programs and contracts with the U.S. government, our ability to receive timely payment from U.S. government entities and our ability to timely obtain export licenses for our products to fulfill contracts with our international customers.
Additionally, there is a possibility that political decisions made by the current U.S. administration, such as changes in prior military commitments, including the withdrawal from Afghanistan or in response to the conflict between Russia and Ukraine, or an impasse on policy issues, could impact future spending and program authorizations, which may not increase or may decrease or shift to programs in areas in which we do not provide products or services or are less likely to be awarded contracts. Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs due to, among other factors, competing demands for federal funds and the number and intensity of military conflicts.
Military transformation and changes in overseas operational levels may affect future procurement priorities and existing programs, which could limit demand for our UAS.
OverWith the last decade,inception of the global war on terror, operational activity in Afghanistan and Iraqthe US-CENTCOM combatant command area of operations led to adoptionbroad deployment and an increase inincreased demand for our small UAS. More recently,UAS and TMS products, training and spares. Since such time, there have been periods during which the U.S. military has reduced its presence and operational activity in Afghanistan and Iraq,tempo of DoD counterinsurgency operations receded, reducing demand for certain of our small UAS and TMS products, training and spares from prior levels. We cannot predict whether theand when a reduction in overseas operational levels will continue,occur, how future procurement priorities related to defense transformation will be impacted, including by future events such as the conflict between Russia and Ukraine, or how changes in the threat environment will impact opportunities and competition for our small UAS businessand TMS products and our ISR services, in terms of existing, additional or replacement programs. If defense transformation or overseas operations cease or slow down or cease in key operational areas, then our business, financial condition and results of operations could be impacted negatively.
The operations tempo in the U.S. DoD both of training and deployments, both domestically and overseas, has reduced as a result of the COVID-19 pandemic. This has negatively affected demand for spares, repairs, and replacement product ordinarily required for the operation and maintenance of our UAS products. We cannot predict whether this reduction in demand will continue and to the extent it may cause an adverse impact on our results of operations.
We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.
Our UAS are sold in new and rapidly evolving markets. The commercial UAS market is in the early stages of customer adoption. The market for HAPS UAS is also in an early stage of development. Accordingly, our business and future prospects may be difficult to evaluate. We cannot accurately predict the extent to which demand for our products and services will increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:
| generate sufficient revenue to maintain profitability; |
| acquire and maintain market share; |
| achieve or manage growth in our operations; |
| develop and renew contracts; |
| attract and retain additional engineers and other |
| successfully develop and commercially market new |
| adapt to new or changing policies and spending priorities of governments and government agencies; and |
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| access additional capital when required and on reasonable terms. |
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If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed.
We face competition from other firms, many of which have substantially greater resources.
The defense industry is highly competitive and generally characterized by intense competition to win contracts. Our current principal small UAS competitors include Elbit Systems Ltd., FLIR Systems,Teledyne Technologies, Inc., L3 Technologies, Inc. and Lockheed Martin Corporation. Our principal MUAS competitors include those competing with us for the U.S. Army’s Future Tactical UAS (FTUAS) program, including Martin UAV and Northrop Grumman’s V-Bat, Textron, Inc.’s Aerosonde and L3 Harris Technologies’ FVR-90, Elbit Systems Ltd. and Israeli Aircraft Industries. International MUAS competitors include Elbit Systems Ltd. and Israeli Aircraft Industries. We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk or General Atomics, Inc.’s Predator and related products, The Boeing Company’s ScanEagle and Textron Inc.’s Shadowits derivatives as direct competitors to our small UAS because they perform different missions, do not typically deliver their information directly to front‑linefront-line ground forces, and are not hand launched and controlled. We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk or General Atomics, Inc.’s Predator and its derivatives as direct competitors to our MUAS because they perform different missions, require a larger logistical footprint and cost considerably more to procure and operate. However, we cannot be certain that these platforms will not become direct competitors to our small UAS and MUAS in the future. Potential competition from consumer-focused drone manufacturers is emerging as their capabilities increase and their prices remain low relative to existing defense solutions, which is resulting in some level of military consideration even if such drones do not meet traditional military performance or security specifications. Our TMS business faces competition from Textron Inc., Raytheon Technologies, Lockheed Martin Corporation, Anduril Industries and UVision Air Ltd. We also face emerging competition from consumer and commercially focused drone manufacturers, such as Skydio, Inc. and Shield AI, as their product capabilities increase and their product prices remain low relative to existing defense solutions, which has resulted in some level of military consideration and procurement even though their UAS products do not meet traditional military performance or security specifications. Our competitors in the U.S. defense market for UGVs include L3 Harris Technologies, Inc., Teledyne Technologies, Inc., QinetiQ North America, Inc., Peraton/Remotec, ICOR and Boston Dynamics.
The market for commercial UAS products and services is in an early stage of development, but is evolving rapidly. Competition for our commercial UAS products and services includes consumer drone manufacturers such as Dà-Jiāng Innovation, who seek to enhance their systems’ capabilities over time, and other small UAS manufacturers, including Lockheed Martin Corporation, PrecisionHawk, Sentera and SlantRange.
The HAPS UAS market is in an early stage of development and our HAPS UAS faces competition from several aerospace and defense contractors and internet technology companies pursuing the high altitude long endurance UAS market for global communication and remote sensing, including The Boeing Company, Airbus, Lockheed Martin Corporation and Northrop Grumman Corporation, and competition from companies pursuing alternative solutions for this market such as Lockheed Martin Corporation and Northrop Grumman Corporation with airships (high altitude aircraft that are kept buoyant by a body of gas that is lighter than air) and companies pursuing conventional satellites, such as The Boeing Company, Lockheed Martin Corporation, General Dynamics Corporation, EADS N.V., Ball Corporation and Low Earth Orbit, orNorthrop Grumman Corporation, and LEO micro or cubesat satellite constellations. Our tactical missile systems business faces competition from competitorsconstellations, including Textron Inc., Raytheon Companyinclude Amazon, Planet, OneWeb, SpaceX and Lockheed Martin Corporation.The Boeing Company.
Some of these firms have substantially greater financial, management, research and marketing resources than we have. Our UAS services business also faces competition from smaller businesses that can provide training and logistics services for multiple UAS platforms, including our small UAS.UAS and MUAS.
Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel, including those with security clearances. Furthermore, many of our competitors may be able to utilize their substantially greater resources and economies of scale to develop competing products and technologies, manufacture in high volumes more efficiently, divert sales away from us by winning broader contracts or hire away our employees by offering more lucrative compensation packages. Small business competitors may be able to offer more cost competitive solutions, due to their lower overhead costs, and take advantage of small
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business incentive and set‑asideset-aside programs for which we are ineligible. Foreign competitors may also be able to offer more cost competitive solutions for our UAS and UGV products and services. The market for small UAS, MUAS and UGV products and services is expanding, and competition intensifying as additional competitors enter the market and current competitors expand their product lines. In order to secure contracts successfully when competing with larger, well‑financedwell-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which could adversely affect our margins. In addition, larger diversified competitors serving as prime contractors may be able to supply underlying products and services from affiliated entities, which would prevent us from competing for subcontracting opportunities on these contracts. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results.
If the UAS, tactical missile systems,UGV, TMS, and commercial UAS markets do not experience significant growth, if we cannot expand our customer base or if our products and services do not achieve broad acceptance, then we may not be able to achieve our anticipated level of growth.
We cannot accurately predict the future growth rates or sizes of the markets for our products.products and services. Demand for our products and services may not increase, or may decrease, either generally or in specific markets, for particular types of products and services or during particular time periods. We believe the market for commercial UAS is nascent. Moreover, there are only a limited number of major programs under which the U.S. military, our primary customer, is currently funding the development or purchase of our UAS, UGV and tactical missile systems.TMS. Although we have expanded our UAS customer base to include foreign governments and domestic non‑militarynon-military agencies, and made our first approved export of our tactical missile systems to a foreign customer, we cannot assure you that our continued efforts to further
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increase our sales to theseinternational customers will be successful. The expansion of the UAS, tactical missile systems,UGV, TMS, and commercial UAS markets in general, and the market for our products and services in particular, depends on a number of factors, including the following:
| customer satisfaction with these types of systems as solutions; |
| the cost, performance and reliability of our products and products offered by our competitors; |
| customer perceptions regarding the effectiveness and value of these types of systems; |
| limitations on our ability to market our UAS and |
| obtaining timely regulatory approvals, including, with respect to any of our |
| marketing efforts and publicity regarding these types of |
Even if UAS, tactical missile systems,UGV, TMS, and commercial UAS gain wide market acceptance, our products and services may not adequately address market requirements and may not continue to gain market acceptance. If these types of systems generally, or our products and services specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level of growth and our revenue and results of operations would decline.
Our international business poses potentially greater risks than our domestic business.
We derived approximately 52%41% of our revenue from international sales, including U.S. government foreign military sales in which an end user is a foreign government, during the fiscal year ended April 30, 20192022 compared to 47%39% for the fiscal year ended April 30, 2018.2021. We expect to continue to derive an increasinga significant portion of our revenue from international sales.sales, including direct sales to allied nations, and initiated international operations with the acquisition of
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Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company (“Telerob”) in May 2021. Our international revenue and operations are subject to a number of material risks, including the following:
| the unavailability of, or difficulties in obtaining any, necessary U.S. governmental authorizations for the export of our products to certain foreign jurisdictions; |
| regulatory requirements that may adversely affect our ability to operate in foreign jurisdictions, sell certain products and services or repatriate profits to the United States; |
| the complexity and necessity of using foreign representatives and |
| the complexities of operating a business in an international location through a subsidiary or joint venture structure that may include foreign business partners, subcontractors and suppliers; |
| the complexities of managing a workforce under foreign labor and employment law and related organizational requirements; |
● | the complexity of shipping our products internationally through multiple jurisdictions with varying legal requirements; |
| difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues, including fewer legal protections for intellectual property; |
| potential fluctuations in foreign economies and in the value of foreign currencies and interest rates; |
| potential preferences by prospective customers to purchase from local |
| general economic and political conditions in the markets in which we operate; |
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| laws or regulations relating to |
| the imposition of tariffs, embargoes, export controls and other trade restrictions; and |
| different and changing legal and regulatory requirements, including those pertaining to anti-corruption, anti-boycott, data protection and privacy, employment law, intellectual property, contracts and |
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, destabilization of performance, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations. While we have adopted policies and procedures to facilitate compliance with laws and regulations applicable to our international operations and sales, our failure, or the failure by our employees or others working on our behalf, to comply with such laws and regulations may result in administrative, civil or criminal liabilities, including fines, suspension or debarment from government contracts or suspension of our export privileges. Moreover, our sales, including sales to customers outside the United States, substantially all are denominated in U.S. dollars, and downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business.
We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S. government authorization regarding the export31
We must comply with U.S. and other laws regulating the export of our products. In some cases, explicit authorization from the relevant U.S. government authorities is needed to export our products. The export regulations and the governing policies applicable to our business are subject to change. We cannot provide assurance that such export authorizations will be available for our products in the future. Compliance with these laws has not significantly limited our operations or our sales in the recent past, but could significantly limit them in the future. We maintain an export compliance program but there are risks that our compliance controls may be ineffective. We have voluntarily disclosed export violations to the U.S. Department of State, a number of which are currently under review by the department. The U.S. Department of State has imposed significant fines, penalties and sanctions, including suspension of export privileges, on companies that have violated the export laws. If the State Department determines that the conduct in our voluntary disclosures warrants the imposition of significant fines, penalties or sanctions, it could have a material adverse impact on our business, operations and financial condition and limit or prevent us from being able to sell our products in certain international jurisdictions.
If we are unable to manage the increasing complexity of our business, or achieve or manage our expected growth, our business could be adversely affected.
The complexity of our business has increased significantly over the last several years. We have expanded the number of business areasproduct lines being pursued, shifting from primarily a U.S. government focused business to a business that includes substantial international product sales, and added commercial services, accelerated development on HAPS UAS and formed a joint ventureengaged in numerous acquisitions further expanding our operations domestically and abroad. Further, in conjunction with SoftBank Corp. to develop HAPS UAS. We also acquired Pulse Aerospace, LLC, a Kansas-based developerthe acquisition of UAS capable of vertical take-offArcturus in February 2021, we entered into certain credit facilities that include affirmative and landing (VTOL), in June 2019.negative covenants and place some restrictions on how we operate our business. These efforts have increased complexity and our expected growth has placed, and will continue to place, a strain on our management and our administrative, operational and financial infrastructure. We anticipate further growth of headcount and facilities will be required to address expansion in our product and service offerings and the geographic scope of our customer base. However, if we are unsuccessful in our efforts, our business could decline. Our success will depend in part upon the ability of our senior management to manage our increased complexity and expected growth effectively. To do so, we must continue to hire, train, manage and integrate a significant number of qualified managers and engineers. If our new employees perform poorly, or if we are unsuccessful
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in hiring, training, managing and integrating these new employees, or retaining these or our existing employees, then our business may experience declines.
To support our expected growth, we must continue to improve our operational, financial and management information systems. If we are unable to manage our growth while maintaining our quality of service, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, then our business, prospects, financial condition or operating results could be adversely affected.
Any efforts to expand our offerings beyond our current markets may not succeed, which could negatively impact our operating results.
Until recently, we have focused on sellingThe U.S. military represents our small UAS to the U.S. military.largest source of revenue. We have, however, expanded our small UASproduct sales into other governmentnew market segments, including those served by our unmanned ground vehicle product line and commercial markets, including the launch ofby our Quantix data collection drone and AV DSS for agriculture operations, and formed a joint venturerelationship with SoftBank Corp. to develop HAPS UAS for global communication and remote sensing applications. Our efforts to expand our product and service offerings beyond our traditional markets may divert management resources from existing operations and require us to commit significant financial resources to unproven businesses that may not generate additional sales, either of which could significantly impair our operating results.
The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete.
Continuing technological changes in the market for our products could make our products and services less competitive or obsolete, either generally or for particular applications. Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements, including but not limited to addressing counter UAS technologies, to our existing product offerings, as well as introduce a variety of new product offerings, to address the changing needs of the markets in which we offer our products. Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors’ products.
If we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis, our products could lose market share, our revenue and profits could decline, and we could experience operating losses.
We expect to incur substantial research and development costs and devote significant resources to identifying and commercializing new products and services, which could significantly reduce our profitability and may never result in revenue to us.
Our future growth depends on penetrating new markets, adapting existing products to new applications, and introducing new products and services that achieve market acceptance. We plan to incur substantial research and
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development costs as part of our efforts to design, develop and commercialize new products and services and enhance existing products. We spent $34.2$54.7 million, or 11%12% of our revenue, in our fiscal year ended April 30, 20192022 on internal research and development activities. We believe that there are significant investment opportunities in a number of business areas. Because we account for internal research and development as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our research and development programs may not produce successful results, and our new products and services may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our business, prospects, financial results and liquidity.
Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on the use of small UAS in response to public privacy concerns, may prevent us from expanding the sales of our small UAS to non‑military customers in the United States.
The regulation of small UAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is uncertain. In 2006, the FAA issued a clarification of its existing policies stating that, in order to
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engage in commercial use of small UAS in the U.S. National Airspace System, a public operator must obtain a COA from the FAA, or fly in restricted airspace. The FAA’s COA approval process requires that the public operator certify the airworthiness of the aircraft for its intended purpose, that a collision with another aircraft or other airspace user is extremely improbable, that the small unmanned aircraft system complies with appropriate cloud and terrain clearances and that the operator or spotter of the small unmanned aircraft system is generally within one half‑mile laterally and 400 feet vertically of the small unmanned aircraft system while in operation. Furthermore, the FAA’s clarification of existing policy stated that the rules for radio‑controlled hobby aircraft do not apply to public or commercial use of small UAS.
On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to allow expanded use of small UAS for both public and commercial applications. On June 21, 2016, the FAA released its final rules regarding the routine use of certain small UAS (under 55 pounds) in the U.S. National Airspace System pursuant to the act. The rules, which became effective in August 2016, provided safety regulations for small UAS conducting non‑recreational operations and contain various limitations and restrictions for such operations, including a requirement that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS. We cannot assure you that these new rules will result in the expanded use of our small UAS by law enforcement or other non‑military government agencies or commercial entities and we may not be able to expand our sales of small UAS beyond our military customers, which could harm our business prospects.
In addition, there exists public concern regarding the privacy implications of U.S. commercial and law enforcement use of small UAS. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small UAS by non‑military customers.
Our products and services are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes.
Our UASproducts rely on complex avionics, sensors, user‑friendlyuser-friendly interfaces and tightly‑integrated,tightly-integrated, electromechanical designs to accomplish their missions. Despite testing, our products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time‑consumingtime-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, damaged customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. In addition, increased development and warranty costs could be substantial and could reduce our operating margins.
The existence of any defects, errors, or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. A defect, error or failure in one of our UASproducts could result in injury, death or property damage and significantly damage our reputation and support for our UASproducts in general. We anticipate this risk will grow as our UASproducts begin to be used in U.S. domestic airspace and urban areas. We also remain liable for warranty and product liability claims for our EV charging systems and power cycling and test systems sold prior the closing of the transaction contemplated by the Purchase Agreement, which products have the potential to cause injury, death or property damage in the event that they are misused, malfunction or fail to operate properly due to unknown defects or errors.
Although we maintain insurance policies, we cannot provide assurance that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all. A successful product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations.
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If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.
Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. We obtain certain of our hardware components, various subsystems and systems from a limited group of suppliers, some of which are sole source suppliers. WeAlthough we hold long term non-binding contracts with certain key suppliers that establish pricing, minimize lead times and to some degree mitigate risk, we do not have long‑termlong-term agreements with any of theseall suppliers that obligate them to continue to sell components, subsystems,products required to build our systems or products to us. Our reliance on these suppliers without long term non-binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components subsystems, or systemsproducts of sufficient quality, will increase prices for the components subsystems or systemsproducts and will perform their obligations on a timely basis.
In addition, certain raw materials and components used in the manufacture of our products and in our development programs are periodically subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. Particularly, the market for electronic components has been and currently still is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ continued productionongoing timely delivery of keythese components to us. In the fiscal year ended April 30, 2022, we experienced delays in receiving of certain electronic and other components for our products. Ifproduct lines resulting from shortages, which caused delays in production and development programs and negatively affected our revenue and results
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for the period and could negatively impact our revenue and results in future periods. We expect shortages in certain critical components to continue throughout at least the remainder of our fiscal year 2023. Should such shortages of components continue or additional shortages occur, and we are unable to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be ableimpaired in our ability to execute development programs on schedule or deliver our products on a timely or cost effectivecost-effective basis to our customers, whichcustomers. Shortages in components for our products and delays in obtaining components for our products could cause customers to terminate their contracts with us, delay orders from us or cause us to delay accepting orders, negatively impact our ability to win new programs and/or contracts, negatively impact and disrupt our development programs, increase our costs and seriously harm our business, results of operations and financial condition. Moreover, if any of our suppliers become capacity constrained, financially unstable or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers. WeEven if we identify alternate suppliers, we may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish such alternative sources, of supply if we lose any of these sources or are required to redesign our products.products and to complete additional quality control procedures. In addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow. We have experienced increased costs for components, as well as increased shipping, warehousing and inventory costs. We cannot predict the extent to which these costs will continue and/or continue to increase or if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all. Additionally, shortages of components may result in increased inventory of unfinished products and significant quantities of other unused components remaining in inventory, which could expose us to increased risks of obsolescence and losses which may not be fully covered by insurance.
Earnings and cash flows can be impacted by changes in tax laws.
As a U.S.-based multinational business, we are subject to income tax in the U.S. and numerous jurisdictions outside the U.S. The relevant tax rules and regulations are complex, often changing and, in some cases, are interdependent. If these or other tax rules and regulations should change, the company’s earnings and cash flows could be impacted. In particular, the changes proposed by the current U.S. administration, including increasing the U.S. corporate income tax rate from 21% to 28%, doubling the rate of tax on certain earnings of non-U.S. subsidiaries and the imposition of a 15% minimum tax on worldwide book income, could materially affect the company’s financial results if enacted. The company’s worldwide provision for income taxes is determined, in part, through the use of significant estimates and judgments. Numerous transactions arise in the ordinary course of business where the ultimate tax determination is uncertain. The company undergoes tax examinations by tax authorities on a regular basis. While the company believes its estimates of its tax obligations are reasonable, the final outcome after the conclusion of any tax examinations and any litigation could be materially different from what has been reflected in the company’s historical financial statements.
Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related to our contracts.
In general, we perform our production work under fixed‑pricefixed-price contracts and our repair and customer‑fundedcustomer-funded research and development work under cost‑plus‑feecost-plus-fee contracts. Under fixed‑pricefixed-price contracts, we perform services under a contract at a stipulated price. Under cost‑plus‑feecost-plus-fee contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. We typically experience lower profit margins under cost‑plus‑feecost-plus-fee contracts than under fixed‑pricefixed-price contracts, though fixed‑pricefixed-price contracts involve higher risks. In general, if the volume of services we perform under cost‑plus‑feecost-plus-fee contracts increases relative to the volume of services we perform under fixed‑pricefixed-price contracts, we expect that our operating margin will decline. In addition, our earnings and margins may decrease depending on the costs we incur in contract performance, our achievement of other contract performance objectives and the stage of our performance at which our right to receive fees, particularly under incentive and award fee contracts, is finally determined.
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We use estimates in accounting for many of our programs and changes in our estimates could adversely affect our future financial results.
Contract accounting requires judgments relative to assessing risks, including risks associated with estimating contract transaction prices and costs, assumptions for schedule and technical issues, customer‑directedcustomer-directed delays and reductions in scheduled deliveries, and unfavorable resolutions of claims and contractual matters. Due to the size and nature of many of our contracts, the estimation of total costs at completion is complicated and subject to many variables. For example, we must make assumptions regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials; and consider incentives or penalties related to performance on contracts and include them in the variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.
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Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our future business.
Fixed‑priceFixed-price contracts (including both government and commercial contracts) represented approximately 71%78% of our revenue for the fiscal year ended April 30, 2019.2022. If we fail to anticipate technical problems, estimate costs accurately or control costs during our performance of fixed‑pricefixed-price contracts, then we may incur losses on these contracts because we absorb any costs in excess of the fixed price. Under cost‑plus‑feecost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all such costs. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns. Under each type of contract, if we are unable to control the costs we incur in performing under the contract, then our financial condition and results of operations could be materially adversely affected. Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.
Our senior management and key employees, including key employees of business recently acquired, are important to our customer relationships and overall business.
We believe that our success depends in part on the continued contributions of our senior management and key employees. We rely on our executive officers, senior management and key employees to generate business and execute programs successfully. In addition, the relationships and reputation that members of our management team and key employees have established and maintain with government defense personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. We do not have employment agreements with any of our executive officers or key employees, and these individuals could terminate their employment with us at any time. We have had some departures in fiscal year 2022 from our senior management team, which has resulted in remaining members bearing additional responsibilities as we seek to recruit additional leadership talent. The loss of any of our continuing executive officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.
We must recruit and retain highly‑skilledhighly-skilled employees to succeed in our competitive business.
We depend on our ability to recruit and retain employees who have advanced engineering and technical services skills and who work well with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. The current tight labor market has adversely impacted our ability to recruit qualified personnel, including engineers. Increased restrictions on the import of foreign labor may also increase demand for engineering personnel and adversely impact our ability to hire and retain qualified personnel. If we are unable to recruit and retain a sufficient number of these employees, then our ability to maintain our competitiveness and grow our
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business could be negatively affected. In addition, because of the highly technical nature of our products, the loss of any significant number of our existing engineering personnel could have a material adverse effect on our business and operating results. Moreover, some of our U.S. government contracts contain provisions requiring us to staff a program with certain personnel the customer considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutes, the customer may terminate the contract. We have experienced shortages of skilled employees that has negatively affected our progress on development programs and our results of operations. We cannot predict the extent to which these shortages will continue or the extent to which they could negatively impact our development programs and results of operations in future periods.
In September 2021, in furtherance of an executive order issued by President Biden, the U.S. Safer Federal Workforce Task Force issued guidance that generally requires that employees of U.S. government contractors receive COVID-19 vaccinations, unless an employee requests and receives a medical or religious accommodation. The mandate is subject to various legal proceedings. While the loss of certain employees due to this vaccine mandate, as well our own vaccine requirements for our employees, has not had a significant impact on our operations to date, our ability to recruit skilled employees in the future may be negatively impacted by vaccine mandates.
Our future profitability may be dependent upon achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products. Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.
We have limited experience manufacturing UAS, TMS and UGV in high volume. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture (or contract for the manufacture of) these products in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities in locations that can efficiently service our markets could have a material adverse effect on our business, financial condition, results of operations and prospects. Our future profitability is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to experience a sharp increase in demand for their products. During the fiscal year ended April 30, 2022, global supply chain issues resulted in delays in procuring components for our products and experienced significant increases in the costs to procure certain components. The extent to which we will have reliable access to supplies that we require or be able to purchase such materials or components at cost effective prices is uncertain. We expect that the global supply chain issues will adversely affect our ability to procure certain components through at least our fiscal year 2023. There is no assurance that we will ever be in a position to realize any material, labor and machinery cost reductions associated with higher purchasing power and higher production levels. Failure to achieve these cost reductions could adversely impact our business and financial results.
We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in supply imbalances that could harm our business.
We maintain a variety of parts and components in inventory to allow us to customize our UAS and UGV products for specific customer requirements, which parts are subject to obsolescence and expiration. Due to the long-lead time for obtaining certain UAS product components, including in response to procurement issues caused by shortages in the supply chain for such components, and the manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our products. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for our products. Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders. Additionally, our failure to manage inventory effectively, including in response to the effects of shortages of our components, could expose us to increased losses.
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Additionally, shortages of components may result in increased inventory of unfinished products and significant quantities of other unused components remaining in inventory, which could expose us to increased risks of obsolescence and losses which may not be covered by insurance.
Due to the volatile and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant injuries, which could adversely affect our financial results.
The development and manufacture of certain of our products involves the handling of a variety of explosive and flammable materials as well as high power equipment. From time to time, these activities may result in incidents that could cause us to temporarily shut down or otherwise disrupt some manufacturing processes, causing production delays and resulting in liability for workplace injuries and/or fatalities. We have safety and loss prevention programs that require detailed reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies, however our insurance coverage may be inadequate to cover all claims and losses related to such incidents. We may experience such incidents in the future, which could result in production delays or otherwise have a material adverse effect on our business and financial condition.
The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our UAS in such environments and harm our business and operating results.
Urban environments may present certain challenges to the operators of UAS. UAS may accidentally collide with other aircraft, persons or property, which could result in injury, death or property damage and significantly damage the reputation of and support for UAS in general. As the usage of UAS has increased, particularly by military customers, the danger of such collisions has increased. Furthermore, the incorporation of our DDL technology into our small UAS has increased the number of vehicles which can operate simultaneously in a given area and with this increase has come an increase in the risk of accidental collision. In addition, obstructions to effective transmissions in urban environments, such as large buildings, may limit the ability of the operator to utilize the aircraft for its intended purpose. The risks or limitations of operating UAS in urban environments may limit their value in such environments, which may limit demand for our UAS and consequently materially harm our business and operating results.
Our quarterly operating results may vary widely.
Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the future due to a number of factors, including the following:
| ● | fluctuations in revenue derived from government contracts, including cost-plus-fee contracts and contracts with a performance-based fee structure; |
| ● | the size and timing of orders from military and other governmental agencies, including increased purchase requests from government customers for equipment and materials in connection with the U.S. government’s fiscal year end, which may affect our quarterly operating results; |
| ● | the mix of products and services that we sell in the period; |
| ● | fluctuations in customer demand for some of our products or services; |
| ● | unanticipated costs incurred in the introduction of new products and services; |
| ● | fluctuations in the adoption of our products and services in new markets; |
| ● | our ability to win additional contracts from existing customers or other contracts from new customers; |
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| ● | cancellations, delays or contract amendments by our U.S. governmental agency and foreign government customers; |
| ● | changes in policy or budgetary measures that adversely affect our U.S. governmental agency and foreign government customers; |
| ● | the cost of complying with various regulatory requirements applicable to our business and the potential penalties or sanctions that could be imposed for non-compliance; and |
| ● | our ability to obtain the necessary export licenses for sales of our products and services to international customers. |
Changes in the volume of products and services provided under existing contracts and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain congressional and presidential approval in a timely manner.
Shortfalls in available external research and development funding could adversely affect us.
We depend on our research and development activities to develop the core technologies used in our products and for the development of our future products. A portion of our research and development activities depends on funding by commercial companies and the U.S. government. U.S. government and commercial spending levels can be impacted by a number of variables, including general economic conditions, specific companies’ financial performance and competition for U.S. government funding with other U.S. government-sponsored programs in the budget formulation and appropriation processes. To the extent that these external sources of funding are reduced or eliminated, company funding for research and development could be reduced. Any reductions in available research and development funding could harm our business, financial condition and operating results.
Unauthorized access to our, our customers’ and/or our suppliers’ information and systems could negatively impact our business.
We face various security threats, including cyber security attacks on our information technology infrastructure, which may include attempts to gain access to our proprietary, financial, banking or classified information, disrupt use of our systems or otherwise compromise the integrity of our operations. Although we utilize various procedures and controls to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficient to prevent physical or cyber access or system disruptions, including the unauthorized release of confidential technical, financial or banking information or corruption of data. Accordingly, any significant operational delays, or any destruction, manipulation or improper use of our data, information systems or networks could adversely affect our financial results and damage our reputation with customers, suppliers and stockholders, and the reputation of our products and services. The occurrence of some of these risks may be increased due to the increase in remote working by our employees, suppliers, contractors and other third parties. Previous cyber-attacks directed at us have not materially impacted our business or financial results, but the impact of future incidents cannot be predicted due to the constantly evolving nature and complexity of cyber-attacks. If we or our partners are subject to data security breaches, whether cyber or due to a failure in physical security protocols, we may have a loss in existing sales and new business opportunities, increased costs arising from remediation of the breach and the restoration or implementation of additional security measures, be subject to regulatory investigations and litigation, including fines and penalties, and face increased insurance or audit requirements in our third party contracts, any of which could materially and adversely affect our business and financial results. Additionally, expenses resulting from cyber security attacks and other security risks may not be fully insured or otherwise mitigated, which could harm our financial results.
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Our work for the U.S. government and international governments may expose us to increased security risks.
As a government contractor, given the enhanced sensitivity of the information we have access to and the nature of our products and services, we are at increased risk of being targeted for cyber and other security attacks, including threats to the physical security of our facilities and employees. In addition, we work in international locations where there are high security risks, which could result in harm to our employees, contractors, and remote assets, and substantial protection or recovery costs. Some of our services are performed in or adjacent to high risk locations where the country or location is experiencing political, social or economic issues, or war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel, our remote assets and our information. As such international locations and the risks associated with them change rapidly, such precautions may be insufficient to avoid such risks including possible possession of our remote assets and related access to our intellectual property by unintended third parties and the possible loss of our personnel in these locations, which could harm our business and operating results.
Our cash may be subject to a risk of loss, and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.
Our assets include a significant amount of cash and investments. We adhere to an investment policy set by our board of directors which aims to preserve our financial assets, maintain adequate liquidity and maximize returns. We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our consolidated financial statements as of April 30, 2022. We currently invest the majority of our cash in U.S. government securities, U.S. government agency securities, municipal bonds and high-grade corporate bonds, the performance of which are subject to additional market risks related to their respective issuers. Nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation. Therefore, our cash and any bank deposits that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity. Our investments are classified as available-for-sale and recorded at fair value each reporting period. Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
Global credit and financial markets have experienced extreme disruptions in recent years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that renewed deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, costlier and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon implementing business initiatives. These events and the continuing market upheavals could adversely affect our business in a number of ways, including:
Potential Deferment of Purchases and Orders by Customers: Uncertainty about current and future global economic conditions may cause governments, including the U.S. government, which is our largest customer, consumers and businesses to modify, defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potential customers to pay us for our products may adversely affect our earnings and cash flow.
Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and
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components from our suppliers. If certain key suppliers were to become capacity constrained or insolvent as a result of a market downturn or disruption, then we may have to find new suppliers, which can result in significant delays in manufacturing and shipping our products to customers and additional costs. See above risk factor “If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business” for more detail on risks related to our supply chain.
Customers’ Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business: Some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products, or otherwise meet their payment obligations to us could adversely impact our financial condition and results of operations. In addition, if a market downturn results in insolvencies for our customers, it could adversely impact our financial condition and results of operations.
Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.
In June 2019, we consummated the acquisition of Pulse Aerospace, LLC. In February 2021 we completed the acquisition of Arcturus and Intelligent Systems Group business segment (“ISG”), and in May 2021 we acquired Telerob. We intend to consider additional acquisitions that could add to our customer base, technological capabilities or system offerings. Acquisitions involve numerous risks, any of which could harm our business, including the following:
| ● | difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of each target company and realizing the anticipated synergies of the combined businesses; |
| ● | difficulties in supporting and transitioning customers, if any, of each target company; |
| ● | diversion of financial and management resources from existing operations; |
| ● | the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity; |
| ● | risks of entering new markets in which we have limited or no experience the complexities of managing a workforce under foreign labor and employment law and related organizational requirements; |
| ● | potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business; |
| ● | assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products or its regulatory compliance; |
| ● | expanded regulatory compliance complexity and risk, including compliance with regulations of foreign jurisdictions; and |
| ● | inability to generate sufficient revenue to offset acquisition costs. |
Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, such as the stock issued as consideration for the purchase of Arcturus, then our existing stockholders may be diluted, which could lower the market price of our common stock. If we finance acquisitions through debt, such as the credit facilities we entered into in connection with the consummation of our acquisition of Arcturus, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility and represent default risk if we are unable to maintain certain financial performance metrics while the debt remains outstanding.
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If we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.
Borrowings under our credit facilities could adversely affect our financial condition and restrict our operating flexibility.
On February 19, 2021, in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement with certain lenders, letter of credit issuers, and others (as amended February 4, 2022, the “Credit Agreement”), which, together with its associated Security and Pledge Agreement, sets forth the terms and conditions of a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and a five-year amortized $200 million term A loan (the “Term Loan Facility”, and together with the Revolving Facility, the “Credit Facilities”). Upon execution of the Credit Agreement, we drew down $200.0 million, the full principal amount of the Term Loan Facility, to partially finance the acquisition of Arcturus.
The Term Loan Facility as amended has a five-year term expiring in February 2026 and bears interest, at our option, either at a secured overnight financing rate (“SOFR”) or a base rate plus a fixed applicable margin dependent on our consolidated leverage ratio under the terms of the agreement. We are required to pay 5.0% of the outstanding obligations under the Term Loan Facility in each of the first four loan years, with the remaining 80.0% payable in the fifth loan year, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the maturity date. The Revolving Facility has a term of 5 years. As of April 30, 2022 we have only letters of credit issued pursuant to the Revolving Facility, totaling $4.2 million.
In support of our obligations under the Credit Facilities, we have granted security interests in substantially all of our personal property and that of our domestic subsidiaries, including a pledge of the equity interests in our subsidiaries (limited to 65% of outstanding equity interests in the case of our foreign subsidiaries), subject to customary exclusions and exceptions. In addition, our domestic subsidiaries, including Arcturus, are required to be guarantors of the Credit Facilities.
In addition, our increased level of indebtedness may have important consequences to us, including:
| ● | increasing our vulnerability to adverse general economic and industry conditions; |
| ● | requiring us to dedicate a portion of our cash flows to the payment of interest and when applicable, principal, on our indebtedness and other obligations thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes; |
| ● | limiting our flexibility in planning for, or reacting to, changes in the economy, the defense industry, and the markets in which we operate; |
| ● | subjecting us to maintenance of various financial covenants and adherence to certain other affirmative and negative covenants, requiring us to seek lender consent or waiver in relation to our financial performance or other potential strategic actions in the future; |
| ● | placing us at a competitive disadvantage compared to our competitors with less indebtedness; |
| ● | exposing us to substantial interest rate risk due to the variable interest rate under the Credit Facilities, such that, if interest rates were to increase substantially during the term of the Credit Facilities, the resulting increase in our interest payment obligations could adversely affect our operating results and our ability to |
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| service the indebtedness under the Credit Facilities; and |
| ● | making it more difficult for us to borrow additional funds in the future to fund our growth, acquisitions, working capital, capital expenditures, and other purposes. |
To the extent we incur additional indebtedness, the risks described above could increase.
If we do not have sufficient funds to repay the Term Loan Facility when it becomes due in 2026, it may be necessary to refinance our debt through additional debt or equity financings. If, at the time of any such refinancing, prevailing interest rates or other factors result in higher interest rates on such refinanced debt, such increases in our interest expense could have an adverse effect on our business, results of operations and financial condition.
The Credit Agreement contains customary events of default, upon the occurrence and during the continuation of which, after any applicable grace period, the lenders would have the ability to declare the loans due and payable in whole or in part. Among other things, if we fail to make required debt payments, or if we fail to comply with financial or other covenants in the Credit Agreement, we would be in default under the terms thereof. The Credit Agreement contains customary negative covenants that include, subject to customary exclusions:
| ● | Restrictions on additional liens on our assets. |
| ● | Restrictions on incurring additional indebtedness. |
| ● | Restrictions on new investments, including acquisitions, mergers, investments in subsidiaries that are not guarantors of the debt, and joint ventures. |
| ● | Restrictions on disposal of assets. |
| ● | Restrictions on payments of cash dividends. |
| ● | Restrictions on changing the nature of our business. |
| ● | A requirement to maintain a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio. |
| ● | Restrictions on changes to our accounting policies. |
| ● | Restrictions on payments of any junior indebtedness. |
To the extent we would wish to engage in any of the prohibited behaviors, we would need to obtain consent under the Credit Agreement, which may not be timely forthcoming or at all. If a default event were to occur, we may not have sufficient available cash to repay such outstanding debt obligations at the time they become due or be able to refinance such debt on acceptable terms or at all.
Any of the foregoing limitations or events could materially and adversely affect our financial condition and results of operations.
Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.
The majority of our research and development and manufacturing operations are located in California in regions known for seismic activity and wildfires. While we maintain insurance coverage to cover certain of risks of losses for damage or destruction to facilities and property and for interruption of our business, such insurance may not cover specific losses and the amount of our insurance coverage may not be adequate to cover all of our losses. A significant natural disaster, such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected, including if our losses are not adequately or timely covered by our insurance.
We face various risks related to the COVID-19 novel coronavirus pandemic and similar public health crises, which may adversely impact our business.
In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China, and has reached multiple other regions and countries, including the United States where our primary
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operations are located. The coronavirus pandemic continues to evolve, and has led to the implementation of various responses and evolving public health safety measures. Although our operations have mostly continued uninterrupted during the COVID-19 outbreak, adoption of work from home protocols, social distancing measures in the workplace, international travel restrictions, vaccine mandates and other responsive actions have required certain changes to our operations. In particular, additional surges in infection rates and resulting travel disruptions, quarantine requirements or other similar logistics restrictions, may further reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations.
