Innovative Solutions and Support (NASDAQ:ISSC), which referred to itself as Innovative Aerosystems during its fiscal third-quarter conference call, reported higher revenue, earnings and cash flow as commercial aviation and business-jet demand helped offset a difficult comparison in its F-16 business.
Revenue for the fiscal third quarter ended June 30 rose approximately 11% year over year to $26.7 million. Net income increased to $4.5 million, or $0.25 per diluted share, from $2.4 million, or $0.14 per share, a year earlier. Management attributed the improvement to organic growth, a more favorable sales mix and operating leverage.
Margins improve as commercial and aftermarket activity grows
Product sales rose to $17.5 million from $16.6 million in the prior-year period, while service revenue climbed to $9.2 million from $7.5 million. Chief Financial Officer Jeff DiGiovanni said service growth was driven by increased volumes tied to inertial reference units and autopilot product lines.
Gross profit increased 61% to $13.8 million, and gross margin expanded to 51.7% from 35.6% a year earlier. DiGiovanni said the results reflected revenue growth and favorable sales mix from commercial aftermarket demand. The prior-year quarter also included elevated costs related to Honeywell’s efforts to build F-16 safety stock before manufacturing transitioned to the company’s Exton, Pennsylvania, facility.
The third quarter marked the company’s fourth consecutive quarter with gross margin of at least 50%, according to DiGiovanni. In response to an analyst question, Askarpour said management’s long-term objective is to sustain gross margin at about 50%, though results may fluctuate with product mix. He added that ongoing efforts to bring circuit-card production in-house for acquired product lines could help make margins more uniform.
Operating expenses increased to $7.8 million from $5.1 million, including an approximately $1 million year-over-year increase in research and development expense. The company said it is accelerating R&D investment in next-generation capabilities intended to support multiple platforms and end markets.
Adjusted EBITDA increased to $7.7 million from $4.4 million a year earlier. Adjusted net income was $6 million, or $0.33 per diluted share, compared with $2.9 million, or $0.16 per share, in the prior-year period.
F-16 comparison masks stronger underlying growth
Management said the year-over-year comparison was affected by an unusually large amount of F-16 revenue in the third quarter of fiscal 2025. F-16 revenue totaled $12.6 million in that earlier period, compared with $5.7 million in the latest quarter, due to a pull-forward of revenue related to the manufacturing transition.
Excluding F-16 revenue from both periods and excluding acquisitions, DiGiovanni said the company’s business grew more than 40% year over year. Growth came from commercial air transport, business aviation, service activity and the start of shipments of the UMS version 2 product line, whose production began in June.
Askarpour said F-16 revenue of roughly $5 million per quarter is considered sustainable over the long term. He said the latest quarter was the first full quarter of production for the mission display generator product line after its manufacturing transition was completed near the end of the previous quarter.
Acquisition broadens defense and industrial exposure
In July, the company acquired Aydin Displays, a manufacturer of rugged display technologies used in defense, industrial and mission-critical aerospace applications. Aydin supports more than 20 military platforms across more than 80 countries, according to Askarpour.
Management said the Birdsboro, Pennsylvania-based business adds engineering talent, display technology and an additional vertically integrated manufacturing facility. The acquisition also broadens the company’s exposure beyond traditional military avionics into naval, ground and industrial programs, including medical instrument applications.
Askarpour described the transaction as the company’s first acquisition of an operating business, rather than a product-line acquisition. He said the company’s acquisition pipeline remains active and that it will continue to pursue aerospace and defense component product lines and businesses with proprietary aftermarket content, cash generation and profitability.
eVTOL contract begins with engineering work
The company announced in August that it had won a contract with a Japanese eVTOL aircraft developer to develop the main display and avionics architecture for an aircraft program. The award is the first original-equipment manufacturer program based on the Liberty Flight Deck, management said.
Early engineering work is expected to begin in the fourth quarter of fiscal 2026. Initial production is targeted for late 2027, with the company expecting to move toward full production during 2028 in support of the customer’s planned full-scale commercial launch that year.
Management said the program has more than 400 aircraft orders from partners in Japan and overseas. During the question-and-answer session, DiGiovanni said a cited $50 million contract value assumed the delivery of those 400-plus aircraft, while Askarpour said the ultimate scope of the program remains uncertain and could expand as production develops.
New orders during the quarter totaled $22.7 million, while backlog was approximately $83 million as of June 30, up about $5.5 million from the comparable prior-year period.
Free cash flow for the first nine months of fiscal 2026 rose to $12.3 million from $4.8 million a year earlier. At quarter-end, the company had $10.7 million in cash and cash equivalents, $54.5 million in total debt and net debt of $43.8 million. Total cash and available credit capacity were approximately $53.7 million.
For the fourth quarter, management expects revenue of approximately $28 million to $30 million, including continued organic growth and contributions from recent acquisitions. The company also said it remains on track toward its long-term goal of $250 million in annual revenue.
The company plans to change its Nasdaq ticker symbol from ISSC to IA at the U.S. market open on Aug. 18. It was also added to the Russell 2000 Index during the 2026 reconstitution, effective June 29.
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.
