Innovative Solutions and Support

Something is happening.

Nothing in this is financial advice. I own shares in Innovative Solutions and Support (Innovative Aerosystems / ISSC) but I might sell them without warning.

Innovative Solutions and Support is a systems integrator working in the aerospace and defense space. The company stands to benefit from secular tailwinds in both the aerospace and defense sectors. ISSC has a market cap around 200m USD with the stock at 11. I started the writeup when it was at $10.60 on Friday, but bought shares on Thursday at $11.74 and Friday at $10.60. I also already owned quite a lot. My overall basis is around $11 a share.

I have been long a while now and will explain why I think ISSC is a solid place to park capital. Management is resourceful, entering new markets carefully and always in a capital efficient way. LTM, ISSC made 77.43m in revenue with operating income of 17.04m. This is over 10x 2019 operating income, and 2x 2023 operating income. Income is lumpy but the trend is clear.

Before I go into how ISSC’s business works, I want to go over recent developments. I think the easiest way to do this is to not even care about what products or services ISSC offers, because the trading dynamics are interesting in themselves.

1. The large loan package

In July 2025, ISSC announced a 100m loan package from JP Morgan at SOFR + 175-275 bp (the spread depends on total leverage). This is quite a lot of money but at a solid rate (Term SOFR is 4.3% so between 6-7% currently, a fairly tight spread with the 10 year at 4% - consider that the current 30 year mortgage rate is around 6.27%).

100m doesn’t sound like that much nominally, but relative to revenue or market cap, it is quite large (on a relative basis, it would be like Woodward borrowing at least 5 billion, which would be an incredibly massive loan, 10x their current debt and almost ⅓ of their revenue).

After this loan, ISSC changed their name to “Innovative Aerosystems”.

2. Killer earnings on the back of their F-16 contract

Innovative’s next earnings after their debt raise came in August 2025, where they announced

“During the third quarter, we delivered revenue growth of 105% compared to the third quarter 2024, driven by continued momentum from new military programs, including significant growth from our F-16 program”

The market liked this (obv). The stock hit $20 a share before a sharp pullback as management made it clear there was a significant pull forward of demand (lumpy defense contracts).

3. The S3 Equity Raise

On October 14, 2025, ISSC filed an S3 announcing they would sell up to 100m of stock in the public market from time to time. The share price thrown out as ‘the current price’ in the doc is $11.78.

By Friday, the stock had dropped to $10.60 where I bought more shares. It’s never great to see a company you believe in issue a bunch of shares, but in this case I saw the financing as bullish - ISSC borrowed 100m at 6-7% from the best bank in the world (a huge amount at a good rate from a credible lender), and yet they still want even more money to the point that they will just dilute shareholders to grow even faster? Ok fine i’m in.

What is going on?

What was especially interesting, and why I wanted to get this out on Monday is that after the market closed on Friday, i checked out the volume. It was… low. Like, really low. Lower than any recent period. On Wednesday the 15th, 192,000 shares changed hands. On Thursday, 291,000. On Friday, 321,000.

Since the offering date, 804,000 shares changed hands. Less than 10m of stock. This is such a small amount that I can actually see my own buy candle on Trading View in Friday’s session.

I think there’s a good chance management has not issued ANY shares and that most the share sales here have just been people selling the stock because it went down.

Why?

Again, let’s go back to July when they raised up to 100 million from JPM. That is a lot of money. Management is careful. They have built this business brick by brick, saying ‘we will do it’ as they take on new product lines other people don’t want or retrofit aging aircraft.

They only need money to grow. As the S3 states

“We intend to use the net proceeds from the sale of the securities described in this prospectus for growing the businesses of the Company through the acquisition of product lines,companies or businesses and for general corporate purposes, which may include, among other things, working capital, capital expenditures and other anticipated growth opportunities”

Did they really raise 100m as 6.5% debt going into rate cuts, then start panic selling their stock Thursday and Friday, all the way up to… 600,000 shares? Or is this small holders getting out for a tax loss while they can with low to run of the mill daily volume?

The ONLY way I can see these sells being ISSC management is if they have an acquisition opportunity so good that they can firesale their equity and still have it be a smart decision. Ok, fine. That’s not the worst bear case I can imagine.

So why make the announcement at all if they weren’t going to immediately market sell the stock?

