Is ISSC about to hit a high growth inflection point?

Or will it be felled by a dragon lurking on its balance sheet?

Innovative Solutions and Support (ISSC) is a small designer and manufacturer of add-on electronics for aircraft, such as GPS and flat panel displays. Its been through some ups and downs but it should roughly double sales over the last three years.

But over the last year it’s been in a transition. It grew revenues a little over 20% (all numbers TTM vs 2023) but has not yet led to higher profits. The real story is it is actually undergoing a big transformation based on its product offerings. Their core Products line declined from a $23M run rate to a $19M run rate TTM, but the new Customer Service segment combined with what was a previously tiny Contracts segment has nearly doubled from $12M to $22M in under a year, while yielding gross margins just a bit below Products.

Extrapolating segment growth blindly would lead to total revenue growth of roughly 50% in 2025. That would be wrong because revenues were clearly helped by an acquisition of products/technology from Honeywell in 2023, so how much of that growth is bolted-on revenues and how much is organic? One answer is that the Customer Service product segment started in Q3, 2024 post-acquisition with revenues of $1,726, and increased to $3,101 in Q3, 2024, nearly doubling. So it appears its adding significant organic growth so far.

The big red flag is liquidity. My math is their net cash position declined from $1M to $-9M in the last 9 months. Some of that was paying another $4.3M to Honeywell for acquisition #2, but to add to it they just announced Honeywell acquisition #3 that is going to be financed from their $30M credit line, which previously carried nearly $10M. I don’t mind them bolting on even more revenues if the products fit and the price is attractive, but their credit line is going to be nearly tapped out, while they have been burning cash to boot. Thats too much risk.

EDIT: One reader (thanks Sean!) pointed out that I misstated that operations have been burning cash, and based on their cash flow statements he’s correct. But I’m very risk averse, and hate the fact they have a huge amount of short term financing. If there is a hiccup in operating cash flow due to integrating the latest acquisition or some other reason, or a credit squeeze, it may become far more difficult to refinance. I’m anxiously anticipating their next few quarters reports and any refinancing announcements since its likely they will assuage my concerns.

My expectation is they will soon replace some or all of their short term debt with a mix of long term debt, equity financing. But until that happens and we find out the dilution and terms, I’m going to stay on the sidelines.