Innovative Solutions & Support, Inc.

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Innovative Solutions & Support, Inc.

720 Pennsylvania Drive
Exton, Pennsylvania 19341-1129
U.S.A.
Telephone: (610) 646-9800
Toll Free: (866) 359-7876
Fax: (610) 646-0149
Web site: http://www.innovative-ss.com

Public Company
Incorporated: 1988
Employees: 138
Sales: $16.72 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: ISSC
NAIC: 334113 Computer Terminal Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 336413 Other Aircraft Parts and Auxiliary Equipment Manufacturing; 541511 Custom Computer Programming Services

Innovative Solutions & Support, Inc., (IS&S) produces solid state instruments and flat panel displays for a variety of aircraft. Originally a maker of replacement barometers, the company found early success with a single digital gauge capable of replacing a number of different instruments. In the late 1990s, the company focused on satisfying new mandates for reduced vertical separation minimum (RVSM) that required more accurate instruments. The company has since shifted emphasis to its Cockpit/IP (Cockpit Information Portal) Flat Panel Display System. In addition to replacing a slew of electromechanical instruments with an elegant glass cockpit, this product forms a base for digital addons such as electronic flight bags. Operators of airliners, business aircraft, and military planes turn to IS&S's upgrades for money, weight, time, and fuel savings, while increasing the amount of information available to pilots.

ORIGINS

Innovative Solutions & Support, Inc., was founded in Pennsylvania in 1988 by Geoffrey S. M. Hedrick. It began by making digital altimeters for the Army and Navy. It then progressed to engine gauges for the C-130 Hercules military transport.

IS&S was not Hedrick's first entrepreneurial venture in the aerospace business. He had launched his own altimeter manufacturer, Harowe Systems Inc., in 1971 after working for Lear-Siegler. Several years later Hedrick sold Harowe to Smiths Industries PLC and, after a decade as an executive at Smiths (he became head of the British company's North American unit), he started IS&S. Start-up capital was reportedly $500,000.

The company found early success with a single digital gauge capable of replacing a number of different instruments. The pin configuration and input voltage determined the appropriate instrument output. This flexibility greatly reduced the number of spare parts operators needed to keep on hand.

Parker Hannifin Corp. made a strategic investment in IS&S in 1991, buying 16 percent of the company for $3 million. Other early investors included the P-A Fund and the Mid-Atlantic Venture Fund.

IS&S was growing rapidly. Revenues rose from $2 million in 1990 to $12 million in 1996, as the workforce doubled to 75 employees. IS&S was beginning to serve the commercial airline market, winning a contract to retrofit its solid-state altimeters in some of Northwest Airline Corporation's DC-9s. It had also begun installing its new RVSM upgrades in Gulfstream Aerospace's Gulfstream II business jets.

MEETING THE RVSM MANDATE

Satisfying a regulatory mandate for more accurate flight instruments became the focus of the company's business in the late 1990s. RVSM standards sought to fit more traffic into the most heavily traveled air routes by spacing planes at altitudes within 1,000 feet of each other, rather than 2,000 feet. This called for greater precision; RVSM-compliant altimeters were accurate to within a few feet at higher altitudes, rather than 200 or 300 feet as had been the previous standard. Airlines were motivated to upgrade their equipment in order to save considerable time and fuel expense by flying on the RVSM routes.

At the same time as civil regulatory standards were changing, the defense industry was shifting to new ways of doing business. To keep costs down and keep up with the fast-evolving electronics, the military turned to commercial off-the-shelf technologies. IS&S became known for adapting commercially available graphics processors and other components into its state-of-the-art designs. IS&S's displays were sharper than high-definition TV, and were legible even in direct sunlight. IS&S instituted a Six Sigma quality control program around 1999.

To maintain an adequate supply of quality printed wiring assemblies, IS&S invested in surface mount technology (SMT) capabilities in 2001. It subsequently reported a reduction in solder joint defects.

Most of IS&S's business came from retrofits, which was a larger market. However, it was building a presence among new aircraft producers. In 2001 Raytheon Aircraft tapped IS&S to supply RVSM-compliant equipment for some models of its King Air turboprops.