Global health concerns, such as the coronavirus pandemic, could result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate. The extent to which COVID-19 will continue to impact our business, financial condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19, new and potentially more contagious variants of the SARS-CoV-2 virus, rates of vaccination, government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which remain highly uncertain.
We cannot presently predict the scope and severity of existing and other potential business disruptions, but if we or any of the third parties with whom we engage, including suppliers and other third parties with whom we conduct business, were to experience prolonged shutdowns or other business disruptions, including a slowdown in the effectiveness of our workforce due to illness or otherwise, our ability to conduct our business in the manner presently planned could be materially and negatively impacted. The COVID-19 outbreak has caused delays in the timing of our customers’ awarding of contracts to us, which has had some negative impact on our business in fiscal year 2022; and there can be no assurances that any further delays would not have a material adverse impact on our business and results of operations in the future.
The COVID-19 pandemic could also cause delays or limits in the ability of our customers to make timely payments to us. Additionally, our government customers may have more limited resources available to purchase our products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic. The future progression of the COVID-19 outbreak and its resulting effects on our business, financial condition and results of operations are uncertain and are continuing to be assessed.
We self-insure a portion of our health insurance program, which may expose us to unexpected costs and negatively affect our results of operations.
We are self-insured for the majority of our employee medical claims, subject to individual and aggregate stop loss insurance policies. We estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by us. However, unanticipated changes in assumptions and management estimates underlying our recorded liabilities for medical claims could result in materially different amounts of expense than expected under our health insurance program, which could have an adverse material impact on our financial condition and results of operations.
Recession, financial and credit market disruptions may adversely affect us.
If another global recession emerges, we may experience declines in revenues, profitability and cash flows from reduced orders, payment delays, collection difficulties, increased price pressures for our products, increased risk of excess and obsolete inventories or other factors caused by the economic problems of our customers. The COVID pandemic has increased volatility and pricing in the capital markets. If negative conditions in the global credit markets prevent our customers from having access to credit or render them insolvent, orders for our products may decrease, which would result in lower revenue. Likewise, if our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses or remaining solvent, they may become unable to offer the materials we use to manufacture our products. An economic or credit crisis could also impact our ability to raise capital when
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needed. These events could adversely impact our ability to manufacture affected products and could also result in reductions in our revenue, increased price competition, and increased operating costs, which could adversely affect our business, financial condition, operational results, and cash flows.
Risks Related to Our U.S. Government Contracts
We are presently classified as a small business defense contractor and the loss of our small business status may adversely affect our ability to compete for small business set-aside US government contracts.
Because we have fewer than 1,500 employees, we are presently classified as a small business defense contractor under our primary North American Industry Classification Systems (“NAICS”) industry and product specific codes (336411 - Aircraft Manufacturing) which are regulated in the United States by the Small Business Administration (“SBA”). Businesses that meet the small business size standard for the relevant NAICS code are able to bid on small business set-aside contracts. While we do not presently derive a substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts which are open to non-small business entities. As we continue to grow and add employees, including through acquisitions, or if NAICS codes are revised, we could cease to qualify as a small business, which could adversely impact our eligibility for special small business programs and limit our ability to partner with other business entities that seek to team with small business entities as may be required under a specific contract. If we outgrow our small business classification, we would not be eligible to serve as the prime contractor on small business set aside programs and may need to implement a small business subcontracting plan with other companies that qualify as a small business, for SBA approval. The loss of our small business classification could have a material adverse effect on our financial position and/or results of operations. Additionally, if we are no longer eligible for the small business exemption from compliance with the full range of Cost Accounting Standards (“CAS”), we would be required to demonstrate compliance with such standards upon the award of a contract subject to the full range of CAS, which will impose additional administrative costs on our business, and may significantly affect the manner in which we conduct our business with our customers and adversely affect our results of operations.
We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.
As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact our revenue, operating costs, profit margins and the internal organization and operation of our business. The most significant regulations and regulatory authorities affecting our business include the following:
| ● | the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under, U.S. government contracts; |
| ● | the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in connection with contract negotiations; |
| ● | the False Claims Act and the False Statements Act, which impose penalties for payments made on the basis of false facts provided to the government and on the basis of false statements made to the government, respectively; |
| ● | the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantage; |
| ● | the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless spectrum allocations upon which UAS depend for operation and data transmission in the United States; |
| ● | the Federal Aviation Administration, which regulates the use of airspace for all aircraft, including UAS operation in the United States; |
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| ● | the International Traffic in Arms Regulations, which regulate the export of controlled technical data, defense articles and defense services and restrict from which countries we may purchase materials and services used in the production of certain of our products; and |
| ● | laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes or determined to be “controlled unclassified information” and the exportation of certain products and technical data. |
Also, we need special security clearances and regulatory approvals to continue working on certain of our projects with the U.S. government. Classified programs generally will require that we comply with various executive orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees and facilities to obtain government security clearances. Our failure to comply with applicable regulations, rules and approvals; changes in the government’s interpretation of such regulations, rules and approvals as have been and are applied to our contracts, proposals or business or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, a decrease in profitability, the loss of our government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which could harm our business, financial condition and results of operations. We are also subject to certain regulations of comparable government agencies in other countries, and our failure to comply with these non-U.S. regulations could also harm our business, financial condition or results of operations.
Our business could be adversely affected by a negative audit or investigation by the U.S. government.
U.S. government agencies, primarily the DCAA and the DCMA, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. These agencies also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, quality, accounting, property, estimating, compensation and management information systems.
Like most government contractors, our contracts are audited and reviewed on a continual basis by the DCMA and the DCAA. The indirect costs we incur in performing government contracts have been audited or have been subject to audit on an annual basis. The audits of our incurred cost claims through fiscal year 2020 have been settled. At April 30, 2022 we had no reserve for open incurred cost claim audits. In addition, non-audit reviews or investigations by the government may still be conducted on all of our government contracts.
Any costs found to be improperly allocated to a specific cost reimbursement contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit or investigation of our business were to uncover improper or illegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, suspension of payments, fines and suspension or debarment from doing business with the U.S. government. We could experience serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if the allegations were inaccurate. In addition, responding to governmental audits or investigations may involve significant expense and divert management attention. If any of the foregoing were to occur, our financial condition and operating results could be materially adversely affected.
Moreover, if any of our administrative processes and business systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete for or perform contracts. In December 2015, DCMA concluded that our purchasing system was not approved. In an April 2016 follow-up review the DCMA approved our purchasing system. The purchasing systems was reviewed and approved again in January 2019. An unfavorable outcome to such an audit or investigation by the DCAA, U.S. Department of Justice (“DOJ”), or other government agency, could materially adversely affect our competitive position, affect our ability to obtain new government business, and obtain the maximum price for our products and services, and result in a substantial reduction of our revenues.
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If we were suspended or debarred from contracting with the federal government generally, or any specific agency, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenue and operating results could be materially harmed. For example, in February 2010, we were notified by the DOJ that it had initiated a civil investigation into our cost charging practices with respect to government contracts. We resolved these claims with the DOJ in October 2013. Under the settlement agreement, we reimbursed the government for an amount erroneously charged to the government in our fiscal 2006 incurred cost claim submittal.
Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete.
Some of our contracts allow the U.S. government to use, royalty-free, or have others use, inventions developed under those contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical data without constraining the recipient on how that data is used. The ability of third parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish alternative suppliers or to negotiate with us to reduce our prices. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us, which could have a material adverse effect on our business, results of operations or financial condition.
U.S. government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business and results of operations.
U.S. government contracts typically involve long lead times for design and development and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated future revenue attributable to that program.
The actual receipt of revenue on awards included in backlog may never occur or may change because a program schedule could change or the program could be canceled, or a contract could be reduced, modified or terminated early.
In addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, at the government’s convenience or for contractor default. Since a substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S. government contracts, the termination of one or more critical government contracts could have a negative impact on our results of operations and financial condition. Termination arising out of our default could result in damage to our reputation, expose us to liability and have a material adverse effect on our ability to re-compete for future contracts and orders. Moreover, several of our contracts with the U.S. government do not contain a limitation of liability provision, creating a risk of responsibility for indirect, incidental damages and consequential damages. These provisions could cause substantial liability for us, especially given the use to which our products may be put.
U.S. government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue.
U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and, in many cases, unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awards through various agency, administrative and judicial channels. We derive significant revenue from U.S. government contracts that were awarded through a competitive bidding process. Much of the business that we expect to
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seek in the foreseeable future likely will be awarded through competitive bidding. Competitive bidding presents a number of risks, including the following:
| ● | the need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns; |
| ● | the substantial cost and managerial time and effort that must be spent to prepare bids and proposals for contracts that may not be awarded to us; |
| ● | the need to estimate accurately the resources and cost structure that will be required to service any contract we are awarded; and |
| ● | the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the delay of our contract performance, the distraction of management, the resubmission of bids on modified specifications, or in termination, reduction or modification of the awarded contract. |
We may not be provided the opportunity to bid on contracts that are held by other companies and are scheduled to expire if the government extends the existing contract. If we are unable to win particular contracts that are awarded through a competitive bidding process, then we may not be able to operate for a number of years in the market for goods and services that are provided under those contracts. If we are unable to win new contract awards over any extended period consistently, then our business and prospects will be adversely affected.
We are subject to procurement rules and regulations, which increase our performance and compliance costs under our U.S. government contracts.
We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things, require certification and disclosure of all cost and pricing data in connection with contract negotiation, define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts, and restrict the use and dissemination of classified information and the exportation of certain products and technical data. These requirements, although customary in U.S. government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Although we believe we have procedures in place to comply with these regulations and requirements, the regulations and requirements are complex and change frequently. Our or our agents’ failure to comply with these regulations and requirements under certain circumstances could lead to suspension or debarment from U.S. government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to receive other U.S. government contract awards in the future.
Risks Related to Legal and Regulatory Requirements
We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S. government authorization regarding the export of our products and services, or if current or future export laws limit or otherwise restrict our business. In addition, failure to comply with export laws could result in fines, export restrictions and other sanctions and penalties.
We must comply with U.S. and other laws regulating the export of our products and services. In some cases, explicit authorization from the relevant U.S. government authorities is needed to export our products and services. The export regulations and the governing policies applicable to our business are subject to change. We cannot provide assurance that such export authorizations will be available for our products and services in the future. Compliance with these laws has not significantly limited our operations or our sales in the recent past but could significantly limit them in the future. We maintain an export compliance program but there are risks that our compliance controls may be ineffective. In November 2019, we entered into a consent agreement (the “Consent Agreement”) with the U.S. Department of State’s Directorate of Defense Trade Controls Office of Defense Trade Controls Compliance to resolve
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various alleged violations of the Armed Export Control Act and the International Traffic in Arms Regulations (“ITAR”) that occurred between June 2014 and December 2016. The Consent Agreement, under which we are currently operating, provides for, among other things: (i) a civil penalty of $1,000,000 payable in installments, $500,000 of which was suspended on the condition that such amount be used future remedial compliance costs over the term of the Consent Agreement and/or credited against prior compliance enhancement costs already expended by us; (ii) the appointment of an external Special Compliance Officer for a minimum of one year to oversee our compliance with the Consent Agreement and ITAR; and (iii) one external audit of our compliance with the Consent Agreement and ITAR. The $500,000 suspension amount was satisfied by our compliance program remediation efforts during our fiscal year ended April 30, 2021. Our failure to comply with the terms of the Consent Agreement or export laws and regulations in general can subject us to additional fines, penalties and sanctions, including suspension of export privileges, which could have a material adverse impact on our business, operations and financial condition and limit or prevent us from being able to sell our products in certain international jurisdictions.
Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on the use of small UAS and MUAS in response to public privacy concerns, may prevent us from expanding the sales of our small UAS and MUAS to non-military customers in the United States.
The regulation of small UAS and MUAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is uncertain. In 2006, the FAA issued a clarification of its existing policies stating that, in order to engage in commercial use of small UAS and MUAS in the U.S. National Airspace System, a public operator must obtain a COA from the FAA or fly in restricted airspace. The FAA’s COA approval process requires that the public operator certify the airworthiness of the aircraft for its intended purpose, that a collision with another aircraft or other airspace user is extremely improbable, that the small unmanned aircraft system complies with appropriate cloud and terrain clearances and that the operator or spotter of the small unmanned aircraft system is generally within one half-mile laterally and 400 feet vertically of the small unmanned aircraft system while in operation. Furthermore, the FAA’s clarification of existing policy stated that the rules for radio-controlled hobby aircraft do not apply to public or commercial use of small UAS and MUAS.
On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to allow expanded use of small UAS and MUAS for both public and commercial applications. On June 21, 2016, the FAA released its final rules regarding the routine use of certain small UAS (under 55 pounds) in the U.S. National Airspace System pursuant to the act (the “Part 107 Rules”). The Part 107 Rules, which became effective in August 2016, provided safety regulations for small UAS conducting non-recreational operations and contain various limitations and restrictions for such operations, including a requirement that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS. Additionally, in December 2019 and January 2020, the FAA proposed rules regarding remote UAS identification and a new policy regarding the airworthiness certification of a newly created special class of UAS. It is unclear when, if ever, the FAA will create a new class of UAS and what the final rules regarding the certification of such new class of UAS will state. We cannot assure you that the Part 107 Rules, or any final rules enacted in furtherance on the FAA’s recently announced proposals, will result in the expanded use of our small UAS and MUAS by law enforcement or other non-military government agencies or commercial entities and we may not be able to expand our sales of small UAS and MUAS beyond our military customers, which could harm our business prospects.
In addition, there exists public concern regarding the privacy implications of U.S. commercial and law enforcement use of small UAS. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small UAS and MUAS by non-military customers.
Our business may be dependent upon our employees obtaining and maintaining required security clearances, as well as our ability to obtain security clearances for the facilities in which we perform sensitive government work.
Certain of our U.S. government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with DoD requirements. The DoD has strict security clearance requirements for personnel who work on classified programs. Obtaining and
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maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts.
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Our future profitability may be dependent upon achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products. Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.
We have limited experience manufacturing small UAS and tactical missile systems in high volume. We do not know whether or when we will be able to develop efficient, low‑cost manufacturing capabilities and processes that will enable us to manufacture (or contract for the manufacture of) these products in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities in locations that can efficiently service our markets could have a material adverse effect on our business, financial condition, results of operations and prospects. Our future profitability is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to experience a sharp increase in demand for their products. As a result, we may not have reliable access to supplies that we require or be able to purchase such materials or components at cost effective prices. There is no assurance that we will ever be in a position to realize any material, labor and machinery cost reductions associated with higher purchasing power and higher production levels. Failure to achieve these cost reductions could adversely impact our business and financial results.
We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in product recalls or supply imbalances that could harm our business.
We maintain a variety of parts and components in inventory to allow us to customize our UAS products for specific customer requirements, which parts are subject to obsolescence and expiration. Due to the long‑lead time for obtaining certain UAS product components and the manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our products. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for our products. Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write‑downs of finished products and materials on‑hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders.
Due to the volatile and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant injuries, which could adversely affect our financial results.
The development and manufacture of certain of our products involves the handling of a variety of explosive and flammable materials as well as high power equipment. From time to time, these activities may result in incidents that could cause us to temporarily shut down or otherwise disrupt some manufacturing processes, causing production delays and resulting in liability for workplace injuries and/or fatalities. We have safety and loss prevention programs that require detailed reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies, however our insurance coverage may be inadequate to cover all claims and losses related to such incidents. We may experience such incidents in the future, which could result in production delays or otherwise have a material adverse effect on our business and financial condition.
The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our UAS in such environments and harm our business and operating results.
Urban environments may present certain challenges to the operators of UAS. UAS may accidentally collide with other aircraft, persons or property, which could result in injury, death or property damage and significantly damage the reputation of and support for UAS in general. As the usage of UAS has increased, particularly by military customers, the danger of such collisions has increased. Furthermore, the incorporation of our DDL technology into our small UAS has increased the number of vehicles which can operate simultaneously in a given area and with this increase has come an increase in the risk of accidental collision. In addition, obstructions to effective transmissions in urban environments,
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such as large buildings, may limit the ability of the operator to utilize the aircraft for its intended purpose. The risks or limitations of operating UAS in urban environments may limit their value in such environments, which may limit demand for our UAS and consequently materially harm our business and operating results.
As a manufacturer of commercial UAS, we are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business.
As a manufacturer of consumer products, we are subject to significant government regulations, including, in the United States, those issued under the Consumer Products Safety Act, as well as those issued under product safety and consumer protection statutes in our international markets. Failure to comply with any applicable product safety or consumer protection regulation could result in sanctions that could have a negative impact on our business, financial condition and results of operations.
Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future and may also increase the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or more of our customers might require changes in our products, such as the non‑usenon-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our business. Similarly, increased penalties for non‑compliancenon-compliance could subject us to greater expenses in the event any of our products were found to not comply with such regulations. Such increased costs or penalties could harm our business.
We could be the subject of future product liability suits or product recalls, which could harm our business.
We may be subject to involuntary product recalls or may voluntarily conduct a product recall. The costs associated with any future product recalls could be significant. In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations. Subject to a determination of the appropriateness of any recall, we remain responsible for the non-warranty costs from the recall of completed products we manufactured, sold or serviced prior to closing of the sale of our EES Business to Webasto. In particular, on August 24, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration (“NHTSA”) that named us as a brand of the affected equipment. To the extent we are obligated under the terms of the Purchase Agreement with Webasto or as a result of the lawsuit filed by Webasto against us seeking costs related to the recall or pursuant to applicable law for all or any portion of the costs incurred in connection with such recall, or any other such recall, our results of operations may be negatively affected.
In addition to government regulation, products that have been or may be developed by us may expose us to potential liability from personal injury or property damage claims by the users of such products. There can be no assurance that a claim will not be brought against us in the future, regardless of merit. While we maintain insurance coverage for product liability claims, our insurance may be inadequate to cover any such claims. Any successful claim or material settlement of such claims could significantly harm our business, financial condition and results of operations.
We are subject to pending legal proceedings that may disrupt our business, cause us to incur substantial costs, expose us to significant legal liabilities and could have a material adverse impact on our financial performance.
We are subject to various legal proceedings and claims, including a lawsuit filed by a former employee alleging claims arising out of the termination of his employment and a lawsuit filed by Webasto alleging several claims against us arising out of or related to our sale of our EES Business to Webasto in June 2018 and the NHTSA recall. Additionaladditional lawsuits may arise in the future. Occasionally we are also involved in governmental inquiries and investigations and administrative and regulatory proceedings. Our activities relating to defending and responding to any such proceedings may result in substantial legal expenses, may disrupt our sales and marketing or other business activities, including our relationships with our customers, suppliers, employees and other third parties, and divert management’s and our employees’ attention from our day-to-day operations, which may have an adverse impact on our financial performance. The results of any such proceedings are unpredictable. We record accruals for liabilities where we believe a loss is probable and reasonably estimable, including when negotiating settlement where appropriate in response to such claims, however, our actual losses may differ significantly from our interim estimates. An adverse
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or unfavorable resolution of any proceedings against us could have a material impact on our financial position, cash flows and results of operations.
Our quarterly operating results may vary widely.
Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the future due to a number of factors, including the following:
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Changes in the volume of products and services provided under existing contracts and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start‑up and early stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain congressional and presidential approval in a timely manner.
Shortfalls in available external research and development funding could adversely affect us.
We depend on our research and development activities to develop the core technologies used in our UAS products and for the development of our future products. A portion of our research and development activities depends on funding by commercial companies and the U.S. government. U.S. government and commercial spending levels can be impacted by a number of variables, including general economic conditions, specific companies’ financial performance and competition for U.S. government funding with other U.S. government‑sponsored programs in the budget formulation and appropriation processes. To the extent that these external sources of funding are reduced or
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eliminated, company funding for research and development could be reduced. Any reductions in available research and development funding could harm our business, financial condition and operating results.
Our work for the U.S. government and international governments may expose us to security risks.
As a U.S. government contractor, we face various security threats, including cyber security attacks on our information technology infrastructure, attempts to gain access to our proprietary, financial, banking or classified information as well as threats to the physical security of our facilities and employees. Although we utilize various procedures and controls to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficient to prevent disruptions, the unauthorized release of confidential technical, financial or banking information or corruption of data. Accordingly, any significant operational delays, or any destruction, manipulation or improper use of our data, information systems or networks could adversely affect our financial results and damage the reputation for our products and services. Previous cyber-attacks directed at us have not materially impacted our business or financial results, but the impact of future incidents cannot be predicted due to the evolving nature and complexity of cyber-attacks. If we or our partners are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could materially and adversely affect our business and financial results. Additionally, expenses resulting from cyber security attacks and other security risks may not be fully insured or otherwise mitigated, which could harm our financial results.
In addition, we work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs. Some of our services are performed in or adjacent to high‑risk locations, such as Iraq and Afghanistan, where the country or location is experiencing political, social or economic issues, or war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we may in the future be negatively impacted by the loss of employees and contractors, which could harm our business and operating results.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.
We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, then we may need additional financing to pursue our business strategies, including to:
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If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly‑issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. Our former line of credit contained, and future debt financing may contain, covenants or other provisions that limit our operational or financial flexibility. In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts.
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Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.
Our assets include a significant amount of cash and investments. We adhere to an investment policy set by our Board of Directors which aims to preserve our financial assets, maintain adequate liquidity and maximize returns. We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our consolidated financial statements as of April 30, 2019. We currently invest the majority of our cash in U.S. government securities, U.S. government agency securities, municipal bonds and high-grade corporate bonds, the performance of which are subject to additional market risks related to their respective issuers. Nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation, or the FDIC. Therefore, our cash and any bank deposits that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity. In the future, should we determine that there is a decline in value of any of our portfolio securities which is not temporary in nature, this would result in a loss being recognized in our consolidated statements of operations.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
Global credit and financial markets have experienced extreme disruptions in recent years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that renewed deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon implementing business initiatives. These events and the continuing market upheavals could adversely affect our business in a number of ways, including:
Potential Deferment of Purchases and Orders by Customers: Uncertainty about current and future global economic conditions may cause governments, including the U.S. government, which is our largest customer, consumers and businesses to modify, defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potential customers to pay us for our products may adversely affect our earnings and cash flow.
Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our hardware components and various subsystems are available only from a limited group of suppliers. If certain key suppliers were to become capacity constrained or insolvent as a result of a market downturn, then we may have to find new suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources or are required to redesign our products. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all. In addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow.
Customers’ Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business: Some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products, or otherwise meet their payment obligations to us could adversely impact our financial condition and results of operations. In addition, if a
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market downturn results in insolvencies for our customers, it could adversely impact our financial condition and results of operations.
Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.
In June 2019, we consummated the acquisition of Pulse Aerospace, LLC, a Kansas based developer of VTOL UAS. We intend to consider additional acquisitions that could add to our customer base, technological capabilities or system offerings. Acquisitions, including the acquisition of Pulse Aerospace, involve numerous risks, any of which could harm our business, including the following:
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Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, then our existing stockholders may be diluted, which could lower the market price of our common stock. If we finance acquisitions through debt, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility.
If we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.
Environmental laws and regulations and unforeseen costs could impact our future earnings.
The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. For example, we obtain a significant number of our electronics components from companies located in East Asia, where environmental rules may be less stringent than in the United States. Over time, the countries where these companies are located may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs. Given the increasing focus on environmental compliance by regulators and the general public, any incidence of non‑compliance could result in damage to our reputation beyond the fines and other sanctions that could be imposed. Furthermore, certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not
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responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are later found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. Although we have never been named a responsible party at a contaminated site, we could be named a potentially responsible party in the future. We cannot assure you that such existing laws or future laws will not have a material adverse effect on our future earnings or results of operations.
Our business is subject to federal, state and international laws regarding data protection, privacy, and information security, as well as confidentiality obligations under various agreements, and our actual or perceived failure to comply with such obligations could damage our reputation, expose us to litigation risk and adversely affect our business and operating results.
In connection with our business, we receive, collect, process and retain certain sensitive and confidential customer information. As a result, we are subject to increasingly rigorous federal, state and international laws regarding privacy and data protection. Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the United States Federal Trade Commission or FTC,(“FTC”) and various state, local and foreign bodies and agencies. We also execute confidentiality agreements with various parties under which we are required to protect their confidential information.
The United States federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data. Additionally, many foreign countries and governmental bodies, and other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personal information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Such laws and regulations may require companies to implement new privacy and security policies, permit individuals to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact of such future laws, regulations and standards may have on our business. For example, in June 2018, California passed the California Consumer Privacy Act, or CCPA, which became effective in 2020, provides new data privacy rights for consumers and new operational requirements for companies effective in 2020.companies. Additionally, we expect that existing laws, regulations and standards may be interpreted differently in the future. There remains significant uncertainty surrounding the regulatory framework for the future of personal data transfers from the European Union to the United States with regulations such as the recently adopted General Data Protection Regulation or GDPR,(“GDPR”), which imposes more stringent E.U. data protection requirements, provides an enforcement authority, and imposes large penalties for noncompliance.noncompliance, including for the transfer of personal data between AeroVironment and its recently acquired German subsidiary, Telerob. Future laws, regulations, standards and other obligations, including the adoption of the GDPR, as well as changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect, use or disclose information relating to individuals, which could decrease demand for our products, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.
Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, such laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our products. As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards,
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contractual obligations and other legal obligations, and our efforts to do so may cause us to incur significant costs or require changes to our business practices, which could adversely affect our business and operating results. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personal information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability
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to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.
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Environmental laws and regulations and unforeseen costs, including in response to climate change, could impact our future earnings.
The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. For example, we obtain a significant number of our electronics components from companies located in East Asia, where environmental rules may be less stringent than in the United States. Over time, the countries where these companies are located may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs. Given the increasing focus on environmental compliance by regulators and the general public, any incidence of non-compliance could result in damage to our reputation beyond the fines and other sanctions that could be imposed. Furthermore, certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are later found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. Although we have never been named a responsible party at a contaminated site, we could be named a potentially responsible party in the future.
The increasing global focus on climate change, including greenhouse gas (“GHG”) emissions, has resulted in legislative and regulatory efforts to address the causes and impacts of climate change. New and more strict laws and regulations to reduce GHG emissions and address other aspects of climate change, including carbon taxes, cap and trade programs, GHG reduction requirements, requirements for the use of green energy, and changes in procurement requirements, may result in increased operational and compliance obligations, which could adversely affect our financial condition and results of operations. Such laws and regulations could result in increased energy costs and costs to upgrade our facilities or change our manufacturing processes. Additionally, our suppliers may also face similar increased costs, which could result in them increasing the costs of components for our products and development programs. Changes to government procurement laws, including proposed changes to the Federal Acquisition Regulations, designed to require climate risk and GHG emissions to be taken into account in the procurement process could result in increased costs to change our operations and manufacturing processes to ensure we remain competitive in the bidding process. We cannot predict the materiality of any potential additional costs associated with complying with such laws and regulations or whether we could raise prices to account for any such additional costs. Any non-compliance could negatively affect our reputation, our ability to compete in competitive bidding processes, including with the U.S. government, and our ability to sell our products and services. We cannot assure you that such existing laws or future laws addressing environmental concerns, including climate change, will not have a material adverse effect on our future earnings or results of operations.
Compliance with the SEC’s conflict minerals regulations may increase our costs and adversely impact the supply‑chainsupply-chain for our UAS products.
In August 2012, the SEC adopted disclosure rules regarding a company’s use of conflict minerals in its products with substantial supply chain verification requirements in the event that the conflict minerals come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements will imposehave imposed additional costs on us and on our suppliers, including costs related to determining the source of conflict minerals used in our products, which willmay adversely affect our results of operations. We are dependent on information supplied by our first tier suppliers in conducting due diligence into the origins of conflict minerals in our products and in complying with our SEC reporting obligations. To the extent that information we receive from our suppliers is inaccurate or inadequate, we may not be able to determine whether our products are conflict mineral‑free.mineral-free. We may face challenges in satisfying our customers who may require that our products be certified as conflict mineral‑free,mineral-free, which could place us at a competitive disadvantage and could harm our business. These regulations could
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also have the effect of limiting the pool of suppliers from which we source items containing conflict minerals, and we may be unable to obtain conflict‑freeconflict-free minerals at competitive prices, if at all, which could increase our costs and adversely affect our results of operations.
Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.
Our corporate headquarters, research and development and manufacturing operations are located in Southern California, a region known for seismic activity and wild fires. A significant natural disaster, such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected.
We self-insure a portion of our health insurance program which may expose us to unexpected costs and negatively affect our results of operations.
We are self-insured for employee medical claims, subject to individual and aggregate stop loss insurance policies. We estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by us. However, unanticipated changes in assumptions and management estimates underlying our recorded liabilities for medical claims could result in materially different amounts of expense than expected under our health insurance program, which could have an adverse material impact on our financial condition and results of operations.
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Risks Related to Our U.S. Government Contracts
We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.
As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact our revenue, operating costs, profit margins and the internal organization and operation of our business. The most significant regulations and regulatory authorities affecting our business include the following:
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Also, we need special security clearances and regulatory approvals to continue working on certain of our projects with the U.S. government. Classified programs generally will require that we comply with various executive orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees and facilities to obtain government security clearances. Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, the loss of our government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which could harm our business, financial condition and results of operations. We are also subject to certain regulations of comparable government agencies in other countries, and our failure to comply with these non‑U.S. regulations could also harm our business, financial condition or results of operations.
Our business could be adversely affected by a negative audit or investigation by the U.S. government.
U.S. government agencies, primarily the DCAA and the DCMA, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. These agencies also may review the adequacy of, and a contractor’s
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compliance with, its internal control systems and policies, including the contractor’s purchasing, quality, accounting, property, estimating, compensation and management information systems.
Like most government contractors, our contracts are audited and reviewed on a continual basis by the DCMA and the DCAA. The indirect costs we incur in performing government contracts have been audited or have been subject to audit on an annual basis. The audit of our 2010 incurred cost claim was settled in April 2016 without payment of any consideration. Our incurred cost claims for fiscal years 2011 through 2014 were accepted as submitted during the fiscal year ended April 30, 2017. Our 2016 and 2017 rates claims were accepted without audit during the fiscal year ended April 30, 2019 without payment of any consideration. At April 30, 2019 we had $0.1 million reserved for open incurred cost claim audits. In addition, non‑audit reviews or investigations by the government may still be conducted on all of our government contracts.
Any costs found to be improperly allocated to a specific cost reimbursement contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit or investigation of our business were to uncover improper or illegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, suspension of payments, fines and suspension or debarment from doing business with the U.S. government. We could experience serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if the allegations were inaccurate. In addition, responding to governmental audits or investigations may involve significant expense and divert management attention. If any of the foregoing were to occur, our financial condition and operating results could be materially adversely affected.
Moreover, if any of our administrative processes and business systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete for or perform contracts. In December 2015, DCMA concluded that our purchasing system was not approved. In an April 2016 follow-up review the DCMA approved our purchasing system. The purchasing systems was reviewed and approved again in January 2019. An unfavorable outcome to such an audit or investigation by the DCAA, U.S. Department of Justice or DOJ, or other government agency, could materially adversely affect our competitive position, affect our ability to obtain new government business, and obtain the maximum price for our products and services, and result in a substantial reduction of our revenues.
If we were suspended or debarred from contracting with the federal government generally, or any specific agency, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenue and operating results could be materially harmed. For example, in February 2010, we were notified by the DOJ that it had initiated a civil investigation into our cost charging practices with respect to government contracts. We resolved these claims with the DOJ in October 2013. Under the settlement agreement, we reimbursed the government for an amount erroneously charged to the government in our fiscal 2006 incurred cost claim submittal.
Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete.
Some of our contracts allow the U.S. government to use, royalty‑free, or have others use, inventions developed under those contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical data without constraining the recipient on how those data are used. The ability of third parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish alternative suppliers or to negotiate with us to reduce our prices. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us, which could have a material adverse effect on our business, results of operations or financial condition.
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U.S. government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business and results of operations.
U.S. government contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated future revenue attributable to that program.
The actual receipt of revenue on awards included in backlog may never occur or may change because a program schedule could change or the program could be canceled, or a contract could be reduced, modified or terminated early.
In addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, at the government’s convenience or for contractor default. Since a substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S. government contracts, the termination of one or more critical government contracts could have a negative impact on our results of operations and financial condition. Termination arising out of our default could result in damage to our reputation, expose us to liability and have a material adverse effect on our ability to re‑compete for future contracts and orders. Moreover, several of our contracts with the U.S. government do not contain a limitation of liability provision, creating a risk of responsibility for indirect, incidental damages and consequential damages. These provisions could cause substantial liability for us, especially given the use to which our products may be put.
U.S. government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue.
U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and, in many cases, unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awards through various agency, administrative and judicial channels. We derive significant revenue from U.S. government contracts that were awarded through a competitive bidding process. Much of the UAS business that we expect to seek in the foreseeable future likely will be awarded through competitive bidding. Competitive bidding presents a number of risks, including the following:
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We may not be provided the opportunity to bid on contracts that are held by other companies and are scheduled to expire if the government extends the existing contract. If we are unable to win particular contracts that are awarded through a competitive bidding process, then we may not be able to operate for a number of years in the market for goods and services that are provided under those contracts. If we are unable to win new contract awards over any extended period consistently, then our business and prospects will be adversely affected.
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We are subject to procurement rules and regulations, which increase our performance and compliance costs under our U.S. government contracts.
We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things, require certification and disclosure of all cost and pricing data in connection with contract negotiation, define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost‑based U.S. government contracts, and restrict the use and dissemination of classified information and the exportation of certain products and technical data. These requirements, although customary in U.S. government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Although we believe we have procedures in place to comply with these regulations and requirements, the regulations and requirements are complex and change frequently. Our or our agents’ failure to comply with these regulations and requirements under certain circumstances could lead to suspension or debarment from U.S. government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to receive other U.S. government contract awards in the future.
Risks Related to Our Intellectual Property
If we fail to protect, or incur significant costs in defending or enforcing our intellectual property and other proprietary rights, our business, financial condition and results of operations could be materially harmed.
Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. In addition, the U.S. government has licenses under certain of our patents and certain other intellectual property that are developed or used in performance of government contracts, and it may use or authorize others to use such patents and intellectual property for government and other purposes. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and our rights may be challenged by third parties. The laws of countries other than the United States may be even less protective of our intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave our employment to work for one of our competitors, then they may disseminate this proprietary information, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed. From time to time, we have initiated lawsuits to protect our intellectual property and other proprietary rights. Pursuing these claims is time consuming and expensive and could adversely impact our results of operations.
In addition, affirmatively defending our intellectual property rights and investigating whether any of our products or services violate the rights of others may entail significant expense. Our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail.
We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time‑consumingtime-consuming and limit our ability to use certain technologies in the future.
We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. Defending against, or otherwise addressing, any such claims, whether they are with or without merit, could be time‑consumingtime-consuming and expensive, and could divert our management’s attention away from the
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execution of our business plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to: obtain from the third party asserting the claim a license on commercially reasonable terms, if at all; develop alternative technology on a timely basis, if at all; or obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.
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Risks Relating to Securities Markets and Investment in Our Stock
The price of our common stock may fluctuate significantly.
The market prices for securities of emerging technology companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including the following:
| U.S. government spending levels, both generally and by our particular customers; |
| the volume of operational activity by the U.S. military; |
| delays in the payment of our invoices by government payment offices, resulting in potentially reduced earnings during a particular fiscal quarter; |
| announcements of new products or technologies, commercial relationships or other events relating to us or our industry or our competitors; |
| failure of any of our key products to gain market acceptance; |
| variations in our quarterly operating results; |
| perceptions of the prospects for the markets in which we compete; |
| changes in general economic conditions; |
| changes in securities analysts’ estimates of our financial performance; |
| regulatory developments in the United States and foreign countries; |
| fluctuations in stock market prices and trading volumes of similar companies; |
| news about the markets in which we compete or regarding our competitors; |
| terrorist acts or military action related to international conflicts, wars or otherwise; |
| media coverage regarding our products and services; |
● | sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and |
| additions or departures of key personnel. |
In addition, the equity markets in general, and NASDAQ in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies.
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Further, the market prices of securities of emerging technology companies have been particularly volatile. These broad market and industry factors may affect the market price of our common stock adversely, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation often has been instituted against that company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.
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We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.
We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, then we may need additional financing to pursue our business strategies, including to:
| ● | hire additional engineers and other personnel; |
| ● | develop new or enhance existing products and services; |
| ● | enhance our operating infrastructure; |
| ● | fund working capital requirements; |
| ● | acquire complementary businesses or technologies; or |
| ● | otherwise respond to competitive pressures. |
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We have obtained capital from the Credit Facilities noted above including the Term Loan Facility and Revolving Facility. We cannot assure you that additional financing will be available on terms favorable to us, or at all. Our current Credit Facilities contain, and future debt financing may contain, covenants or other provisions that limit our operational or financial flexibility. In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts.
Our management, whose interests may not be aligned with yours, is able to exert significant influence over all matters requiring stockholder approval.
As of June 19, 2019,22, 2022, our directors, executive officers and their affiliates collectively beneficially owned 2,642,163394,855 shares, or approximately 11%2%, of our total outstanding shares of common stock. Accordingly, our directors and executive officers as a group may be able to exert significant influence over matters requiring stockholder approval, including the election of directors. The interests of our directors and executive officers may not be fully aligned with yours. Although there is no agreement among our directors and executive officers with respect to the voting of their shares, this concentration of ownership may delay, defer or even prevent a change in control of our company, and make transactions more difficult or impossible without the support of all or some of our directors and executive officers. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then‑prevailingthen-prevailing market price for shares of our common stock.
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Failure to establish and maintain effective internal control over financial reporting could adversely affect our financial results.
It is management’s responsibility to establish and maintain effective internal control in order to provide reasonable assurance regarding the financial reporting soundness for external purposes. Internal control over financial reporting is not intended to impart absolute assurance that the Company can prevent or detect misstatements of its financial statement or fraud due to its inherent limitations.
As of April 30, 2022, our management determined that the Company’s internal control over financial reporting was not effective due to certain identified material weaknesses. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management identified deficiencies related to inadequate design and operation of certain controls at certain newly acquired businesses. Specifically, management did not effectively select and develop certain information technology (“IT”) general controls related to access and change management controls that led to deficiencies in the design and operation of control activities, including segregation of duties. The Company also had deficiencies in the design and operation of account reconciliations at certain newly acquired businesses. These deficiencies and a lack of sufficient resources contributed to the potential for there to have been material errors related to certain newly acquired businesses in the Company’s financial statements. While these deficiencies did not result in any material misstatements of the Company’s consolidated financial statements, they did collectively represent a material weakness in internal control over financial reporting. Additional information about the nature of these material weaknesses and how we are remediating and addressing them is provided in Item 9A.- “Controls and Procedures.”
