UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
[For the transition period from to ]
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction | (I.R.S. Employer | |
(Address of Principal Executive Offices) | (Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☐ Large accelerated filer | ☐ Accelerated filer |
☐ | |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of July 31, 2023, there were
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
FORM 10-Q June 30, 2023
INDEX
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Condensed Consolidated Balance Sheets – June 30, 2023 (unaudited) and September 30, 2022 | 1 | |
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2 | ||
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3 - 4 | ||
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5 | ||
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Notes to Condensed Consolidated Financial Statements (unaudited) | 6 - 23 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 - 32 | |
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32 | ||
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33 | ||
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33 | ||
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34 | ||
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34 | ||
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34 | ||
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34 | ||
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35 | ||
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36 |
PART I—FINANCIAL INFORMATION
Item 1- Financial Statements
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivables | |
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Contract assets |
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Inventories |
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Prepaid inventory | | — | ||||
Prepaid expenses and other current assets |
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Total current assets |
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Goodwill | | — | ||||
Intangible assets, net | | | ||||
Property and equipment, net |
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Deferred income taxes | | | ||||
Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Current portion of long-terrm debt | $ | | $ | — | ||
Accounts payable | | | ||||
Accrued expenses |
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Contract liability |
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Total current liabilities |
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Long-term debt | | — | ||||
Other liabilities | | | ||||
Total liabilities |
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Commitments and contingencies (See Note 6) | ||||||
Shareholders’ equity | ||||||
Preferred stock, | ||||||
Common stock, $ |
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Additional paid-in capital |
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Retained Earnings (accumulated deficit) |
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Treasury stock, at cost, |
| ( |
| ( | ||
Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these statements.
1
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net Sales: | ||||||||||||
Product | $ | | $ | | $ | | $ | | ||||
Engineering development contracts |
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| — |
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Total net sales |
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Cost of sales: | ||||||||||||
Product |
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Engineering development contracts |
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Total cost of sales |
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Gross profit |
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Operating expenses: | ||||||||||||
Research and development |
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Selling, general and administrative |
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Total operating expenses |
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Operating income |
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Interest income |
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Other income |
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Income before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Net income per common share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding: | ||||||||||||
Basic |
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Diluted |
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The accompanying notes are an integral part of these statements.
2
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended June 30, 2023 and 2022 | |||||||||||||||
(Accumulated | |||||||||||||||
Additional | Deficit) | Total | |||||||||||||
Common | Paid-In | Retained | Treasury | shareholders’ | |||||||||||
| Stock |
| Capital |
| Earnings |
| Stock |
| equity | ||||||
Balance, March 31, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance, March 31, 2022 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2022 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Nine Months Ended June 30, 2023 and 2022 | |||||||||||||||
(Accumulated | |||||||||||||||
Additional | Deficit) | Total | |||||||||||||
Common | Paid-In | Retained | Treasury | shareholders’ | |||||||||||
| Stock |
| Capital |
| Earnings |
| Stock |
| equity | ||||||
Balance, September 30, 2022 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance, September 30, 2021 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2022 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
4
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization |
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Share-based compensation expense |
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Stock options | | | ||||
Stock awards | | | ||||
Impairment of long-lived assets | | — | ||||
Loss on disposal of property and equipment | — | | ||||
Deferred income taxes | ( | | ||||
(Increase) decrease in: | ||||||
Accounts receivables |
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Contract asset |
| ( |
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Inventories |
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Prepaid expenses and other assets |
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Other non-current assets | ( | — | ||||
Increase (decrease) in: | ||||||
Accounts payables |
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Accrued expenses |
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Income taxes payable/receivable | ( | ( | ||||
Contract liability |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchases of property and equipment |
| ( |
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Acquisition of a business |
| ( |
| — | ||
Net cash used in investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Debt proceeds | | — | ||||
Proceeds from exercise of stock options | | | ||||
Net cash provided by financing activities |
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Net (decrease) increase in cash and cash equivalents | ( | | ||||
Cash and cash equivalents, beginning of period | | | ||||
Cash and cash equivalents, end of period | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||
Cash paid for income taxes | $ | | $ | | ||
The accompanying notes are an integral part of these statements.
5
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Description of the Company
Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in
The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop high-quality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.
On June 30, 2023 (the “Acquisition Date”), the Company entered into an Asset Purchase and License Agreement with Honeywell International, Inc. (“Honeywell”) whereby Honeywell sold, certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines (the “Product Lines”) to the Company (the “Transaction”). The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company. See Note, “Acquisition” in the Supplemental Balance Sheet Disclosures section below for more details.
Basis of Presentation
The accompanying unaudited consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The consolidated balance sheet as of September 30, 2022 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 which cannot be determined at this time. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Reclassification
The Company presented intangible assets, net separately in the consolidated balance sheet as of June 30, 2023. In order to conform to the presentation of the consolidated balance sheet as of June 30, 2023, the Company reclassified $
Principles of Consolidation
The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
6
Use of Estimates
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, valuation of tangible and intangible assets acquired, long term contracts, evaluation of allowances for doubtful accounts, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment, and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.