PUBLIC IN 2000

IS&S completed an initial public offering (IPO) in August 2000, listing on the NASDAQ. Three million shares were sold at $11 per share. It was experiencing double-digit growth in revenues and profits. In 1999, the company had recorded net income of $1.4 million on revenues of $6.7 million. The next year, net income reached $2.1 million as revenues rose to $9.6 million. By the time of the IPO, IS&S had about 115 employees. In spite of its relatively small size, it had become a spirited competitor to industry giants such as Honeywell International Inc. and Rockwell International Corp. Still, it controlled a tiny portion of the overall cockpit avionics market, which was estimated to be worth more than $6 billion.

Forbes magazine pronounced IS&S one of the 200 Best Small Companies of 2002. A couple of years later, Investor's Business Daily recognized it on "The IBD 100" list. Two years after that, in 2006, Aviation Week & Space Technology named it a Top-Performing Aerospace Company in the under $250 million in revenues category.

After several years of use over the Atlantic, RVSM was mandated on routes within the United States in January 2005. As RVSM conversions gained momentum, more of IS&S's sales were coming from the commercial sector. A little more than half the company's business came from the Department of Defense in 2002; within four years, the civil sector would account for 80 percent of sales.

In 2005, Wilmington, Ohio, cargo airline ABX and IS&S developed a flat panel display conversion program for Boeing 757 and 767 airliners. This replaced 22 parts weighing more than 200 pounds with four ten-inch flat panel displays. By August 2006, they had reduced the turnaround for this process to 48 hours. IS&S's partner for executive jets was Columbia Avionics of Maryland. Revenues reached $63.3 million in 2005, with net income of $18.6 million.

COMPANY PERSPECTIVES

Innovative Solutions & Support, Inc., is a diversified international avionics supplier to civil, military, business, and commercial markets and operators. IS&S manufactures a broad range of RVSM compliant Air Data Systems, Flat Panel Display Systems, Fuel quantity and flow measurement and Engine Hydraulic displays. We specialize in OEM and retrofit systems that enhance performance and reliability.

FLAT PANEL FOCUS

Company President Roman G. Ptakowski told Aviation Week & Space Technology that IS&S had been responsible for half of all RVSM installations in the United States. This amounted to more than 5,000 aircraft.

IS&S slipped into the red in 2006 as the Federal Aviation Administration (FAA) mandate for installing RVSM equipment passed. Revenues fell to $16.7 million in 2006. The company posted a net loss of $949,000. The falloff in RVSM business was anticipated, and IS&S was shifting its emphasis to flat panel displays. These replaced an aircraft's existing array of older electromechanical or electronic instruments with a modern glass cockpit. In typical IS&S fashion, the replacement panels bolted neatly where the old instruments had been and connected to the original wiring.

A flat panel conversion for the Pilatus PC-12 utility and business aircraft became available in 2006. IS&S's installation partners for this model were Epps Aviation of Atlanta and Western Aircraft of Boise.

KEY DATES

1988:: Geoffrey S. M. Hedrick forms Innovative Solutions & Support, Inc., (IS&S) in Pennsylvania.
1990:: Revenues are about $2 million.
1991:: Parker Hannifin Corp. acquires a minority holding.
1996:: Retrofit kits to meet reduced vertical separation minimum (RVSM) standards are introduced.
1997:: RVSM standards go into effect over crowded North Atlantic air routes.
2000:: IS&S holds initial public offering on the NASDAQ.
2001:: In-house surface mount technology capabilities are added.
2005:: Cargo airline ABX and IS&S develop flat panel display conversion program for Boeing 757 and 767 airliners.
2006:: Company shifts focus to flat panel displays as the FAA's deadline for RVSM installations passes; electronic flight bags are introduced.

New types of data were being made available for display through the flat panel cockpit systems. In October 2006, IS&S announced an electronic flight bag option, which offered a number of enhancements over the stacks of paper navigation charts typically toted by pilots. A key feature was the display of the pilot's own aircraft on the electronic map. Planned for the near future was a "synthetic vision" product to overlay virtual images of objects and runways in low visibility conditions. IS&S had also developed a file server allowing for Internet access via Wi-Fi hotspots. Yet another project was a cockpit video recorder, anticipating a possible FAA mandate.

Frederick C. Ingram