Although the current material weaknesses identified did not result in a need to restate any prior period financial statements, if the current material weaknesses are not remediated in full, or if additional material weaknesses or significant deficiencies in the Company’s internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate financial results. Further, because of ongoing changes in our operations and business condition and changes in accounting rules and regulations, even our remediation of the current material weaknesses will not remove the need to timely assess such changes and develop additional updates to our internal controls from time to time. The failure to maintain an effective system of internal control over financial reporting could limit our ability to report its financial results accurately and in a timely manner or to detect and prevent fraud, which could cause a loss of investor confidence in our reporting, depress our stock price, adversely limit our liquidity and access to the capital markets and we may be unable to maintain compliance with applicable stock exchange listing requirements and debt covenant requirements.
Delaware law and anti‑takeoveranti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could make it more difficult to acquire us and limit your ability to sell your shares at a premium.
Our certificate of incorporation and bylaws contain certain provisions that reduce the probability of a change of control or acquisition of our company, even if such a transaction would be beneficial to our stockholders. These provisions include, but are not limited to:
| the ability of our board of directors to issue preferred stock in one or more series of with such rights, obligations and preferences as the board may determine, without further vote or action by our stockholders; |
| advanced notice procedures for stockholders to nominate candidates for election to the board of directors and for stockholders to submit proposals for consideration at a meeting of stockholders; |
| the absence of cumulative voting rights for our stockholders; |
| the classification of our board of directors, which effectively prevents stockholders from electing a majority of the directors at any one annual meeting of stockholders; |
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| the limitation that directors may be removed only for cause by the affirmative vote of the holders of 662/3% of the total voting power of all of our outstanding securities entitled to vote in the election of directors, voting together as a single class; and |
| restrictions on the ability of our stockholders to call a special meeting of stockholders. |
We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly‑heldpublicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three‑yearthree-year period following the date that such stockholder became an interested stockholder. This statute, as well as the provisions in our organizational documents, could have the effect of delaying, deterring or preventing certain potential acquisitions or a change in control of us.
Significant inflation could adversely affect our business and financial results.
Although historically our operations have not been materially affected by inflation and we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs, the rate of current inflation and resulting pressures on our costs and pricing could adversely impact our business and financial results. Inflation can adversely affect us by increasing our operating costs, including our materials, freight and labor costs, which are already under pressure due to supply chain constraints and the continuing effects of the COVID-19 pandemic. As interest rates rise to address inflation, such increases will also impact the base rates applicable in our credit arrangements and will result in borrowed funds becoming more expensive to us over time; similar financing pressures from inflation also can have a negative impact on customers’ willingness to purchase our products in the same volumes and at the same rates as previously anticipated. In a highly inflationary environment, we may be unable to raise the sales prices of our products at or above the rate of inflation, which could reduce our profit margins having a material adverse effect on our financial performance.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
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All of our facilities are leased. Our corporate headquarters are located in Simi Valley, CaliforniaArlington, Virginia where we lease approximately 85,0002,000 square feet under an agreement expiring in May 2020.November 2024. We also lease an additional 105,000a total of approximately 280,000 square feet of space in Simi Valley, California, which lease expires in 2022,leases expire between 2025 and 2027, and approximately 150,000 square feet of space in Moorpark, California, which lease expires in 2023, used for administration and to design, engineer, test and manufacture UAS. We also lease other facilities in California, Alabama, Kansas, Massachusetts, Pennsylvania, Minnesota, Virginia, and VirginiaStuttgart, Germany that are used for administration, research and development, logistics, testing and manufacturing. We believe that
As of April 30, 2022, our facilities are adequate to meet our needs for the foreseeable future.
In January 2019 we exercised our one-time right of early termination to terminate our lease for our facilities in Monrovia, California effective January 15, 2020. Allbusiness segments had significant operations and personnel located at the Monrovia facilities will be transferred to our other facilities in Simi Valley, California.following locations:
| ● | Small UAS, TMS and HAPS: Simi Valley, CA; Moorpark, CA; Huntsville, AL; Lawrence, KS; Wilmington, MA; and Minneapolis, MN. |
| ● | MUAS: Petaluma, CA and Rohnert Park, CA. |
| ● | UGV: Stuttgart, Germany and Eerie, PA. |
| ● | Corporate: Arlington, VA, Moorpark, CA and Simi Valley, CA. |
Item 3. Legal Proceedings.Proceedings.
On April 18, 2018, a former employee of AeroVironment, Mark Anderson, filed a lawsuit against us and Wahid Nawabi, our President and Chief Executive Officer, in the Superior Court of the State of California for the County of Los Angeles. Mr. Anderson’s claims include whistle blower retaliation, race discrimination and wrongful termination related to the termination of his employment with the Company. Mr. Nawabi was subsequently dismissed as an individual defendant from all claims in the lawsuit. The case is currently proceeding through discovery, including depositions. Mr. Anderson is seeking special damages, general damages, punitive damages, attorneys’ fees and other relief the court deems just and proper. We believe the complaint contains legal claims that are without merit and will defend ourselves vigorously.
On February 22, 2019, Webasto Charging Systems, Inc. (“Webasto”) filed a lawsuit, which was subsequently amended on April 5, 2019, against us in Delaware Superior Court, arising from the sale of the EES divisionBusiness to Webasto in June 2018. The lawsuit generally allegesalleged several claims against us for breach of contract, indemnity, declaratory
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judgment, and fraud and misrepresentation, including allegations regarding inaccuracy of certain diligence disclosures, financial disclosures, failure to provide certain consents to contract assignments and related to the previously announced recall. In order to avoid the future cost, expense, and distraction of continued litigation, we executed a written settlement agreement with Webasto seeks to recover the costs of the recall and other damages totaling over $100 million in addition to attorneys’ fees, costs, and punitive damages. Additionally, Webasto is seeking a declaratory judgment thateffective December 16, 2021, under which we did not meetadmit to any fault or wrongdoing and fully settled all claims in the requirements to receivelawsuit. Further, the additional $6.5 million ofsettlement eliminates future warranty and indemnity claims against the purchase price whichcompany by Webasto. The lawsuit was held back at the closing of the transaction. dismissed on December 28, 2021.
On May 20, 2019 weAugust 9, 2021, a former employee filed a motionclass action complaint against AeroVironment in California Superior Court in Los Angeles, California alleging various claims pursuant to dismiss certain claims regarding the recall and claimsCalifornia Labor Code related to Webasto’s post-closing cancellationwages, meal breaks, overtime and other recordkeeping matters. The complaint seeks a jury trial and payment of an assigned contract. A hearing regarding the motionvarious alleged unpaid wages, penalties, interest and attorneys’ fees in unspecified amounts. We filed our answer on December 16, 2021. Discovery in this lawsuit has begun and is scheduled for July 17, 2019. Our initial evaluation is that many of the allegations are meritless and that we lack sufficient information to fully analyze other allegations at this time.ongoing. We intendcontinue to mount a vigorous defense.
We are subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.
Item 4. Mine Safety Disclosure.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock
On June 19, 2019,22, 2022, the closing sales price of our common stock as reported on the NASDAQ Global Select Market, where it trades under the symbol AVAV, was $61.90$82.39 per share. As of June 19, 2019,22, 2022, there were 6673 holders of record of our common stock.
Dividends
To date we have retained all earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, capital allocation policy, expected return on invested capital, contractual restrictions and such other factors as our board of directors deems relevant.
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Stock Price Performance Graph
The following graph shows a comparison of cumulative returns on our common stock, based on the market price of the common stock, with the cumulative total returns of companies in the Russell 2000 Index and the SPADE Defense Index.
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The following table shows the value of $100 invested on April 30, 20142017 in AeroVironment, Inc., the Russell 2000 Index and the SPADE Defense Index.
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| April 30, |
| April 30 |
| April 30, |
| April 30, |
| April 30 |
| April 30, |
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| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
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AeroVironment Stock |
| 100 |
| 76 |
| 86 |
| 85 |
| 161 |
| 203 |
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| April 30, |
| April 30 |
| April 30, |
| April 30, |
| April 30 |
| April 30, |
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| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
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AeroVironment, Inc. Stock | | 100 | | 191 | | 240 | | 211 | | 386 | | 281 | | |||||||||||||
Russell 2000 Index |
| 100 |
| 108 |
| 100 |
| 124 |
| 138 |
| 141 |
| | 100 | | 111 | | 114 | | 94 | | 162 | | 133 | |
SPADE Defense Index |
| 100 |
| 115 |
| 115 |
| 142 |
| 178 |
| 197 |
| | 100 | | 125 | | 138 | | 121 | | 169 | | 163 | |
The stock price performance shown on the graph above is not necessarily indicative of future price performance. Factual material was obtained from sources believed to be reliable, but we are not responsible for any errors or omissions contained therein. No portions of this graph shall be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act through any general statement incorporating by reference in its entirety the report in which this graph appears, except to the extent that we specifically incorporate this graph or a portion of it by reference. In addition, this graph shall not be deemed filed under either the Securities Act or the Exchange Act.
Issuer Purchases of Equity Securities
On September 24, 2015, we announced that on September 23, 2015 our Boardboard of Directorsdirectors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which we may repurchase up to $25 million of our common stock from time to time, in amounts and at prices we deem appropriate, subject to market conditions and other considerations. Share repurchases may be executed through open market transactions or negotiated purchases and may be made under a Rule 10b5-1 plan. There is no expiration date for the program. The Share Repurchase Program does not obligate us to acquire any particular amount of common stock and may be suspended at any time by our Boardboard of Directors.directors. We did not repurchase any shares during the fiscal year ended April 30, 2019.2022. As of April 30, 2019,2022, approximately $21.2 million remained authorized for future repurchases under this program.
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Item 6. Selected Consolidated Financial Data.
Reserved.
The following selected financial data should be read in conjunction with our consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary
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Data” of this Annual Report in order to understand fully factors that may affect the comparability of the financial data presented below.Operations.
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Consolidated Income Statement Data: |
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Revenue |
| $ | 314,274 |
| $ | 268,424 |
| $ | 233,105 |
| $ | 233,738 |
| $ | 220,951 |
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Net income from continuing operations attributable to AeroVironment |
| $ | 41,912 |
| $ | 21,750 |
| $ | 17,701 |
| $ | 15,393 |
| $ | 11,682 |
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Earnings per common share from continuing operations attributable to AeroVironment: |
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Basic |
| $ | 1.77 |
| $ | 0.93 |
| $ | 0.77 |
| $ | 0.67 |
| $ | 0.51 |
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Diluted |
| $ | 1.74 |
| $ | 0.91 |
| $ | 0.76 |
| $ | 0.67 |
| $ | 0.50 |
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Weighted average common shares outstanding (basic): |
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| 23,663 |
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| 23,471 |
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| 23,059 |
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| 22,936 |
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| 22,869 |
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Weighted average common shares outstanding (diluted): |
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| 24,072 |
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| 23,814 |
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| 23,308 |
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| 23,153 |
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| 23,146 |
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Balance Sheet Data |
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Total assets |
| $ | 508,844 |
| $ | 473,418 |
| $ | 433,831 |
| $ | 410,393 |
| $ | 397,467 |
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Capital lease obligations, current portion |
| $ | — |
| $ | 161 |
| $ | 288 |
| $ | 390 |
| $ | — |
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Capital lease obligations, net of current portion |
| $ | — |
| $ | — |
| $ | 161 |
| $ | 449 |
| $ | — |
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Other long-term obligations |
| $ | 1,403 |
| $ | 2,274 |
| $ | 2,083 |
| $ | 2,339 |
| $ | 1,712 |
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Introduction
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward‑lookingforward-looking statements. Refer to “Forward‑LookingPart I, “Forward-Looking Statements” on page 2 and Part 1A, “Risk Factors” beginning on page 19,25, for a discussion of the uncertainties, risks and assumptions associated with these statements.
On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.
Overview
We design, develop, produce, deliver and support and operate a technologically‑advancedtechnologically-advanced portfolio of products. We supply unmanned aircraftintelligent, multi-domain robotic systems (“UAS”) and related services to organizations within the U.S. Department of Defense (“DoD”)for government agencies and to international allied governments, and tactical missile systemsbusinesses. We supply UAS, TMS, UGV and related services primarily to organizations within the U.S. Government.DoD and to international allied governments. We derive the majority of our revenue from these business areas and we
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believe that the markets for these solutions haveoffer the potential for significant growth potential.long-term growth. Additionally, we believe that some of the innovative potential products, services and technologies in our research and development pipeline will emerge as new growth platforms in the future, creating additional market opportunities.
The success we have achieved withof our current products and services stems from our investment in research and development and our ability to invent and deliver advanced solutions, utilizing our proprietary technologies, to help our government and commercial customers operate more effectively and efficiently. We develop these highly innovative solutions by working very closely with our key customers and solving their most important challenges related to our areas of expertise. Our core technological capabilities, developed through more than 45nearly 50 years of innovation, include robotics;robotics and robotics systems autonomy; sensor design, development, miniaturization and integration; embedded software and firmware; miniature, low power wireless digital communications; lightweight aerostructures; high-altitude systems design, integration and operations; machine vision, machine learning and autonomy; low SWaP (Size, Weight and Power) system design and integration; manned-unmanned teaming, unmanned-unmanned teaming; power electronics and electric propulsion systems; efficient electric power conversion, storage systems and high density energy packaging; controls and systems integration; vertical takeoff and landing flight, fixed wing flight and hybrid aircraft flight; image stabilization and target tracking; advanced flight control systems; fluid dynamics; robotic systems autonomy; human-machine interface development; and integrated mission solutions for austere environments.
Our UAS business focuses primarily on the design, development, production, marketing, support and operation of innovative UAS and tactical missile systemsTMS and the delivery of UAS-related services that provide situational awareness, remote sensing, multi‑bandmulti-band communications, force protection and other information and mission effects to increase the safety and effectiveness of our customers’ operations.
Revenue
We generate our revenue primarily from the sale, support, design and operation of our small UAS, TMS, HAPS and tactical missile systems.UGV as well as ISR services by our MUAS. Support for our small UAS and TMS customers includes training, spare
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parts, product repair, product replacement, and the customer‑contractedcustomer-contracted operation of our small UAS by our personnel. Under ISR services contracts we deliver the information our MUAS produce to our customers, who use that information to support their missions. We refer to these support activities, in conjunction with customer‑fundedcustomer-funded research and development (“R&D”), as our services operation. We derive most of our small UAS, MUAS, HAPS and TMS revenue from fixed‑pricefixed-price and cost‑plus‑feecost-plus-fee contracts with the U.S. government and allied foreign governments.
Cost of Sales
Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor, materials, travel, subcontracts and other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses, fringe benefits, depreciation of in-service ISR assets, amortization of acquired intangible assets and other costs that are not directly charged to a specific contract.
Gross Margin
Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to help us understand trends in our direct costs and allocated indirect costs when compared to the revenue we generate.
Selling, General and Administrative
Our selling, general and administrative expenses or (“SG&A,&A”), include salaries, fringe benefits, and other expenses related to selling, marketing and proposal activities, and other administrative costs.costs and amortization of acquired intangible assets. Some SG&A expenses relate to marketmarketing and business development activities that support both ongoing business areas as well as new and emerging market areas. These activities can be directly associated with developing requirements for and applications of capabilities created in our research and development (“R&D&D”) activities. SG&A is an important financial metric that we analyze to help us evaluate the contribution of our selling, marketing and proposal activities to revenue generation.
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Research and Development Expense
R&D is an integral part of our business model. We normally conduct significant internally funded R&D. Our R&D activities focus specifically on creating capabilities that support our existing product portfolio as well as new solutions.
Other Income and Expenses
Other income and expenses includes the gain on the sale of our equity interest in HAPSMobile, legal accruals related to our former EES Business, a one-time gain from a litigation settlement, income from transition services performed on behalf of the buyer of the discontinued EES business,Business, interest income, interest expense, and amortization of capital lease payments, changes in fair value of certain financial investments, and gains resulting from the purchase of a controlling interest in an entity formerly accounted for under the equity method.payments.
Income Tax Expense (Benefit)
Our effective tax rates are lowerhigher than the statutory rates primarily due to researchR&D tax credits and developmentexcess tax credits. Our effective tax rate for the fiscal year ended April 30, 2018 was also impacted by the Tax Cut and Jobs Actbenefit of 2017. equity awards.
Equity Method Investment Loss, Net of Tax
Equity method investment loss, net of tax, includes equity method gainincome or loss related to the HAPSMobile Inc. joint venture we formed in December 2017 with Softbank Corp,SoftBank and our investment in Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”) prior to obtaining a controllinglimited partnership fund for which we have concluded we have influence for holding more than a minor interest. In March 2022, we sold our equity interest on February 1, 2017.in HAPSMobile and will no longer record equity method income (loss) of HAPSMobile.
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Loss from Discontinued Operations, Net of Tax
On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests includes the 15%50% interest in the income or losses of our Turkish joint venture, Altoy. We acquired a controllingAltoy, as of September 15, 2021 and 15% interest in Altoy on February 1, 2017.for all prior periods presented.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventories andinventory reserves for excess and obsolescence, self‑insured liabilities, accounting for stock‑based awards,intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 1 to our consolidated financial statements entitled “Organization and Significant Accounting Policies,” which are
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is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Organization and Significant Accounting Policies.Report. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.
Revenue Recognition
Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business or market conditions. Management judgments and estimates have been applied consistently and have been reliable historically. We believe that there are two key factors which impact the reliability of management’s estimates. The first of those key factors is that the terms of our contracts are typically less than six months. The short‑termshort-term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis of market conditions or other factors. The second key factor is that we have hundreds of contracts in any given accounting period, which reduces the risk that any one change in an accounting estimate on one or several contracts would have a material impact on our consolidated financial statements.
The substantial majority of our revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to customer specifications. These contracts may be fixed price, cost‑reimbursable,cost-reimbursable, or time and materials. We account for all revenue contracts in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).606. A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. For contracts with multiple performance obligations, we allocate the contract’s
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transaction price to each performance obligation using its observable standalone selling priceprices for similar products and services. When the standalone selling price is not directly observable, we use itsour best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus reasonable margin approach.
Our performance obligations are satisfied over time or at a point in time. Revenue for TMS product deliveries, customization of UGV transport vehicles and Customer-Funded R&D contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, including ISR services, is recognized over time as services are rendered. Typically, revenue is recognized over time usingWe elected the right to invoice practical expedient in which if an input measure (e.g., costs incurredentity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, relativesuch as flight hours for ISR services, the entity may recognize revenue in the amount to total estimated costs at completion)which the entity has a right to measure progress.invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.
We review cost performance and estimates to complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in the estimated costs to complete for all types of contracts using the over time method are recognized on a cumulative catch‑upcatch-up basis in the period in which the revisions are made. During the fiscal years ended April 30, 2019, 20182022, 2021 and 2017,2020, changes in accounting estimates on fixed‑price contracts recognized using the over time method are presented below. Amounts
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representing contract change orders or claims are included in revenue if the order or claim meets the criteria of a contract or contract modification in accordance with ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.
For the years ended April 30, 2019, 20182022, 2021 and 2017,2020, favorable and unfavorable cumulative catch‑upcatch-up adjustments included in revenue were as follows (in thousands):
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Gross favorable adjustments |
| $ | 1,190 |
| $ | 1,643 |
| $ | 46 |
| | $ | 1,331 | | $ | 1,953 | | $ | 2,181 | |
Gross unfavorable adjustments |
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| (2,857) | |
| (2,205) | |
| (2,019) | |
Net adjustments |
| $ | (118) |
| $ | (667) |
| $ | (229) |
| | $ | (1,526) | | $ | (252) | | $ | 162 | |
For the year ended April 30, 2019,2022, favorable cumulative catch‑catch up adjustments of $1.2$1.3 million were primarily due to final cost adjustments on nine19 contracts, which individually were not material. For the same period, unfavorable cumulative catch‑catch up adjustments of $1.3$2.9 million were primarily related to higher than expected costs on 14 contracts, which individually were not material.
For the year ended April 30, 2018, favorable cumulative catch‑up adjustments of $1.6 million were primarily due to final cost adjustments on nine contracts, which individually were not material. For the same period, unfavorable cumulative catch‑up adjustments of $2.3 million were primarily related to higher than expected costs on six10 contracts. During the year ended April 30, 2018,2022, we revised our estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.3$1.1 million.
For the year ended April 30, 2017,2021, favorable cumulative catch‑catch up adjustments of $46,000$2.0 million were primarily due to final cost adjustments on 12 contracts, which individually were not material. For the same period, unfavorable
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cumulative catch‑catch up adjustments of $0.3$2.2 million were primarily related to higher than expected costs on five contracts, which individuallynine contracts. During the year ended April 30, 2021, we revised our estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.0 million.
For the year ended April 30, 2020, favorable cumulative catch-up adjustments of $2.2 million were not material.primarily due to final cost adjustments on 13 contracts. During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a design and development agreement. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.1 million. For the same period, unfavorable cumulative catch-up adjustments of $2.0 million were primarily related to higher than expected costs on seven contracts. During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a TMS contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.4 million.
Inventories and ReserveReserves for Excess and Obsolescence
Our policy for valuation of inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, an estimate of future demand for products within specific time horizons, valuation of existing inventory, as well as product lifecycle and product development plans. Inventory reserves are also provided to cover risks arising from slow‑movingslow-moving items. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions.conditions and record to cost of sales. We may be required to record additional inventory write‑downswrite-downs if actual market conditions are less favorable than those projected by our management.
Self‑Insured Liability
We are self‑insured for employee medical claims, subject to individual and aggregate stop‑loss policies. We estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by us. We perform an annual evaluation of this policy and have determined that for all prior years during which this policy has been in effect there have been cost advantages to this policy, as compared to obtaining commercially available employee medical insurance. However, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements.
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Impairment of Long‑Lived Assets
We review the recoverability of long‑lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made.
Intangible Assets – Acquired in Business Combinations
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: technology, backlog, in-process research and development, customer relationships, licenses, trademarks and trade names.tradenames, and non-compete agreements. We use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits of such assets are consumed.
Long‑Term Incentive AwardsGoodwill
ForGoodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of our outstanding long-term incentive plans asfiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of April 30, 2019, we grant long-term incentive awards and we establish a target payout atkey personnel, significant changes in the beginningmanner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.
Our evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, period. Theto determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, we may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill
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impairment loss to be recognized (if any). For the quantitative impairment test we estimate the fair value by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.
Income Taxes
Our income tax provision and related income tax assets and liabilities are based on actual payout at the end of the performance period is calculated based upon our achievement of such targets. Payouts of performance awards are made in shares of restricted stock which become immediately vested upon issuance.
At each reporting period, we reassess the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on currentexpected future income, U.S. and prior periods of those changes will be recordedforeign statutory income tax rates, and tax regulations and planning opportunities in the periodvarious jurisdictions in which it operates. We believe that the accounting estimates related to income taxes are revised."critical accounting estimates" because significant judgment is required in interpreting tax regulations in the United States and in foreign jurisdictions, evaluating our worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect our consolidated financial statements.
Income Taxes
We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes. We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assets principally depends on our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors, which may result in recording a valuation allowance against those deferred tax assets. We record a valuation allowance to reduce our deferred tax assets if, based on the weight of available evidence, we believe expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. We evaluate the level of our valuation allowances during the interim and annually.
We record unrecognized tax benefits for U.S. federal, state, local, and foreign tax positions related primarily to tax credits claimed and tax nexus. For each reporting period, we apply a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Our measurement of our unrecognized tax benefits is based on our assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments. We recognize unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more likely than not (a greater than 50% likelihood) be realized.
We have various foreign subsidiaries to conduct or support our business outside the United States. We do not provide for U.S. income taxes on undistributed earnings for our foreign subsidiaries as management expectswe expect the foreign earnings will be indefinitely reinvested in such foreign jurisdictions.
Fiscal Periods
Our fiscal year ends on April 30. Due to our fixed year end date of April 30, our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday.
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Results of Operations
The following table sets forth certain historical consolidated income statement data expressed in dollars (in thousands) and as a percentage of revenue for the periods indicated. Certain amounts may not sum due to rounding.
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| Fiscal Year Ended April 30, |
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| 2019 |
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| 2018 |
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| 2017 |
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Revenue |
| $ | 314,274 |
| 100 | % |
| $ | 268,424 |
| 100 | % |
| $ | 233,105 |
| 100 | % |
Cost of sales |
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| 185,871 |
| 59 | % |
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| 160,739 |
| 60 | % |
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| 136,232 |
| 58 | % |
Gross margin |
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| 128,403 |
| 41 | % |
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| 107,685 |
| 40 | % |
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| 96,873 |
| 42 | % |
Selling, general and administrative |
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| 60,343 |
| 19 | % |
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| 50,826 |
| 19 | % |
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| 47,642 |
| 20 | % |
Research and development |
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| 34,234 |
| 11 | % |
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| 26,433 |
| 10 | % |
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| 28,465 |
| 12 | % |
Income from continuing operations |
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| 33,826 |
| 11 | % |
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| 30,426 |
| 11 | % |
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| 20,766 |
| 9 | % |
Interest income, net |
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| 4,672 |
| 1 | % |
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| 2,240 |
| 1 | % |
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| 1,618 |
| 1 | % |
Other income (expense), net |
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| 11,980 |
| 4 | % |
|
| (49) |
| — | % |
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| 172 |
| 0 | % |
Income from continuing operations before income taxes |
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| 50,478 |
| 16 | % |
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| 32,617 |
| 12 | % |
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| 22,556 |
| 10 | % |
Income tax expense |
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| 4,641 |
| 1 | % |
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| 9,800 |
| 4 | % |
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| 4,758 |
| 2 | % |
Equity method investment loss, net of tax |
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| (3,944) |
| (1) | % |
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| (1,283) |
| — | % |
|
| (119) |
| — | % |
Net income from continuing operations |
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| 41,893 |
| 13 | % |
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| 21,534 |
| 8 | % |
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| 17,679 |
| 8 | % |
Gain on sale of business, net of tax |
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| 8,490 |
| 3 | % |
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| — |
| — | % |
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| — |
| — | % |
Loss from discontinued operations, net of tax |
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| (2,964) |
| (1) | % |
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| (3,887) |
| (1) | % |
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| (4,601) |
| (2) | % |
Net income |
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| 47,419 |
| 15 | % |
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| 17,647 |
| 7 | % |
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| 13,078 |
| 6 | % |
Net loss attributable to noncontrolling interest |
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| 19 |
| — | % |
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| 216 |
| — | % |
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| 22 |
| — | % |
Net income attributable to AeroVironment |
| $ | 47,438 |
| 15 | % |
| $ | 17,863 |
| 7 | % |
| $ | 13,100 |
| 6 | % |
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| | Fiscal Year Ended April 30, |
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| | 2022 |
| | 2021 |
| | 2020 |
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Revenue |
| $ | 445,732 |
| 100 | % | | $ | 394,912 |
| 100 | % | | $ | 367,296 |
| 100 | % |
Cost of sales | |
| 304,496 | | 68 | % | |
| 230,354 | | 58 | % | |
| 214,194 | | 58 | % |
Gross margin | |
| 141,236 | | 32 | % | |
| 164,558 | | 42 | % | |
| 153,102 | | 42 | % |
Selling, general and administrative | |
| 96,434 | | 22 | % | |
| 67,481 | | 17 | % | |
| 59,490 | | 16 | % |
Research and development | |
| 54,689 | | 12 | % | |
| 53,764 | | 14 | % | |
| 46,477 | | 13 | % |
(Loss) income from continuing operations | |
| (9,887) | | (2) | % | |
| 43,313 | | 11 | % | |
| 47,135 | | 13 | % |
Interest (expense) income, net | |
| (5,440) | | (1) | % | |
| (618) | | — | % | |
| 4,828 | | 1 | % |
Other (expense) income, net | | | (10,313) | | (2) | % | |
| (8,330) | | (2) | % | |
| 707 | | — | % |
Sale of ownership in HAPSMobile Inc. joint venture | |
| 6,497 | | 1 | % | |
| — | | — | % | |
| — | | — | % |
(Loss) income from continuing operations before income taxes | |
| (19,143) | | (4) | % | |
| 34,365 | | 9 | % | |
| 52,670 | | 14 | % |
(Benefit from) provision for income taxes | |
| (10,369) | | (2) | % | |
| 539 | | — | % | |
| 5,848 | | 2 | % |
Equity method investment income (loss), net of tax | | | 4,589 | | 1 | % | | | (10,481) | | (3) | % | | | (5,487) | | (1) | % |
Net income from continuing operations | | | (4,185) | | (1) | % | | | 23,345 | | 6 | % | | | 41,335 | | 11 | % |
Loss on sale of business, net of tax | | | — | | — | % | | | — | | — | % | | | (265) | | — | % |
Net income | | | (4,185) | | (1) | % | | | 23,345 | | 6 | % | | | 41,070 | | 11 | % |
Net (income) loss attributable to noncontrolling interest | | | (3) | | — | % | | | (14) | | — | % | | | 4 | | — | % |
Net income attributable to AeroVironment, Inc. | | $ | (4,188) | | (1) | % | | $ | 23,331 | | 6 | % | | $ | 41,074 | | 11 | % |
The Company operates its business as four reportable segments, small UAS, TMS, MUAS and HAPS. The small UAS segment consists of our existing small UAS product lines. The TMS segment consists of our existing tactical missile systems product lines. The MUAS segment consists of our recently acquired Arcturus business. The HAPS segment consists of our existing development of High Altitude Pseudo-Satellite systems in conjunction with SoftBank. The segment below entitled “All other” includes MacCready Works, which includes the recently acquired ISG and Telerob businesses. The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.
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| Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 178,201 | | $ | 76,415 | | $ | 93,156 | | $ | 43,325 | | $ | 54,635 | | $ | 445,732 |
Gross margin | | | 83,759 | | | 24,486 | | | 6,155 | | | 15,533 | | | 11,303 | | | 141,236 |
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Income (loss) from continuing operations | | | 28,980 | | | (3,120) | | | (27,715) | | | 8,056 | | | (16,088) | | | (9,887) |
Acquisition-related expenses | | | 502 | | | 297 | | | 1,994 | | | 123 | | | 1,938 | | | 4,854 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,828 | | | - | | | 22,170 | | | - | | | 11,709 | | | 36,707 |
Adjusted income (loss) from operations | | $ | 32,310 | | $ | (2,823) | | $ | (3,551) | | $ | 8,179 | | $ | (2,441) | | $ | 31,674 |
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| | Year Ended April 30, 2021 | ||||||||||||||||
| | Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 235,854 | | $ | 87,268 | | $ | 15,837 | | $ | 42,426 | | $ | 13,527 | | $ | 394,912 |
Gross margin | | | 119,062 | | | 26,675 | | | 2,965 | | | 13,038 | | | 2,818 | | | 164,558 |
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Income (loss) from continuing operations | | | 58,194 | | | (3,131) | | | (1,869) | | | 268 | | | (10,149) | | | 43,313 |
Acquisition-related expenses | | | 3,026 | | | 1,661 | | | 1,682 | | | 593 | | | 1,019 | | | 7,981 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,649 | | | - | | | 4,356 | | | - | | | 453 | | | 7,458 |
Adjusted income (loss) from operations | | $ | 63,869 | | $ | (1,470) | | $ | 4,169 | | $ | 861 | | $ | (8,677) | | $ | 58,752 |
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| | Year Ended April 30, 2020 | ||||||||||||||||
| | Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 225,888 | | $ | 63,781 | | $ | - | | $ | 60,864 | | $ | 16,763 | | $ | 367,296 |
Gross margin | | | 117,538 | | | 18,082 | | | - | | | 17,436 | | | 46 | | | 153,102 |
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Income (loss) from continuing operations | | | 64,680 | | | (15,822) | | | - | | | 9,744 | | | (11,467) | | | 47,135 |
Acquisition-related expenses | | | 537 | | | 336 | | | - | | | 134 | | | 112 | | | 1,119 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,467 | | | - | | | - | | | - | | | - | | | 2,467 |
Adjusted income (loss) from operations | | $ | 67,684 | | $ | (15,486) | | $ | - | | $ | 9,878 | | $ | (11,355) | | $ | 50,721 |
The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying consolidated statements of operations:
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| | Year Ended |
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| April 30, | | April 30, |
| April 30, |
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| | 2022 | | 2021 | | 2020 |
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Cost of sales: | | | | | | | | | | |
Product sales | | $ | 8,301 | | $ | 3,492 | | $ | 2,284 | |
Contract services | |
| 10,331 | |
| 959 | |
| — | |
Selling, general and administrative | | | 18,075 | | | 3,007 | | | 183 | |
Total | | $ | 36,707 | | $ | 7,458 | | $ | 2,467 | |
Fiscal Year Ended April 30, 20192022 Compared to Fiscal Year Ended April 30, 20182021
Revenue. Revenue for the fiscal year ended April 30, 20192022 was $314.3$445.7 million, as compared to $268.4$394.9 million for the fiscal year ended April 30, 2018,2021, representing an increase of $45.9$50.8 million, or 17%13%. The increase in revenue was due to an increase in service revenue of $25.5$89.0 million, and an increasepartially offset by a decrease in product deliveriesrevenue of $20.4$38.2 million. The increase in service revenue was primarily due to an increase in customer-funded R&D workMUAS service revenue, resulting from our acquisition of $23.9 million predominantly associated with our design and development agreement with HAPSMobile, partially offset by a decreaseArcturus in tactical missile systems and tactical missile system variant programs,February 2021, and an increase in sustainment activities in supportcustomer-funded R&D largely resulting from our acquisition of tactical missile system product deliveries.ISG. The increasedecrease in product deliveriesrevenue was primarily due to an increasedecreases in product deliveries of small UAS to international customers and to customers within the U.S. governmentTMS product revenue, partially offset by increases in UGV and an increase in tactical missile systemsMUAS product revenue, resulting from customers within the U.S. government.our acquisitions of Telerob and Arcturus.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 20192022 was $185.9$304.5 million, as compared to $160.7$230.4 million for the fiscal year ended April 30, 2018,2021, representing an increase of $25.1$74.1 million, or 16%32%. The increase in cost of sales was a result of an increase in service cost of sales of $83.3 million, partially offset by a decrease in product costs of sales of $21.0 million and an increase in product cost of sales of $4.1$9.1 million. The increase in service costscost of sales was primarily due to the increase in service revenue. Therevenues
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resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments. The decrease in product costs of sales was primarily due to the increasedecrease in product deliveriesrevenue, unfavorable product mix and an increase in inventory reserve charges largelyintangible amortization expense and other purchase accounting adjustments. Cost of sales for the fiscal year ended April 30, 2022 included $18.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to our commercial Quantix product.$4.5 million for the fiscal year ended April 30, 2021. As a percentage of revenue, cost of sales decreasedincreased from 60%58% to 59%68%, primarily due to a favorable product mix, partially offset by an increase in inventory reserve chargesthe proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable serviceproduct mix.
Gross Margin. Gross margin for the fiscal year ended April 30, 20192022 was $128.4$141.2 million, as compared to $107.7$164.6 million for the fiscal year ended April 30, 2018,2021, representing a decrease of $23.3 million, or 14%. The decrease in gross margin was due to a decrease in product margin of $29.1 million, partially offset by an increase in service margin of $20.7 million, or 19%.$5.8 million. The increasedecrease in grossproduct margin was primarily due to an increasethe decrease in product margins of $16.3 millionrevenue, unfavorable product mix and an increase in service margins
50
of $4.4 million.intangible amortization expense and other purchase accounting adjustments. The increase in product marginsservice margin was primarily due to the increase in product deliveries,service revenue, partially offset by an increase in inventory reserve charges largely related to our commercial Quantix product. The increase in services margins was primarily due to the increase in customer-funded R&D revenue.intangible amortization expense and other purchase accounting adjustments. As a percentage of revenue, gross margin increaseddecreased from 40%42% to 41%32%, primarily due to a favorable product mix, partially offset by an increase in inventory reserve chargesthe proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service mix.revenue, which generally has lower gross margins than our product revenue, in future quarters as compared to our historical trends. Additionally, we expect inflationary and supply chain constraint trends to continue throughout our fiscal year 2023, which will negatively impact our gross margin.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 20192022 was $60.3$96.4 million, or 19%22% of revenue, compared to SG&A expense of $50.8$67.5 million, or 19%17% of revenue, for the fiscal year ended April 30, 2018.2021. The increase in SG&A expense was primarily due to an impairment charge related to the long-lived assets of our commercial Quantix product, an increase in corporate development expenses primarilyheadcount and related to the sale ofcosts associated with our EES business, an increase in costs incurred related to the transition services agreement with Webasto,Arcturus, ISG and Telerob acquisitions and an increase in employee-relatedintangible amortization and acquisition related expenses. SG&A included $22.9 million and $11.0 million of intangible amortization expenses partially offset by a decrease in legaland acquisition-related expenses a decrease in amortization expense,for the fiscal year ended April 30, 2022 and a decrease in bad debt expense.April 30, 2021, respectively.
Research and Development. R&D expense for the fiscal year ended April 30, 20192022 was $34.2$54.7 million, or 11%12% of revenue, compared to R&D expense of $26.4$53.8 million, or 10%14% of revenue, for the fiscal year ended April 30, 2018.2021. R&D expense increased by $0.9 million, or 2%, for the fiscal year ended April 30, 2022, primarily due to increasedan increase in development activities regarding enhanced capabilities for certain strategic initiatives.our products, development of new product lines and to support our recently acquired businesses.
Interest Income,Expense, net. Interest income,expense, net for the fiscal year ended April 30, 20192022 was $4.7$5.4 million, compared to $2.2interest expense, net of $0.6 million for the fiscal year ended April 30, 2018.2021. The increase in interest incomeexpense was primarily due to an increase in interest expense resulting from the average interest rates earned on our investments portfolio.term debt issued concurrent with the acquisition of Arcturus.
Other Income (Expense),Expense, net. Other income,expense, net for the fiscal year ended April 30, 20192022 was $12.0$10.3 million, as compared to other expense, net of $49,000$8.3 million for the fiscal year ended April 30, 2018. The increase in other income,2021. Other expense, net was primarily due to a litigation settlement and income earned under a transition services agreement with the buyer of our former EES Business.
Income Taxes. Our effective income tax rate was 9.2% for the fiscal year ended April 30, 2019, as compared2022 included $10 million of expense related to 30.0%the Webasto legal settlement. Other expense, net for the fiscal year ended April 30, 2018. The provision for income taxes2021 included $9.3 million of expense related to the Webasto legal accrual.
Sale of ownership in HAPSMobile Inc. joint venture. Sale of ownership in HAPSMobile Inc. joint venture for the fiscal year ended 2018 includedApril 30, 2022 was $6.5 million gain related to the impactsale of the Tax Cut and Jobs Act of 2017, inclusive of a reductionour equity interest in HAPSMobile.
