Innovative Solutions and Support Q2 Earnings Call Highlights

Key Points

• Revenue rose 2% to $22.4 million in fiscal Q2 despite a sharp F-16 comparison headwind, as strength in commercial aerospace and business aviation offset the decline. Net income and adjusted EBITDA were both lower year over year due to higher operating expenses and the tougher F-16 comp.
• The company completed three acquisitions that expand its autopilot and avionics capabilities, including the S-TEC autopilot line from Moog and several Honeywell product lines. Management said the deals should add about $10 million in annual revenue and position ISSC as a major autopilot supplier across multiple aircraft categories.
• F-16 production has returned to normal run rates after recertifications were completed, and management expects quarterly F-16 revenue of roughly $3 million to $5 million going forward. Backlog stood at about $87 million, free cash flow improved sharply, and the company issued third-quarter revenue guidance of $24 million to $26 million.

Innovative Solutions and Support NASDAQ: ISSC reported modest revenue growth for its fiscal second quarter as strength in commercial aerospace and business aviation offset a sharp year-over-year decline tied to the F-16 program.

Chief Executive Shahram Askarpour said the company’s “positive business momentum carried into the second quarter,” citing significant organic growth in commercial aerospace and business aviation, continued strength in bookings, strong margins and free cash flow conversion. The company said commercial and business aviation markets grew approximately 50% organically during the quarter.

The results came against what management described as a difficult comparison with the prior-year quarter, when F-16 revenues were elevated because deliveries to Lockheed Martin were accelerated ahead of a manufacturing transition to the company’s Exton facility. Askarpour said that created a $7 million year-over-year decline in F-16 revenues during the second quarter.

Revenue Rises Despite F-16 Headwind

Chief Financial Officer Jeffrey DiGiovanni said net revenues were $22.4 million in the second quarter, up 2% from the same period last year. Product sales rose to $14.3 million from $13.2 million a year earlier, driven by stronger volumes of aftermarket product upgrades in the commercial market and sales to business aviation customers.

Service revenue declined modestly to $8.1 million from $8.8 million, reflecting an approximately $3 million decline in F-16 service revenue. DiGiovanni said growth in service volumes related to IRUs and radio product lines partially offset that decrease.

Gross profit was $11.4 million, up 1.5% from the prior-year quarter. Gross margin was 51.1%, compared with 51.4% a year earlier. DiGiovanni said the company continues to expect gross margins in the mid-40% range over the long term, with quarterly fluctuations based on mix. He noted that as the military business ramps back up, gross margins are expected to normalize, though the military business has similar EBITDA margins because of a lower SG&A burden.

Operating expense increased to $6.5 million from $4.3 million a year earlier, reflecting R&D investments and one-time acquisition-related costs. Net income was $3.4 million, or $0.19 per diluted share, compared with $5.3 million, or $0.30 per share, in the prior-year quarter. Adjusted net income was $4.8 million, or $0.27 per diluted share, compared with $5.7 million, or $0.32 per diluted share, last year. Adjusted EBITDA was $6.8 million, down from $7.7 million.

Acquisitions Add Autopilot and Avionics Capabilities

Askarpour highlighted three acquisitions completed during the quarter, which management said are expected to contribute $10 million in annual revenue with a blended gross margin profile of approximately 50%.

In February, the company acquired the S-TEC autopilot product line from Moog. Askarpour said that transaction added an established autopilot solution that can be integrated into the company’s avionics cockpit offering. In March, the company acquired several product lines from Honeywell, including navigation radios, multifunction displays, transponder technologies, power generation and additional autopilot solutions.

Askarpour said the Moog and Honeywell autopilot platforms establish the company as a major supplier of aircraft autopilots, with certified and fielded solutions ranging from small general aviation aircraft to large Part 25 platforms and helicopters across military and commercial markets.

“In aggregate, it’s put us in a position where I would say we’re probably the largest autopilot suppliers right now in the market, covering the spectrum of aircraft,” Askarpour said during the question-and-answer session.

He said customer interest has been strong, particularly for the S-TEC product lines, which he described as well established in general aviation and business aviation. He also said the Honeywell product lines include OEM content for customers including Pilatus and Boeing.

F-16 Production Returns to Normal Run Rate

Management said the company completed all required recertifications and resumed full-scale production of the Digital Flight Control Computer at its Exton facility. The company also completed recertification and resumption of production for the Improved Programmable Display Generator, or IPDG, used in support of the F-16 program.

DiGiovanni said F-16 revenue was affected in the quarter by the timing of Lockheed Martin approval for the IPDG, which came near the end of the quarter. Because each box requires more than 80 hours of testing before shipment, he said there was limited time to ship F-16 products before quarter-end.

Management said the company has enough capacity to handle both F-16 work and commercial opportunities. Looking ahead, Askarpour and DiGiovanni said F-16 revenue is expected to run at roughly $3 million to $5 million per quarter, with backlog supporting production over the next few years.

Askarpour also said the company remains encouraged by broader defense opportunities, including cockpit upgrades and aging aircraft platforms within the Department of Defense. He cited the KC-135 as an example of a large program where there are inquiries, and said the company’s work on the F-16 has opened doors with Lockheed Martin decision makers.

Backlog, Cash Flow and Outlook

New orders in the second quarter were $24.7 million, and backlog as of March 31 was approximately $87 million, up about $7 million from the comparable period.

Cash flow from operations was $10.5 million during the first half of fiscal 2026, compared with $3.1 million in the year-ago period. Capital expenditures were $2.7 million, up from $1.8 million. Free cash flow rose to $7.7 million from $1.3 million.

At quarter-end, the company had total debt of $55.1 million and cash and cash equivalents of $6.8 million, resulting in net debt of $48.3 million. DiGiovanni said total cash and availability under the credit line was approximately $49.8 million, while net leverage was 1.7 times.

For fiscal 2026, management continues to expect organic revenue growth to be essentially flat year over year because of the pull-forward of F-16 production and service revenue into fiscal 2025. The company expects third-quarter revenue of $24 million to $26 million.

Askarpour said the acquisition pipeline remains active and includes both product-line opportunities and broader business acquisitions. He said the company will remain disciplined and focus on deals that are strategic, profitable and complementary to its growth objectives.

About Innovative Solutions and Support NASDAQ: ISSC

Innovative Solutions and Support, Inc NASDAQ: ISSC is a provider of technology solutions and mission support services to U.S. federal government agencies, with a focus on defense, intelligence, and national security programs. The company delivers integrated program management, systems engineering, and advanced IT infrastructure support designed to enhance operational readiness and maintain secure, scalable environments for mission-critical operations.

Its core service offerings include systems integration, custom software development, data analytics, cybersecurity, and logistics management.

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