Here’s how I think this is going to play out

1. Management has a very wide breadth of potential business opportunities currently. There is no shortage of places for them to convert cash into high ROI across defense and aerospace, both sectors are booming.

2. I think management expects the stock price to go back to all time highs fairly soon. Some ways this could happen

• The F-16 program has continued to be very profitable (and so demand was pulled forward, but will still be solid for a long time).

• An exciting new acquisition they announce and fund with debt in the next 6 months.

• Generally high demand at Pilatus (PC24) and Textron (King Air) lead to a higher than expected uptick in sales in Q3.

• An exciting new product line with an existing customer comes to light

• All of the above (I see this as the most likely outcome).

3. If we get back to $20 a share, I believe management wants the option to sell down their stock to raise more capital and roll that into even more acquisitions.

In short, I think the company is going to grow significantly over a short period of time, and that if I am wrong, the downside risk is quite small. At $10.60 a share, the company is cheap. Fundamentals are too good for us to ever really see $5 here, so the EV is very high if $20 is a likely outcome.

What does ISSC actually do?

Understanding ISSC is somewhat complicated - i would not like to raise venture capital as this company because the story is is not clean and focused. Some of their revenue is as an OEM. Some is doing retrofits. Some is service revenue. Some is defense, some is aerospace. But in reality most successful businesses this size operate this way.

Smart management makes business decisions that are extremely likely to work out. Customer relationships are built slowly over time. New markets are entered with small product wedges, carefully. Bolt on acquisitions are made on good terms, opportunistically, often leveraging pre-existing distribution relationships with the underutilized product line, perhaps sprinkling in a little opex and capex efficiency. “We will take on your mess if we think it will make us money” and “we have a pretty nice way of solving that for you, you know…?” are the way these businesses are built, not “here’s a drone with a gattling gun on it, give me 2 billion for these warrants”. In some ways this is actually bad - every company in SPY has a pretty clean story. But I believe we can still increase in size significantly from here, which I will go into later.

Outside of the companies CFO, the management team are mostly lifers with 20+ years of experience at the company. The CEO was initially VP of engineering, and replaced the old CEO when he died (results have been extremely good since he took over.

Most importantly, the 2 sectors ISSC provides products and services for are experiencing very strong secular trends. The current administration is pro-spending when it comes to the Defense sector. And the wealth effect has lead to incredible business in aerospace, where private jet backlogs have ballooned.

Here are some of the key revenue drivers for ISSC:

Retrofits

ISSC started up by building a business in the avionics retrofits space. What is the value of avionics retrofits? Well, planes tend to work well for a long time. But their avionics get outdated reasonably quickly. This is the key insight you have that makes you decide to start the company in the first place.

This is not just an ease of use thing. Imagine the year is 2032. Tesla has finally cracked full self driving well enough that its customers are allowed to sit in the back seat of the car while it drives. Waymo has replaced 50% of ride share miles. But in a strange twist, the Federal Aviation Administration (FAA) handles road safety.

At this point in the self driving timeline the FAA would probably say “Ok, the new tech is solid, everyone has 3 years to make their car self driving, after that we are not letting anyone in a human driven car on the road”.

“What the fuck!? My Toyota has another 20 years in it mate!”.

My dad’s 1990 Forerunner cost 20 grand in 1990bucks, and he wouldn’t have been happy if he got told he had to stop driving it after 10 years.

In this scenario, a company would rapidly spring up to retrofit perfectly respectable Toyota’s with a polished hardware version of Comma AI’s (https://comma.ai/) open source self driving solution. It wouldn’t just be ease of use - legislatively you would only have 2 options - pay for a retrofit or send it to the scrapyard.

Now, imagine that I’m into private aviation. I was mad about my 20k Toyota Forerunner. What about the 3m I spent on a 1990 Pilatus PC12 prop plane that i’m no longer allowed to fly?

Pilatus Relationship

Swiss company PILATUS makes the most successful prop plane in the world, the Pilatus PC-12. A prop plane just means the engine has a propeller attached to it (in this case the Pratt and Whitney PT6). The PC-24 is a slightly larger version of this light jet. Lately Pilatus’s backlog has gone nuts. Before you ask, no they are not public.

Pilatus backlog value was 3.25b USD February 2025, up 25%. In 2024 they delivered 153 aircraft, probably somewhere in the neighbour of a billion or so (the PC12 goes for 4-7m, the PC24 for around 10m).