Income Taxes. Our effective income tax rate was 54.2% for the blended fiscal year 2018 federal statutoryended April 30, 2022, as compared to 1.6% for the fiscal year ended April 30, 2021. The increase in our effective tax rate from 35%was primarily due to 30.4%the decrease in income before income taxes and a $3.3 million one-time expense resulting from the remeasurementan increase in certain federal income tax credits.
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Equity method investment loss,income (loss), net of tax. Equity method investment loss,income, net of tax for the fiscal year ended April 30, 20192022 was $3.9$4.6 million, as compared to equity method investment loss, net of $1.3$(10.5) million for the fiscal year ended April 30, 2018.2021. The increase was due to thein equity method loss associated with our investment in the HAPSMobile joint venture formed in December 2017 and our increase to 10% ownership in March 2019 which was diluted to approximately 5% during the first fiscal quarter of fiscal year 2020.
Gain on sale of a business, net of tax. Gain on sale of a business,income, net of tax for fiscal 2019 was $8.5 million and resultedprimarily due to our proportionate share of the income from the sale of our EES business.
Loss from discontinued operations, net of tax. Loss from discontinued operations, net of taxlimited partnership investment fund for the fiscal year ended April 30, 2019 was2022 and a loss of $3.0$8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC in the fiscal year ended April 30, 2021. With the sale of our equity interest in HAPSMobile during the fiscal year ended April 30, 2022, no future joint venture equity income or losses for HAPSMobile will be recorded.
Fiscal Year Ended April 30, 2021 Compared to Fiscal Year Ended April 30, 2020
Revenue. Revenue for the fiscal year ended April 30, 2021 was $394.9 million, as compared to a loss from discontinued operations, net of tax of $3.9$367.3 million for the fiscal year ended April 30, 2018. The loss from discontinued operations, net of tax relates to the results of our EES Business.
Fiscal Year Ended April 30, 2018 Compared to Fiscal Year Ended April 30, 2017
Revenue. Revenue for the fiscal year ended April 30, 2018 was $268.4 million, as compared to $233.1 million for the fiscal year ended April 30, 2017,2020, representing an increase of $35.3$27.6 million, or 15%8%. The increase in revenue was due to an increase in product deliveriesrevenue of $32.8$22.1 million and an increase in service revenue of $2.5$5.5 million. The increase in product deliveriesrevenue was primarily due to an increase in product deliveries of TMS and small UAS to international customers and to customers within the U.S. government and product deliveries of tactical missile systems to customers within the U.S.
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government.UAS. The increasedecrease in service revenue was primarily due to an increasea decrease in customer-funded R&D work of $9.2 million, predominantlyprimarily associated with oura design and development agreement, with HAPSMobile, partially offset by a decreasean increase in tactical missile systemsMUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and tactical missile system variant programs and a decrease in sustainment activities in support of tactical missile system product deliveries.customer-funded R&D primarily associated with TMS.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 20182021 was $160.7$230.4 million, as compared to $136.2$214.2 million for the fiscal year ended April 30, 2017,2020, representing an increase of $24.5$16.2 million, or 18%8%. The increase in cost of sales was a result of an increase in product cost of sales of $20.4$10.6 million and an increase in service costs of sales of $4.2$5.6 million. The increase in product costs of sales was primarily due to thean increase in product deliveries and an increase in inventory reserve charges.sales. The increase in service costscost of sales was primarily due to the increase in service revenuerevenues resulting from the acquisitions of Arcturus in February 2021, partially offset by a decrease in service revenues for the HAPS segment. Cost of sales for fiscal 2021 included $1.7 million and $2.8 million of intangible amortization expense and other related non-cash purchase accounting expense as compared to $2.4 million for the increase in the proportion of customer-funded R&D revenue to total service revenue.fiscal year ended April 30, 2020. As a percentage of revenue, cost of sales increased fromremained consistent at 58% to 60%, primarily due to unfavorable mix in both products and services and an increase in inventory reserve charges..
Gross Margin. Gross margin for the fiscal year ended April 30, 20182021 was $107.7$164.6 million, as compared to $96.9$153.1 million for the fiscal year ended April 30, 2017,2020, representing an increase of $10.8$11.5 million, or 11%7%. The increase in gross margin was primarily due to an increase in product marginsmargin of $12.4 million,$11.5 million. The increase in product gross margin was primarily due to an increase in product sales, partially offset by a decrease in service margins of $1.6 million. The increase in product margins was primarily due to the increase in product deliveries, partially offset by an increase in inventory reserve charges. The decrease in services margins was primarily due to the increase in the proportion of customer-funded R&D revenue to total service revenue, partially offset by the increase in service revenue.revenues and a favorable mix. As a percentage of revenue, gross margin decreased fromremained consistent at 42% to 40%, primarily due to an unfavorable mix in both products and services and an increase in inventory reserve charges..
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 20182021 was $50.8$67.5 million, or 19%17% of revenue, compared to SG&A expense of $47.6$59.5 million, or 20%16% of revenue, for the fiscal year ended April 30, 2017.2020. The increase in SG&A expense was primarily due to an increase in bonus expense associated with our fiscal 2018 financial results, the recordingacquisition related expenses of impairment charges$6.5 million primarily related to the identifiable intangible assetsacquisition of Arcturus, ISG and goodwill of Altoy during the three months ended October 28, 2017, an increase in bad debt expenseTelerob and an increase in legal expenses, partially offset by a decrease in sales commissionintangible amortization expense as a result of a decrease in the number of international small UAS contracts under which we utilized sales agents.$2.8 million.
Research and Development. R&D expense for the fiscal year ended April 30, 20182021 was $26.4$53.8 million, or 10%14% of revenue, compared to R&D expense of $28.5$46.5 million, or 12%13% of revenue, for the fiscal year ended April 30, 2017.2020. R&D expense decreasedincreased primarily due to decreasedan increase in development activities regarding enhanced capabilities for certain strategic initiatives.our products and development of new product lines.
Interest (Expense) Income, net. Interest income,expense, net for the fiscal year ended April 30, 20182021 was $2.2$0.6 million, compared to $1.6interest income net of $4.8 million for the fiscal year ended April 30, 2017.2020. The increase in interest income wasexpense is primarily due to an increasea combination of a decrease in the average interest rates earned on our investments portfolio.portfolio and a decrease in the average investment balances and an increase in interest expense of $0.9 million resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other (Expense) Income, (Expense), net. Other expense, net for the fiscal year ended April 30, 20182021 was $49,000,$8.3 million, as compared to other income, net of $0.2$0.7 million for the fiscal year ended April 30, 2017. 2020. The increase in other expense, net was primarily due to a legal accrual related to our former EES Business.
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Income Taxes. Our effective income tax rate was 30.0%1.6% for the fiscal year ended April 30, 2018,2021, as compared to 21.1%11.1% for the fiscal year ended April 30, 2017.2020. The provision fordecrease in our effective tax rate was primarily due to the decrease in income before income taxes for the fiscal year ended 2018 included the impact of the Tax Cut and Jobs Act of 2017, inclusive of a reductionan increase in the blended fiscal year 2018certain federal statutoryincome tax rate from 35% to 30.4% and a $3.3 million one-time expense resulting from the remeasurement of our deferred tax assets and liabilities.credits.
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Equity method investment loss, net of tax. Equity method investment loss, net of tax for the fiscal year ended April 30, 20182021 was $1.3$10.5 million, as compared to equity method investment loss, net of $0.1$5.5 million for the fiscal year ended April 30, 2017.2020. The increase was primarily due to the equity methoda loss associated withof $8.4 million for our investment inproportionate share of the HAPSMobile joint venture formedventure’s impairment of its investment in December 2017. Equity method investment loss,Loon LLC.
Loss on sale of business, net of tax. Loss on sale of business, net of tax for the fiscal year ended April 30, 2017 related to our investment in Altoy prior to obtaining a controlling interest in February 2017.
Loss from discontinued operations, net of tax. Loss from discontinued operations, net of tax for the fiscal year ended April 30, 20182021 was a loss of $3.9 million$0, as compared to a loss from discontinued operations, net of tax of $4.6$0.3 million for the fiscal year ended April 30, 2017.2020. The loss from discontinued operations,on sale of business, net of tax relatesrelated to the resultssale of our former EES Business.Business during the fiscal year ended April 30, 2019. We recorded an adjustment related to a settled working capital dispute during the fiscal year ended April 30, 2020.
Liquidity and Capital Resources
On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement (as amended February 4, 2022, the “Credit Agreement”) for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and (ii) a five-year amortized $200 million term A loan (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $4.2 million as of April 30, 2022. As of April 30, 2022, approximately $95.8 million was available under the Revolving Facility. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 12—Debt to our financial statements for further details.
We currently have no material cash commitments, except foranticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and ongoing research and development costs, all of which we anticipate fundingobligations under the Credit Facilities through our existing working capital and funds provided by operating activities.activities including those provided by our recent acquisitions of Arcturus, ISG and Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and debt service requirements, if any,obligations under the Credit Facilities during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain additional financing.draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, and marketing acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from short‑term borrowingour Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.financing, subject to the limitations specified in our Credit Agreement. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
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Our working capital requirements vary by contract type. On cost‑plus‑feecost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed‑pricefixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.
On May 10, 2019, we purchased 500 million yen (approximately $4.6 million)To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of additional shares of HAPSMobileCOVID-19 has led to maintaindisruption and volatility in the global capital markets, which, depending on future developments, could impact our 10% ownership interest HAPSMobile which was subsequently diluted to approximately 5%.
On June 10, 2019, we purchased 100%capital resources and liquidity in the future. In consideration of the issuedimpact of the ongoing COVID-19 pandemic, we continue to hold a significant portion of our investments in U.S. government and outstanding member unitsU.S. government agency securities.
During the fiscal year ended April 30, 2022, we made certain commitments outside of Pulse Aerospace LLC pursuantthe ordinary course of business, including capital contribution commitments to a second limited partnership fund. Under the terms of a Unit Purchase Agreement. Wethe new limited partnership agreement, we have committed to make capital contributions to such fund totaling $20.0 million, inclusive of the expected reinvestment of distributions from our existing limited partnership fund, of which $20.0 million was remaining at April 30, 2022. The contributions are anticipated to be paid $20,650,000 in cash, less closing indebtedness and transaction costs as defined inover the Pulse Purchase Agreement, less a $250,000 retention and less a $1,250,000 holdback amount. In addition tonext five fiscal years. The remaining $15 million obligation under the considerationlegal settlement with Webasto will be paid at closing,during the member unit holders of Pulse Aerospace may receive up to a maximum of $5,000,000 in additional cash consideration if specific research and development milestones are achieved by December 10, 2021. We financed the acquisition entirely from available cash on hand.fiscal year ending April 30, 2023.
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Cash Flows
The following table provides our cash flow data from continuing operations for the periods ended:
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| Fiscal Year Ended April 30, |
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| 2019 |
| 2018 |
| 2017 |
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Net cash provided by (used in) operating activities |
| $ | 26,946 |
| $ | 69,832 |
| $ | (8,253) |
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Net cash provided by (used in) investing activities |
| $ | 11,546 |
| $ | (6,397) |
| $ | (36,516) |
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Net cash (used in) provided by financing activities |
| $ | (1,184) |
| $ | 2,020 |
| $ | 3,470 |
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| | Fiscal Year Ended April 30, |
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| | 2022 |
| 2021 |
| 2020 | | |||
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| | | | | | | | |
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| | (In thousands) |
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Net cash (used in) provided by operating activities | | $ | (9,618) | | $ | 86,532 | | $ | 25,097 | |
Net cash (used in) provided by investing activities | | $ | (52,288) | | $ | (378,771) | | $ | 59,167 | |
Net cash (used in) provided by financing activities | | $ | (16,607) | | $ | 194,160 | | $ | (1,830) | |
Cash (Used in) Provided by (Used in) Operating Activities. Net cash provided byused in operating activities for the fiscal year ended April 30, 2019 decreased2022 increased by $42.9$96.2 million to $26.9$9.6 million, compared to net cash provided by operating activities of $69.8$86.5 million for the fiscal year ended April 30, 2018.2021. This decreaseincrease in net cash provided byused in operating activities was primarily due to a decreasean increase in the cash providedused as a result of changes in operating assets and liabilities of $70.9$98.5 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, in revenue and related billings and increases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and increases in accounts payable due to year over year timing differences, and an increase in net loss of $27.5 million, partially offset by an increase in non-cash expenses of $7.7$29.9 million primarily due to an increase in the equity method loss associated with the our HAPS JV,depreciation and amortization, partially offset by a decrease in amortization of held-to-maturity investments, and an increase in net incomegains from continuing operations of $20.4 million.equity method investments.
Net cash provided by operating activities for the fiscal year ended April 30, 20182021 increased by $78.1$61.4 million to $69.8$86.5 million, compared to net cash used inprovided by operating activities of $8.3$25.1 million for the fiscal year ended April 30, 2017.2020. This increase in net cash provided by operating activities was primarily due to an increase in the cash provided as a result of changes in operating assets and liabilities of $66.6$66.9 million largely resulting from decreasesincreases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, in revenue and related collections andpartially offset by decreases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and decreases in prepaid expenses and other assets due to year over year timing differences, and an increase in non-cash expenses of $7.6$12.5 million primarily due to the $3.3 million charge resulting from the remeasurement of our deferred tax assets and liabilities, an increase in stock-based compensation,depreciation and theamortization and loss from equity method loss associated with the our HAPS JV, and an increase in net income from continuing operations of $3.9 million.investments.
Cash (Used in) Provided by (Used in) Investing Activities. Net cash provided byused in investing activities increaseddecreased by $17.9$326.5 million to $11.5$52.3 million for the fiscal year ended April 30, 2019,2022, compared to net cash used in investing activities of $6.4$378.8 million for the fiscal year ended April 30, 2018. The increase in net cash provided by investing activities was primarily due to the proceeds from the sale of the EES Business of $32.0 million, partially offset by higher net purchases of held‑to‑maturity investments of $12.2 million. During the fiscal years ended April 30, 2019 and 2018, we used cash to purchase property and equipment totaling $8.9 million and $9.6 million, respectively.
Net cash used in investing activities decreased by $30.1 million to $6.4 million for the fiscal year ended April 30, 2018, compared to net cash used in investing activities of $36.5 million for the fiscal year ended April 30, 2017.2021. The decrease in net cash used in investing activities was primarily due to lowerthe acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021,
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partially offset by the acquisition of Telerob, net of cash for $46.2 million, and a decrease in purchases of held to maturityavailable-for-sale investments of $33.5$101.8 million, partially offset by a decrease in redemptions of available-for-sale investments of $110.6 million and an increase in the investment inacquisition of property and equipment of $11.0 million to support our HAPSMobile joint venture.existing and newly acquired businesses. During the fiscal years ended April 30, 20182022 and 2017,2021, we used cash to purchase property and equipment totaling $9.6$22.3 million and $9.0$11.3 million, respectively.
Cash (Used in) Provided by Financing Activities.Net cash used by financingin investing activities increased by $3.2$437.9 million to $1.2$378.7 million for the fiscal year ended April 30, 2019,2021, compared to net cash provided by investing activities of $59.2 million for the fiscal year ended April 30, 2020. The increase in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021 and a decrease in redemptions of available-for-sale investments net of purchases. During the fiscal years ended April 30, 2021 and 2020, we used cash to purchase property and equipment totaling $11.3 million and $11.2 million, respectively.
Cash (Used in) Provided by Financing Activities. Net cash used in financing activities increased by $210.8 million to $16.6 million for the fiscal year ended April 30, 2022, compared to net cash provided by financing activities of $2.0$194.2 million for the fiscal year ended April 30, 2018.2021. The decreaseincrease in net cash provided by financing activities was primarily due to a decreasethe proceeds of long-term debt of $200.0 million in the cash provided fromfiscal year ended April 30, 2021 and the exerciseprincipal payment of employee stock optionsthe loan in the fiscal year ended April 30, 2022 of $2.6$10.0 million.
Net cash provided by financing activities decreasedincreased by $1.5$196.0 million to $2.0$194.2 million for the fiscal year ended April 30, 2018,2021, compared to net cash provided byused in financing activities of $3.5$1.8 million for the fiscal year ended April 30,
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2017. 2020. The decreaseincrease in net cash provided by financing activities was primarily due to a decrease in the cash provided from the exerciseproceeds of employee stock optionslong-term debt of $1.2$200.0 million, partially offset by payment of debt issuance costs of $3.9 million.
Contractual Obligations
The following table describes our commitments to settle contractual obligations as of April 30, 2019:2022:
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Operating lease obligations | | $ | 31,568 | | $ | 6,819 | | $ | 13,050 | | $ | 6,215 | | $ | 5,484 | |
Purchase obligations(1) | |
| 99,752 | |
| 99,752 | |
| — | |
| — | |
| — | |
Long-term debt obligations | | | 190,000 | | | 10,000 | | | 20,000 | | | 160,000 | | | — | |
Webasto legal settlement | | | 15,000 | | | 15,000 | | | — | | | — | | | — | |
Total | | $ | 336,320 | | $ | 131,571 | | $ | 33,050 | | $ | 166,215 | | $ | 5,484 | |
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| Less Than |
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| 3 to 5 Years |
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Operating lease obligations |
| $ | 14,055 |
| $ | 5,298 |
| $ | 6,250 |
| $ | 2,507 |
| $ | — |
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Purchase obligations(1) |
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| 7,239 |
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| 7,239 |
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| — |
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| — |
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| — |
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Total |
| $ | 21,294 |
| $ | 12,537 |
| $ | 6,250 |
| $ | 2,507 |
| $ | — |
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| (1) |
| Consists of all cancelable and |
| (2) |
| Not included in the table above is an additional capital contribution of |
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Off‑Balance Sheet Arrangements
As of April 30, 2019 we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S‑K.
Inflation
Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.
Recently Adopted Accounting Standards
In August 2016,Effective May 1, 2021, we adopted ASU 2019-12, Simplifying the FASB issued Accounting for Income Taxes (Topic 740) (“ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230)2019-12”). This ASU adds and clarifiessimplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, including removing the requirement to limit income tax expense (benefit) in an interim period to the full year projected amounts. We adopted ASU 2019-12 using the prospective method, applying the new guidance on the classification of certain cash receipts and payments in the statement of cash flows. Ouraccounting for income taxes after adoption. The adoption of ASU No. 2017-01 effective May 1, 20182019-12 did not have a material impact on our consolidated financial statements.
New Accounting Standards
In January 2017,October 2021, the FASB issued ASU 2017-01, 2021-08, Business Combinations—Clarifying the definition of a businessCombinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This ASU clarifies the definition2021-08 requires an acquirer to
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In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when applyingapply the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. Our adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on our consolidated financial statements.
In the first quarter of fiscal 2019, we adopted ASU 2014-09, ASC 606, Revenue from Contracts with Customers (Topic 606), to recognize and measure contract assets and contract liabilities in a business combination, rather than using the full retrospective method. Topic 606 requires revenue to be recognized when promised goods or services
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are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.
Revenue for small UAS product contracts with both the U.S. government and foreign governments under the new standard will be recognized at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. Revenue for Tactical Missile Systems (“TMS”) contracts will now be recognized under the new standard over time as costs are incurred. Under previous U.S. GAAP, revenue was generally recognized when deliveries of the related TMS products were made.fair value. The new standard accelerates the timing of when the revenue is recognized; however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for our Customer-Funded Research and Development (“R&D”) contracts. We continue to recognize revenue for these contracts over time as costs are incurred. The adoption of Topic 606 resulted in a cumulative adjustment to increase retained earnings by $500,000 at May 1, 2016 relating to both our continuing and discontinued operations. For our continuing operations, the adoption of Topic 606 resulted in a cumulative adjustment to increase retained earnings by $564,000 at May 1, 2016.
We applied the standard’s practical expedient that permits the omission of prior-period information our remaining performance obligations, the practical expedient that permits us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset the entity otherwise would have recognized is one year or less, and the practical expedient that permits us to not retrospectively restate contracts which were modified prior to our initial date of adoption, or May 1, 2016. Instead we reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price. No other practical expedients were applied.
New Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and interim periods therein,2022, with early adoption permitted. We currently do not hold a large number of leases that are classified as operating leases under the existing lease standard, with the only significant leases being our various property leases.ASU 2021-08 is adopted prospectively and could impact future acquisitions.
We plan to adopt Topic 842 using the required modified retrospective approach with the election to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of adoption, we plan to elect the package of practical expedients which allows us to not reassess existing or expired contracts for existence of a lease, lease classification, or amortization of previously capitalized initial direct leasing cost. Additionally, we also plan to elect the short-term lease exception to not record right-of-use assets and lease liabilities for leases with a term less than 12 months, the hindsight practical expedient to utilize latest information in determining lease term, and the practical expedient to not separate lease and non-lease components for most asset classes. We are evaluating the potential impact of this adoption on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU is intended to replace the incurred loss impairment methodology under GAAP with a methodology that reflects using a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments, and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The guidance is effective for fiscal years beginning after December 15, 2019 and the interim periods therein, with early adoption permitted. Entities are required to apply the amendments in this update using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are evaluating the potential impact of this adoption on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU permits, but does not require, us to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within AOCI to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. We are evaluating the potential impact of this adoption on our consolidated financial statements.
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In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU removes or modifies current disclosures while adding certain new disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for the removed or modified disclosures. The removed and modified disclosures can be adopted retrospectively, and the added disclosures should be adopted prospectively. We are evaluating the potential impact of this adoption on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350-40). This ASU allows for capitalization of implementation costs associated with certain cloud computing arrangements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted. We are evaluating the potential impact of this adoption on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
ItOn February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into the Credit Facilities. As of April 30, 2022, the current outstanding balance of the Credit Facilities is our policy not to enter into$190 million and bears a variable interest rate. If market interest rates increase significantly, interest due on the Credit Facilities would increase. An increase or decrease in the variable interest rate derivative financial instruments. We do not currently have any significantof 100 basis points would result in an increase or decrease to our interest rate exposure.expense for the fiscal year ending April 30, 2023 of approximately $1.9 million.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date. We currently do not engage in forward contracts or other derivatives in foreign currencies to limit our exposure on non‑U.S.non-U.S. dollar transactions. With the acquisition of Telerob, who does conduct sales denominated in Euros, we are exposed to future foreign exchange gains or losses, and we will consider methods to limit our exposure on non-U.S. dollar transactions in the future.
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Item 8. Financial Statements and Supplementary Data.
AeroVironment, Inc.
Audited Consolidated Financial Statements
Index to Consolidated Financial Statements and Supplementary Data
| Page | ||
Report of Independent Registered Public Accounting Firm (PCAOB 34) | | 74 | |
Consolidated Balance Sheets at April 30, | | 77 | |
| 78 | | |
| 79 | | |
| 80 | | |
| 81 | | |
| 82 | | |
| | | |
Financial Statement Schedule | | 127 | |
All other schedules are omitted because they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of AeroVironment, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AeroVironment, Inc. and subsidiaries (the Company)"Company") as of April 30, 20192022 and 2018,2021, the related consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity, and cash flows, for each of the three years in the period ended April 30, 2019,2022, and the related notes and financial statementthe schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atas of April 30, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2019,2022, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of April 30, 2019,2022, based on criteria established in Internal Control-IntegratedControl — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 25, 201928, 2022, expressed an unqualifiedadverse opinion thereon.on the Company's internal control over financial reporting because of material weaknesses.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers in fiscal year 2019 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Acquisitions – Refer to Note 1 and 21 to the financial statements
Critical Audit Matter Description
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to the terms of the Telerob Purchase Agreement for total consideration of approximately $47.0 million, net of cash acquired, which includes the Company’s estimate of contingent consideration of $.9 million based on the achievement of certain revenue targets, awards and/or orders from the U.S. military prior to the end of a 36-month post-closing period. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets
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acquired and liabilities assumed based on their respective fair values, resulting in technology of $11.5 million, customer relationships of $5.0 million, backlog of $2.4 million and goodwill of $20.8 million. Management estimated the fair value of the intangible assets using discounted cash flow analyses, which were based on the Company’s best estimate of future revenues, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Determining the fair value of the intangible assets acquired required management to make significant estimates and assumptions related to future revenue projections.
We identified the assumptions related to estimating the amount and timing of expected future revenues to be a critical audit matter given the inherent judgment involved in estimating these amounts. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the expected amount and timing of future revenue used to estimate the fair value of the intangible assets acquired included the following, among others:
| ● | We tested the effectiveness of management’s controls over the valuation of intangibles, including management’s controls over the estimates of the amount and timing of expected future revenues. |
| ● | We assessed the reasonableness of management’s forecasts of future revenues by performing inquiries of appropriate individuals outside of the accounting organization, comparing the projections to historical results, certain peer companies, third-party industry forecasts, and internal communications to management and board of directors. |
| ● | With the assistance of our fair value specialists, we compared applicable industry forecasted long-term revenue growth rates to management’s projected revenues used within the valuation model. |
| ● | We evaluated management’s ability to estimate future revenues by comparing actual revenues to estimates assumed in the valuation model. |
Goodwill— Refer to Note 1 and Note 7 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company estimates the fair value by weighting the results from the income approach and the market approach. The income approach incorporates the use of cash flow projections and a discount rate that are developed using market participant-based assumptions. The cash-flow projections are based on seven-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth. The selected discount rate considers the risk and nature of the respective reporting unit’s cash flows and the rates of return market participants would require to invest their capital in its reporting units. The market approach utilizes the guideline public company and guideline transaction methods. The goodwill balance was $334.3 million as of April 30, 2022, of which $290.2 million relates to the MUAS Reporting Unit (“MUAS”) as a result of the acquisition of Arcturus, $20.8 million relates to the UGV Reporting Unit (“UGV”) as a result of the acquisition of Telerob, and $23.3 million relates to other historical acquisitions. The fair values of all reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized. Determining the fair values of the reporting units required management to make significant estimates and assumptions related to future revenue projections.
We identified the assumptions related to estimating the amount and timing of expected future revenue used in determining the fair values of the MUAS and UGV reporting units as a critical audit matter because of the significant judgments involved in estimating these amounts. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
75
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the expected amount and timing of future revenue used to estimate the fair values of the MUAS and UGV reporting units included the following, among others:
| ● | We tested the effectiveness of management’s controls over their goodwill impairment evaluation, including those over the determination of the fair values of the MUAS and UGV reporting units, such as controls related to management’s selection of forecasts of future revenues. |
| ● | We assessed the reasonableness of management’s forecasts of future revenues by performing inquiries of appropriate individuals outside of the accounting organization, comparing the projections to historical results, certain peer companies, third-party industry forecasts, contractual agreements and internal communications to management and board of directors. |
| ● | With the assistance of our fair value specialists, we compared applicable industry forecasted long-term revenue growth rates to management’s projected revenues used within the valuation models. |
| ● | We evaluated management’s ability to estimate future revenues by comparing actual revenue to management’s historical forecasts. |
/s/ ErnstDeloitte & YoungTouche LLP
Los Angeles, California
June 28, 2022
We have served as the Company’s auditor since 1999.fiscal 2020.
Los Angeles, California
June 25, 2019
5976
AEROVIRONMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
|
|
|
|
|
|
|
|
|
| April 30, |
| ||||
|
| 2019 |
| 2018 |
| ||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 172,708 |
| $ | 143,517 |
|
Short-term investments |
|
| 150,487 |
|
| 113,649 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,041 at April 30, 2019 and $1,080 at April 30, 2018 |
|
| 31,051 |
|
| 56,813 |
|
Unbilled receivables and retentions (inclusive of related party unbilled receivables of $9,028 at April 30, 2019 and $3,145 at April 30, 2018) |
|
| 53,047 |
|
| 16,872 |
|
Inventories |
|
| 54,056 |
|
| 37,425 |
|
Prepaid expenses and other current assets |
|
| 7,418 |
|
| 5,103 |
|
Income taxes receivable |
|
| 821 |
|
| — |
|
Current assets of discontinued operations |
|
| — |
|
| 25,668 |
|
Total current assets |
|
| 469,588 |
|
| 399,047 |
|
Long-term investments |
|
| 9,386 |
|
| 40,656 |
|
Property and equipment, net |
|
| 16,905 |
|
| 19,219 |
|
Deferred income taxes |
|
| 6,685 |
|
| 11,494 |
|
Other assets |
|
| 6,280 |
|
| 3,002 |
|
Total assets |
| $ | 508,844 |
| $ | 473,418 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 15,972 |
| $ | 21,340 |
|
Wages and related accruals |
|
| 18,507 |
|
| 16,851 |
|
Income taxes payable |
|
| — |
|
| 4,085 |
|
Customer advances |
|
| 2,962 |
|
| 3,564 |
|
Other current liabilities |
|
| 7,425 |
|
| 6,954 |
|
Current liabilities of discontinued operations |
|
| — |
|
| 9,294 |
|
Total current liabilities |
|
| 44,866 |
|
| 62,088 |
|
Deferred rent |
|
| 1,173 |
|
| 1,536 |
|
Other non-current liabilities |
|
| 150 |
|
| 622 |
|
Deferred tax liability |
|
| 29 |
|
| 67 |
|
Liability for uncertain tax positions |
|
| 51 |
|
| 49 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value: |
|
|
|
|
|
|
|
Authorized shares—10,000,000; none issued or outstanding at April 30, 2019 and April 30, 2018 |
|
| — |
|
| — |
|
Common stock, $0.0001 par value: |
|
|
|
|
|
|
|
Authorized shares—100,000,000 |
|
|
|
|
|
|
|
Issued and outstanding shares—23,946,293 shares at April 30, 2019 and 23,908,736 shares at April 30, 2018 |
|
| 2 |
|
| 2 |
|
Additional paid-in capital |
|
| 176,216 |
|
| 170,139 |
|
Accumulated other comprehensive loss |
|
| 2 |
|
| (21) |
|
Retained earnings |
|
| 286,351 |
|
| 238,913 |
|
Total AeroVironment stockholders’ equity |
|
| 462,571 |
|
| 409,033 |
|
Noncontrolling interest |
|
| 4 |
|
| 23 |
|
Total equity |
|
| 462,575 |
|
| 409,056 |
|
Total liabilities and stockholders’ equity |
| $ | 508,844 |
| $ | 473,418 |
|
| | | | | | | |
| | April 30, | | ||||
| | 2022 | | 2021 | | ||
|
| | |
| | |
|
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 77,231 | | $ | 148,741 | |
Short-term investments | | | 24,716 | | | 31,971 | |
Accounts receivable, net of allowance for doubtful accounts of $592 at April 30, 2022 and $595 at April 30, 2021 | | | 60,170 | | | 62,647 | |
Unbilled receivables and retentions (inclusive of related party unbilled receivables of $2,229 at April 30, 2022 and $544 at April 30, 2021) | | | 104,194 | | | 71,632 | |
Inventories | | | 90,629 | | | 71,646 | |
Income taxes receivable | | | 442 | | | — | |
Prepaid expenses and other current assets | | | 11,527 | | | 15,001 | |
Total current assets | | | 368,909 | | | 401,638 | |
Long-term investments | | | 15,433 | | | 12,156 | |
Property and equipment, net | | | 62,296 | | | 58,896 | |
Operating lease right-of-use assets | | | 26,769 | | | 22,902 | |
Deferred income taxes | | | 7,290 | | | 2,061 | |
Intangibles, net | | | 97,224 | | | 106,268 | |
Goodwill | | | 334,347 | | | 314,205 | |
Other assets | | | 1,932 | | | 10,440 | |
Total assets | | $ | 914,200 | | $ | 928,566 | |
Liabilities and stockholders��� equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 19,244 | | $ | 24,841 | |
Wages and related accruals | | | 25,398 | | | 28,068 | |
Customer advances | | | 8,968 | | | 7,183 | |
Current portion of long-term debt | | | 10,000 | | | 10,000 | |
Current operating lease liabilities | | | 6,819 | | | 6,154 | |
Income taxes payable | | | 759 | | | 861 | |
Other current liabilities | | | 30,203 | | | 19,078 | |
Total current liabilities | | | 101,391 | | | 96,185 | |
Long-term debt, net of current portion | | | 177,840 | | | 187,512 | |
Non-current operating lease liabilities | | | 21,915 | | | 19,103 | |
Other non-current liabilities | | | 768 | | | 10,141 | |
Liability for uncertain tax positions | | | 1,450 | | | 3,518 | |
Deferred income taxes | | | 2,626 | | | — | |
Commitments and contingencies | | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock, $0.0001 par value: | | | | | | | |
Authorized shares—10,000,000; NaN issued or outstanding at April 30, 2022 and April 30, 2021 | | | — | | | — | |
Common stock, $0.0001 par value: | | | | | | | |
Authorized shares—100,000,000 | | | | | | | |
Issued and outstanding shares—24,951,287 shares at April 30, 2022 and 24,777,295 shares at April 30, 2021 | | | 2 | | | 2 | |
Additional paid-in capital | | | 267,248 | | | 260,327 | |
Accumulated other comprehensive (loss) income | | | (6,514) | | | 343 | |
Retained earnings | | | 347,233 | | | 351,421 | |
Total AeroVironment, Inc. stockholders’ equity | | | 607,969 | | | 612,093 | |
Noncontrolling interest | | | 241 | | | 14 | |
Total equity | | | 608,210 | | | 612,107 | |
Total liabilities and stockholders’ equity | | $ | 914,200 | | $ | 928,566 | |
See accompanying notes to consolidated financial statements.
6077
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| |||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 212,089 |
| $ | 191,712 |
| $ | 158,924 |
|
Contract services (inclusive of related party revenue of $55,407 and $29,594 for the years ended April 30, 2019 and April 30, 2018, respectively) |
|
| 102,185 |
|
| 76,712 |
|
| 74,181 |
|
|
|
| 314,274 |
|
| 268,424 |
|
| 233,105 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 113,489 |
|
| 109,393 |
|
| 89,039 |
|
Contract services |
|
| 72,382 |
|
| 51,346 |
|
| 47,193 |
|
|
|
| 185,871 |
|
| 160,739 |
|
| 136,232 |
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 98,600 |
|
| 82,319 |
|
| 69,885 |
|
Contract services |
|
| 29,803 |
|
| 25,366 |
|
| 26,988 |
|
|
|
| 128,403 |
|
| 107,685 |
|
| 96,873 |
|
Selling, general and administrative |
|
| 60,343 |
|
| 50,826 |
|
| 47,642 |
|
Research and development |
|
| 34,234 |
|
| 26,433 |
|
| 28,465 |
|
Income from continuing operations |
|
| 33,826 |
|
| 30,426 |
|
| 20,766 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
| 4,672 |
|
| 2,240 |
|
| 1,618 |
|
Other income (expense), net |
|
| 11,980 |
|
| (49) |
|
| 172 |
|
Income from continuing operations before income taxes |
|
| 50,478 |
|
| 32,617 |
|
| 22,556 |
|
Provision for income taxes |
|
| 4,641 |
|
| 9,800 |
|
| 4,758 |
|
Equity method investment loss, net of tax |
|
| (3,944) |
|
| (1,283) |
|
| (119) |
|
Net income from continuing operations |
|
| 41,893 |
|
| 21,534 |
|
| 17,679 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of tax expense of $2,444 for the year ended April 30, 2019 |
|
| 8,490 |
|
| — |
|
| — |
|
Loss from discontinued operations, net of tax |
|
| (2,964) |
|
| (3,887) |
|
| (4,601) |
|
Net income (loss) from discontinued operations |
|
| 5,526 |
|
| (3,887) |
|
| (4,601) |
|
Net income |
|
| 47,419 |
|
| 17,647 |
|
| 13,078 |
|
Net loss attributable to noncontrolling interest |
|
| 19 |
|
| 216 |
|
| 22 |
|
Net income attributable to AeroVironment |
| $ | 47,438 |
| $ | 17,863 |
| $ | 13,100 |
|
Net income (loss) per share attributable to AeroVironment—Basic |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 1.77 |
| $ | 0.93 |
| $ | 0.77 |
|
Discontinued operations |
|
| 0.23 |
|
| (0.17) |
|
| (0.20) |
|
Net income per share attributable to AeroVironment—Basic |
| $ | 2.00 |
| $ | 0.76 |
| $ | 0.57 |
|
Net income (loss) per share attributable to AeroVironment—Diluted |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 1.74 |
| $ | 0.91 |
| $ | 0.76 |
|
Discontinued operations |
|
| 0.23 |
|
| (0.16) |
|
| (0.20) |
|
Net income per share attributable to AeroVironment—Diluted |
| $ | 1.97 |
| $ | 0.75 |
| $ | 0.56 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 23,663,410 |
|
| 23,471,241 |
|
| 23,059,045 |
|
Diluted |
|
| 24,071,713 |
|
| 23,813,772 |
|
| 23,307,738 |
|
See accompanying notes to consolidated financial statements.
61
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | |
| | Year Ended April 30, |
| |||||||
| | 2022 |
| 2021 |
| 2020 | | |||
|
| | | | | | | | |
|
Revenue: | | | | | | | | | | |
Product sales | | $ | 240,683 | | $ | 278,888 | | $ | 256,758 | |
Contract services (inclusive of related party revenue of $43,325, $42,426 and $60,864 for the years ended April 30, 2022, 2021, and 2020, respectively) | |
| 205,049 | |
| 116,024 | |
| 110,538 | |
| |
| 445,732 | |
| 394,912 | |
| 367,296 | |
Cost of sales: | | | | | | | | | | |
Product sales | |
| 140,596 | |
| 149,714 | |
| 139,131 | |
Contract services | |
| 163,900 | |
| 80,640 | |
| 75,063 | |
| |
| 304,496 | |
| 230,354 | |
| 214,194 | |
Gross margin: | |
| | | | | | | | |
Product sales | | | 100,087 | | | 129,174 | | | 117,627 | |
Contract services | | | 41,149 | | | 35,384 | | | 35,475 | |
| |
| 141,236 | |
| 164,558 | |
| 153,102 | |
Selling, general and administrative | |
| 96,434 | |
| 67,481 | |
| 59,490 | |
Research and development | |
| 54,689 | |
| 53,764 | |
| 46,477 | |
(Loss) income from continuing operations | |
| (9,887) | |
| 43,313 | |
| 47,135 | |
Other (loss) income: | | | | | | | | | | |
Interest (expense) income, net | |
| (5,440) | |
| (618) | |
| 4,828 | |
Other (expense) income, net | |
| (10,313) | |
| (8,330) | |
| 707 | |
Sale of ownership in HAPSMobile Inc. joint venture | | | 6,497 | | | — | | | — | |
(Loss) income from continuing operations before income taxes | |
| (19,143) | |
| 34,365 | |
| 52,670 | |
(Benefit from) provision for income taxes | | | (10,369) | |
| 539 | |
| 5,848 | |
Equity method investment income (loss), net of tax | |
| 4,589 | |
| (10,481) | |
| (5,487) | |
Net (loss) income from continuing operations | | | (4,185) | | | 23,345 | | | 41,335 | |
Discontinued operations: | | | | | | | | | | |
Loss on sale of business, net of tax benefit of $76 for the year ended April 30, 2020 | | | — | | | — | | | (265) | |
Net loss from discontinued operations | | | — | | | — | |
| (265) | |
Net (loss) income | | | (4,185) | | | 23,345 | | | 41,070 | |
Net (income) loss attributable to noncontrolling interest | | | (3) | | | (14) | | | 4 | |
Net (loss) income attributable to AeroVironment, Inc. | | $ | (4,188) | | $ | 23,331 | | $ | 41,074 | |
Net (loss) income per share attributable to AeroVironment, Inc.—Basic | | | | | | | | | | |
Continuing operations | | $ | (0.17) | | $ | 0.97 | | $ | 1.74 | |
Discontinued operations | | | — | | | — | | | (0.01) | |
Net (loss) income per share attributable to AeroVironment, Inc.—Basic | | $ | (0.17) | | $ | 0.97 | | $ | 1.73 | |
Net (loss) income per share attributable to AeroVironment, Inc.—Diluted | | | | | | | | | | |
Continuing operations | | $ | (0.17) | | $ | 0.96 | | $ | 1.72 | |
Discontinued operations | | | — | | | — | | | (0.01) | |
Net (loss) income per share attributable to AeroVironment, Inc.—Diluted | | $ | (0.17) | | $ | 0.96 | | $ | 1.71 | |
Weighted-average shares outstanding: | | | | | | | | | | |
Basic | |
| 24,685,534 | |
| 24,049,851 | |
| 23,806,208 | |
Diluted | |
| 24,685,534 | |
| 24,362,656 | |
| 24,088,167 | |
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| |||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 47,419 |
| $ | 17,647 |
| $ | 13,078 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
| (34) |
|
| 36 |
|
| - |
|
Unrealized gain on investments, net of deferred tax expense of $51, $25, and $43 for the fiscal years ended 2019, 2018, and 2017, respectively |
|
| 57 |
|
| 70 |
|
| 74 |
|
Total comprehensive income |
|
| 47,442 |
|
| 17,753 |
|
| 13,152 |
|
Net loss attributable to noncontrolling interest |
|
| 19 |
|
| 216 |
|
| 22 |
|
Comprehensive income attributable to AeroVironment |
| $ | 47,461 |
| $ | 17,969 |
| $ | 13,174 |
|
See accompanying notes to consolidated financial statements.
