[Management View]
Key metrics: Revenue growth of 105% YoY driven by F-16 product line acquisition from Honeywell and military program momentum. Gross profit increased by 37% YoY to $8.6 million.
Strategic priorities: Integration of Honeywell F-16 product line, expansion of Exton facility, and evaluation of acquisition opportunities in avionics and adjacent markets.

[Outlook]
Performance guidance: Gross margin expected to stabilize around 45% post-integration. Revenue and EBITDA growth targets of over 30% compared to FY2024.
Future plans: Completion of Exton facility expansion to triple manufacturing capacity, focus on organic growth and potential acquisitions of smaller avionics manufacturers.

[Financial Performance]
YoY/QoQ trends: Net revenues of $24.1 million, up 105% YoY. Gross margin declined to 35.6% from 53.4% YoY. EBITDA increased by 62.7% YoY to $4.3 million. Operating expenses increased to $5.1 million from $4.2 million YoY but declined as a percentage of revenue to 21% from 36.1%.

[Q&A Highlights]
Question 1: 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?
Answer: 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.

Question 2: Okay. And then I realize you have a new facility. Just wondering what the targeted leverage ratio you're comfortable with at this point?
Answer: Overall, depending on the size of the acquisition, comfortable around a net leverage ratio around three.

Question 3: 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.
Answer: 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.

Question 4: Good morning. Can you hear me?
Answer: Yes.

Question 5: 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?
Answer: 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.

Question 6: 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.
Answer: 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.

Question 7: Okay. And are you seeing any changes in defense budgets that might impact backlog execution over the next six to twelve months?
Answer: 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.

Question 8: Okay. Any breakdown into that backlog? Whether some of that contains any multiyear military commercial multi-year military retrofits?
Answer: 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.

Question 9: 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?
Answer: 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.

[Sentiment Analysis]
Tone of analysts: Generally positive, with inquiries focused on gross margin outlook, leverage ratios, acquisition pipeline, and defense budget impacts.
Tone of management: Confident and strategic, emphasizing long-term growth, integration efforts, and operational efficiencies.

[Quarterly Comparison]
| Metric | Q3 FY2025 | Q3 FY2024 | YoY Change |
|-------------------------|-----------|-----------|------------|
| Net Revenues | $24.1M | $11.8M | +105% |
| Gross Profit | $8.6M | $6.3M | +37% |
| Gross Margin | 35.6% | 53.4% | -17.8% |
| EBITDA | $4.3M | $2.7M | +62.7% |
| Operating Expenses | $5.1M | $4.2M | +21.4% |
| Net Income | $2.4M | $1.6M | +50% |
| Backlog | $72M | N/A | N/A |
| Operating Cash Flow | $10.3M | $5.4M | +90.7% |
| Free Cash Flow | $4.8M | N/A | N/A |
| Net Debt | $22.7M | N/A | N/A |

[Risks and Concerns]
- Gross margin compression due to lower margins on F-16 product line and integration costs.
- Temporary dip in F-16 revenues during production transition.
- Potential volatility from foreign-based customers reducing production forecasts due to tariff implications.

[Final Takeaway]
Innovative Solutions and Support (ISSC) reported strong revenue growth driven by the acquisition of Honeywell's F-16 product line and military program momentum. Despite near-term gross margin compression and a temporary dip in F-16 revenues, management remains confident in achieving long-term growth targets. The completion of the Exton facility expansion and the new $100 million credit facility provide significant capacity and flexibility for future growth. Management's focus on organic growth and strategic acquisitions positions ISSC favorably for continued profitable growth.