Acquisitions
The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business.
The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.
During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations.
Intangible Assets
The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.
Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described below.
Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.
Goodwill
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company’s goodwill impairment
7
test is performed at the reporting unit level. Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.
Goodwill is tested for impairment annually or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist. Factors to consider that may indicate an impairment may exist are: the macroeconomic conditions, industry and market considerations such as a significant adverse change in the business climate, cost factors, overall financial performance such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels, and any entity-specific events.
If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations.
Cash and Cash Equivalents
Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using an accelerated method over the estimated useful lives of the assets (the lesser of to
Long-Lived Assets
The Company assesses the impairment of long-lived assets in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows.
Fair Value of Financial Instruments
The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
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Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
| ● | Quoted prices for similar assets or liabilities in active markets; |
| ● | Quoted prices for identical or similar assets in non-active markets; |
| ● | Inputs other than quoted prices that are observable for the asset or liability; and |
| ● | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.
Fair Value Measurement on June 30, 2023 | |||||||||
Quoted Price in | Significant Other | Significant | |||||||
Active Markets for | Observable | Unobservable | |||||||
Identical Assets | Inputs | Inputs | |||||||
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets | |||||||||
Cash and cash equivalents: | |||||||||
Money market funds |
| $ | |
| $ | — |
| $ | — |
Fair Value Measurement on September 30, 2022 | |||||||||
Quoted Price in | Significant Other | Significant | |||||||
Active Markets for | Observable | Unobservable | |||||||
Identical Assets | Inputs | Inputs | |||||||
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets | |||||||||
Cash and cash equivalents: | |||||||||
Money market funds |
| $ | |
| $ | — |
| $ | — |
Revenue Recognition
The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.
Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:
1) | Identify the contract with a customer |
The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms
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related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2) | Identify the performance obligations in the contract |
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.
3) | Determine the transaction price |
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
4) | Allocate the transaction price to performance obligations in the contract |
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Historically, the Company has also recognized revenue from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.
Contract Estimates
Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified.
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Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter in which it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2023 and 2022, respectively.
Contract Balances
Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract. Contract liabilities primarily relate to consideration received in advance of performance under the contract. The following table reflects the Company’s contract assets and contract liabilities:
Contract | Contract | |||||
| Assets |
| Liabilities | |||
September 30, 2022 | $ | | $ | | ||
Amount transferred to receivables from contract assets | — | — | ||||
Contract asset additions | | — | ||||
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period | — | ( | ||||
Increases due to invoicing prior to satisfaction of performance obligations | — | | ||||
June 30, 2023 | $ | | $ | | ||
Customer Service Revenue
The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty. The Company’s customer service revenue and cost of sales are included in product sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2023 and 2022 respectively are as follows:
For the Three Months Ended June 30, |
| For the Nine Months Ended June 30, | ||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Customer Service Sales |
| $ | |
| $ | | $ | | $ | | ||
Customer Service Cost of Sales | | | | | ||||||||
Gross Profit | $ | | $ | | $ | | $ | | ||||
Lease Recognition
The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.
Income Taxes
Income taxes are recorded in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing NOLs and tax credit carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.
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Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.
The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.
Engineering Development
The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2023, approximately
Treasury Stock
We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.
Share-Based Compensation
The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award. Our policy is to recognize forfeitures as incurred.
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Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.
Warranty Reserves
The Company offers warranties on some products of various lengths, however the standard warranty period is
Self-Insurance Reserves
Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2023 and September 30, 2022, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $
Concentrations
Major Customers and Products
In the three-month period ended June 30, 2023,
In the three-month period ended June 30, 2022,
Major Suppliers
The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.
For the three- and nine-month periods ended June 30, 2023, the Company had four suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.
For the three- and nine-month periods ended June 30, 2022, the Company had
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Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with
Recent Accounting Pronouncements
In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. The adoption of this standard is not expected to have a material impact on our consolidated financial statements or related disclosures.
2. Supplemental Balance Sheet Disclosures
Acquisition
On June 30, 2023, the Company entered into an Asset Purchase and License Agreement with Honeywell whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines to the Company. The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company. The Transaction allows the Company to diversify its product offerings in the aerospace industry. The Company determined that the Transaction met the definition of a business under ASC 805; therefore, the Company accounted for the Transaction as a business combination and applied the acquisition method of accounting.
In connection with the Transaction, the Company entered into a term loan with PNC Bank, National Association for $
The allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing. Specifically, the purchase price amount for the Transaction and the allocation of the purchase consideration for
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prepaid inventory, equipment, construction in progress, intangible assets, and goodwill are preliminary estimates, which may be subject to change within the measurement period.