ISSC retrofits old Pilatus planes, as well as working as an OEM on the Utility Management System of the PC24 (the flight computer). But lets quickly get the retrofit business out the way.

Retrofitting older planes

ISSC retrofits old versions of the Pilatus PC-12 with something they call ThrustSense. This costs around 55k (guess). ThrustSense is an auto throttle. What’s an auto throttle? You can think of it as removing the gas pedal from your car and making that part self driving. Very helpful for landing a plane, which is somewhat precise (when i took my first flying lesson they let me do literally everything - except land the plane). When landing a plane, especially as a solo pilot (like in the PC-12) there is a lot to do - coordinating with air traffic control etc. Having it automatically get the velocity of the landing perfect every time is good. How does the auto throttle work?

Well, it attaches directly to the Pratt and Whitney PT6, the engine in the PC12. The auto throttle is an electromechanical solution - it hooks the old analog engine up to the digital avionics so that it can self drive.

The autothrottle is also offered in new versions of Textron’s King Air, so ISSC works as an OEM there - very good.

2: ISSC also offer a complete flightdeck replacement for the Pilatus PC-12 which upgrades it to “NextGen” avionics. This is a major upgrade for things like navigation. Importantly, the FAA requires certain standards to be met to even fly your plane. Thus, some tranches of PC-12s MUST be upgraded. I would guess a NextGen flightdeck retrofit costs a little over 300k.

Great. We have a decent business retrofitting old PC12s.

As an OEM

ISSC also provides the Utility Management System for Pilatus’s flagship PC-24 plane. The Utility Management System is the airplanes flight computer.

I am allergic to reading ChatGPT Substack posts but I think this GPT5 Pro explanation of what the UMS does is better than anything I can offer, and I include it in its entirety to explain one thing:

Providing the UMS for Pilatus’s flagship plane is a strong indication that, although ISSC is willing to do scrappy work, they are very well respected and not just a commodity manufacturer.

Pilatus is a Swiss aerospace company, which is about as serious as any business gets.

This matters because I think ISSC has long term multibagger potential, something I wouldn’t believe if they only did retrofits and service work.

What the UMS actually does on the PC‑24 (in simple terms)

• Puts everything on the screens: Integrated with Pilatus’s ACE cockpit (which is based on the Honeywell Apex Primus), it displays and lets you command aircraft utility systems right from the flight deck. It also manages secondary power distribution. Global Jet

• Monitors and controls “~two dozen‑plus” subsystems: AIN reports the PC‑24’s UMS monitors/controls about 28 subsystems and automates normal/emergency sequences to cut workload. Aviation International News

• Acts as the jet’s “maintenance computer”: It aggregates sensor data, runs built‑in tests, and centralizes health monitoring for quicker troubleshooting. Innovative Solutions

• Basically, the UMS is the CPU of the plane.

I would guess ISSC charges about 100-200k for the UMS. If Pilatus ships 70 PC24s a year, thats about 7-14m in revenue just on the UMS. I would lean on the higher side. These are very rough numbers, but i don’t think they are out by 100%.

I expect Pilatus to continue crushing it for the foreseeable future. This is supported by a recent Reuters story from October 13, 2025.

Aerospace supplier Honeywell said on Monday it expects record deliveries of new business jets over the next decade, providing the latest sign that demand for private air travel, which surged during the COVID-19 pandemic, is holding up. Affluent travelers, who avoided scheduled flights in 2020, helped private flying recover earlier than the commercial airlines’ business, but there were doubts whether they would stick with private air travel once the pandemic was over.

A report by the U.S. maker of avionics and business jet engines, forecasts private plane deliveries at a higher level than before the pandemic, with demand for planes resilient despite a U.S.-led trade war and geopolitical tensions.

Honeywell predicts global deliveries of 8,500 new business jets with a projected value of $283 billion – the highest in the report’s 34-year history – over the next decade. The report comes ahead of the world’s largest business jet show, which starts on Tuesday in Las Vegas.

“More people are flying in business aviation than pre-COVID,” said Ben Driggs, chief commercial and strategy officer at Honeywell Aerospace in an interview.”

Honeywell provides the flight deck (The Primus Apex) for the Pilatus planes (https://aerospace.honeywell.com/us/en/products-and-services/aircraft/pilatus), so this comment from Ben Driggs of Honeywell Aerospace is a direct readthrough to Pilatus earnings, which in turn, is a read through straight to Utility Management System sales for ISSC, which is a read through to my bags going up in value - a key goal of mine as I seek to escape the post-AGI underclass.