6278
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
| Total |
| Non- |
|
|
|
| ||||
|
| Common Stock |
| Paid-In |
| Retained |
| Comprehensive |
| AeroVironment |
| Controlling |
|
|
|
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Equity |
| Interest |
| Total |
| |||||||
Balance at April 30, 2016 |
| 23,359,925 |
|
| 2 |
|
| 154,274 |
|
| 207,185 |
|
| (201) |
|
| 361,260 |
|
| — |
|
| 361,260 |
|
Adoption of ASU 2016-09 |
| — |
|
| — |
|
| — |
|
| 265 |
|
| — |
|
| 265 |
|
| — |
|
| 265 |
|
Adoption of ASU 2014-09 |
| — |
|
| — |
|
| — |
|
| 500 |
|
| — |
|
| 500 |
|
| — |
|
| 500 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 13,100 |
|
| — |
|
| 13,100 |
|
| (22) |
|
| 13,078 |
|
Unrealized gain on investments |
| — |
|
| — |
|
| — |
|
| — |
|
| 74 |
|
| 74 |
|
| — |
|
| 74 |
|
Stock options exercised |
| 204,130 |
|
| — |
|
| 3,865 |
|
| — |
|
| — |
|
| 3,865 |
|
| — |
|
| 3,865 |
|
Restricted stock awards |
| 126,557 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock awards forfeited |
| (60,017) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Tax withholding payment related to net share settlement of equity awards |
| (176) |
|
| — |
|
| (5) |
|
| — |
|
| — |
|
| (5) |
|
| — |
|
| (5) |
|
Reclassification from share-based liability compensation to equity |
| — |
|
| — |
|
| 307 |
|
| — |
|
| — |
|
| 307 |
|
| — |
|
| 307 |
|
Business acquisition |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 261 |
|
| 261 |
|
Stock-based compensation |
| — |
|
| — |
|
| 3,709 |
|
| — |
|
| — |
|
| 3,709 |
|
| — |
|
| 3,709 |
|
Balance at April 30, 2017 |
| 23,630,419 |
|
| 2 |
|
| 162,150 |
|
| 221,050 |
|
| (127) |
|
| 383,075 |
|
| 239 |
|
| 383,314 |
|
Net income (loss) |
| — |
|
| — |
|
| — |
|
| 17,863 |
|
| — |
|
| 17,863 |
|
| (216) |
|
| 17,647 |
|
Unrealized gain on investments |
| — |
|
| — |
|
| — |
|
| — |
|
| 70 |
|
| 70 |
|
| — |
|
| 70 |
|
Foreign currency translation |
| — |
|
| — |
|
| — |
|
| — |
|
| 36 |
|
| 36 |
|
| — |
|
| 36 |
|
Stock options exercised |
| 153,211 |
|
| — |
|
| 2,705 |
|
| — |
|
| — |
|
| 2,705 |
|
| — |
|
| 2,705 |
|
Restricted stock awards |
| 140,787 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock awards forfeited |
| (6,834) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Tax withholding payment related to net share settlement of equity awards |
| (8,847) |
|
| — |
|
| (397) |
|
| — |
|
| — |
|
| (397) |
|
| — |
|
| (397) |
|
Reclassification from share-based liability compensation to equity |
| — |
|
| — |
|
| 384 |
|
| — |
|
| — |
|
| 384 |
|
| — |
|
| 384 |
|
Stock-based compensation |
| — |
|
| — |
|
| 5,297 |
|
| — |
|
| — |
|
| 5,297 |
|
| — |
|
| 5,297 |
|
Balance at April 30, 2018 |
| 23,908,736 |
|
| 2 |
|
| 170,139 |
|
| 238,913 |
|
| (21) |
|
| 409,033 |
|
| 23 |
|
| 409,056 |
|
Net income (loss) |
| — |
|
| — |
|
| — |
|
| 47,438 |
|
| — |
|
| 47,438 |
|
| (19) |
|
| 47,419 |
|
Unrealized gain on investments |
| — |
|
| — |
|
| — |
|
| — |
|
| 57 |
|
| 57 |
|
| — |
|
| 57 |
|
Foreign currency translation |
| — |
|
| — |
|
| — |
|
| — |
|
| (34) |
|
| (34) |
|
| — |
|
| (34) |
|
Stock options exercised |
| 12,725 |
|
| — |
|
| 71 |
|
| — |
|
| — |
|
| 71 |
|
| — |
|
| 71 |
|
Restricted stock awards |
| 57,476 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock awards forfeited |
| (18,023) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Tax withholding payment related to net share settlement of equity awards |
| (14,621) |
|
| — |
|
| (1,094) |
|
| — |
|
| — |
|
| (1,094) |
|
| — |
|
| (1,094) |
|
Stock based compensation |
| — |
|
| — |
|
| 7,100 |
|
| — |
|
| — |
|
| 7,100 |
|
| — |
|
| 7,100 |
|
Balance at April 30, 2019 |
| 23,946,293 |
| $ | 2 |
| $ | 176,216 |
| $ | 286,351 |
| $ | 2 |
| $ | 462,571 |
| $ | 4 |
| $ | 462,575 |
|
| | | | | | | | | | |
| | Year Ended April 30, |
| |||||||
| | 2022 |
| 2021 |
| 2020 | | |||
|
| | | | | | | | |
|
Net (loss) income | | $ | (4,185) | | $ | 23,345 | | $ | 41,070 | |
Other comprehensive (loss) income: | | | | | | | | | | |
Unrealized (loss) gain on investments, net of deferred tax expense of $8, $1 and $14 for the fiscal years ended 2021, 2020 and 2019, respectively | |
| (43) | |
| (60) | |
| 50 | |
Change in foreign currency translation adjustments | | | (6,814) | | | 75 | | | 276 | |
Total comprehensive (loss) income | | | (11,042) | | | 23,360 | | | 41,396 | |
Net (income) loss attributable to noncontrolling interest | | | (3) | | | (14) | | | 4 | |
Comprehensive (loss) income attributable to AeroVironment, Inc. | | $ | (11,045) | | $ | 23,346 | | $ | 41,400 | |
See accompanying notes to consolidated financial statements.
6379
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| |||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||
|
|
|
|
|
|
|
|
| ||
Operating activities |
|
|
|
|
|
|
|
| ||
Net income |
| $ | 47,419 |
| $ | 17,647 |
| $ | 13,078 |
|
Gain on sale of business, net of tax |
|
| (8,490) |
|
| — |
|
| — |
|
Loss from discontinued operations, net of tax |
|
| 2,964 |
|
| 3,887 |
|
| 4,601 |
|
Net income from continuing operations |
|
| 41,893 |
|
| 21,534 |
|
| 17,679 |
|
Adjustments to reconcile net income to cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 7,669 |
|
| 5,982 |
|
| 5,054 |
|
Loss from equity method investment |
|
| 3,944 |
|
| 1,283 |
|
| 119 |
|
Impairment of long-lived assets |
|
| 4,398 |
|
| 255 |
|
| 46 |
|
Provision for doubtful accounts |
|
| (39) |
|
| 977 |
|
| 48 |
|
Impairment of intangible assets and goodwill |
|
| — |
|
| 1,021 |
|
| — |
|
Gains on foreign currency transactions |
|
| 38 |
|
| (87) |
|
| 284 |
|
Deferred income taxes |
|
| 4,792 |
|
| 2,853 |
|
| 309 |
|
Gain on business acquisition |
|
| — |
|
| — |
|
| (584) |
|
Stock-based compensation |
|
| 6,985 |
|
| 4,956 |
|
| 3,392 |
|
Loss on disposition of property and equipment |
|
| 76 |
|
| 20 |
|
| 44 |
|
Amortization of held-to-maturity investments |
|
| (1,506) |
|
| 1,424 |
|
| 2,382 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 25,821 |
|
| 11,070 |
|
| (19,720) |
|
Unbilled receivables and retentions |
|
| (36,175) |
|
| 2,253 |
|
| 615 |
|
Inventories |
|
| (16,631) |
|
| 1,192 |
|
| (16,816) |
|
Income tax receivable |
|
| (821) |
|
| — |
|
| — |
|
Prepaid expenses and other assets |
|
| (2,401) |
|
| 139 |
|
| (1,484) |
|
Accounts payable |
|
| (7,054) |
|
| 5,736 |
|
| 545 |
|
Other liabilities |
|
| (4,043) |
|
| 9,224 |
|
| (166) |
|
Net cash provided by (used in) operating activities of continuing operations |
|
| 26,946 |
|
| 69,832 |
|
| (8,253) |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
| (8,896) |
|
| (9,563) |
|
| (9,017) |
|
Equity method investments |
|
| (7,598) |
|
| (3,267) |
|
| — |
|
Business acquisitions, net of cash acquired |
|
| — |
|
| — |
|
| (430) |
|
Proceeds from sale of business |
|
| 31,994 |
|
| — |
|
| — |
|
Redemptions of held-to-maturity investments |
|
| 260,918 |
|
| 227,663 |
|
| 121,522 |
|
Purchases of held-to-maturity investments |
|
| (267,122) |
|
| (221,680) |
|
| (148,991) |
|
Redemptions of available-for-sale investments |
|
| 2,250 |
|
| 450 |
|
| 400 |
|
Net cash provided by (used in) investing activities from continuing operations |
|
| 11,546 |
|
| (6,397) |
|
| (36,516) |
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations |
|
| (161) |
|
| (288) |
|
| (390) |
|
Tax withholding payment related to net settlement of equity awards |
|
| (1,094) |
|
| (397) |
|
| (5) |
|
Exercise of stock options |
|
| 71 |
|
| 2,705 |
|
| 3,865 |
|
Net cash (used in) provided by financing activities from continuing operations |
|
| (1,184) |
|
| 2,020 |
|
| 3,470 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
Operating activities of discontinued operations |
|
| (7,686) |
|
| (623) |
|
| (2,246) |
|
Investing activities of discontinued operations |
|
| (431) |
|
| (1,219) |
|
| (838) |
|
Financing activities of discontinued operations |
|
| — |
|
| — |
|
| — |
|
Net cash used in discontinued operations |
|
| (8,117) |
|
| (1,842) |
|
| (3,084) |
|
Net increase (decrease) in cash and cash equivalents |
|
| 29,191 |
|
| 63,613 |
|
| (44,383) |
|
Cash and cash equivalents at beginning of period |
|
| 143,517 |
|
| 79,904 |
|
| 124,287 |
|
Cash and cash equivalents at end of period |
| $ | 172,708 |
| $ | 143,517 |
| $ | 79,904 |
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
Cash paid, net during the period for: |
|
|
|
|
|
|
|
|
|
|
Income taxes |
| $ | 6,780 |
| $ | 1,813 |
| $ | 1,804 |
|
Non-cash activities |
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of deferred tax expense of $51, $25 and $43, respectively |
| $ | 57 |
| $ | 70 |
| $ | 74 |
|
Reclassification from share-based liability compensation to equity |
| $ | — |
| $ | 384 |
| $ | 307 |
|
Change in foreign currency translation adjustments |
| $ | (34) |
| $ | 36 |
| $ | — |
|
Acquisitions of property and equipment included in accounts payable |
| $ | 810 |
| $ | 379 |
| $ | 724 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | |
| |
| | | | | | | Additional | | | | | Other | | Total | | Non- | | | |
| ||||
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | AeroVironment, Inc. | | Controlling | | | |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| (Loss) Income | | Equity | | Interest |
| Total |
| |||||||
Balance at April 30, 2019 |
| 23,946,293 | |
| 2 | |
| 176,216 | |
| 286,351 | |
| 2 | | | 462,571 | | | 4 | |
| 462,575 | |
Adoption of ASU 2018-09 | | — | |
| — | |
| — | |
| 665 | |
| — | | | 665 | | | — | | | 665 | |
Net income (loss) |
| — | |
| — | |
| — | |
| 41,074 | |
| — | | | 41,074 | | | (4) | |
| 41,070 | |
Unrealized gain on investments |
| — | |
| — | |
| — | |
| — | |
| 50 | | | 50 | | | — | |
| 50 | |
Foreign currency translation | | — | |
| — | |
| — | |
| — | |
| 276 | | | 276 | | | — | |
| 276 | |
Stock options exercised |
| 16,189 | |
| — | |
| 100 | |
| — | | | — | | | 100 | | | — | |
| 100 | |
Restricted stock awards |
| 131,991 | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Restricted stock awards forfeited |
| (12,541) | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Tax withholding payment related to net share settlement of equity awards | | (18,293) | |
| — | |
| (1,062) | |
| — | | | — | | | (1,062) | | | — | |
| (1,062) | |
Stock-based compensation |
| — | |
| — | |
| 6,227 | |
| — | | | — | | | 6,227 | | | — | |
| 6,227 | |
Balance at April 30, 2020 |
| 24,063,639 | |
| 2 | |
| 181,481 | |
| 328,090 | |
| 328 | | | 509,901 | | | — | |
| 509,901 | |
Net income |
| — | |
| — | |
| — | |
| 23,331 | |
| — | | | 23,331 | | | 14 | |
| 23,345 | |
Unrealized loss on investments |
| — | |
| — | |
| — | |
| — | |
| (60) | | | (60) | | | — | |
| (60) | |
Foreign currency translation | | — | |
| — | |
| — | |
| — | |
| 75 | | | 75 | | | — | |
| 75 | |
Stock options exercised |
| 53,500 | |
| — | |
| 1,522 | |
| — | | | — | | | 1,522 | | | — | |
| 1,522 | |
Restricted stock awards |
| 117,468 | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Restricted stock awards forfeited |
| (5,509) | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Business acquisition | | 573,794 | | | — | | | 72,384 | | | — | | | — | | | 72,384 | | | — | | | 72,384 | |
Tax withholding payment related to net share settlement of equity awards |
| (25,597) | |
| — | |
| (1,992) | |
| — | | | — | | | (1,992) | | | — | |
| (1,992) | |
Stock-based compensation |
| — | |
| — | |
| 6,932 | |
| — | | | — | | | 6,932 | | | — | |
| 6,932 | |
Balance at April 30, 2021 |
| 24,777,295 | | | 2 | | | 260,327 | | | 351,421 | | | 343 | | | 612,093 | | | 14 | | | 612,107 | |
Net (loss) income |
| — | |
| — | |
| — | |
| (4,188) | |
| — | | | (4,188) | | | 3 | |
| (4,185) | |
Unrealized loss on investments |
| — | |
| — | |
| — | |
| — | |
| (43) | | | (43) | | | — | |
| (43) | |
Foreign currency translation | | — | |
| — | |
| — | |
| — | |
| (6,814) | | | (6,814) | | | — | |
| (6,814) | |
Stock options exercised |
| 114,362 | |
| — | |
| 2,776 | |
| — | | | — | | | 2,776 | | | — | |
| 2,776 | |
Restricted stock awards |
| 104,402 | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Restricted stock awards forfeited |
| (32,120) | |
| — | |
| — | |
| — | | | — | | | — | | | — | |
| — | |
Tax withholding payment related to net share settlement of equity awards |
| (12,652) | |
| — | |
| (1,245) | |
| — | | | — | | | (1,245) | | | — | |
| (1,245) | |
Change in non-controlling interest | | — | | | — | | | — | | | — | | | — | | | — | | | 224 | | | 224 | |
Stock based compensation |
| — | |
| — | |
| 5,390 | |
| — | | | — | | | 5,390 | | | — | |
| 5,390 | |
Balance at April 30, 2022 |
| 24,951,287 | | $ | 2 | | $ | 267,248 | | $ | 347,233 | | $ | (6,514) | | $ | 607,969 | | $ | 241 | | $ | 608,210 | |
See accompanying notes to consolidated financial statements.
6480
AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | |
| | Year Ended April 30, |
| |||||||
|
| 2022 |
| 2021 |
| 2020 |
| |||
| | | | | | | | | ||
Operating activities | | | | | | | | | ||
Net (loss) income | | $ | (4,185) | | $ | 23,345 | | $ | 41,070 | |
Loss on sale of business, net of tax | | | — | | | — | | | 265 | |
Net (loss) income from continuing operations | | | (4,185) | | | 23,345 | | | 41,335 | |
Adjustments to reconcile net (loss) income from continuing operations to cash (used in) provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 60,825 | | | 19,262 | | | 9,888 | |
(Income) loss from equity method investments, net | | | (5,889) | | | 10,481 | | | 5,487 | |
Amortization of debt issuance costs | | | 789 | | | 145 | | | — | |
Realized gain from sale of available-for-sale investments | | | — | | | (11) | | | (180) | |
Provision for doubtful accounts | | | (6) | | | (114) | | | 388 | |
Other non-cash expense (income) | | | 649 | | | (449) | | | (703) | |
Non-cash lease expense | | | 6,814 | | | 5,150 | | | 4,574 | |
Loss on foreign currency transactions | | | 233 | | | 1 | | | 1 | |
Deferred income taxes | | | (7,282) | | | (1,694) | | | 3,419 | |
Stock-based compensation | | | 5,390 | | | 6,932 | | | 6,227 | |
Loss (gain) on disposal of property and equipment | | | 8,277 | | | 123 | | | (71) | |
Amortization of debt securities | | | 242 | | | 309 | | | (1,423) | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | |
Accounts receivable | | | 3,084 | | | 17,177 | | | (42,869) | |
Unbilled receivables and retentions | | | (31,883) | | | 8,381 | | | (22,790) | |
Inventories | | | (27,160) | | | (5,179) | | | 8,855 | |
Income taxes receivable | | | (442) | | | — | | | 821 | |
Prepaid expenses and other assets | | | (4,534) | | | (6,104) | | | 831 | |
Accounts payable | | | (7,044) | | | 2,565 | | | 3,127 | |
Other liabilities | | | (7,496) | | | 6,212 | | | 8,180 | |
Net cash (used in) provided by operating activities | | | (9,618) | | | 86,532 | | | 25,097 | |
Investing activities | | | | | | | | | | |
Acquisition of property and equipment | | | (22,289) | | | (11,263) | |
| (11,220) | |
Equity method investments | | | (6,884) | | | (2,675) | | | (14,498) | |
Business acquisitions, net of cash acquired | | | (46,150) | | | (385,614) | | | (18,641) | |
Proceeds from sale of ownership in equity method investment | | | 6,497 | | | — | | | — | |
Proceeds from loan repayment | | | 4,345 | | | — | | | — | |
Proceeds from sale of property and equipment | | | — | | | — | | | 81 | |
Redemptions of held-to-maturity investments | | | — | | | — | | | 185,917 | |
Purchases of held-to-maturity investments | | | — | | | — | | | (176,757) | |
Redemptions of available-for-sale investments | | | 35,851 | | | 146,425 | |
| 200,892 | |
Purchases of available-for-sale investments | | | (23,882) | | | (125,644) | | | (106,607) | |
Other | | | 224 | | | — | | | — | |
Net cash (used in) provided by investing activities | | | (52,288) | | | (378,771) | | | 59,167 | |
Financing activities | | | | | | | | | | |
Principal payments of term loan | | | (10,000) | | | — | | | — | |
Payment of contingent consideration | | | — | | | — | | | (868) | |
Tax withholding payment related to net settlement of equity awards | | | (1,245) | | | (1,992) | | | (1,062) | |
Holdback and retention payments for business acquisition | | | (7,814) | | | (1,492) | | | — | |
Exercise of stock options | | | 2,776 | | | 1,522 | | | 100 | |
Payment of debt issuance costs | | | (293) | | | (3,878) | | | — | |
Proceeds from long-term debt | | | — | | | 200,000 | | | — | |
Other | | | (31) | | | — | | | — | |
Net cash (used in) provided by financing activities | | | (16,607) | | | 194,160 | | | (1,830) | |
Effects of currency translation on cash and cash equivalents | | | (1,319) | | | — | | | — | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | |
| (79,832) | |
| (98,079) | |
| 82,434 | |
Cash, cash equivalents and restricted cash at beginning of period | | | 157,063 | | | 255,142 | | | 172,708 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 77,231 | | $ | 157,063 | | $ | 255,142 | |
Supplemental disclosures of cash flow information | | | | | | | | | | |
Cash paid, net during the period for: | | | | | | | | | | |
Income taxes | | $ | 1,879 | | $ | 2,405 | | $ | 532 | |
Interest | | $ | 5,025 | | $ | — | | $ | — | |
Non-cash activities | | | | | | | | | | |
Unrealized (loss) gain on investments, net of deferred tax expense of $8, $1 and $14 for the fiscal years ended 2021, 2020 and 2019, respectively | | $ | (43) | | $ | (60) | | $ | 50 | |
Issuance of common stock for business acquisition | | $ | — | | $ | 72,384 | | $ | — | |
Change in foreign currency translation adjustments | | $ | (6,814) | | $ | 75 | | $ | 276 | |
Issuances of inventory to property and equipment, ISR in-service assets | | $ | 17,481 | | $ | 769 | | $ | — | |
Acquisitions of property and equipment included in accounts payable | | $ | 1,117 | | $ | 756 | | $ | 1,425 | |
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
AeroVironment, Inc., a Delaware corporation, is engaged in the design, development, production, delivery and support of a technologically advanced portfolio of intelligent, multi-domain robotic systems and operation ofrelated services for government agencies and businesses. AeroVironment, Inc. supplies unmanned aircraft systems (“UAS”) for various industries, tactical missile systems (“TMS”), unmanned ground vehicles (“UGV”) and governmental agencies.related services primarily to organizations within the U.S. Department of Defense (“DoD”) and to international allied governments.
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AeroVironment, Inc. and its wholly‑owned subsidiaries: AeroVironment Rhode Island, LLC, Skytowerwholly-owned subsidiaries Arcturus UAV, Inc. (“Arcturus”), AeroVironment, Inc. (Afghanistan)and Telerob Gesellschaft für Fernhantierungstechnik mbH (“Telerob”), as well as the Company’s Turkish joint venture, Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”) (collectively referred to herein as the “Company”). The Company increased its ownership in Altoy to a controlling interest on February 1, 2017. As a result of the increase in ownership, the consolidated financial statements include the balance sheet and results of operations of Altoy from February 1, 2017 forward. Prior to this date, the Company's investment in Altoy was accounted for under the equity method. Refer to Note 19 - Business Acquisitions for further details. All intercompany balances and transactions have been eliminated in consolidation.
In July 2016, the Company dissolved Charger Bicycles, LLC, the results of which were not material to the consolidated financial statements. In October 2016, the Company dissolved Skytower, LLC and Regenerative Fuel Cell Systems, LLC, the results of which were not material to the consolidated financial statements. In February 2018, the Company dissolved AeroVironment GmbH, the results of which were not material to the consolidated financial statements. In February 2019, the Company dissolved AeroVironment International PTE. LTD., the results of which were not material to the consolidated financial statements.
On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its efficient energy systems business segment (“the EES(the “EES Business”) to Webasto Charging Systems, Inc. (“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company. The Company determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. Refer to Note 2—Discontinued Operations for further details.
On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unit Purchase Agreement (the “Pulse Purchase Agreement”). The assets, liabilities and operating results of Pulse have been included in the Company’s consolidated financial statements. In February 2021, the Company dissolved its wholly-owned subsidiary, Pulse Aerospace, LLC, the results of which were not material to the consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On February 19, 2021, the Company closed its acquisition of Arcturus, a California corporation pursuant to a Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus and each of the shareholders and other equity interest holders of Arcturus (collectively, the “Arcturus Sellers”), to purchase 100% of the issued and outstanding equity of Arcturus (the “Arcturus Acquisition”). The assets, liabilities and operating results of Arcturus have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation, a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date by and among the Company, ISG Seller and the sole shareholder of ISG Seller (the “Beneficial Owner,” and such acquisition of ISG, the “ISG Acquisition”). The assets, liabilities and operating results of ISG have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to its previously announced Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Seller (collectively, the “Telerob Shareholders”), to purchase 100% of the issued and outstanding shares of Telerob
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Seller’s wholly-owned subsidiary Telerob GmbH (the “Telerob Acquisition”). The assets, liabilities and operating results of Telerob GmbH have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
Investments in Companies Accounted for Using the Equity or Cost Method
Investments in other non‑consolidatednon-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not provided for as the Company is not obligated to provide additional capital. The Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended.
When an investment accounted for using the equity method issues its own shares, the subsequent reduction in the Company’s proportionate interest in the investee is reflected in equity as an adjustment to paid‑in‑capital.paid-in-capital. The Company evaluates its investments in companies accounted for by the equity or cost method for impairment when there is evidence or indicators that a decrease in value may be other than temporary.
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In December of 2017, the Company and SoftbankSoftBank Corp. (“Softbank”SoftBank”) formed a joint venture, HAPSMobile Inc. (“HAPSMobile”). AsIn March 2022, the Company hassold its 7% share of HAPSMobile to Softbank. Following the sale, Softbank owns 100% of HAPSMobile. Prior to the sale, as the Company had the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment is accounted as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in “Equityequity method investment loss, net of tax”tax in the consolidated statement of operations. The carrying value of the investment in HAPSMobile was recorded in “Other assets, long-term.”other assets. Refer to Note 89 – Equity Method Investments for further details.
SegmentsIn July 2019, the Company made its initial capital contribution to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets. In March 2022, the Company entered into a second related limited partnership fund also focusing on highly relevant technologies and start-up companies serving defense and industrial markets. The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest. Refer to Note 9 – Equity Method Investments for further details.
Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of research and development (“R&D”), on a consolidated basis for the Company’s continuing operations.. Accordingly, the Company operates its business as a singleidentifies 4 reportable segment.segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management include, but are not limited to, valuation of: inventory, available‑for‑saleavailable-for-sale securities, acquired intangibles, goodwill, deferred tax assets and liabilities, useful lives of property, plant and equipment, medical and dental liabilities, warranty liabilities, long-term incentive plan liabilities and estimates of
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anticipated contract costs and transaction price utilized in the revenue recognition process. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. Equity method losses associated with the Company’s investment in Altoy for the fiscal year ended 2017 have been reclassified from other income (expense), net to equity method investment loss, net of tax on the consolidated statement of operations.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. The Company’s cash equivalents are comprised of money market funds, certificates of deposit of major financial institutions, and U.S. Treasury bills.
InvestmentsRestricted Cash
The Company classifies cash accounts which are not available for general use as restricted cash. Pursuant to the terms of the Arcturus Purchase Agreement, the Company maintained escrow accounts to address final purchase price adjustments post-Arcturus Closing and to address Arcturus UAV’s and/or the Sellers’ indemnification obligations. The restricted funds in the escrow account were recorded in other assets on the consolidated balance sheet. During the fiscal year ended April 30, 2022, the restricted cash was released, and the Company had 0 restricted cash as of April 30, 2022. As of April 30, 2021 restricted cash was $8,322,000.
Investments
The Company’s investments are accounted for as held‑to‑maturity and available‑for‑sale andheld-to-maturity reported at amortized cost and available-for-sale reported at fair value, respectively.value.
Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes for available-for-sale investments.
Gains and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Premium and discount on investments are amortized and accreted using the interest method and charged or credited to investment income.
Management determines the appropriate classification of securities at the time of purchase and re‑evaluatesre-evaluates such designation as of each balance sheet date.
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Investments are considered to be impaired when a decline in fair value is judged to be other‑than‑temporary.other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and its intent and ability to hold the investment to maturity. The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. Once a decline in fair value is determined to be other‑than‑temporary,other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the investment is established.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost due to the short period of time to maturity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, municipal bonds, U.S. government securities, U.S. government-guaranteed agency securities, U.S. Governmentgovernment sponsored agency debt securities, highly rated commercial paper, highly rated corporate bonds, and accounts receivable. The Company currently invests the majority of its cash in municipal bonds, U.S. government securities, U.S. government-guaranteed agency securities, U.S. Governmentgovernment sponsored agency debt securities and highly rated corporate bonds. The Company’s revenue and accounts receivable are with a limited number of corporations and governmental entities. In the aggregate, 58%
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66%, 58%69% and 65%61% of the Company’s revenue came from agencies of the U.S. government for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively. These agencies accounted for 26%65% and 49%64% of the accounts receivable balances at April 30, 20192022 and 2018,2021, respectively. One such agency, the U.S. Army, accounted for 28%21%, 19%34% and 20%32% of the Company’s consolidated revenue for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively. The Company performs ongoing credit evaluations of its commercial customers and maintains an allowance for potential losses.
Accounts Receivable, Unbilled Receivables and Retentions
Accounts receivable represents primarily U.S. government and Foreign government,allied foreign governments, and to a lesser extent commercial receivables, net of allowances for doubtful accounts. Unbilled receivables represent costs in excess of billings on incomplete contracts and, where applicable, accrued profit related to government long‑termlong-term contracts on which revenue has been recognized, but for which the customer has not yet been billed. Unbilled receivables are considered contract assets.
Retentions represent amounts withheld by customers until contract completion. At April 30, 20192022 and 2018,2021, the retention balances were $1,102,000$736,000 and $1,411,000,$700,000, respectively. The Company determines the allowance for doubtful accounts based on historical customer experience, age of receivable and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. The allowance for doubtful accounts reflects the Company’s best estimate of probableexpected credit losses inherent inover the accounts receivable balance;life of the receivable; such losses have historically been within management’s expectations. An account is deemed past due based on contractual terms rather than on how recently payments have been received.
Inventories
Inventories are stated at the lower of cost (using the weighted average costing method) or net realizable value. Inventory write‑offswrite-offs and write‑downwrite-down provisions are provided to cover risks arising from slow‑movingslow-moving items or technological obsolescence and for market prices lower than cost. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume. Based on this evaluation, provisions are made to write inventory down to its net realizable value.
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Long-Lived Assets
Long‑Lived Assets
Property and equipment are carried at cost. Depreciation of property and equipment, including amortization of leasehold improvements, are provided using the straight‑linestraight-line method over the following estimated useful lives:
| | | | |
Machinery and equipment |
| 2 - 7 | years |
|
Computer equipment and software |
| 2 - 5 | years | |
In-service ISR assets | | 3 years | | |
Furniture and fixtures |
| 3 - 7 | years | |
Leasehold improvements |
| Lesser of useful life or term of lease | |
The Company finances the purchase of certain IT equipment and perpetual software licenses with capital lease arrangements. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the asset under lease. Assets under capital leases are depreciated using the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease.
Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and betterments to property and equipment are capitalized at cost. When the Company disposes of assets, the applicable costs and accumulated depreciation and amortization thereon are removed from the accounts and any resulting gain or loss is included in selling, general and administrative (“SG&A”) expense in the period incurred with the exception of in-service ISR assets which is included in cost of sales expense in the period incurred.
The Company reviews the recoverability of its long‑livedlong-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. During the three months ended April 30, 2019, the Company recorded an impairment loss
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Intangibles Assets — Acquired in Business Combinations
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. Acquired intangible assets include technology, backlog, in-process research and development, customer relationships, trademarks and trade names.tradenames, and non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed. The estimated useful life for the Company’s intangible assets are as follows:
| | | |
Technology | 3 - 12 years | ||
Backlog | | 1 year | |
Licenses | 3 years | | |
Customer relationships | 3 - 5 years | | |
In-process research and development | | 3 years | |
Trademarks and tradenames | 6 years | | |
Non-compete agreements | | Contractual term | |
The Company monitors conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization period. The Company tests its intangible assets with finite lives for potential impairment whenever management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset's useful life and the impact of an event or circumstance on either an asset's useful life or carrying value involve significant judgment. NaN impairment was recorded for the fiscal years ended April 30, 2022, 2021 or 2020.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is tested at the reporting unit level for impairment annually during the fourth quarter of the Company’s fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Goodwill is assigned to the reporting units based on specific identification. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the impairment test, the Company first assesses qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, the Company may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). For the quantitative impairment test the Company estimates the fair value by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in the Company’s industry and require the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.
When performing the income approach for each reporting unit, the Company incorporates the use of projected financial information and a discount rate that are developed using market participant based assumptions. The cash-flow projections are based on seven-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth, which are updated at
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least annually and reviewed by management. The selected discount rate considers the risk and nature of the respective reporting unit’s cash flows and the rates of return market participants would require to invest their capital in its reporting units.
When performing the market approach for each reporting unit, the Company utilizes the guideline public company method and the guideline transaction method. The guideline public company method incorporates revenue and earnings multiples from publicly traded companies with operations and other characteristics similar to each reporting unit. The selected multiples consider each reporting unit’s relative growth, profitability, size, and risk relative to the selected publicly traded companies. The guideline transaction method incorporates implied multiples based on transactions from publicly traded companies with similar characteristics to each reporting unit.
NaN impairment was recorded for the fiscal years ended April 30, 2022, 2021 or 2020. The MUAS reporting unit is considered at higher risk of failing future quantitative impairment tests as the estimated fair value exceeded the carrying value by 9% for the fiscal year ended April 30, 2022.
Product Warranty
The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. Product warranty reserves are recorded in other current liabilities.
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Accrued Sales Commissions
As of April 30, 20192022 and 2018,2021, the Company accrued sales commissions in other current liabilities of $1,301,000$3,219,000 and $1,293,000,$2,716,000, respectively.
Self‑InsuranceSelf-Insurance Liability
The Company is self-insured for employee medical claims, subject to individual and aggregate stop loss policies. The Company estimates a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by the Company. As of April 30, 20192022 and 2018,2021, the Company estimated and recorded a self-insurance liability in wages and related accruals of approximately $965,000$1,653,000 and $1,003,000,$1,181,000, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The provision for income taxes reflects the taxes to be paid for the period and the change during the period in the deferred income tax assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. For uncertain tax positions, the Company determines whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, repeal of the corporate alternative minimum tax, repeal of the deduction for domestic production activities, and limitation on the deductibility of certain executive compensation.
In accordance with U.S. GAAP as determined by ASC 740, Income Taxes, the Company is required to record the effects of tax law changes in the period enacted. The Company remeasured its existing deferred tax assets and liabilities at the rate the Company expects to be in effect when those deferred taxes will be realized and recorded a one-time deferred tax expense of approximately $3,300,000 during the year ended April 30, 2018.
The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.
The measurement period under SAB 118 closed during the quarter ended January 31, 2019. AV has finalized its accounting for the impact of the Tax Act during the quarter ended January 31, 2019 and reached conclusions on the previous provisional estimates. AV has concluded that its foreign subsidiaries are in a cumulative earnings and profits deficit and therefore has confirmed that it will not have an income tax payable as a result of the one-time deemed repatriation tax. In relation to the one-time deferred tax remeasurement, AV has concluded that the impact recorded at the date of enactment is appropriate and no changes to the provision estimate of this item.
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Customer Advances and Amounts in Excess of Cost Incurred
The Company receives advances, performance‑basedperformance-based payments and progress payments from customers that may exceed costs incurred on certain contracts, including contracts with agencies of the U.S. government resulting in contract liabilities. These advances are classified as customer advances from customers and will be offset against billings.
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Revenue Recognition
The Company’s revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to the specifications of the customers. These contracts may be firm fixed price (“FFP”), cost plus fixed fee (“CPFF”), or time and materials (“T&M”). The Company considers all such contracts to be within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
Performance Obligations
A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its observable standalone selling price for products and services. When the standalone selling price is not directly observable, the Company uses its best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus reasonable margin approach. This approach estimates the Company’s expected costs of satisfying the performance obligation and then adds an appropriate margin for that distinct good or service.
Contract modifications are routine in the performance of the Company’s contracts. In most instances, contract modifications are for additional goods and/or services that are distinct and, therefore, accounted for as new contracts.
The Company’s performance obligations are satisfied over time, which accounted for 57%, 43% and 42% of revenue during its fiscal years ended April 30, 2022, 2021 and 2020, respectively, or at a point in time.time, 43%, 57% and 58% during its fiscal year ended April 30, 2022, 2021 and 2020, respectively. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs, if the customer controls the asset as it is being developed or produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment for the Company’s costs incurred to date plus a reasonable margin. The contractual right to payment is generally supported by termination for convenience clauses that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. Revenue for TMS product deliveries, customization of UGV transport vehicles and Customer-Funded R&D contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities and technical support services. Contract services revenue is recognized over time as services are rendered. Typically, revenue 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 services revenue, including ISR services, is recognized over time as services are rendered. The Company elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed.
For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. The Company’s small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.
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On April 30, 2019,2022, the Company had approximately $164,326,000$210,780,000 of remaining performance obligations under contracts with its customers, which the Company also refers to as backlog. The Company currently expects to recognize approximately 92%94% of the remaining performance obligations as revenue in fiscal 2020,2023 and an additional 7%6% in fiscal 2021, and the balance thereafter.2024.
The Company collects sales, value add, and other taxes concurrent with revenue producing activities, which are excluded from revenue when they are both imposed on a specific transaction and collected from a customer.
Contract Estimates
Accounting for contracts and programs primarily with a duration of less than six months involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the total expected costs to complete the contract and recognizes revenue based on the percentage of costs incurred at period end. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer.
