture 100% of our products in our Exton facility.
This expansion is the key element of our long-term strategy to achieve revenues exceeding $250 million over the next few years. With the ongoing trade uncertainty and priorities of the current administration, it should be in an enviable position to give the likely significant push for reshoring of manufacturing and an America-first mentality. Additionally, as it relates to tariffs, we are not directly impacted by the uncertain tariff environment given our U.S.-based manufacturing and vertically integrated operations. However, we could see some impact from our foreign-based customers that are reducing their production forecast due to potential tariff implications.
Meanwhile, we do not expect a meaningful impact on our results and view this to be a short-term measure while political negotiations are at play. During the third quarter, we continued with the integration of our most recent acquisition from Honeywell. As we have discussed in recent quarters, much of the spending and integration activities are being done ahead of the expected growth from this platform. We anticipate the integration to be completed during our 2026, and we are excited by the opportunities from this acquisition. Importantly, we were pleased with the recent closing of our new credit facility, which Jeff will cover shortly.
If you a key priority and our new credit facility extended by Chase Bank provides us with expanded access to credit and more flexibility to accelerate our long-term growth plan. Although our most recent acquisitions have been focused on complementary product lines from large avionics suppliers, we continue to evaluate opportunities to acquire smaller avionics manufacturers where we anticipate synergies will be realized by incorporating their outsourced production in our facility. Additionally, we are also evaluating opportunities in adjacent markets that are more developmental in nature but offer unique long-term growth opportunities. Despite recent margin pressure due to the impact of the F-16 safety stock, we expect EBITDA and profit margins to grow steadily.
We are further establishing our company as a premier systems integrator in flight navigation and precision instrumentation with cutting-edge technology. A vertically integrated U.S.-based production provides a competitive advantage, fostering relationships with key aircraft manufacturers, operators, and defense organizations. In summary, we remain focused on the long term on our strategic priorities. We are encouraged by the progress we have made and remain committed to taking strategic steps to further our growth objectives. We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024.
We are excited by everything we have accomplished and are confident we are strategically positioned to continue generating profitable growth for the future to come. With that, I'll turn the call over to Jeff for his prepared remarks.
Jeff DiGiovanni: Thank you, Shahram, and good morning to all those joining us today. I will provide a high-level overview of our third quarter performance, including a discussion of our working capital, balance sheet, and liquidity profile at quarter end. We generated net revenues of $24.1 million in the third quarter, more than double our revenues during the third quarter last year. The increase was driven largely by the contribution from the recently acquired F-16 product line from Honeywell, which contributed $12.6 million. Our revenues related to the F-16 products once again included some revenues that were pulled forward as Honeywell built safety stock ahead of the shift in the production to our Exton facility.
As a result, we expect a temporary dip in revenues related to the F-16 product line during the fourth quarter as we complete the transition before revenues begin to ramp back up in fiscal 2026. Product sales were $16.6 million during the third quarter, up significantly from $5.1 million last year, driven primarily by the recently acquired military product line. Service revenue was $7.5 million, owing largely to customer service sales from the product lines acquired from Honeywell, including $1 million associated with the F-16 program.
Gross profit was $8.6 million during the third quarter, up 37% from $6.3 million in the same period last year, driven by the strong revenue growth partially offset by lower gross margins on the acquired F-16 product line from Honeywell, as well as higher depreciation expense resulting from the Honeywell acquisitions, duplicate costs in support of the migration of the recent Honeywell acquisition, and continued investments in growth initiatives as Shahram discussed. Our third quarter gross margin was 35.6%, down from 53.4% in the same period last year. The decline from last year was driven by lower than gross margins received from Honeywell.
As we have discussed, this is a gross margin of less than 25% in the F-16 revenues, which impacted our overall margins. As we have stated in recent quarters, the potential exists for our gross margins to be lumpy in the near term as we continue to integrate the Honeywell product lines into our facilities. This can be due to a variety of factors, including duplicate costs as we prepare to integrate these products, the hiring and training of engineers, and staff to support these products. And as we saw this quarter, the cost to build stock to ensure a smooth transition.
Additionally, as we discussed previously, as it relates to the product mix, generally, military sales carry a lower average gross margin versus commercial contracts. However, importantly, there is minimal operating expense associated with these contracts, so the incremental EBITDA margins are strong. Similar to last quarter, this dynamic was fully evident in our third quarter results as we saw very strong operating expense leverage in the quarter. Operating expense during the 2025 was $5.1 million, an increase from $4.2 million last year despite the significant growth in revenue. The increase in operating expense was driven by approximately $200,000 of incremental depreciation and amortization, $600,000 in employee-related costs.
Operating expenses represented 21% of revenue during the third quarter, a significant decline from 36.1% in the third quarter of last year, highlighting the opportunity for improved operating leverage as the business scales. Net income for the quarter was $2.4 million as compared to $1.6 million last year. GAAP earnings per share of $0.14 increased from $0.09. EBITDA was $4.3 million during the third quarter, up from $2.7 million, or an increase of 62.7%, largely due to our revenue growth and operating expense leverage, partially offset by the lower gross margins. Moving on to backlog. New orders in the 2025 were $17 million, and backlog as of June 30 was $72 million.
Backlog includes only purchase orders in hand and excludes additional orders from the company's OEM customers under long-term programs, including Caladis PC-24, Hextron King Air, Boeing PC-7 Red Hawk, Boeing KC-46A, and the F-16 with Martin. We expect these programs to remain in production for several years and anticipate they will continue to generate future sales. Further, due to their nature, 2025 cash flow from operations was $10.3 million compared to $5.4 million in the year-ago comparable period, due to our solid operating results. Capital expenditures during the nine months ended June 30 were $5.5 million versus $500,000 in the year-ago period.