As I mentioned, the Autothrottle ISSC makes fits well with the Pratt and Whitney PT6. So any plane that uses that engine is a viable. What other planes use the Pratt and Whitney PT6? The Textron Aviation King Air. Ok great, we can put thrust sense on that too.

What else?

As a Defense Contractor

You know where you will find PT6 engines? In the Huron C12, which is a military version of the Textron King Air.

The C‑12/UC‑12 is the U.S. military designation for military utility versions of the Beechcraft King Air. New UC‑12 aircraft are sold by Textron.

Being able to land the plane with one pilot in a military aircraft is a significant upgrade, something that is much easier with the Thrust Sense Autothrottle.

The Boeing KC46a

Since 2011, ISSC has provided display and control units for Boeing’s KC-46A tanker. The KC-46A is the industry standard way to refuel another plane while it’s in the air.

Refueling mid air with the KC46A

The KC-46A stands to be a workhorse for in flight refueling until the next generation of refueling (dubbed NGAS) becomes a reality (targeting 2030).

Acquisition of Honeywell Product Lines - The F-16

June 30th, 2023, ISSC bought several military and commercial product lines from Honeywell, including those for the F-16 fighter jet. The purchase price was $36 million, which included $18.5 million in hard assets (including a sale of certain inventory valued at approximately $12.5 million, equipment valued at approximately $6 million). This significantly expanded ISSC’s presence in the defense market. Specifically, they purchased an exclusive license agreement for several of the inertial, communication and navigation product lines.

What does that actually mean? Here’s chatGPT:

To handle the increased production volume, ISSC tripled the manufacturing capacity at its Exton, Pennsylvania, facility in 2025 (cost 6m).

Interestingly, this increased manufacturing capacity has only just come online, with the capex buildout set to be finished fall 2025 (now).

So, I think that covers the main segments ISSC is working within.

Future

This is getting long, but I will just quickly go over the future because my main question for this company is… how big should I go here?

As I mentioned, I see downside risk as being significantly less than 50% here. The idea the stock retraces to $5.50 a share (where they had activist interest to buy out the whole thing) after landing the F16 gig (when there’s significant backlog for new F16s and over 2000 still in service) seems unlikely. I just don’t see $4 here ever. That makes max downside less than 50%.

I see going back to all time highs soon as being extremely likely. $20 a share by EOY2026 seems like my base case here.

On top of that, I can see future scenarios where the company builds to a billion dollar market cap over the long run.

How?

Here’s a little infograph the company made a while back:

ISSC is a great small business, but if it turns into a narrative stock because they become a key provider in the autonomous flights space, it is going to go up a lot more.

And why wouldn’t they pull this off? They provide Pilatus, one of the most respected jet manufacturers in the world, with the UMS for their flagship light jet. They’ve said they’re going to do it in this infrographic I just showed you.

What does that actually look like? What plane is this going to be?

I mentioned earlier that the Boeing KC46A was set to be phased out, ideally by something unmanned and potentially stealth, starting 2030. Lockheed Martin has expressed an interest in creating this product (they are the best at stealth, see F35).

Would we be in this next generation refueling plane? Why not?

• We are doing work on LMTs F-16 program already.

• We are an OEM provider for Boeings KC46A, the current best in class refueling plane.

• LMT has already shown off a stealth, pilot optional, tanker program.

• We have a plan to do work in autonomous planes and a pilot optional plane would make a tonne of sense as a starting point.

Lockheed Martin recently showed off a stealth ‘pilot optional’ refueling plane.

If LMT does not get it done however, then the most likely outcome is that Boeing beat them out of the business - in which case we are probably going to supply the UMS anyway!

We could also do something with General Dynamics, who make the highly successful (and autonomous) MQ9 Reaper. The MQ9 uses Honeywell’s TPE331-10 turboprop engine - very interesting, because we are experts at handling turboprop engines, and have a deep Honeywell relationship. Could we take over maintenence of the MQ9 engines as General Dynamics builds a next gen unmanned aircraft to replace the MQ9? For sure.

In short, I see many avenues for ISSC to grow in the future - we work as an OEM in new product lines, and provide on going support for aging ones. Overall, our customers all seem happy with us and our business has grown rapidly over the last few years.