The nature of the Company’s contracts gives rise to several types of variable consideration, including penalty fees and incentive awards generally for late delivery and early delivery, respectively. The Company generally estimates such variable consideration as the most likely amount. In addition, the Company includes the estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. Because of the certainty in estimating these amounts, they are included in the transaction price of the Company’s contracts and the associated remaining performance obligations.
As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company regularly reviews and updates its contract-related estimates. Changes in cumulative revenue estimates, due to changes in the estimated transaction price or cost estimates, are recorded using a cumulative catch-up adjustment in the period identified for contracts with performance obligations recognized over time. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on the Company’s operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was not significant for the years ended April 30, 2019, 20182022, 2021 or 2017. No adjustment on any one contract was material to the Company’s consolidated financial statements for the years ended April 30, 2019 or 2017.2020. During the year ended April 30, 2018,2022, the Company revised its estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1,124,000. During the year ended April 30, 2021, the Company revised its estimates of the total expected costs to complete a TMS contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1,041,000. During the year ended April 30, 2020, the Company revised its estimates of the total expected costs to complete a TMS contract and a contract associated with a design and development agreement. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease of approximately $1,255,000.
$1,403,000 and an increase of approximately $1,099,000, respectively.
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Revenue by Category
The following tables present the Company’s revenue disaggregated by major product line,segment, contract type, customer category and geographic location (in thousands):
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| April 30, |
| April 30, |
| April 30, | ||||||||||||
Revenue by major product line/program |
| 2019 |
| 2018 |
| 2017 | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended April 30, | ||||||||||||||||
Revenue by segment | | 2022 |
| 2021 | | 2020 | ||||||||||||
Small UAS |
| $ | 183,157 |
| $ | 167,534 |
| $ | 145,760 | | $ | 178,201 | | $ | 235,854 | | $ | 225,888 |
TMS |
|
| 65,087 |
|
| 63,406 |
|
| 81,182 | | | 76,415 | | | 87,268 | | | 63,781 |
MUAS | | | 93,156 | | | 15,837 | | | — | |||||||||
HAPS |
|
| 55,407 |
|
| 29,593 |
|
| 3 | | | 43,325 | | | 42,426 | | | 60,864 |
Other |
|
| 10,623 |
|
| 7,891 |
|
| 6,160 | |
| 54,635 | |
| 13,527 | |
| 16,763 |
Total revenue |
| $ | 314,274 |
| $ | 268,424 |
| $ | 233,105 | | $ | 445,732 | | $ | 394,912 | | $ | 367,296 |
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| April 30, |
| April 30, |
| April 30, | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended April 30, | ||||||||||||||||
Revenue by contract type |
| 2019 |
| 2018 |
| 2017 | | 2022 |
| 2021 | | 2020 | ||||||
FFP |
| $ | 224,090 |
| $ | 212,976 |
| $ | 177,506 | | $ | 346,092 | | $ | 307,413 | | $ | 269,917 |
CPFF |
|
| 89,485 |
|
| 55,203 |
|
| 54,052 | | | 93,428 | | | 86,719 | | | 94,176 |
T&M |
|
| 699 |
|
| 245 |
|
| 1,547 | |
| 6,212 | |
| 780 | |
| 3,203 |
Total revenue |
| $ | 314,274 |
| $ | 268,424 |
| $ | 233,105 | | $ | 445,732 | | $ | 394,912 | | $ | 367,296 |
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with FFP contracts. However, these types of contracts generally offer additional profits when the Company completes the work for less than originally estimated. CPFF contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees on FFP contracts. Under T&M contracts, the Company’s profit may vary if actual labor hour rates vary significantly from the negotiated rates.
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| April 30, |
| April 30, |
| April 30, | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended April 30, | ||||||||||||||||
Revenue by customer category |
| 2019 |
| 2018 |
| 2017 | | 2022 |
| 2021 | | 2020 | ||||||
U.S. government: |
| $ | 182,586 |
| $ | 156,996 |
| $ | 151,595 | |||||||||
U.S. government | | $ | 294,941 | | $ | 271,273 | | $ | 225,341 | |||||||||
Non-U.S. government |
|
| 131,688 |
|
| 111,428 |
|
| 81,510 | | | 150,791 | | | 123,639 | | | 141,955 |
Total revenue |
| $ | 314,274 |
| $ | 268,424 |
| $ | 233,105 | | $ | 445,732 | | $ | 394,912 | | $ | 367,296 |
|
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| April 30, |
| April 30, |
| April 30, | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended April 30, | ||||||||||||||||
Revenue by geographic location |
| 2019 |
| 2018 |
| 2017 | | 2022 |
| 2021 | | 2020 | ||||||
Domestic |
| $ | 151,124 |
| $ | 142,158 |
| $ | 149,698 | | $ | 262,258 | | $ | 241,898 | | $ | 201,046 |
International |
|
| 163,150 |
|
| 126,266 |
|
| 83,407 | | | 183,474 | | | 153,014 | | | 166,250 |
Total revenue |
| $ | 314,274 |
| $ | 268,424 |
| $ | 233,105 | | $ | 445,732 | | $ | 394,912 | | $ | 367,296 |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits on the consolidated balance sheet. In the Company’s services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, which is generally monthly, or upon the achievement of contractual milestones. Generally, billing occurs subsequent to
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revenue recognition, resulting in contract assets recorded in “Unbilledunbilled receivables and retentions”retentions on the consolidated balance sheet. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities recorded in “Customer advances”customer advances on the consolidated balance sheet. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. For the Company’s product revenue, the Company generally receives cash payments subsequent to satisfying the performance obligation via delivery of the product, resulting in billed accounts receivable. Changes in the contract asset and liability balances during
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the years ended April 30, 20192022 or 20182021 were not materially impacted by any other factors. For the Company’s contracts, there are no significant gaps between the receipt of payment and the transfer of the associated goods and services to the customer for material amounts of consideration.
Revenue recognized for the years ended April 30, 2019, 2018,2022, 2021, and 20172020 that was included in contract liability balances at the beginning of each year were $1,587,000, $977,000$3,144,000, $5,468,000 and $483,000,$1,670,000, respectively.
Stock‑BasedCost to Fulfill a Contract with a Customer
The Company recognizes assets for the costs to fulfill a contract with a customer if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered in accordance with ASC 340-40 Other Assets and Deferred Costs: Contracts with Customers. The assets related to costs to fulfill contracts with customers are capitalized and amortized over the period the related performance obligations are satisfied. As of April 30, 2022 and 2021, the Company had $0 and $1,729,000 of costs to fulfill future performance obligations on contracts considered to be probable of occurrence. Costs to fulfill a contract are recorded in prepaid expenses and other current assets on the consolidated balance sheets.
Stock-Based Compensation
Stock‑basedStock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.
Long‑TermLong-Term Incentive Awards
For long‑termlong-term incentive awards outstanding as of April 30, 2019,2022, the awards include time-based awards which vest equally over three years and performance-based awards which vest based on the achievement of a target payout established at the beginning of each performance period. The actual payout at the end of the performance period is calculated based upon the Company’s achievement of such targets. Payouts are made in shares of restricted stock units which become immediately vested upon issuance.
At each reporting period, the Company reassesses the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised.
Research and Development
Internally funded research and development costs (“IRAD”), sponsored by the Company relate to both U.S. government products and services and those for commercial and foreign customers. IRAD costs for the Company are recoverable and allocable under government contracts in accordance with U.S. government procurement regulations.
Customer‑fundedCustomer-funded research and development costs are incurred pursuant to contracts (revenue arrangements) to perform research and development activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue is recognized, which is generally as the research and development services are performed. Revenue from customer‑fundedcustomer-funded research and development was approximately $76,407,000, $52,489,000$84,247,000, $74,218,000 and $43,329,000$80,934,000 for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively. The related cost of sales for customer‑fundedcustomer-funded research and development totaled approximately $54,824,000, $36,855,000$59,054,000, $51,395,000 and $29,527,000$56,440,000 for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively.
In January 2017, the Company executed a cost sharing Other Transaction Agreement type contract funded by the US Federal Government to perform certain system design, development and functional testing activities specific to a new prototype UAS on a best-efforts basis. The total estimated coststerm of the project are approximately $21,933,000,agreement was completed as of which the Company is responsible for funding $11,225,000. The remaining $10,708,000 will beDecember 2020. Costs of $21,833,000 have been reimbursed to the Company as the activities are performed. The termwere performed, while the Company was
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responsible for funding a minimum of $11,225,000. The Company has
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determined that the contract meets the criteria of ASC 912-730-05 Contractors – Federal Government and, therefore, all reimbursements are recorded as an offset to research and development expense in the consolidated statements of operations.income. Reimbursements under the contract were $5,936,000, $4,188,000$3,424,000 and $233,000$8,102,000 for the fiscal years ended April 30, 2019, 20182021 and 2017,2020, respectively.
Lease Accounting
At contract inception the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are recorded in operating lease right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.
The Company accountsrecognizes operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. The Company defines the initial lease term to include renewal options determined to be reasonably certain. The Company’s leases have remaining lease terms of less than one year to six years, some of which may include options to extend the lease for its leasesup to 10 years, and subsequent amendments assome of which may include options to terminate the lease after two years. None of the Company’s options to extend or terminate are reasonably certain of being exercised, and are therefore not included in the Company’s determination of lease assets and liabilities. For operating leases, or capitalthe Company recognizes lease expense for these leases for financial reporting purposes. Certain operating leases contain rent escalation clauses, which are recorded on a straight‑line basis over the initial term of the lease with the difference between the rent paid and the straight‑line rent recorded as a deferred rent liability. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a straight‑linestraight-line basis over the lease termterm.
Many of the Company’s real estate lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, if the incentive is determined to be a leasehold improvement owned by the lessee, the Company generally records incentive as a reduction to fixed lease payments thereby reducing rent expense. DeferredFor rent liabilities were approximately $1,173,000holidays and $1,536,000rent escalation clauses during the lease term, the Company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of April 30, 2019access to the space and 2018, respectively.begins to make improvements in preparation for intended use.
The Company does not have any material restrictions or covenants in its lease agreements, sale-leaseback transactions, land easements or residual value guarantees.
In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. Additionally, the Company makes judgments around contractual asset substitution rights in determining whether a contract contains a lease.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses included in SG&A expenses were approximately $897,000, $526,000$451,000, $675,000 and $227,000$934,000 for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively.
Foreign Currency Transactions
Foreign currency transaction gains and losses are charged or credited to earnings as incurred. For the fiscal years ended April 30, 2019, 20182022, 2021 and 2017,2020, foreign currency transaction gains and losses that are included in other (expense) income, (expense)net in the accompanying statements of operationsincome were $(38,000), $87,000,$242,000, $1,000, and $(284,000),$1,000, respectively.
(Loss) Earnings Per Share
Basic (loss) earnings per share are computed using the weighted‑averageweighted-average number of common shares outstanding and excludes any anti‑dilutiveanti-dilutive effects of options, restricted stock and restricted stock units. The dilutive effect of potential common shares outstanding is included in diluted (loss) earnings per share.
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The reconciliation of diluted to basic shares is as follows:
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|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year Ended April 30, |
| |||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Continuing operations attributable to AeroVironment |
| $ | 41,912,000 |
| $ | 21,750,000 |
| $ | 17,701,000 |
| ||||||||||
| | | | | | | | | | | ||||||||||
| | Year Ended April 30, |
| |||||||||||||||||
|
| 2022 |
| 2021 |
| 2020 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
Continuing operations attributable to AeroVironment, Inc. | | $ | (4,188,000) | | $ | 23,331,000 | | $ | 41,339,000 | | ||||||||||
Discontinued operations, net of tax |
|
| 5,526,000 |
|
| (3,887,000) |
|
| (4,601,000) |
| | | — | | | — | | | (265,000) | |
Net income attributable to AeroVironment |
| $ | 47,438,000 |
| $ | 17,863,000 |
| $ | 13,100,000 |
| ||||||||||
Net (loss) income attributable to AeroVironment, Inc. | | $ | (4,188,000) | | $ | 23,331,000 | | $ | 41,074,000 | | ||||||||||
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Weighted average common shares |
|
| 23,663,410 |
|
| 23,471,241 |
|
| 23,059,045 |
| |
| 24,685,534 | |
| 24,049,851 | |
| 23,806,208 | |
Dilutive effect of employee stock options, restricted stock and restricted stock units |
|
| 408,303 |
|
| 342,531 |
|
| 248,693 |
| |
| — | |
| 312,805 | |
| 281,959 | |
Denominator for diluted earnings per share |
|
| 24,071,713 |
|
| 23,813,772 |
|
| 23,307,738 |
| |
| 24,685,534 | |
| 24,362,656 | |
| 24,088,167 | |
During the years ended April 30, 2019, 20182022, 2021 and 2017,2020, certain options, shares of restricted stock and restricted stock units were not included in the computation of diluted earnings per share because their inclusion would have been anti‑dilutive.anti-dilutive. Due to the net loss for the fiscal year ended April 30, 2022, 0 shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. The number of options, restricted stock and restricted stock units which met this anti‑dilutiveanti-dilutive criterion was approximately 18,000, 22,000224,000, 3,000 and 86,0003,000 for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively.
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Recently Adopted Accounting Standards
In August 2016,Effective May 1, 2021, the FASB issuedCompany adopted ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments2019-12, Simplifying the Accounting for Income Taxes (Topic 230)740). This ASU adds and clarifiessimplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including removing the requirement to limit income tax expense (benefit) in an interim period to the full year projected amounts. The Company adopted ASU 2019-12 using the prospective method, applying the new guidance on the classification of certain cash receipts and payments in the statement of cash flows.accounting for income taxes after adoption. The Company’s adoption of ASU No. 2017-01 effective May 1, 20182019-12 did not have a material impact on itsthe Company’s consolidated financial statements.
Recently Issued Accounting Standards
In January 2017,October 2021, the FASB issued ASU 2017-01, 2021-08, Business Combinations—Clarifying the definition of a businessCombinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This ASU clarifies the definition of a business with the objective of providing a more robust framework2021-08 requires an acquirer to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when applyingapply the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
In the first quarter of its fiscal 2019, the Company adopted ASU 2014-09, ASC 606, Revenue from Contracts with Customers, (Topic 606), to recognize and measure contract assets and contract liabilities in a business combination, rather than using the full retrospective method. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services.
Revenue for small UAS product contracts with both the U.S. government and foreign governments under the new standard will be recognized at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. Revenue for Tactical Missile Systems (“TMS”) contracts will now be recognized under the new standard over time as costs are incurred. Under previous U.S. GAAP, revenue was generally recognized when deliveries of the related TMS products were made.fair value. The new standard accelerates the timing of when the revenue is recognized; however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for the Company’s Customer-Funded Research and Development (“R&D”) contracts. The Company continues to recognize revenue for these contracts over time as costs are incurred. The adoption of Topic 606 resulted in a cumulative adjustment to increase retained earnings by $500,000 at May 1, 2016 relating to both the Company’s continuing and discontinued operations. For the Company’s continuing operations, the adoption of Topic 606 resulted in a cumulative adjustment to increase retained earnings by $564,000 at May 1, 2016.
The Company applied the standard’s practical expedient that permits the omission of prior-period information about the Company’s remaining performance obligations, the practical expedient that permits the Company to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset the entity otherwise would have recognized is one year or less, and the practical expedient that permits the Company to not retrospectively restate contracts which were modified prior to the Company’s initial date of adoption, or May 1, 2016. Instead the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price. No other practical expedients were applied.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and interim periods therein,2022, with early adoption permitted. The Company currently does not hold a large number of leases that are classified as operating leases under the existing lease standard, with the only significant leases being its various property leases.ASU 2021-08 is adopted prospectively and could impact future acquisitions.
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The Company plans to adopt Topic 842 using the required modified retrospective approach with the election to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of adoption, the Company plans to elect the package of practical expedients which allows us to not reassess existing or expired contracts for existence of a lease, lease classification, or amortization of previously capitalized initial direct leasing cost. Additionally, the Company also plans to elect the short-term lease exception to not record right-of-use assets and lease liabilities for leases with a term less than 12 months, the hindsight practical expedient to utilize latest information in determining lease term, and the practical expedient to not separate lease and non-lease components for most asset classes. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU is intended to replace the incurred loss impairment methodology under GAAP with a methodology that reflects using a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments, and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The guidance is effective for fiscal years beginning after December 15, 2019 and the interim periods therein, with early adoption permitted. Entities are required to apply the amendments in this update using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU permits, but does not require, the Company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within AOCI to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU removes or modifies current disclosures while adding certain new disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for the removed or modified disclosures. The removed and modified disclosures can be adopted retrospectively, and the added disclosures should be adopted prospectively. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350-40). This ASU allows for capitalization of implementation costs associated with certain cloud computing arrangements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
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2. Discontinued Operations
On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its EES Business to Webasto.Webasto pursuant to a Purchase Agreement between Webasto and the Company. In accordance with the terms of the Purchase Agreement, as amended by a Side Letter Agreementside letter agreement executed at the closing, the Company received cash consideration of $31,994,000 upon closing, which resulted inclosing. During the year ended April 30, 2020, the Company and Webasto engaged an independent accounting firm to resolve a gain of $11,420,000working capital dispute. In June 2020, the independent accounting firm determined the final adjustment to the working capital dispute to be $341,000 which has been recorded in “Gain on sale of business, net of tax”tax as a loss of discontinued operations in the consolidated statements of operations. Duringincome for the year ended April 30, 2019, the Company recorded a reduction to the gain resulting from a working capital adjustment of $486,000. In addition, the Company has disputed $1,085,000 of Webasto’s working capital adjustment claim, which is being submitted to an independent accounting firm for resolution pursuant to the terms of Purchase Agreement. No amounts have been recorded in the consolidated financial statements related to the additional working capital dispute as the Company has assessed the likelihood of a loss to be less than probable.2020.
The Company iswas entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of two2 remaining customer contracts to Webasto. The Holdback was not recorded in the Company’s consolidated financial statements as the amount was not realized or realizable as of April 30, 2019. The Company’s satisfaction2022.
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Table of the requirements for the payment of the Holdback is currently in dispute.Contents
On February 22, 2019, Webasto filed a lawsuit alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures, failure to provide certain consents to contract assignments and related to the previously announced recall. Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $6,500,000 in addition to attorneys’ fees, costs, and punitive damages. The Company believes that the allegations are generally meritless and intends to mount a vigorous defense.
During the three months ended October 27, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration that named certain of the Company’s EES products as subject to the recall. The Company is continuing to assess the facts giving rise to the recall. Under the terms of the Purchase Agreement, the Company may be responsible for certain costs of such recall of named products the Company manufactured, sold or serviced prior to the closing of the sale of the EES Business. On August 14, 2019, Benchmark Electronics, Inc. (“Benchmark”), the company that assembled the products subject to the recall, served a demand for arbitration to the Company and Webasto, and a third-party part supplier pursuant to its contracts with the Company and Webasto, respectively. The Company filed a responsive pleading in the Benchmark arbitration on October 29, 2019, consisting of a general denial, affirmative defenses, and a reservation of the right to file counter-claims at a later date. Webasto challenged the validity of the Benchmark arbitration by filing an action in New York Superior Court. In December 2019, Webasto and Benchmark reached a settlement of their disputed claims. Benchmark withdrew its Notice of Arbitration against Webasto and the Company, but reserved its right to pursue indemnity claims against suppliers. The recall remains a significant part of the Webasto lawsuit.
On February 22, 2019, Webasto filed a lawsuit, which was amended in April 2019, alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures and failure to provide certain consents to contract assignments, and related to a previously announced product recall. Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $6,500,000 in addition to attorneys’ fees, costs, and punitive damages. On August 16, 2019, the Company filed a counterclaim against Webasto seeking payment of the Holdback and declaratory relief regarding Webasto’s cancellation of an assigned contract. Webasto again amended the complaint in May 2021 to include additional claims. On June 2, 2021, the Company filed an answer to Webasto’s second amended complaint filed in May 2021.
In order to avoid the future cost, expense, and distraction of continued litigation, the Company engaged in settlement negotiations with Webasto in May 2021. While the negotiations did not result in a settlement of any of the Company’s or Webasto’s claims at such time, as a result of the settlement negotiations, the Company established a litigation reserve, which reflected the scope of a rejected offer intended to communicate the Company’s serious and good faith intention to attempt to reach a settlement for the stated purposes. The offer did not reflect the Company’s view of the merits of the claims made; however, as a result of the preparation of the good faith offer and the Company’s willingness to pursue settlement for that amount, the Company recorded litigation reserve expenses in the amount of $9,300,000 during the year ended April 30, 2021 recorded in other (expense) income on the consolidated statements of (loss) income and in other current liabilities on the consolidated balance sheet. On December 2, 2021, the Company agreed in principle, subject to formal documentation with Webasto, to settle all existing claims related to the sale of its former EES business for $20,000,000 and Webasto keeping the Holdback. As a result of the agreement in principle to settle the litigation, the Company recorded additional litigation reserve expenses in the amount of $10,000,000 during the three months ended October 30, 2021 in other (expense) income on the consolidated statements of operations and in other current liabilities on the consolidated balance sheet. The Company executed a written settlement agreement with Webasto effective December 16, 2021 to officially and fully settle all claims in the lawsuit. Under the terms of the written settlement agreement, the Company’s payment of the settlement amount of $20,000,000 will occur over a 24 month period from the effective date of the settlement agreement and Webasto will retain the Holdback. As of April 30, 2022, $5,000,000 of the settlement has been paid.
Concurrent with the execution of the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) to provide certain general and administrative services to Webasto for a defined period. Income from performing services under the TSA was $2,758,000$0, $38,000 and $551,000 and has been recorded in “Otherother income, net”net in the consolidated statements of operations(loss) income for the yearfiscal years ended April 30, 2019,2022, 2021 and 2020, respectively.
7794
The Company determined that the EES Business met the criteria for classification as an asset held for sale as of April 30, 2018 and represents a strategic shift in in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. The table below presents the statements of operationsincome data for the EES Business (in thousands).
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Year Ended April 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended April 30, | ||||||||||||||||
| | 2022 | | 2021 | | 2020 | ||||||||||||
| | | | | | | | | | |||||||||
Net sales |
| $ | 4,256 |
| $ | 38,411 |
| $ | 36,201 | | $ | — | | $ | — | | $ | — |
Cost of sales |
|
| 5,097 |
|
| 33,384 |
|
| 29,983 | |
| — | |
| — | |
| — |
Gross margin |
|
| (841) |
|
| 5,027 |
|
| 6,218 | |
| — | |
| — | |
| — |
Selling, general and administrative |
|
| 1,515 |
|
| 7,825 |
|
| 8,895 | |
| — | |
| — | |
| — |
Research and development |
|
| 1,072 |
|
| 3,526 |
|
| 4,577 | |
| — | |
| — | |
| — |
Other income, net |
|
| 1 |
|
| (27) |
|
| 7 | | | — | | | — | | | — |
Loss from discontinued operations before income taxes |
|
| (3,427) |
|
| (6,351) |
|
| (7,247) | |
| — | |
| — | |
| — |
Benefit for income taxes |
|
| (463) |
|
| (2,464) |
|
| (2,646) | | | — | | | - | | | - |
Net loss from discontinued operations |
| $ | (2,964) |
| $ | (3,887) |
| $ | (4,601) | | $ | — | | $ | — | | $ | — |
Gain on sale of business, net of tax expense of $2,444 for the year ended April 30, 2019 |
|
| 8,490 |
|
| — |
|
| — | |||||||||
Net income (loss) from discontinued operations |
| $ | 5,526 |
| $ | (3,887) |
| $ | (4,601) | |||||||||
Loss on sale of business, net of tax benefit of $76 for the year ended April 30, 2020 | | | — | | | — | | | (265) | |||||||||
Net loss from discontinued operations | | $ | — | | $ | — | | $ | (265) | |||||||||
The major classes of assets and liabilities included in discontinued operations related to the EES Business are presented in the table below.
|
|
|
|
|
|
|
|
| April 30, | ||||
|
| 2019 |
| 2018 | ||
Carrying amount of assets classified as discontinued operations |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $139 at April 30, 2018 |
| $ | — |
| $ | 6,889 |
Inventories, net |
|
| — |
|
| 15,494 |
Prepaid expenses and other current assets |
|
| — |
|
| 185 |
Property and equipment, net |
|
| — |
|
| 3,100 |
Total current assets classified as discontinued operations |
|
| — |
|
| 25,668 |
Property and equipment, net |
|
| — |
|
| — |
Total non-current assets classified as discontinued operations |
|
| — |
|
| — |
Total assets classified as discontinued operations |
| $ | — |
| $ | 25,668 |
Carrying amount of liabilities classified as discontinued operations |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | — |
| $ | 5,121 |
Wages and related accruals |
|
| — |
|
| 1,946 |
Customer advances |
|
| — |
|
| 1,028 |
Other current liabilities |
|
| — |
|
| 1,199 |
Total current liabilities |
|
| — |
|
| 9,294 |
Total liabilities classified as discontinued operations |
| $ | — |
| $ | 9,294 |
78
3. Investments
Investments consist of the following:
|
|
|
|
|
|
| ||||||
|
| April 30, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (In thousands) | ||||||||||
| | | | | | | ||||||
| | April 30, | ||||||||||
|
| 2022 |
| 2021 | ||||||||
Short-term investments: |
|
|
|
|
|
| | | | | | |
Held-to-maturity securities: |
|
|
|
|
|
| ||||||
Available-for-sale securities: | | | | | | | ||||||
Municipal securities |
| $ | 5,332 |
| $ | 35,344 | | | 19,725 | | | 22,245 |
U.S. government securities |
|
| 63,205 |
|
| 31,620 | | | 4,991 | | | 4,009 |
Corporate bonds |
|
| 81,950 |
|
| 46,685 | | | — | | | 5,717 |
Total held-to-maturity and short-term investments |
| $ | 150,487 |
| $ | 113,649 | ||||||
Total short-term investments | | $ | 24,716 | | $ | 31,971 | ||||||
Long-term investments: |
|
|
|
|
|
| | | | | | |
Held-to-maturity securities: |
|
|
|
|
|
| ||||||
Available-for-sale securities: | | | | | | | ||||||
Municipal securities |
| $ | — |
| $ | 2,046 | | | — | | | 988 |
U.S. government securities |
|
| 7,404 |
|
| 27,356 | | | — | | | 4,000 |
Corporate bonds |
|
| 1,982 |
|
| 9,112 | ||||||
Total held-to-maturity investments |
|
| 9,386 |
|
| 38,514 | ||||||
Available-for-sale securities: |
|
|
|
|
|
| ||||||
Auction rate securities |
|
| — |
|
| 2,142 | ||||||
Total available-for-sale investments |
|
| — |
|
| 2,142 | ||||||
Total long-term available-for-sale investments | |
| — | |
| 4,988 | ||||||
Equity method investments | | | | | | | ||||||
Investment in limited partnership fund | |
| 15,433 | |
| 7,168 | ||||||
Total equity method investments | |
| 15,433 | |
| 7,168 | ||||||
Total long-term investments |
| $ | 9,386 |
| $ | 40,656 | | $ | 15,433 | | $ | 12,156 |
Held‑To‑MaturityAvailable-For-Sale Securities
As of April 30, 20192022 and 2018,2021, the balance of held‑to‑maturityavailable-for-sale securities consisted of state and local government municipal securities, U.S. government securities, U.S. government agency securities, and investment grade corporate bonds. Interest earned from these investments is recorded in interest (expense) income. Realized gains on sales of these investments on the basis of specific identification is recorded in interest (expense) income.
95
The amortized cost, gross unrealized losses, and estimated fair valuefollowing table is a summary of the held‑to‑maturityactivity related to the available-for-sale investments recorded in short-term and long-term investments as of April 30, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| April 30, 2019 |
| April 30, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| |||||||||||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| |||||||||||||||||||||||||||||||||
|
| Cost |
| Gains |
| Losses |
| Value |
| Cost |
| Gains |
| Losses |
| Value |
| |||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | April 30, 2022 | | April 30, 2021 | | |||||||||||||||||||||||||||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
| | | | Gross | | Gross | | | |
| |||||||||||||||||||||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | | |||||||||||||||||||||||||||||||||
| | Cost | | Gains | | Losses | | Value | | Cost |
| Gains | | Losses |
| Value | | |||||||||||||||||||||||||||||||||
Municipal securities |
| $ | 5,332 |
| $ | 2 |
| $ | (1) |
| $ | 5,333 |
| $ | 37,390 |
| $ | 9 |
| $ | (36) |
| $ | 37,363 |
| | $ | 19,756 | | $ | — | | $ | (31) | | $ | 19,725 | | $ | 23,227 | | $ | 8 | | $ | (2) | | $ | 23,233 | |
U.S. government securities |
|
| 70,609 |
|
| 78 |
|
| (52) |
|
| 70,635 |
|
| 58,976 |
|
| — |
|
| (367) |
|
| 58,609 |
| | | 4,995 | | | — | | | (4) | | | 4,991 | | | 8,008 | | | 1 | | | — | | | 8,009 | |
Corporate bonds |
|
| 83,932 |
|
| 20 |
|
| (5) |
|
| 83,947 |
|
| 55,797 |
|
| 2 |
|
| (71) |
|
| 55,728 |
| | | — | | | — | | | — | | | — | | | 5,718 | | | — | | | (1) | | | 5,717 | |
Total held-to-maturity investments |
| $ | 159,873 |
| $ | 100 |
| $ | (58) |
| $ | 159,915 |
| $ | 152,163 |
| $ | 11 |
| $ | (474) |
| $ | 151,700 |
| |||||||||||||||||||||||||
Total available-for-sale investments | | $ | 24,751 | | $ | — | | $ | (35) | | $ | 24,716 | | $ | 36,953 | | $ | 9 | | $ | (3) | | $ | 36,959 | | |||||||||||||||||||||||||
79
The amortized cost and fair value of the Company’s held‑to‑maturityavailable-for-sale securities by contractual maturity at April 30, 2019,2022, are as follows:
|
|
|
|
|
|
|
| |||||||
|
| Cost |
| Fair Value |
| |||||||||
| | | | | | | | |||||||
|
| Cost |
| Fair Value |
| |||||||||
Due within one year |
| $ | 150,487 |
| $ | 150,498 |
| | $ | 24,751 | | $ | 24,716 | |
Due after one year through five years |
|
| 9,386 |
|
| 9,417 |
| |
| — | |
| — | |
Total |
| $ | 159,873 |
| $ | 159,915 |
| | $ | 24,751 | | $ | 24,716 | |
Available‑For‑Sale Securities
Auction Rate Securities
As of April 30, 2018, the balance of available-for-sale auction rate securities consisted of two investment grade auction rate municipal bonds with maturities ranging from 1 to 16 years. These investments have characteristics similar to short term investments, because at predetermined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses whether to roll over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.
During the three months ended July 28, 2018, the remaining investment grade auction rate municipal bonds were redeemed at par value.
The amortized cost, gross unrealized losses, and estimated fair value of the available‑for‑sale auction rate securities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| April 30, |
| ||||
|
| 2019 |
| 2018 |
| ||
Auction rate securities |
|
|
|
|
|
|
|
Amortized cost |
| $ | - |
| $ | 2,250 |
|
Gross unrealized losses |
|
| - |
|
| (108) |
|
Fair value |
| $ | - |
| $ | 2,142 |
|
4. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
| Level 1—Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date. |
| Level 2—Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data. |
| Level 3—Inputs to the valuation that are unobservable inputs for the asset or liability. |
The Company did not have anyCompany’s financial assets measured at fair value on a recurring basis at April 30, 20192022, were as the Company’s remaining auction rate securities were redeemed during the three months ended July 28, 2018 at parfollows (in thousands):
| | | | | | | | | | | | | |
| | Fair Value Measurement Using | | ||||||||||
|
| | |
| Significant |
| | |
| | | | |
| | Quoted prices in | | other | | Significant | | | | | |||
| | active markets for | | observable | | unobservable | | | | | |||
| | identical assets | | inputs | | inputs | | | | | |||
Description | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | ||||
Available-for-sale securities | | $ | — | | $ | 24,716 | | $ | — | | $ | 24,716 | |
Contingently returnable consideration | | | — | | | — | | | 143 | | | 143 | |
Total | | $ | — | | $ | 24,716 | | $ | 143 | | $ | 24,859 | |
8096
value. The Company’s financial liabilities measured at fair value on a recurring basis at April 30, 2022, were as follows (in thousands):
| | | | | | | | | | | | | |
| | Fair Value Measurement Using | | ||||||||||
|
| | |
| Significant |
| | |
| | | | |
| | Quoted prices in | | other | | Significant | | | | | |||
| | active markets for | | observable | | unobservable | | | | | |||
| | identical assets | | inputs | | inputs | | | | | |||
Description | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | ||||
Contingent consideration | | $ | — | | $ | — | | $ | 1,084 | | $ | 1,084 | |
Total | | $ | — | | $ | — | | $ | 1,084 | | $ | 1,084 | |
The Company’s financial assets measured at fair value on a recurring basis at April 30, 2021, were as follows (in thousands):
| | | | | | | | | | | | |
| | Fair Value Measurement Using | ||||||||||
|
| | |
| Significant |
| | |
| | | |
| | Quoted prices in | | other | | Significant | | | | |||
| | active markets for | | observable | | unobservable | | | | |||
| | identical assets | | inputs | | inputs | | | | |||
Description | | (Level 1) | | (Level 2) | | (Level 3) | | Total | ||||
Available-for-sale securities | | $ | — | | $ | 36,959 | | $ | — | | $ | 36,959 |
Contingently returnable consideration | | | — | | | — | | | 479 | | | 479 |
Total | | $ | — | | $ | 36,959 | | $ | 479 | | $ | 37,438 |
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
| Fair Value |
| |
|
| Measurements Using |
| |
|
| Significant |
| |
|
| Unobservable Inputs |
| |
Description |
| (Level 3) |
| |
Balance at May 1, 2018 |
| $ | 2,142 |
|
Transfers to Level 3 |
|
| — |
|
Total gains (realized or unrealized) |
|
|
|
|
Included in earnings |
|
| — |
|
Included in other comprehensive income |
|
| 108 |
|
Settlements |
|
| (2,250) |
|
Balance at April 30, 2019 |
| $ | — |
|
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at April 30, 2019 |
| $ | — |
|
| | | | | | | |
|
| Fair Value | | Fair Value |
| ||
| | Measurements Using | | Measurements Using |
| ||
| | Significant | | Significant |
| ||
| | Unobservable Inputs | | Unobservable Inputs |
| ||
| | | Assets | | | Liabilities | |
Description | | (Level 3) | | (Level 3) |
| ||
Balance at May 1, 2021 | | $ | 479 | | $ | — | |
Business acquisition | | | — | | | 889 | |
Transfers to Level 3 | |
| — | |
| — | |
Total losses (realized or unrealized) | | | | | | | |
Included in selling, general and administrative | | | 336 | | | 195 | |
Settlements | |
| — | |
| — | |
Balance at April 30, 2022 | | $ | 143 | | $ | 1,084 | |
The amount of total (gains) or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at April 30, 2022 | | $ | — | | $ | — | |
The auction rate securities werefair value measurement tables above have been corrected to present the fair value of the contingently returnable consideration associated with the acquisition of ISG of $479,000 as of April 30, 2021 and subsequent changes in fair value, which is recorded in other assets on the consolidated balance sheet. The tables previously included the fair value of the contingent consideration, rather than the returnable contingent consideration. The returnable contingent consideration represents the difference between the $6,000,000 cash consideration paid to the sellers in escrow and the fair value of the contingent consideration of $5,857,000 as of April 30, 2022.
Pursuant to the ISG Purchase Agreement, the sellers may receive up to a maximum of $6,000,000 in additional cash consideration (“contingent consideration”), if certain revenue targets are achieved during the 3 years following closing. The contingent consideration was valued using a discounted cash flowBlack-Scholes option-pricing model. The analysis considered, among other items, the collateralization underlying the security investments, the creditworthinesscontractual terms of the counterparty,ISG Purchase Agreement, the Company’s discount rate, the timing of
97
expected future cash flows and the probability that the revenue targets required for payment of the contingent consideration will be achieved. During the fiscal year ended April 30, 2022, the target for the first and second years were achieved, and the related consideration of $2,000,000 for the first year was released from an escrow account that is not controlled by the Company and, therefore, not recorded on the consolidated balance sheet. The related consideration of $2,000,000 for the second year is in an escrow account not controlled by the Company and is expected to be released during the three months ended July 30, 2022. The fair value of the contingently returnable consideration is equal to the difference between the maximum value of the contingent consideration and the fair value of the contingent consideration and is recorded in other assets on the consolidated balance sheet.
Pursuant to the Telerob Purchase Agreement, the Telerob Sellers may receive up to a maximum of €6,000,000 (approximately $7,272,000) in additional cash consideration if specific revenue and contract award targets for Telerob are achieved during the 36 month period after closing. The contingent consideration was valued using a Black-Scholes option-pricing model. The analysis considered, among other items, contractual terms of the Telerob Purchase Agreement, the Company’s discount rate, the timing of expected future cash flows and the estimated date upon whichprobability that the securityrevenue and contract award targets required for payment of the contingent consideration will be achieved. The first year earnout of €2,000,000 was not achieved. The fair value of the contingent consideration is expected to have a successful auction.recorded in other current liabilities on the consolidated balance sheet. See Note 21—Business Acquisitions.
5. Inventories, net
Inventories consist of the following:following (in thousands):
| | | | | | | | |||||||
| | April 30, | | |||||||||||
|
| 2022 |
| 2021 |
| |||||||||
|
|
|
|
|
|
|
| |||||||
|
| April 30, |
| |||||||||||
|
| 2019 |
| 2018 |
| |||||||||
| | (In thousands) |
| |||||||||||
Raw materials |
| $ | 16,792 |
| $ | 12,020 |
| | $ | 42,310 | | $ | 23,997 | |
Work in process |
|
| 19,162 |
|
| 14,780 |
| |
| 28,034 | |
| 13,825 | |
Finished goods |
|
| 25,926 |
|
| 14,578 |
| |
| 32,619 | |
| 44,113 | |
Inventories, gross |
|
| 61,880 |
|
| 41,378 |
| |
| 102,963 | |
| 81,935 | |
Reserve for inventory excess and obsolescence |
|
| (7,824) |
|
| (3,953) |
| |
| (12,334) | |
| (10,289) | |
Inventories, net |
| $ | 54,056 |
| $ | 37,425 |
| | $ | 90,629 | | $ | 71,646 | |
For the fiscal years ended April 30, 2022, 2021 and 2020, the Company recorded inventory reserve charges of $2,271,000, $1,178,000 and $5,377,000, respectively. Of the $5,377,000 inventory reserve recorded during fiscal year ended April 30, 2020, approximately $2,600,000 related to an impairment of the remaining net book value of the Company’s Quantix commercial UAS solution.