The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton facility. Despite the increase in spend of over $5 million when compared to the nine months last year, we were still able to generate free cash flow of $4.8 million during the nine months ended June 30, 2025, which is in line with our previous year. As of 06/30/2025, we had total long-term debt of $23.3 million and cash and cash equivalents of $600,000, resulting in net debt of $22.7 million.
Net debt was down $3.5 million from the end of the second quarter 2025, despite elevated capital expenditures related to the Exton expansion project, reflecting the strong operating results and disciplined financial management. As of 06/30/2025, ISNS had total cash and availability under its line of credit of approximately $12.3 million. Our net leverage at the end of the quarter was 1.1 times. As Shahram mentioned, on 07/18/2025, we entered into a new five-year $100 million committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The credit agreement replaces our existing $35 million line of credit.
The new facility provides an additional $65 million in expanded liquidity and an option, subject to certain conditions, to request up to $25 million in additional loan commitments under an accordion feature in the credit agreement. This improved flexibility better enables us to execute on our long-term growth strategy. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of the call.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Van Sinderen with B. Riley Securities. Please go ahead.
Jeff Van Sinderen: Hi. Good morning, everyone. I just wanted to touch a little bit on the gross margin outlook given the F-16 impact. What do you think is a normalized gross margin rate for you?
Jeff DiGiovanni: So, hi. This is Jeff. So, when we look ahead, our expectations vary in the mid-forties, what we said before, depending on the mix of our products. As you look at military, it's lower gross margins. So it really depends on the mix, but we are gauging in the mid-forties.
Jeff Van Sinderen: Okay. And then I realize you have a new facility. Just wondering what the targeted leverage ratio you're comfortable with at this point?
Jeff DiGiovanni: Overall, depending on the size of the acquisition, comfortable around a net leverage ratio around three.
Jeff Van Sinderen: Okay. And is there an idea of a pipeline? How are you approaching targets? Are they typically more auction situations? Are they mostly Honeywell? Just any other color on that would be helpful.
Shahram Askarpour: So in terms of, in terms of, yeah. We do have a pipeline. Some of them are acquisitions. Looking at a number of smaller avionics companies that we are engaged in dialogue with. And we are looking at probably doing some acquisition of that nature if we can agree on a price that suits ISNS.
Jeff Van Sinderen: Fair enough. Thanks for taking my questions.
Jeff DiGiovanni: Thank you.
Operator: Press star then 1. Singular Research. Please go ahead.
Singular Research: Good morning. Can you hear me?
Jeff DiGiovanni: Yes.
Singular Research: My first question is, you mentioned the F-16 safety stock deliveries pulled forward into Q3. Will you reduce revenues from the line for the next two quarters? Can you help us frame the magnitude of that dip? Or are there other programs in the backlog that are positioned to compensate for it? Also, the Q3 product sales came in sequentially above Q2. Was it entirely due to the pull forward, or were there other program wins or price factors that lifted the product revenue?
Jeff DiGiovanni: Yeah. So I could take a little bit of that. So sequentially, a lot of it was through the F-16 and the pull forward. When we look ahead, now the equipment's getting transitioned to ISNS currently right now in our factory, you know, we're expecting nominal F-16 revenue for Q4 and Q1 potentially. Because the equipment's got to be set up. It's got to be certified. It's got to be calibrated. So we're working through that process as we speak.
Singular Research: And my second question is, you know, I know the management has emphasized EBITDA margins as the key profitability metric. But given the Q3 gross margins, could you provide some context as to how you're thinking about the trajectory in gross margins over the next few quarters? Are there any structural or short-term factors that could that you we should watch out that might lead to further compression from here, or do you believe that major headwinds have now played out? Any color on how quickly operational efficiencies or mix changes might stabilize the margins would be helpful in modeling. Thank you.
Jeff DiGiovanni: Sure. Not the year due to the lumpiness of the product mix. More importantly, the F-16. So, you know, when we look forward, we're engaging in that 45% range for gross margins. That's kind of the target we're focused on.
Singular Research: Okay. And are you seeing any changes in defense budgets that might impact backlog execution over the next six to twelve months?
Shahram Askarpour: I think what we're seeing is a lot of positive feedback that we're getting from our different contractors. And I would just make sure we recently received the contact that was partially a military program, which is based on a commercial platform. But we should be seeing an increased level of interest from all aspects of the government and the military side of the business. Very encouraging.
Singular Research: Okay. Any breakdown into that backlog? Whether some of that contains any multiyear military commercial multi-year military retrofits?
Jeff DiGiovanni: So obviously, that backlog includes some of the F-16 backlog that we inherited from Honeywell. But there's a small amount of it for these multiyear programs. Because, typically, we only put things in a backlog where we have a purchase order with a delivery date on it. And some of the long-term agreements don't, they kind of forecast, and that we don't put in a backlog.
Singular Research: Okay. And just one last question. With that $100 million credit facility giving you significant headroom, are you prioritizing acquisitions to fully leverage your Exton facilities? Is that how we're supposed to think about it?
Shahram Askarpour: Organic growth is a significant part of our growth strategy. It's obviously, acquisitions, you see quick results when you do an acquisition. Organic growth, it's more of a long-term objective. But, you know, certainly a lot of that capacity will be taken with our organic growth.
Singular Research: Gotcha. Thank you. Thank you, guys. That's all I had.
Operator: I would like to turn the conference back over to Shahram Askarpour for any closing remarks.
Shahram Askarpour: Thank you, operator, and thank you all for your time and interest in ISNS. Have a good day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.