The preliminary allocation of the purchase consideration as of the Acquisition Date is as follows:
Cash consideration |
| $ | |
Total consideration | $ | | |
Prepaid inventory | $ | | |
Equipment |
| | |
Construction in progress |
| | |
Intangible assets (a) |
| | |
Goodwill (b) |
| | |
Assets acquired |
| | |
Accrued expenses |
| ( | |
Liabilities assumed |
| ( | |
Net assets acquired | $ | |
| (a) | Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at provisional estimated fair values. The provisional estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method. The provisional estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to Note, “Intangible assets” for further details. |
| (b) | Goodwill represents the excess of the preliminary purchase consideration over the provisional fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been provisionally assigned to the Company’s one operating segment; the assignment of goodwill to reporting units is not complete. The goodwill is not expected to be deductible for income tax purposes. Further, the Company determined that the preliminary goodwill was not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023. |
Transition services agreement
Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional costs, to receive certain transitional services and technical support during the transition service period. The Company accounted for the TSA separate from business combination and have recognized $
Acquisition and related costs
For the three and nine months ended June 30, 2023, the Company incurred acquisition costs of $
Unaudited actual and pro forma information
Since the acquisition date of the Transaction was on June 30, 2023, the Company did not recognize any revenues and net income related to the Product Lines in the consolidated statements of operations.
The following unaudited pro forma summary presents consolidated information of the Company, including the Product Lines, as if the Transaction had occurred on October 1, 2021, the earliest period presented herein:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
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Net sales | $ | | $ | | $ | | $ | | ||||
Net income | $ | | $ | | $ | | $ | |
These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations. The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Transaction and is factually supportable. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change, and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.
Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine months ended June 30, 2022 and exclusion of those costs from all other periods presented; increase in interest expense related to the Term Loan; increase in amortization expense associated with the estimate of the acquired intangible assets; increase in depreciation expense related to the fair value adjustment of the acquired equipment; and increase in cost of sales related to the fair value adjustment of the acquired inventory.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory, and consist of the following:
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Raw materials |
| $ | |
| $ | |
Work-in-process |
| |
| | ||
Finished goods |
| |
| | ||
| $ | |
| $ | | |
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Prepaid insurance |
| $ | | $ | | |
Other |
| |
| | ||
| $ | | $ | | ||
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Intangible assets
The Company’s intangible assets other than goodwill are as follows:
| As of June 30, 2023 | |||||||||||
| Gross Carrying |
| Accumulated |
| Accumulated |
| Net Carrying | |||||
Value |
| Impairment |
| Amortization |
| Value | ||||||
License agreement acquired from the Transaction (a) | $ | | $ | — | $ | — | $ | | ||||
Customer relationships acquired from the Transaction (a) |
| |
| — |
| — |
| | ||||
Licensing and certification rights (b) |
| |
| ( |
| ( |
| | ||||
Total | $ | | $ | ( | $ | ( | $ | | ||||
As of September 30, 2022 | ||||||||||||
| Gross Carrying |
| Accumulated |
| Accumulated |
| Net Carrying | |||||
| Value |
| Impairment |
| Amortization |
| Value | |||||
Licensing and certification rights (b) | $ | | $ | — | $ | ( | $ | | ||||
Total | $ | | $ | — | $ | ( | $ | | ||||
(a) | As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property, and customer relationships. The gross carrying values are preliminary estimates and may be subject to change within the measurement period – refer to Note, “Acquisition” for further details. The license agreement has an indefinite life and is not subject to amortization; the customer relationships have an estimated weighted average life of |
(b) | The licensing and certification rights are amortized over a defined number of units. An impairment charge of $ |
Intangible asset amortization expense was $
The timing of future amortization expense is not determinable for the licensing and certification rights because they are amortized over a defined number of units. The expected future amortization expense related to the customer relationships as of June 30, 2023 is as follows:
2023 (three months remaining) |
| $ | |
2024 | | ||
2025 | | ||
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total | $ | |
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Property and equipment
Property and equipment, net consists of the following:
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Computer equipment | $ | | $ | | ||
Corporate airplanes |
| |
| | ||
Furniture and office equipment |
| |
| | ||
Manufacturing facility |
| |
| | ||
Equipment |
| |
| | ||
Land | | | ||||
Construction in progress | | — | ||||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
| $ | |
| $ | | |
Depreciation and amortization related to property and equipment was $
Depreciation and amortization related to property and equipment was approximately $
Other assets
Other assets consist of the following:
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Operating lease right-of-use asset | $ | | $ | | ||
Other non-current assets | |
| | |||
| $ | |
| $ | | |
Other non-current assets as of June 30, 2023 and September 30, 2022 include the security deposit for an airplane hangar, supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of June 30, 2023 and September 30, 2022 includes $
Accrued expenses
Accrued expenses consist of the following:
June 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Warranty |
| $ |
| |||