8198
6. Intangibles, net
Intangibles are included in other assets on the balance sheet. The components of intangibles are as follows:follows (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| April 30, |
| April 30, |
| |||||||||
|
| 2019 |
| 2018 |
| |||||||||
|
| (In thousands) |
| |||||||||||
| | | | | | | | |||||||
| | April 30, | | April 30, | | |||||||||
|
| 2022 |
| 2021 | | |||||||||
Technology | | $ | 56,913 | | $ | 46,850 | | |||||||
Licenses |
| $ | 1,006 |
| $ | 818 |
| | | 1,008 | | | 1,008 | |
Customer relationships |
|
| 733 |
|
| 733 |
| | | 72,448 | | | 68,073 | |
Backlog | | | 2,100 | | | — | | |||||||
In-process research and development | | | 550 | | | 550 | | |||||||
Non-compete agreements | | | 320 | | | 320 | | |||||||
Trademarks and tradenames |
|
| 28 |
|
| 28 |
| | | 68 | | | 68 | |
Other |
|
| 3 |
|
| 3 |
| | | 144 | | | 3 | |
Intangibles, gross |
|
| 1,770 |
|
| 1,582 |
| | | 133,551 | | | 116,872 | |
Less accumulated amortization |
|
| (1,311) |
|
| (954) |
| |
| (36,327) | |
| (10,604) | |
Intangibles, net |
| $ | 459 |
| $ | 628 |
| | $ | 97,224 | | $ | 106,268 | |
The Company tests identifiable intangible assets and goodwill for impairment in the fourth quarter of each fiscal year unless there are interim indicators that suggest that it is more likely than not that either the identifiable intangible assets or goodwill may be impaired. Due to the political situation within Turkey and the increased uncertainty in the relations between the U.S. and Turkey, the Company significantly lowered its cash flow expectations for its Altoy operations. As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairment of Altoy’s long-lived assets, excluding goodwill during the three months ended October 28, 2017. Based on the analysis, the Company determined that the fair value of Altoy had declined below its carrying value, excluding goodwill. As a result, the Company performed an additional analysis to determine the amount of the impairment loss and recorded an impairment loss totaling $899,000 during the three months ended October 28, 2017, which is included in selling, general and administrative expense on the consolidated statements of operations. The fair value of the Altoy asset group was determined based on a discounted cash flow model reflective of the revised cash flow estimates.
The weighted average amortization period at April 30, 20192022 and 20182021 was one yearfour years and threefive years, respectively. Amortization expense for the years ended April 30, 2019, 20182022, 2021 and 20172020 was $357,000, $296,000$26,558,000, $6,469,000 and $139,000,$2,822,000, respectively.
TheTechnology, backlog and customer relationships, trademarks and tradenames, and otherrelationship intangible assets were recognized in conjunction with the Company’s acquisition of a controlling interestTelerob on May 3, 2021. Technology and customer relationship intangible assets were recognized in its Altoy joint ventureconjunction with the Company’s acquisition of Arcturus on February 1, 2017.19, 2021. Technology and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of ISG on February 23, 2021. Technology, in-process research and development, customer relationships, trademarks and tradenames, and non-compete agreements were recognized in conjunction with the Company’s acquisition of Pulse on June 10, 2019. Refer to Note 1921 - Business Combinations for further details.
Estimated amortization expense for the next five years is as follows:follows (in thousands):
|
|
|
|
|
|
| Year ending |
| |
|
| April 30, |
| |
|
| (In thousands) |
| |
2020 |
| $ | 360 |
|
2021 |
|
| 98 |
|
2022 |
|
| 1 |
|
2023 |
|
| — |
|
2024 |
|
| — |
|
|
| $ | 459 |
|
| | | | |
|
| Year ending |
| |
| | April 30, |
| |
2023 | | $ | 27,760 | |
2024 | |
| 26,870 | |
2025 | |
| 18,156 | |
2026 | |
| 13,114 | |
2027 | |
| 2,485 | |
| | $ | 88,385 | |
7. Goodwill
The following table presents the changes in the Company’s goodwill balance (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Small UAS | | TMS | | MUAS | | HAPS | | All other | | Total | ||||||
Balance at April 30, 2021 | | $ | 6,340 | | $ | — | | $ | 288,611 | | $ | — | | $ | 19,254 | | $ | 314,205 |
Additions to goodwill | | | — | | | — | | | 1,546 | | | — | | | 18,596 | | | 20,142 |
Balance at April 30, 2022 | | $ | 6,340 | | $ | — | | $ | 290,157 | | $ | — | | $ | 37,850 | | $ | 334,347 |
8299
| | | | | | | | | | | | | | | | | | |
| | Small UAS | | TMS | | MUAS | | HAPS | | All other | | Total | ||||||
Balance at April 30, 2020 | | $ | 6,340 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 6,340 |
Additions to goodwill | | | — | | | — | | | 288,611 | | | — | | | 19,254 | | | 307,865 |
Balance at April 30, 2021 | | $ | 6,340 | | $ | — | | $ | 288,611 | | $ | — | | $ | 19,254 | | $ | 314,205 |
The addition during the fiscal year ended April 30, 2022 to the MUAS segment relates to measurement period adjustments for pre-acquisition tax returns. The addition to All other goodwill is attributable to the Telerob acquisition, which was recorded in Euros and translated to dollars at each reporting date. The addition during the fiscal year ended April 30, 2021 to the MUAS segment is attributable to the Arcturus Acquisition, and the addition to All other is attributable to the ISG acquisition. The goodwill balance at April 30, 2020 is attributable to the acquisition of Pulse. Refer to Note 21—Business Acquisitions for further details.
7.
8. Property and Equipment, net
Property and equipment, net consist of the following:
| | | | | | | |
| | April 30, | | ||||
|
| 2022 |
| 2021 | | ||
| | (In thousands) | | ||||
In-service ISR assets | | $ | 48,496 | | $ | 36,047 | |
Leasehold improvements | | | 20,842 | | | 18,703 | |
Machinery and equipment | |
| 64,759 | |
| 53,943 | |
Furniture and fixtures | |
| 4,239 | |
| 3,698 | |
Computer equipment and software | |
| 41,476 | |
| 36,618 | |
Construction in process | |
| 4,618 | |
| 2,689 | |
Property and equipment, gross | |
| 184,430 | |
| 151,698 | |
Less accumulated depreciation and amortization | |
| (122,134) | |
| (92,802) | |
Property and equipment, net | | $ | 62,296 | | $ | 58,896 | |
|
|
|
|
|
|
|
|
|
| April 30, |
| ||||
|
| 2019 |
| 2018 |
| ||
|
| (In thousands) |
| ||||
Leasehold improvements |
| $ | 12,324 |
| $ | 10,541 |
|
Machinery and equipment |
|
| 40,432 |
|
| 40,377 |
|
Furniture and fixtures |
|
| 2,145 |
|
| 2,094 |
|
Computer equipment and software |
|
| 35,056 |
|
| 31,895 |
|
Construction in process |
|
| 2,411 |
|
| 3,359 |
|
Property and equipment, gross |
|
| 92,368 |
|
| 88,266 |
|
Less accumulated depreciation and amortization |
|
| (75,463) |
|
| (69,047) |
|
Property and equipment, net |
| $ | 16,905 |
| $ | 19,219 |
|
During the three months ended April 30, 2019, the Company determined that the continued less than forecasted sales of its Quantix commercial UAS solution, which launched during the fourth quarter of fiscal year 2018, was an indicator that the long-lived assets of this asset group may not be recoverable. As a result, the company performed an analysis and concluded that the projected undiscounted cash flows were less than the carrying value of the asset group (Step 1). As a result, the Company performed additional analysis to determine the amount of the impairment loss (Step 2) and recorded an impairment loss totaling $4,398,000 related to the long-lived assets of the commercial UAS Quantix solution, which is included in selling, general and administrative expense on the consolidated statements of operations. The fair value of the asset group was determined based on a discounted cash flow model reflective of the Company’s revised cash flow estimates.
Depreciation expense for the years ended April 30, 2019, 20182022, 2021 and 20172020 was $7,311,000, $5,676,000$30,493,000, $12,793,000 and $4,939,000,$7,066,000, respectively. At April 30, 2019 and 2018, property and equipment includes computer equipment and software under capital leases with a cost basis of $1,836,000 and $1,836,000 and accumulated depreciation of $1,822,000 and $1,687,000, respectively. Depreciation of computer equipment and software under capital leases was $135,000 and $201,000 forDuring the fiscal yearsyear ended April 30, 2019 and 2018 respectively.2022, the Company recorded losses on the disposal of in-service ISR assets which included the write-off of $1,378,000 of non-cash purchase accounting fair value adjustments.
8.9. Investments in Companies Accounted for Using the Equity Method
In December of 2017, the Company and SoftbankSoftBank formed a joint venture, HAPSMobile. HAPSMobile, which is a Japanese corporation that is 10% owned bycorporation. Concurrent with the formation of HAPSMobile, the Company executed a Design and 90% owned by SoftBank as of April 30, 2019 and is governed by a Joint VentureDevelopment Agreement (the “JVA”“DDA”) with HAPSMobile. In connection with the formation of the joint venture on December 27, 2017, the Company initially purchased shares of HAPSMobile representing a 5% ownership interest in exchange for an investment of 210,000,000 yen ($1,860,000). The Company subsequently purchased additional shares of HAPSMobile in order to maintain a 5% ownership stake in HAPSMobile for 210,000,000 yen ($1,860,000) effective as of December 27, 2017;the joint venture. The first such purchase occurred on April 17, 2018, at which time the Company invested 150,000,000 yen ($1,407,000) on April 17, 2018; andfor the purchase of additional shares of HAPSMobile. On January 29, 2019, the Company invested an additional 209,500,000 yen ($1,926,000) on January 29, 2019 to maintain its 5% ownership stake. On February 9, 2019, the Company elected to purchase 632,800,000 yen ($5,671,000) of additional shares of HAPSMobile to increase the Company’s ownership in the joint venture from 5% to 10%, and on May 10, 2019, the Company purchased 500,000,000 JPYyen ($4,569,000) of additional shares of HAPSMobile Inc. to maintain its 10% ownership stake whichstake. The Company’s ownership percentage was subsequently was diluted from 10% to approximately 5%.
As On December 4, 2019, the Company purchased 540,050,000 yen ($4,982,000) of additional shares of HAPSMobile to increase its ownership stake to approximately 7%. In March 2022, the Company sold it’s 7% equity interest in HAPSMobile to SoftBank, for 808,008,000 yen ($6,497,000) and a gain was recorded in sale of ownership in HAPSMobile Inc. joint venture. Following the sale, SoftBank owns 100% of HAPSMobile. As of April 30, 2022, the Company had 0 ownership stake in HAPSMobile.
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On May 29, 2021, the Company entered into an amendment to the DDA with HAPSMobile. The parties agreed to the amendment in anticipation of the Company and SoftBank entering into a Master Design and Development Agreement (“MDDA”) with each other to continue the design and development of the Solar High Altitude Pseudo-Satellite (“Solar HAPS”) aircraft developed under the DDA.
On May 29, 2021, the Company and SoftBank entered into a MDDA to continue the development of Solar HAPS. Pursuant to the MDDA, which has a five-year term, SoftBank will issue orders to the Company for the Company to perform design and development services and produce deliverables as specified in the applicable order(s). Upon the execution of the MDDA, SoftBank issued to the Company, and the Company accepted, the first order under the MDDA which has a maximum value of approximately $51,200,000. Concurrent with the execution of the MDDA, each of SoftBank and the Company agreed to lend HAPSMobile loans which are convertible into shares of HAPSMobile under certain conditions, and to cooperate with each other to explore restructuring and financing options for HAPSMobile to continue the development of Solar HAPS. The Company committed to lend 500,000,000 yen. On June 7, 2021 the Company funded 130,000,000 yen ($1,195,000) of the loan agreement. On August 13, 2021, the Company made the second payment of the loan agreement in the amount of 180,000,000 yen ($1,638,000). On October 29, 2021, the Company made the final payment under the loan agreement in the amount of 190,000,000 yen ($1,674,000). On March 1, 2022, HAPSMobile repaid the Company the loan in full plus accrued interest in the amount of 503,832,000 yen ($4,345,000). The repayment resulted in equity method income during the fiscal year ended April 30, 2022 up to the extent of the previously recognized equity method losses associate with the loan.
Prior to the sale of the equity interest, the Company had the ability to exercise significant influence over the operating and financial policies of HAPSMobile pursuant to the applicable Joint Venture Agreement and related organizational documents, and therefore, the Company’s investment iswas accounted for as an equity method investment. At April 30, 20192022, 2021 and 2018,2020, the Company recorded its ownership percentage of the net loss of HAPSMobile, or $3,944,000$0, $10,530,000 and $1,283,000,$4,982,000, respectively, in “Equityequity method investment loss, net of tax”tax in the consolidated statements of income. During the fiscal year ended April 30, 2021, the Company recorded its proportion of a loss for HAPSMobile’s impairment of its investment in Loon LLC in the amount of $8,363,000. HAPSMobile initially made its investment in Loon LLC in April 2019. The impairment recorded by HAPSMobile is included in realized and unrealized losses on investments in the summarized financial information shown below. At April 30, 2022 and 2021, the carrying value of the investment in HAPSMobile of $0 was recorded in other assets, long-term.
Investment in Limited Partnership Fund
In July 2019, the Company made its initial capital contributions totaling $4,948,000 to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets. The Company made additional contributions of $2,377,000 and $2,675,000 during the fiscal years ended April 30, 2022 and 2021, respectively. Under the terms of the limited partnership agreement, there are 0 further contribution commitments to the fund as of April 30, 2022. The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest. At April 30, 2022, 2021 and 2020, the Company recorded its ownership percentage of the net gain (loss) of the limited partnership, or $5,889,000 $49,000 and $(394,000), respectively, in equity method investment income (loss), net of deferred taxes of $1,300,000, $11 and $111,000, respectively, in the consolidated statements of income. At April 30, 20192022 and 2018,2021, the carrying value of the investment in HAPSMobile was $5,612,000the limited partnership of $15,433,000 and $2,020,000,$7,168,000, respectively, and was recorded in “Other assets, long-term.”available-for-sale long-term investments.
83
In March of 2014,2022, the Company purchased 49%entered into a limited partnership agreement with a second limited partnership fund also focusing on highly relevant technologies and start-up companies serving defense and industrial markets. Under the terms of the outstanding common stock of Altoy, a Turkish corporation founded in February 2014. During the year ended April 30, 2017,limited partnership agreement, the Company recorded 49%is committed to contributions totaling $20,000,000 over an expected five year period. In May 2022, the Company made its initial capital contribution to the second fund of $2,774,000. The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest.
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Summarized financial information of the net lossequity method investments, including HAPSMobile for the period of Altoy, or $119,000 in “Equity method investment loss, netfiscal year 2022 prior to the sale of tax” in the consolidated statements of income.equity interest, are as follows:
| | | | | | | | | | |
| | | April 30, | | | | ||||
|
| | 2022 |
| 2021 |
| | | ||
| | | (In thousands) | | | | ||||
Current assets | | | $ | 3,243 | | $ | 9,106 | | | |
Noncurrent assets | | |
| 140,178 | |
| 65,717 | | | |
Current liabilities | | | $ | 683 | | $ | 76,492 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended April 30, | |||||||
| | | 2022 |
| 2021 |
| 2020 | |||
| | | (In thousands) | |||||||
Revenues | | | $ | 187 | | $ | 159 | | $ | 25 |
Gross loss | | | | (13,113) | | | (1,241) | | | (1,331) |
Realized and unrealized losses on investments | | | | 63,314 | | | (131,971) | | | (7,028) |
Net loss | | | $ | 40,349 | | $ | (190,454) | | $ | (85,818) |
On February 1, 2017, the Company acquired an additional 36% interest in Altoy, increasing the Company’s total ownership interest to 85%, for total cash consideration of $625,000. As a result of the Company obtaining a controlling interest in Altoy, Altoy has been consolidated into the consolidated financial statements of the Company as of the date of the acquisition. Refer to Note 19 - Business Acquisitions.
9.10. Warranty Reserves
Warranty reserve activity is summarized as follows:
| | | | | | | | |||||||
| | April 30, | | |||||||||||
| | 2022 |
| 2021 |
| |||||||||
|
|
|
|
|
|
|
| |||||||
|
| April 30, |
| |||||||||||
|
| 2019 |
| 2018 |
| |||||||||
|
| (In thousands) |
| |||||||||||
| | (In thousands) |
| |||||||||||
Beginning balance |
| $ | 2,090 |
| $ | 1,947 |
| | $ | 2,341 | | $ | 2,015 | |
Balance acquired from acquisition | | | 256 | | | — | | |||||||
Warranty expense |
|
| 211 |
|
| 1,884 |
| |
| 1,089 | |
| 1,650 | |
Changes in estimates related to pre-existing warranties |
|
| 491 |
|
| — |
| |||||||
Warranty costs settled |
|
| (1,088) |
|
| (1,741) |
| |
| (1,496) | |
| (1,324) | |
Ending balance |
| $ | 1,704 |
| $ | 2,090 |
| | $ | 2,190 | | $ | 2,341 | |
During the fiscal year ended April 30, 2019, the Company revised its estimates based on the results of additional engineering studies and recorded incremental warranty reserve charges totaling $491,000 related to the estimated costs to repair a component of certain small UAS that were delivered in prior periods. At April 30, 2019, there were $251,000 remaining estimated warranty costs related to the repair of the impacted small UAS. As of April 30, 2019, a total of $240,000 of costs related to this warranty have been incurred.
10.11. Employee Savings Plan
The Company has an employee 401(k) savings plan covering all eligible employees. The Company expensed approximately $3,961,000, $2,953,000$6,842,000, $5,764,000 and $2,603,000$4,744,000 in contributions to the plan for the years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively.
11. Severance Charges12.Debt
DuringIn connection with the consummation of the Arcturus Acquisition on February 19, 2021, the Company, as borrower, and Arcturus, as guarantor, entered into a Credit Agreement with certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S. Bank National Association, as joint lead arrangers and joint bookrunners (the “Credit Agreement”).
The Credit Agreement and its associated Security and Pledge Agreement set forth the terms and conditions for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and (ii) a five-year amortized $200 million term A loan (the “Term Loan Facility”, and together with the Revolving Facility, the “Credit Facilities”). Certain existing letters of credit issued by JPMorgan Chase Bank were reserved for under the Revolving Facility at closing and remain outstanding under the terms thereof. Upon execution of the Credit Agreement, the Company drew the full principal of the Term Loan Facility for use in the acquisition of Arcturus. The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80% payable in loan year five, consisting of 3
102
quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes.
Any borrowing under the Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid under the Revolving Facility may be reborrowed. Mandatory prepayments are required under the revolving loans when borrowings and letter of credit usage exceed the aggregate revolving commitments of all lenders. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested and unpermitted debt transactions.
In support of its obligations pursuant to the Credit Facilities, the Company has granted security interests in substantially all of the personal property of the Company and its domestic subsidiaries, including a pledge of the equity interests in its subsidiaries (limited to 65% of outstanding equity interests in the case of foreign subsidiaries), and the proceeds thereof, with customary exclusions and exceptions. The Company’s existing and future domestic subsidiaries, including Arcturus, are guarantors for the Credit Facilities.
The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including certain restrictions on the ability of the Company and its subsidiaries (as defined in the Credit Agreement) to incur any additional indebtedness or guarantee indebtedness of others, to create liens on properties or assets, or to enter into certain asset and stock-based transactions. In addition, the Credit Agreement includes certain financial maintenance covenants, requiring that (x) the Consolidated Leverage Ratio (as defined in the Credit Agreement) shall not be more than 3.00 to 1.00 as of the end of any fiscal quarter and (y) the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) shall not be less than 1.25 to 1.00 as of the end of any fiscal quarter.
On February 4, 2022, the Company entered into a First Amendment to Credit Agreement and Waiver relating to its existing Credit Agreement (the “First Amendment to Credit Agreement”). The First Amendment to Credit Agreement waives any event of default that may have occurred as a result of the potential failure by the Company to comply with the consolidated leverage ratio covenant set forth in the Credit Agreement for the fiscal yearquarter ended January 29, 2022. In addition, the parties amended the maximum permitted Consolidated Leverage Ratio, such that such ratio may not exceed 4.00 to 1.00 for the Company’s fiscal quarters ended January 29, 2022 and April 30, 2017,2022; 3.50 to 1.00 for any of the Company’s fiscal quarters ending during the period from May 1, 2022 to October 31, 2022; and 3.00 to 1.00 for any fiscal quarter ending thereafter.
The Credit Agreement, as amended by the First Amendment to Credit Agreement, contains certain customary events of default, which include failure to make payments when due thereunder, the material inaccuracy of representations or warranties, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, certain judgments, certain ERISA-related events, invalidity of loan documents, or a Change of Control (as defined in the Credit Agreement). Upon the occurrence and continuation of an event of default, the Lenders may cease making future loans under the Credit Agreement and may declare all amounts owing under the Credit Agreement to be immediately due and payable.
The First Amendment to Credit Agreement also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from LIBOR as a reference interest rate. Following the First Amendment to Credit Agreement, the Company recorded severance costs totaling $1,262,000. Of this total, approximately $850,000 was duehas a choice of interest rates between (a) Term SOFR (with a 0% floor) plus the Applicable Margin; or (b) Base Rate (defined as the highest of (a) the Federal Funds Rate plus one-half percent (0.50%), (b) the Bank of America prime rate, and (c) the one (1) month SOFR plus one percent (1.00%)) plus the Applicable Margin. The Applicable Margin is based upon the Consolidated Leverage Ratio (as defined in the First Amendment to two officers who leftCredit Agreement) and whether the Company elects SOFR (ranging from 1.50 - 2.50%) or Base Rate (ranging from 0.50 - 1.50%). The Company may choose interest periods of one, three or six months with respect to Term SOFR and all such rates will include a 0.10% SOFR adjustment. The Company also remains responsible for certain commitment fees from 0.20-0.35% depending on the Consolidated Leverage Ratio, and administrative agent expenses incurred in relation to the Credit Facilities. In the event of a default,
103
an additional 2% default interest rate in addition to the applicable rate if specified or the Base Rate plus Applicable Margin if an applicable rate is not specified. As of April 30, 2022, the Company is in compliance with all amended covenants.
Long-term debt and the current period interest rates were as follows:
| | | | | | |
| | Year Ended | | Year Ended | ||
| | April 30, | | April 30, | ||
| | 2022 | | 2021 | ||
| | (In thousands) | | (In thousands) | ||
Term loans | | $ | 190,000 | | $ | 200,000 |
Revolving credit facility | | | — | | | — |
Total debt | | | 190,000 | | | 200,000 |
Less current portion | | | 10,000 | | | 10,000 |
Total long-term debt, less current portion | | | 180,000 | | | 190,000 |
Less unamortized debt issuance costs - term loans | | | 2,160 | | | 2,488 |
Total long-term debt, net of unamortized debt issuance costs - term loans | | $ | 177,840 | | $ | 187,512 |
Unamortized debt issuance costs - revolving credit facility | | $ | 1,076 | | $ | 1,244 |
Current period interest rate | | | 2.6% | | | 2.2% |
Future long-term debt principal payments at April 30, 2022 were as follows:
| | | |
| | (In thousands) | |
2023 | | $ | 10,000 |
2024 | |
| 10,000 |
2025 | |
| 10,000 |
2026 | |
| 160,000 |
2027 | |
| — |
| | $ | 190,000 |
13. Leases
The Company leases certain buildings, land and equipment. At contract inception the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are recorded in operating lease right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.
The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. The Company defines the initial lease term to include renewal options determined to be reasonably certain. The Company’s leases have remaining lease terms of less than one year to eight years, some of which may include options to extend the lease for up to 10 years, and some of which may include options to terminate the lease after two years. If the Company determines it is reasonably certain of exercising an option to extend or terminate, the option is included in the Company’s determination of lease assets and liabilities. For operating leases, the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Many of the Company’s real estate lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, if the incentive is determined to be a leasehold improvement owned by the lessee, the Company generally records incentive as a reduction to fixed lease payments thereby reducing rent expense. For rent holidays and rent escalation clauses during the fiscal year ended April 30, 2017. lease term, the Company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the Company uses the date of
104
initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.
The remaining severanceCompany does not have any material finance leases, restrictions or covenants in its lease agreements, sale-leaseback transactions, land easements or residual value guarantees.
In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. Additionally, the Company makes judgments around contractual asset substitution rights in determining whether a contract contains a lease.
The components of lease costs were due to certain strategic headcount reductions consisting entirely of severance payments. Of the total, approximately $555,000 was recorded toin cost of sales for product sales and $707,000contract services and SG&A expense were as follows (in thousands):
| | | | | | |
| | Year Ended | | Year Ended | ||
| | April 30, | | April 30, | ||
|
| 2022 | | 2021 | ||
Operating lease cost | | $ | 6,814 | | $ | 5,150 |
Short term lease cost | | | 840 | | | 602 |
Variable lease cost | | | 653 | | | 23 |
Sublease income | | | (176) | | | (91) |
Total lease costs, net | | $ | 8,131 | | $ | 5,684 |
Supplemental lease information was recorded to SG&A. Of the total, approximately $127,000 was in accrued wages and related accruals atas follows:
| | | | | | |
| | Year Ended | | Year Ended | ||
| | April 30, | | April 30, | ||
|
| 2022 | | 2021 | ||
| | (In thousands) | | (In thousands) | ||
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 6,925 | | $ | 5,070 |
Right-of-use assets obtained in exchange for new lease liabilities | | $ | 10,238 | | $ | 18,729 |
| | | | | | |
Weighted average remaining lease term | | | 62 months | | | 71 months |
Weighted average discount rate | | | 3.4% | | | 3.6% |
Maturities of operating lease liabilities as of April 30, 2017. The Company did not have significant severance charges during the fiscal years ended April 30, 2019 or 2018.2022 were as follows (in thousands):
| | | |
2022 | | $ | 6,819 |
2023 | |
| 6,980 |
2024 | |
| 6,070 |
2025 | |
| 3,675 |
2026 | |
| 2,540 |
Thereafter | | | 5,484 |
Total lease payments | | | 31,568 |
Less: imputed interest | | | (2,834) |
Total present value of operating lease liabilities | | $ | 28,734 |
12. Stock‑Based
14. Stock-Based Compensation
For the years ended April 30, 2019, 20182022, 2021 and 2017,2020, the Company recorded stock‑basedstock-based compensation expense of approximately $6,985,000, $4,956,000$5,390,000, $6,932,000 and $3,392,000,$6,227,000, respectively.
On September 24, 2021, the stockholders of the Company approved the 2021 Equity Incentive Plan (“2021 Plan”) effective September 24, 2021, for officers, directors, key employees and consultants. Under the 2021 Plan,
105
incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation right awards, performance share awards, performance stock unit awards, dividend equivalents awards, stock payment awards, deferred stock awards, restricted stock unit awards, other stock-based awards, performance bonus awards or performance-based awards may be granted at the discretion of the compensation committee, which consists of outside directors. The sum of any cash compensation, or other compensation, and the value of awards granted to a non-employee director as compensation for services as a non-employee director during any fiscal year may not exceed $500,000, which amount is increased to $700,000 in the fiscal year of a non-employee director’s initial year of service as a non-employee director. The exercise price for any incentive stock option shall not be less than 100% of the fair market value on the date of grant. Vesting of awards is established at the time of grant.
On January 14, 2007, the stockholders of the Company approved the 2006 Equity Incentive Plan or (“2006 Plan,Plan”) effective January 21, 2007, for officers, directors, key employees and consultants. On September 29, 2011, the stockholders of the Company approved an amendment and restatement of the 2006 Plan or (“Restated 2006 Plan.Plan”). Under the Restated 2006 Plan, incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation right awards, performance share awards, performance stock unit awards, dividend equivalents awards, stock payment
84
awards, deferred stock awards, restricted stock unit awards, other stock‑basedstock-based awards, performance bonus awards or performance‑basedperformance-based awards may be granted at the discretion of the compensation committee, which consists of outside directors. A maximum of 4,884,157 shares of stock may be issued pursuant to awards under the Restated 2006 Plan. The maximum number of shares of common stock with respect to one or more awards that may be granted to any one participant during any twelve month period is 2,000,000. A maximum of $5,000,000 may be paid in cash to any one participant as a performance‑basedperformance-based award during any twelve month period. The exercise price for any incentive stock option shall not be less than 100% of the fair market value on the date of grant. Vesting of awards is established at the time of grant. The Restated 2006 Plan expired in July 2021.
The Company had an equity incentive plan or (“2002 Plan,Plan”) for officers, directors and key employees. Under the 2002 Plan, incentive stock options or nonqualified stock options were granted, as determined by the administrator at the time of grant. Stock purchase rights were also granted under the 2002 Plan. Options under the 2002 Plan were granted at their fair market value (as determined by the board of directors). The options became exercisable at various times over a five-year period from the grant date. The 2002 Plan was terminated on the effective date of the 2006 Plan. Awards outstanding under the 2002 Plan remain outstanding and exercisable; noNo additional awards may be made under the 2002 Plan.
The Company had a 1992 nonqualified stock option plan or (“1992 Plan,Plan”) for certain officers and key employees. Options under the 1992 Plan were granted at their fair market value (as determined by the board of directors) at the date of grant and became exercisable at various times over a five-year period from the grant date. The 1992 Plan expired in August 2002.
No options were granted during the fiscal years ended April 30, 2019, 2018 and 2017. The fair value of stock options granted previously was estimated at the grant date using the Black‑ScholesBlack-Scholes option pricing model. Assumptions included in the Black-Scholes option pricing model included the expected term of stock options, the expected volatility, the risk free interest rate, and the expected dividend yield. The expected term of stock options represents the weighted average period the Company expects the stock options to remain outstanding, based on the Company’s historical exercise and post‑vestingpost-vesting cancellation experience and the remaining contractual life of its outstanding options. The expected volatility is based on historical volatility for the Company’s stock. The risk free interest rate is based on the implied yield on a U.S. Treasury zero‑couponzero-coupon bond with a remaining term that approximates the expected term of the option. The expected dividend yield of zero reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.
85106
Information related to the stock option plans at April 30, 2019, 20182022, 2021 and 2017,2020, and for the years then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Restated 2006 Plan |
| 2002 Plan |
| 1992 Plan |
| |||||||||||||||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted |
| |||||||||||||||||||
|
|
|
| Average |
|
|
| Average |
|
|
| Average |
| |||||||||||||||||||
|
|
|
| Exercise |
|
|
| Exercise |
|
|
| Exercise |
| |||||||||||||||||||
|
| Shares |
| Price |
| Shares |
| Price |
| Shares |
| Price |
| |||||||||||||||||||
Outstanding at April 30, 2016 |
| 678,799 |
|
| 24.46 |
| 13,824 |
|
| 11.79 |
| 68,604 |
|
| 0.59 |
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | Restated 2006 Plan | | 2002 Plan | | 1992 Plan |
| |||||||||||||||||||||||||
|
| |
| Weighted |
| |
| Weighted |
| |
| Weighted |
| |||||||||||||||||||
| | | | Average | | | | Average | | | | Average |
| |||||||||||||||||||
| | | | Exercise | | | | Exercise | | | | Exercise |
| |||||||||||||||||||
| | Shares | | Price | | Shares | | Price | | Shares | | Price |
| |||||||||||||||||||
Outstanding at April 30, 2019 |
| 337,026 | |
| 25.25 |
| — | |
| — |
| 14,302 | |
| 0.59 | | ||||||||||||||||
Options granted |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Options exercised |
| (167,310) |
|
| 22.32 |
| (9,601) |
|
| 11.79 |
| (25,189) |
|
| 0.59 |
|
| (3,000) | |
| 31.15 |
| — | |
| — |
| (13,189) | |
| 0.59 | |
Options canceled |
| (64,865) |
|
| 26.76 |
| (4,223) |
|
| 11.79 |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Outstanding at April 30, 2017 |
| 446,624 |
|
| 24.93 |
| — |
|
| — |
| 43,415 |
|
| 0.59 |
| ||||||||||||||||
Outstanding at April 30, 2020 |
| 334,026 | |
| 25.19 |
| — | |
| — |
| 1,113 | |
| 0.59 | | ||||||||||||||||
Options granted |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Options exercised |
| (107,598) |
|
| 23.80 |
| — |
|
| — |
| (25,113) |
|
| 0.59 |
|
| (53,500) | |
| 28.45 |
| — | |
| — |
| (1,113) | |
| 0.59 | |
Options canceled |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Outstanding at April 30, 2018 |
| 339,026 |
|
| 25.29 |
| — |
|
| — |
| 18,302 |
|
| 0.59 |
| ||||||||||||||||
Outstanding at April 30, 2021 |
| 280,526 | |
| 24.57 |
| — | |
| — |
| — | |
| — | | ||||||||||||||||
Options granted |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Options exercised |
| (2,000) |
|
| 32.19 |
| — |
|
| — |
| (4,000) |
|
| 0.59 |
|
| (114,362) | |
| 24.28 |
| — | |
| — |
| — | |
| — | |
Options canceled |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — | |
| — |
| — | |
| — |
| — | |
| — | |
Outstanding at April 30, 2019 |
| 337,026 |
|
| 25.25 |
| — |
|
| — |
| 14,302 |
|
| 0.59 |
| ||||||||||||||||
Options exercisable at April 30, 2019 |
| 297,516 |
| $ | 24.94 |
| — |
| $ | — |
| 14,302 |
| $ | 0.59 |
| ||||||||||||||||
Outstanding at April 30, 2022 |
| 166,164 | |
| 24.78 |
| — | |
| — |
| — | |
| — | | ||||||||||||||||
Options exercisable at April 30, 2022 |
| 166,164 | | $ | 24.78 |
| — | | $ | — |
| — | | $ | — | | ||||||||||||||||
The total intrinsic value of all options exercised during the years ended April 30, 2019, 20182022, 2021 and 20172020 was approximately $371,000, $2,407,000,$4,785,000, $4,828,000, and $1,747,000,$833,000, respectively. The intrinsic value of all options outstanding at April 30, 20192022 and 20182021 was $15,569,000$9,229,000 and $10,890,000,$24,068,000, respectively. The intrinsic value of all exercisable options at April 30, 20192022 and 20182021 was $13,950,000$9,229,000 and $8,587,000,$24,068,000, respectively.
A summary of the status of the Company’s non‑vestedThe Company had 0 non-vested stock options as of April 30, 20192022 and the year then ended is as follows:ended.
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| Weighted |
| |
|
|
|
| Average |
| |
|
|
|
| Grant Date |
| |
Non-vested Options |
| Options |
| Fair Value |
| |
Non-vested at April 30, 2018 |
| 83,014 |
| $ | 10.97 |
|
Granted |
| — |
|
| — |
|
Expired |
| — |
|
| — |
|
Canceled |
| — |
|
| — |
|
Vested |
| (43,504) |
|
| 11.03 |
|
Non-vested at April 30, 2019 |
| 39,510 |
| $ | 10.90 |
|
As of April 30, 2019,2022, there was approximately $6,214,000$10,583,000 of total unrecognized compensation cost related to non‑vested share‑basednon-vested share-based compensation awards granted under the equity plans. That cost is expected to be recognized over an approximately two‑yeartwo-year period or a weighted average period of approximately 1.92.1 years.
86
NoNaN options were granted during the fiscal years ended April 30, 2019, 20182022, 2021 and 2017.2020. The total fair value of shares vesting during the years ended April 30, 2019, 20182022, 2021 and 20172020 was $4,756,000, $3,328,000$5,901,000, $5,312,000 and $2,942,000,$4,900,000, respectively.
Proceeds from all option exercises under all stock option plans for the years ended April 30, 2019, 20182022, 2021 and 20172020 were approximately $67,000, $2,576,000$2,776,000, $1,522,000 and $3,863,000,$100,000, respectively. The tax benefit realized from stock‑basedstock-based compensation was $0 during the years ended April 30, 2019, 20182022, 2021 and 2017 was approximately $0, $0, and $0,2020, respectively.
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The following tabulation summarizes certain information concerning outstanding and exercisable options at April 30, 2019:2022:
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | Options Outstanding | | | | | |
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| | | | | | | Weighted | | | | | | | | |
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| | | | | | | Average | | | | | Options Exercisable |
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| | | |
| |
| Remaining |
| Weighted |
| |
| Weighted |
| ||
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| Options Outstanding |
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| Weighted |
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|
| Average |
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|
| Options Exercisable |
| |||||||||||||||||||
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|
| Remaining |
| Weighted |
|
|
| Weighted |
| ||||||||||||||||||
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|
|
| As of |
| Contractual |
| Average |
| As of |
| Average |
| ||||||||||||||||||
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|
|
|
| April 30, |
| Life In |
| Exercise |
| April 30, |
| Exercise |
| ||||||||||||||||||
| | | | | As of | | Contractual | | Average | | As of | | Average |
| ||||||||||||||||||
| | | | | April 30, | | Life In | | Exercise | | April 30, | | Exercise |
| ||||||||||||||||||
Range of Exercise Prices | Range of Exercise Prices |
| 2019 |
| Years |
| Price |
| 2019 |
| Price |
| Range of Exercise Prices | | 2022 | | Years | | Price | | 2022 | | Price |
| ||||||||
$ | 0.59 | - | 19.16 |
| 68,302 |
| 3.36 |
| $ | 14.56 |
| 68,302 |
| $ | 14.56 |
| 18.07 | - | 18.32 |
| 30,000 |
| 0.98 | | $ | 18.07 |
| 30,000 | | $ | 18.07 | |
| 19.17 | - | 26.24 |
| 58,500 |
| 3.86 |
|
| 20.54 |
| 58,500 |
|
| 20.54 |
| ||||||||||||||||
| 26.25 | - | 26.99 |
| 80,000 |
| 6.15 |
|
| 26.70 |
| 48,000 |
|
| 26.70 |
| ||||||||||||||||
| 27.00 | - | 27.99 |
| 50,000 |
| 4.56 |
|
| 27.27 |
| 50,000 |
|
| 27.27 |
| ||||||||||||||||
| 28.00 | - | 31.27 |
| 94,526 |
| 3.68 |
|
| 29.85 |
| 87,016 |
|
| 29.73 |
| ||||||||||||||||
| 18.33 | - | 22.64 |
| 20,000 |
| 0.98 | |
| 18.57 |
| 20,000 | |
| 18.57 | | ||||||||||||||||
| 22.65 | - | 26.99 |
| 50,000 |
| 3.15 | |
| 26.70 |
| 50,000 | |
| 26.70 | | ||||||||||||||||
| 27.00 | - | 29.27 | | 50,000 | | 1.56 | | | 27.27 | | 50,000 | | | 27.27 | | ||||||||||||||||
| 29.28 | - | 31.27 |
| 16,164 |
| 2.26 | |
| 31.27 |
| 16,164 | |
| 31.27 | | ||||||||||||||||
$ | 0.59 | - | 31.27 |
| 351,328 |
| 4.34 |
| $ | 24.24 |
| 311,818 |
| $ | 23.82 |
| 18.07 | - | 31.27 |
| 166,164 |
| 1.93 | | $ | 24.78 |
| 166,164 | | $ | 24.78 | |
The remaining weighted average contractual life of exercisable options at April 30, 20192022 was 4.131.93 years.
Information related to the Company’s restricted stock awards at April 30, 20192022 and for the year then ended is as follows:
|
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|
|
|
|
| |||||||||||
|
| Restated 2006 Plan |
| ||||||||||||||
|
|
|
| Weighted |
| ||||||||||||
|
|
|
| Average |
| ||||||||||||
|
|
|
| Grant Date |
| ||||||||||||
|
| Shares |
| Fair Value |
| ||||||||||||
Unvested stock at April 30, 2018 |
| 341,911 |
| $ | 31.13 |
| |||||||||||
| | | | | | | | | | | | ||||||
| | 2021 Plan | | Restated 2006 Plan |
| ||||||||||||
|
| |
| Weighted | | |
| Weighted |
| ||||||||
| | | | Average | | | | Average |
| ||||||||
| | | | Grant Date | | | | Grant Date |
| ||||||||
| | Shares | | Fair Value | | Shares | | Fair Value |
| ||||||||
Unvested stock at April 30, 2021 |
| — | | $ | — | | 180,028 | | $ | 83.02 | | ||||||
Stock granted |
| 57,476 |
|
| 74.05 |
|
| 47,026 | |
| 75.66 | | 57,376 | |
| 66.10 | |
Stock vested |
| (163,839) |
|
| 29.03 |
|
| — | |
| — | | (94,389) | |
| 62.52 | |
Stock canceled |
| (9,389) |
|
| 36.19 |
|
| (1,950) | |
| 74.27 | | (30,170) | |
| 89.58 | |
Unvested stock at April 30, 2019 |
| 226,159 |
| $ | 43.35 |
| |||||||||||
Unvested stock at April 30, 2022 |
| 45,076 | | $ | 75.71 | | 112,845 | | $ | 89.80 | | ||||||
Information related to the Company’s restricted stock units at April 30, 2022 and for the year then ended is as follows:
13. Long‑Term
| | | | | | |
| | Restated 2006 Plan |
| |||
|
| |
| Weighted |
| |
| | | | Average |
| |
| | | | Grant Date |
| |
| | Shares | | Fair Value |
| |
Unvested stock at April 30, 2021 |
| — | | $ | — | |
Stock granted |
| 4,395 | |
| 97.96 | |
Stock vested |
| — | |
| — | |
Stock canceled |
| — | |
| — | |
Unvested stock at April 30, 2022 |
| 4,395 | | $ | 97.69 | |
15. Long-Term Incentive Awards
During the three months ended July 28, 2018,31, 2021, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 20192022 LTIP”). Awards under the Fiscal 20192022 LTIP consist of: (i) time-based restricted stock awards and time-based restricted stock units, which vest in equal tranches in July 2019,2022, July 20202023 and July 2021,2024, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2021.2024. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the
108
PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 250% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully-vested shares of common stock. During the fiscal year ended April 30, 2022, the Company recorded $752,000 of compensation expense related to the Fiscal 2022 LTIP. At April 30, 2022, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2022 LTIP is $10,473,000.
During the three months ended August 1, 2020, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2021 LTIP”). Awards under the Fiscal 2021 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2021, July 2022 and July 2023, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2023. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric
87
were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully vested shares of common stock. During the fiscal year ended April 30, 2019, the Company recorded $572,000 of compensation expense related to the Fiscal 2019 LTIP. At April 30, 2019, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2019 LTIP is $3,033,000.
During the three months ended July 29, 2017, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2018 LTIP”). Awards under the Fiscal 2018 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2018, July 2019 and July 2020, and (ii) performance-based restricted stock units (“PRSUs”) which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2020. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200%250% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully vestedfully-vested shares of common stock. During the fiscal yearsyear ended April 30, 2019 and 2018,2022, the Company recorded $588,000 and $269,000a reversal of $(634,000) compensation expense related to the Fiscal 2021 LTIP. During the fiscal year ended April 30, 2021, the Company recorded $1,072,000 of compensation expense related to the Fiscal 2018 LTIP, respectively. During the fiscal year ended April 30, 2017, the Company did not record compensation expense related to the Fiscal 20182021 LTIP. At April 30, 2019,2022, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 20182021 LTIP is $2,275,000.$6,021,000.
During the three months ended July 29, 2017,27, 2019, the Company also granted awards under the Restatedits amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 20172020 LTIP”). Awards under the Fiscal 20172020 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2017,2020, July 20182021 and July 2019,2022, and (ii) PRSUsperformance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2019.2022. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully-vested shares of common stock. During the fiscal year ended April 30, 2022, the Company recorded a reversal of $(701,000) compensation expense related to the Fiscal 2020 LTIP. During the fiscal years ended April 30, 20192021 and 2018,2020, the Company recorded $301,000$620,000 and $159,000$649,000 of compensation expense related to the Fiscal 20172020 LTIP, respectively. At April 30, 2022, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2020 LTIP is $3,335,000.
During the fiscal yearthree months ended July 28, 2018, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2019 LTIP”). Awards under the Fiscal 2019 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2019, July 2020 and July 2021, and (ii) PRSUs which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2017,2021. During the three months ended July 31, 2021, the Company did not record compensation expense related to the Fiscal 2017 LTIP. During the first quarter of fiscal 2019, the Company expects to issueissued a total of 14,81412,101 fully-vested shares of common stock to settle the PRSUs in the Fiscal 2019 LTIP. NaN compensation expense was recorded during fiscal year ended April 30, 2022 for the Fiscal 2019 LTIP. During the fiscal years ended April 30, 2021 and 2020, the Company recorded $368,000, and $386,000 of compensation expense related to the Fiscal 2019 LTIP, respectively.
During the three months ended July 29, 2017, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2018 LTIP”). Awards under the Fiscal 2018 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2018, July 2019 and July 2020, and (ii) PRSUs which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2020. During the three months ended August 1, 2020, the Company issued a total of 16,228 fully-vested shares of common stock to settle the
109
PRSUs in the Fiscal 2018 LTIP. NaN compensation expense was recorded during fiscal years ended April 30, 2022 or 2021 for the Fiscal 2018 LTIP. During the fiscal years ended April 30, 2020, the Company recorded $193,000 of compensation expense related to the Fiscal 2018 LTIP
At April 30, 20192022 and 2018,2021, the Company recorded cumulative stock-based compensation expense from these long-term incentive awards of $1,889,000$4,594,000 and $428,000,$5,177,000, respectively. At each reporting period, the Company reassesses the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised.
88
14.16. Income Taxes
The components of income before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year Ended April 30, |
| |||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| Year Ended April 30, |
| |||||||||||||||||
| | 2022 | | 2021 | | 2020 |
| |||||||||||||
Domestic |
| $ | 50,644 |
| $ | 32,651 |
| $ | 22,642 |
| | $ | (10,187) | | $ | 34,274 | | $ | 52,730 | |
Foreign |
|
| (166) |
|
| (34) |
|
| (86) |
| | | (8,956) | |
| 91 | |
| (60) | |
Income from continuing operations before income taxes |
|
| 50,478 |
|
| 32,617 |
|
| 22,556 |
| | | (19,143) | | | 34,365 | | | 52,670 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Equity method investment loss |
|
| (3,944) |
|
| (1,283) |
|
| (119) |
| | | 5,889 | | | (10,481) | | | (5,487) | |
Total income from continuing operations before income taxes |
| $ | 46,534 |
| $ | 31,334 |
| $ | 22,437 |
| | $ | (13,254) | | $ | 23,884 | | $ | 47,183 | |
The Company expects any foreign earnings to be reinvested in such foreign jurisdictions and, therefore, no0 deferred tax liabilities for U.S. income taxes on undistributed earnings are recorded. The foreign subsidiaries do not have any undistributed earnings.
110
A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual income tax expense (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| ||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
U.S. federal statutory income tax rate |
| 21.0 | % |
| 30.4 | % |
| 34.0 | % |
State and local income taxes, net of federal benefit |
| (2.2) |
|
| (2.2) |
|
| (1.7) |
|
R&D and other tax credits |
| (8.1) |
|
| (7.0) |
|
| (10.8) |
|
Valuation allowance |
| 3.7 |
|
| 4.9 |
|
| 3.8 |
|
Foreign rate differential |
| — |
|
| 0.1 |
|
| — |
|
Return to provision adjustments |
| (0.3) |
|
| (0.1) |
|
| (0.3) |
|
Permanent items |
| 0.8 |
|
| (2.7) |
|
| (2.3) |
|
Foreign derived intangible income |
| (3.7) |
|
| — |
|
| — |
|
Excess benefit of stock options |
| (3.1) |
|
| (4.4) |
|
| (1.0) |
|
Tax Act |
| — |
|
| 10.4 |
|
| — |
|
Other |
| 1.1 |
|
| 0.6 |
|
| (0.6) |
|
Effective income tax rate |
| 9.2 | % |
| 30.0 | % |
| 21.1 | % |
89
| | | | | | | | | |
| | Year Ended April 30, | | ||||||
|
| 2022 | |
| 2021 |
|
| 2020 | |
U.S. federal statutory income tax rate |
| 21.0 | % | | 21.0 | % | | 21.0 | % |
Foreign rate differential | | 4.9 | | | — | | | — | |
State and local income taxes, net of federal benefit |
| 40.8 | | | (1.4) | | | (2.1) | |
R&D and other tax credits |
| 23.0 | | | (11.5) | | | (6.8) | |
Valuation allowance |
| (37.4) | | | 3.2 | | | 3.4 | |
Return to provision adjustments | | (0.9) | | | (0.3) | | | 0.1 | |
Permanent items | | (3.3) | | | 3.6 | | | 0.7 | |
Foreign derived intangible income | | — | | | (7.6) | | | (3.9) | |
Excess benefit of equity awards | | 5.2 | | | (5.7) | | | (1.5) | |
Other |
| 0.9 | | | 0.3 | | | 0.2 | |
Effective income tax rate |
| 54.2 | % | | 1.6 | % | | 11.1 | % |
The components of the provision (benefit) for income taxes are as follows (in thousands):
| | | | | | | | | | |
| | Year Ended April 30, |
| |||||||
|
| 2022 |
| 2021 |
| 2020 |
| |||
Current: | | | | | | | | | | |
Federal | | $ | (3,025) | | $ | 3,094 | | $ | 3,005 | |
State | |
| 165 | |
| 448 | |
| 390 | |
Foreign | | | 279 | | | — | | | — | |
| |
| (2,581) | |
| 3,542 | |
| 3,395 | |
Deferred: | | | | | | | | | | |
Federal | |
| (5,764) | |
| (3,247) | |
| 2,063 | |
State | |
| 483 | |
| 244 | |
| 421 | |
Foreign | | | (2,507) | | | — | | | (31) | |
| |
| (7,788) | |
| (3,003) | |
| 2,453 | |
Total income tax expense | | $ | (10,369) | | $ | 539 | | $ | 5,848 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| |||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 1,953 |
| $ | 6,010 |
| $ | 4,336 |
|
State |
|
| 228 |
|
| 900 |
|
| 243 |
|
Foreign |
|
| — |
|
| — |
|
| — |
|
|
|
| 2,181 |
|
| 6,910 |
|
| 4,579 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
| 1,945 |
|
| 3,272 |
|
| (66) |
|
State |
|
| 551 |
|
| (330) |
|
| 280 |
|
Foreign |
|
| (36) |
|
| (52) |
|
| (35) |
|
|
|
| 2,460 |
|
| 2,890 |
|
| 179 |
|
Total income tax expense (benefit) |
| $ | 4,641 |
| $ | 9,800 |
| $ | 4,758 |
|
111
Significant components of the Company’s deferred income tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| April 30, |
| |||||||||||
|
| 2019 |
| 2018 |
| |||||||||
| | | | | | | | |||||||
| | April 30, |
| |||||||||||
|
| 2022 |
| 2021 |
| |||||||||
Deferred income tax assets: |
|
|
|
|
|
|
| | | | | | | |
Accrued expenses |
| $ | 5,206 |
| $ | 5,771 |
| | $ | 3,399 | | $ | 4,422 | |
Stock based compensation | | | 1,892 | | | 2,492 | | |||||||
Allowances, reserves, and other |
|
| 2,729 |
|
| 2,100 |
| |
| 4,455 | |
| 1,482 | |
Outside basis difference | | | 89 | | | 4,617 | | |||||||
Unrealized loss on securities |
|
| — |
|
| 25 |
| |
| 3,229 | |
| 110 | |
Net operating loss and credit carry-forwards |
|
| 13,208 |
|
| 12,361 |
| |
| 41,931 | |
| 33,155 | |
Intangibles basis |
|
| 125 |
|
| 94 |
| |
| — | |
| — | |
Lease liability | | | 6,303 | | | 5,645 | | |||||||
Total deferred income tax assets |
|
| 21,268 |
|
| 20,351 |
| |
| 61,298 | |
| 51,923 | |
Deferred income tax liabilities: |
|
|
|
|
|
|
| | | | | | | |
Fixed asset basis |
|
| (425) |
|
| (682) |
| |
| (10,413) | |
| (10,286) | |
|
| (2,909) |
|
| 326 |
| ||||||||
Right-of-use asset | | | (5,878) | | | (5,119) | | |||||||
Intangibles basis | | | (15,503) | | | (17,004) | | |||||||
Total deferred income tax liabilities |
|
| (3,334) |
|
| (356) |
| |
| (31,794) | |
| (32,409) | |
Valuation allowance |
|
| (11,278) |
|
| (8,568) |
| |
| (24,840) | |
| (17,453) | |
Net deferred tax assets |
| $ | 6,656 |
| $ | 11,427 |
| | $ | 4,664 | | $ | 2,061 | |
At April 30, 20192022 and 20182021 the Company recorded a valuation allowance of $11,278,000$24,840,000 and $8,568,000,$17,453,000, respectively, primarily against state R&D credits as the Company is currently generating more tax credits than it will utilize in future years and against the outside basis difference in an equity method investee.capital loss carryforward. The valuation allowance increased by $2,710,000$7,387,000 and $3,152,000$3,304,000 for April 30, 20192022 and April 30, 2018,2021, respectively.
At April 30, 20192022 the Company had state credit carryforwards of $23,832,000$31,379,000 that do not expire and federal tax credit carryforwards of $4,727,000$5,875,000 that begin to expire in 2039.2041.
At April 30, 2019,2022, the Company had afederal, state and foreign net operating loss carryforwardcarryforwards of approximately $10,000$88,863,000, $93,485,000and $205,000,$64,000, respectively. The federal and $47,000 of the state net operating losses carry forward indefinitely. $93,438,000 of state net operating losses will begin expiring in fiscal year 2032, and the foreign loss carryforward will begin expiring in fiscal year 2023. Utilization of federal and state net operating loss carryforwards carry forward indefinitely. $73,000may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the foreign loss carryforwards expire in fiscal 2020.Internal Revenue Code, as amended and similar state provisions.
90
At April 30, 20192022 and 2018,2021, the Company had approximately $12,593,000$17,806,000 and $11,170,000,$17,556,000, respectively, of unrecognized tax benefits all of which $4,969,000 would impact the Company’s effective tax rate if recognized.and $9,956,000 would result in an increase in valuation allowance. The Company estimates that $224,000$3,263,000 of its unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration.
112
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the years ended April 30, 20192022 and 20182021 (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| April 30, |
| |||||||||||
|
| 2019 |
| 2018 |
| |||||||||
| | | | | | | | |||||||
| | April 30, |
| |||||||||||
|
| 2022 |
| 2021 |
| |||||||||
Balance as of May 1 |
| $ | 11,170 |
| $ | 9,856 |
| | $ | 17,556 | | $ | 14,347 | |
Increases related to prior year tax positions |
|
| 216 |
|
| 228 |
| |
| 415 | |
| 1,305 | |
Decreases related to prior year tax positions |
|
| — |
|
| — |
| |
| (239) | |
| (116) | |
Increases related to current year tax positions |
|
| 1,756 |
|
| 1,347 |
| |
| 1,398 | |
| 2,074 | |
Decreases related to lapsing of statute of limitations |
|
| (549) |
|
| (261) |
| |
| (1,324) | |
| (54) | |
Balance as of April 30 |
| $ | 12,593 |
| $ | 11,170 |
| | $ | 17,806 | | $ | 17,556 | |
The Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 20192022 and 2018,2021, the Company had accrued approximately $18,000$302,000 and $16,000,$23,000, respectively, of interest and penalties related to uncertain tax positions. The Company is currently under audit by various state jurisdictions but does not anticipate any material adjustments from these examinations.jurisdictions. The 2018 to 2021 tax years 2016 to 2017 remain open to examination by the IRS for federal income taxes. The tax years 20112010 to 20172012 and 2018 to 2021 remain open for major state taxing jurisdictions.
DuringOn March 27, 2020, the fiscal year ended April 30, 2019,U.S. government enacted the Company recordedCoronavirus Aid, Relief, and Economic Security Act, or the CARES Act, a reversal$2 trillion relief package comprising a combination of a $549,000 reserve, including the related interest, for uncertain tax positions dueprovisions and other stimulus measures. The CARES Act broadly provides entities tax payment relief and significant business incentives and makes certain technical corrections to the lapse of prior year statue.
On December 22, 2017 Tax Cuts and Jobs Act, or the Tax Act was signed into law, which resulted in significant changes to the Internal Revenue Code. ChangesAct. The tax relief measures for entities include but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, repealfive-year net operating loss carry back, increases interest expense deduction limits, acceleration of the corporate alternative minimum tax repealcredit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The Act also provides other non-income tax benefits, including federal funding for a range of stabilization measures and emergency funding to assist those impacted by the deduction for domestic production activities, a deduction for certain Foreign Derived Intangible Income (“FDII”), and limitation on the deductibility of certain executive compensation.
In accordance with ASC 740, Income Taxes,COVID-19 pandemic. Similar legislation is being enacted in other jurisdictions in which the Company is requiredoperates. ASC Topic 740, Income Taxes, requires the effect of changes in tax rates and laws on deferred tax balances to record the effects of tax law changesbe recognized in the period in which new legislation is enacted. As the Company has an April 30 fiscal year end, its U.S. federal corporate income tax rate was blended in fiscal 2018, resulting in a statutory federal rate of approximately 30.4% (8 months at 35% and 4 months at 21%), and 21% for subsequent fiscal years. The Company remeasured its existing deferred tax assets and liabilities at the rate the Company expected to be in effect when those deferred taxes will be realized and recorded a one-time deferred tax expense of approximately $3,300,000 during the fiscal year ended April 30, 2018.
The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provided additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effectsenactment of the TaxCARES Act for the reporting periodand similar legislation in other jurisdictions in which the ActCompany operates was enacted. SAB 118 providesnot material to the Company’s income tax benefit for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.
The measurement period under SAB 118 closed during the year ended April 30, 2019. The Company has finalized its accounting for the impact of the Tax Act during and reached the following conclusions on the previous provisional estimates.2022.
The Company has concluded it will be eligible to claim the FDII deduction and has reflected a rate benefit in the provision for income taxes. The Company expects the IRS will be issuing additional guidance that could ultimately
91
impact the size of the benefit. In addition, the Company has concluded that its foreign subsidiaries are in a cumulative earnings and profits deficit and, therefore, has confirmed that it will not have an income tax payable as a result of the one-time deemed repatriation tax.
15.17. Accumulated Other Comprehensive LossIncome
The components of accumulated other comprehensive lossincome are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Accumulated |
| ||
|
|
|
|
|
|
|
| Other |
| |
|
| Available-for-Sale |
| Foreign Currency |
| Comprehensive |
| |||
|
| Securities |
| Translation Adjustments |
| Loss |
| |||
Total accumulated other comprehensive loss balance as of April 30, 2018 |
| $ | (57) |
| $ | 36 |
| $ | (21) |
|
Changes in foreign currency translation adjustments, net of $0 taxes |
|
| — |
|
| (34) |
|
| (34) |
|
Unrealized gains, net of $51 of taxes |
|
| 57 |
|
| — |
|
| 57 |
|
Total accumulated other comprehensive loss balance as of April 30, 2019 |
| $ | — |
| $ | 2 |
| $ | 2 |
|
| | | | | | | | | | |
| | | | | | | Total Accumulated | | ||
| | | | | | | | Other | | |
| | Available-for-Sale | | Foreign Currency | | Comprehensive | | |||
|
| Securities | | Translation Adjustments | | Income | | |||
Total accumulated other comprehensive income balance as of April 30, 2021 | | $ | (10) | | $ | 353 | | $ | 343 | |
Unrealized losses, net of $8 of taxes | | | (43) | | | — | | | (43) | |
Changes in foreign currency translation adjustments | | | — | | | (6,471) | | | (6,471) | |
Amounts reclassified to other (expense) income, net | | | — | | | (343) | | | (343) | |
Total accumulated other comprehensive income balance as of April 30, 2022 | | $ | (53) | | $ | (6,461) | | $ | (6,514) | |
16.18. Changes in Accounting Estimates
During the year ended April 30, 2022, the Company revised its estimates of the achievement of the performance metrics of the Company’s long term incentive plans, which resulted in a cumulative adjustment to reduce previously recognized compensation expense of $1,602,000. During the years ended April 30, 2019, 20182022, 2021 and 2017,2020, the Company revised its estimates at completion of various fixed-price contracts recognized using the over time method, which resulted in cumulative catch up adjustments during the year in which the change in estimate occurred. The change in estimate was a result of the Company changing the total costs required to complete the contracts due to having more accurate cost information as work progressed in subsequent periods on the various contracts. The changes in estimates resulted in cumulative catch-up adjustments to revenue for the years ended April 30, 2019 and 2017 were not material. During the year ended April 30, 2018, 2022,
113
the Company revised its estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1,255,000.$1,124,000. During the year ended April 30, 2021, the Company revised its estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1,041,000. During the year ended April 30, 2020, the Company revised its estimates of the total expected costs to complete a TMS contract and a contract associated with a design and development agreement. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease of approximately $1,403,000 and an increase of approximately $1,099,000, respectively.
17.19. Related Party Transactions
Pursuant to a consulting agreement, the Company paid a board member approximately $55,000, $48,000$36,000, $29,000 and $80,000$59,000 for fiscal years ended April 30, 2019, 20182022, 2021 and 2017,2020, respectively, for consulting services independent of his board service.
Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile. Under the DDA and related efforts with HAPSMobile, the Company will use its best efforts, up to a maximum value of $133,360,000, to designdesigned and buildbuilt prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conductconducted low altitude and high altitude flight tests of the prototype aircraft.aircraft on a best efforts basis, up to a maximum net value of $185,202,000. The Company will continue the development of Solar HAPS with SoftBank under the MDDA. Upon the execution of the MDDA, SoftBank issued the first order under the MDDA, which has a maximum value of approximately $51,200,000.
The Company recorded revenue under both the MDDA and DDA and preliminary design agreements between the Company and SoftBank of $55,407,000$43,325,000, $42,426,000 and $29,594,000$60,864,000 for the fiscal years ended April 30, 20192022, 2021 and 2018,2020, respectively. At April 30, 20192022 and 2018,2021, the Company had unbilled related party receivables from HAPSMobile of $9,028,000$2,229,000 and $3,145,000$544,000 recorded in “Unbilledunbilled receivables and retentions”retentions on the consolidated balance sheet, respectively. As of April 30, 2019,2022, the Company owned a 10%had no ownership stake in accordance with the JVA which was diluted to approximately 5% during the first fiscal quarter of fiscal year 2020.HAPSMobile and SoftBank and HAPSMobile are no longer considered related parties. Refer to Note 89 – Equity Method Investments for further details.
18.20. Commitments and Contingencies
Commitments
The Company’s operations are conducted in leased facilities. The Company finances the purchase of certain IT equipment and perpetual software licenses under capital lease arrangements. As of April 30, 2019, the Company has no
92
future commitments relatedRefer to capital lease arrangements as final payments were made during fiscal year 2019. Following is a summary of non‑cancelable operating commitments:Note 13—Leases for additional information.
|
|
|
|
|
| April 30, 2019 | |
|
| (In thousands) | |
|
|
| Operating leases |
2020 |
| $ | 5,298 |
2021 |
|
| 3,527 |
2022 |
|
| 2,723 |
2023 |
|
| 1,554 |
2024 |
|
| 953 |
Thereafter |
|
| — |
|
| $ | 14,055 |
Rental expense under operating leases was approximately $4,609,000, $4,011,000 and $3,849,000 for the years ended April 30, 2019, 2018 and 2017, respectively.Contingencies
Contingencies
The Company is subject to legal proceedings and claims which arise out of the ordinary course of its business. Although adverse decisions or settlements may occur, the Company, in consultation with legal counsel, believes that the final disposition of such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. During the fiscal year ended April 30, 2022 the Company entered into a settlement agreement with Webasto to settle all claims. Refer to Note 2—Discontinued Operations for further details.
At April 30, 20192022 and 2018,2021, the Company had outstanding letters of credit totaling $7,079,000$5,968,000 and $6,389,000,$5,029,000, respectively.
Contract Cost Audits
Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.
114
For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.
The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured. During the fiscal year ended April 30, 2017,2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 without paymentyear 2015 for an amount not significant. At April 30, 2022 and 2021, the Company had 0 reserve for open incurred cost claim audits.
21. Business Acquisitions
Telerob Acquisition
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to the terms of the Telerob Purchase Agreement. Telerob develops, manufactures, sells, and services remote-controlled unmanned ground robots and transport vehicles for civil and defense applications.
Pursuant to the Telerob Purchase Agreement at closing, the Company paid €37,455,000 (approximately $45,400,000) in cash to the Telerob Seller (subject to certain purchase price adjustments as set forth in the Telerob Purchase Agreement), less (a) €3,000,000 (approximately $3,636,000) to be held in escrow for breaches of the Telerob Seller’s fundamental warranties or any consideration.other of Telerob Seller’s warranties to the extent not covered by a representation and warranty insurance policy (the “RWI Policy”) obtained by the Company in support of certain indemnifications provided by the Telerob Seller; (b) transaction-related fees and costs incurred by the Telerob Seller, including change in control payments triggered by the transaction; and (c) 50% of the cost of obtaining the RWI Policy. In addition, at closing the Company paid off approximately €7,811,000 (approximately $9,468,000), of certain indebtedness of Telerob, which amount was paid in combination to the Telerob Seller and the lender under an agreement between Telerob GmbH and the lender providing for a reduced payoff amount. This indebtedness was offset by cash on hand at Telerob at closing. The escrow amount is to be released to the Telerob Seller, less any amounts paid or reserved, 30 months following the closing date.
In addition to the consideration paid at closing, the Telerob Seller may receive €2,000,000 (approximately $2,424,000) in additional cash consideration if specific revenue targets for Telerob are achieved during the 12 month period after closing beginning on the first day of the calendar month following the closing (the “First Earnout Year”) and an additional €2,000,000 (approximately $2,424,000) in cash consideration if specific revenue targets for Telerob are achieved in the 12 month period following the First Earnout Year. The Telerob Seller may also receive up to €2,000,000 (approximately $2,424,000) in additional cash consideration if specific awards and/or orders from the U.S. military are achieved prior to the end of a 36-month post-closing period.
The Company accounted for the acquisition under the acquisition method of accounting for business combinations. During the fiscal year ended April 30, 2019,2022, the Company settled rates forfinalized its incurred cost claims with the DCAA for fiscal years 2016 and 2017 without paymentdetermination of any consideration. At April 30, 2019 and 2018, the Company had $93,000 and $77,000 reserved for open incurred cost claim audits, respectively.
The Company is also currently undergoing an escheat examination by the state of Delaware. The amount of any potential loss is currently not estimable, and therefore, no reserve has been recorded.
93
19. Business Acquisitions
On February 1, 2017, the Company completed the acquisition of 36% of the common shares of Altoy for cash consideration of $625,000, which increased its interest from 49% to 85% and provided the Company with control over Altoy. As a result, Altoy became a consolidated subsidiary of the Company on the date of the acquisition. Altoy aims to market and distribute small UAS in Turkey. The Company previously accounted for its 49% interest in Altoy as an equity method investment. As a result of the acquisition, the Company is expected to expand the sales of its small UAS and related services in Turkey.
The following table summarizes the consideration transferred to acquire Altoy and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the noncontrolling interest in Altoy atassets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 1,600 |
|
Goodwill |
|
| 122 |
|
Trademark and trade names |
|
| 60 |
|
Deferred tax liability |
|
| (332) |
|
Other assets and liabilities assumed |
|
| 286 |
|
Total net identified assets acquired |
| $ | 1,736 |
|
|
|
|
|
|
Fair value of consideration transferred: |
|
|
|
|
Cash |
| $ | 625 |
|
Fair value of the Company's investment in Altoy prior to the acquisition |
|
| 851 |
|
Fair value of the noncontrolling interest in Altoy |
|
| 260 |
|
Total |
| $ | 1,736 |
|
As a result
115
| | | | |
| | May 3, | | |
| | 2021 | | |
Fair value of assets acquired: | | | | |
Accounts receivable |
| $ | 1,045 | |
Unbilled receivable | | | 829 | |
Inventories, net | | | 15,074 | |
Prepaid and other current assets | | | 314 | |
Property and equipment, net | | | 1,571 | |
Operating lease assets | | | 1,508 | |
Other assets | | | 494 | |
Technology | | | 11,500 | |
Backlog | | | 2,400 | |
Customer relationships | | | 5,000 | |
Other intangible assets | | | 102 | |
Goodwill | | | 20,800 | |
Total assets acquired | | $ | 60,637 | |
| | | | |
Fair value of liabilities assumed: | | | | |
Accounts payable | | $ | 1,136 | |
Wages and related accruals | | | 560 | |
Customer advances | | | 1,243 | |
Current operating lease liabilities | | | 361 | |
Other current liabilities | | | 3,310 | |
Non-current operating lease liabilities | | | 1,147 | |
Other non-current liabilities | | | 224 | |
Deferred income taxes | | | 5,617 | |
Total liabilities assumed | | | 13,598 | |
Total identifiable net assets | | $ | 47,039 | |
| | | | |
Fair value of consideration: | | | | |
Cash consideration, net of cash acquired | | $ | 46,150 | |
Contingent consideration | | | 889 | |
Total | | $ | 47,039 | |
Determining the fair value of the Company obtaining control over Altoy,intangible assets acquired requires significant judgment, including the Company’s previously held 49% interest was remeasured to fair value, resulting in a gainamount and timing of $584,000 which has been recognized in “other income (loss), net” on the consolidated statement of income.
expected future cash flows, long-term growth rates and discount rates. The fair value of the noncontrolling interest of $260,000 and the fair value of the previously held equity interest of $851,000 in Altoy, immediately prior to the acquisition,intangibles assets was determined using a discounted cash flow analysis, which were estimated by applying an income approach. These fair value measurements of the noncontrolling interest and the previously held equity interest are based on significant inputs not observablethe Company’s best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in the market,working capital, long term business plans and thus represent Level 3 measurements.recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of AltoyTelerob and expected future customers in the TurkeyUGV market. GoodwillFor tax purposes the acquisition was treated as a stock purchase and the goodwill is not tax deductible for tax purposes. All of the goodwill was assigned to the Company’s UAS segment.deductible.
The Company tests identifiable intangible assets and goodwill for impairment in the fourth quarter of each fiscal year unless there are interim indicators that suggest that it is more likely than not that either the identifiable intangible assets or goodwill may be impaired. Due to the current political situation within Turkey and the increased uncertainty in the relations between the U.S. and Turkey, the Company significantly lowered its cash flow expectations for its Altoy operations. As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairment of Altoy’s long-lived assets, excluding goodwill during the three months ended October 28, 2017. Based on the analysis, the Company determined that the fair value of Altoy had declined below its carrying value, excluding goodwill. As a result, the Company performed additional analysis to determine the amount of the impairment loss and recorded an impairment loss totaling $899,000 during the three months ended October 28, 2017, which is included in selling, general and administrative expense on the consolidated statements of operations. The fair value of the Altoy asset group was determined based on a discounted cash flow model reflective of the revised cash flow estimates.
94116
Supplemental Pro Forma Information (unaudited)
Altoy contributed revenues of $0Telerob revenue and a net loss of $122,000 to the Companyfrom operations for the period from February 1, 2017 toyear ended April 30, 2017.2022 since acquisition on May 3, 2021 was $29,177,000 and $12,115,000, respectively. The following unaudited pro forma summary presents consolidated information of the Company as if the business combinationacquisition had occurred on May 1, 20152020 (in thousands):
|
|
|
|
|
|
|
|
|
| Fiscal year ended |
|
|
|
| |
|
| April 30, 2017 |
| 2016 |
| ||
Revenue |
| $ | 229,287 |
| $ | 233,941 |
|
Net income from continuing operations |
| $ | 15,808 |
| $ | 15,595 |
|
Net income attributable to AeroVironment |
| $ | 15,888 |
| $ | 15,666 |
|
| | | | | | |
| | Year Ended | ||||
| | April 30, | | April 30, | ||
|
| 2022 |
| 2021 | ||
Revenue | | $ | 445,732 | | $ | 428,353 |
Net (loss) income attributable to AeroVironment, Inc. | | $ | 2,334 | | $ | 17,345 |
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business combinationacquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated afterby applying the Company’s accounting policies, and adjustingassuming transaction costs had been incurred during the results of Altoy to reflectthree months ended August 1, 2020, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2015,2020 with the consequential tax effects.effects and including the results of Telerob prior to acquisition.
The Company incurred approximately $74,000$1,186,000 of acquisition-related costs.expenses for the fiscal year ended April 30, 2022. These expenses are included in selling, general and administrative on the Company’s consolidated statement of operations.
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above as of May 1, 2020, nor are they indicative of results of operations that may occur in the future.
Arcturus Acquisition
On February 19, 2021, the Company closed its acquisition of Arcturus pursuant to the terms of the Arcturus Purchase Agreement. Arcturus, headquartered in Petaluma, California, designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems.
Pursuant to the Arcturus Purchase Agreement at the closing of the Arcturus Acquisition, the Company paid approximately $422,602,000, net of cash acquired (subject to certain customary adjustments and escrow arrangements set forth in the Arcturus Purchase Agreement), financed with a combination of approximately $150,218,000 of cash-on-hand, $200,000,000 of financing pursuant to the Term Loan Facility and the issuance of approximately $72,384,000 of unregistered, restricted shares of common stock. As specified in the Arcturus Purchase agreement, the number of shares issued was determined based on a value of $50,000,000 and a calculated average price as of the last business day prior to execution of the Arcturus Purchase Agreement.
The final cash consideration is subject to certain customary adjustments, including for net working capital, cash, debt and unpaid transaction expenses (including change in control related payments triggered by the transaction) of Arcturus at the Arcturus closing, less $6,500,000 to be held in escrow to address final purchase price adjustments post-Arcturus closing, if any (the “Adjustment Escrow”), and $1,822,500 to be held in escrow to address Arcturus’s and/or the Sellers’ indemnification obligations (the “Indemnification Escrow”). During the fiscal year ended April 30, 2022, the Adjustment Escrow of $6,500,000, less $509,000 of post-closing adjustments, and Indemnification Escrow of $1,822,500 was released to the Arcturus Sellers. To further address potential breaches of Arcturus’s and the Sellers’ representations and warranties beyond the application of the Indemnification Escrow, the Company also obtained representation and warranty insurance policies providing $40,000,000 in coverage, subject to customary terms, exclusions and retention amounts.
117
The Company accounted for the acquisition under the acquisition method of accounting for business combinations. During the fiscal year ended April 30, 2022, the Company finalized its determination of the fair value of the assets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):
| | | | |
| | February 19, | | |
| | 2021 | | |
Fair value of assets acquired: | | | | |
Accounts receivable | | $ | 6,050 | |
Unbilled receivable | | | 4,176 | |
Inventories, net | | | 21,701 | |
Prepaid and other current assets | | | 2,709 | |
Property and equipment, net | | | 38,739 | |
Operating lease assets | | | 11,429 | |
Other assets | | | 136 | |
Technology | | | 20,500 | |
Customer relationships | | | 62,700 | |
Goodwill | | | 290,006 | |
Total assets acquired | | $ | 458,146 | |
| | | | |
Fair value of liabilities assumed: | | | | |
Accounts payable | | $ | 3,085 | |
Wages and related accruals | | | 1,698 | |
Customer advances | | | 1,818 | |
Other current liabilities | | | 9,562 | |
Operating lease liabilities | | | 12,297 | |
Other non-current liabilities | | | 1,190 | |
Deferred income taxes, net | | | 5,869 | |
Total liabilities assumed | | | 35,519 | |
Total identifiable net assets | | $ | 422,627 | |
| | | | |
Fair value of consideration transferred: |
| | | |
Cash consideration, net of cash acquired | | $ | 350,243 | |
Equity consideration | | | 72,384 | |
Total consideration | | $ | 422,627 | |
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s preliminary estimates of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Arcturus and expected future customers in the MUAS market. For tax purposes the acquisition was treated as a stock purchase and the goodwill is not deductible.
118
Supplemental Pro Forma Information (unaudited)
Arcturus revenue and loss from operations for the year ended April 30, 2021 since acquisition on February 19, 2021 was $15,837,000 and $1,869,000, respectively. The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):
| | | | | | |
| | Year Ended | ||||
| | April 30, | | April 30, | ||
|
| 2021 |
| 2020 | ||
Revenue | | $ | 478,579 | | $ | 454,769 |
Net income attributable to AeroVironment, Inc. | | $ | 27,572 | | $ | 31,264 |
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 27, 2019, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2019 with the consequential tax effects, and including the results of Arcturus prior to acquisition.
The Company incurred approximately $6,015,000 acquisition-related expenses for the year ended April 30, 2021. These expenses are included in selling, general and administrative expense on the Company’s consolidated income statement forof operations.
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above as of May 1, 2019, nor are they indicative of results of operations that may occur in the future.
ISG Acquisition
On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, ISG pursuant to the terms of the ISG Purchase Agreement. ISG is engaged in development of artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services to United States government customers.
In connection with the ISG Acquisition, the Company (i) paid a base purchase price of $29,700,000 in cash at closing and (ii) may pay additional cash consideration of up to $6,000,000, which is held in escrow account not controlled by the Company, based on the achievement of certain revenue targets by ISG during the 3 years following closing, in each case, subject to the terms and conditions of the ISG Purchase Agreement, including certain customary adjustments. During the fiscal year ended April 30, 2017.2022, the target for the first year was achieved and the related consideration of $2,000,000 was released from an escrow account that is not controlled by the Company and, therefore, not recorded on the consolidated balance sheet.
As a condition to closing pursuant to the ISG Purchase Agreement, the Company and the ISG Seller entered into certain ancillary agreements, including a transition services agreement through February 2023 and two subleases pursuant to which the ISG Seller will provide the Company certain services and facilities space to accommodate the transition of ISG to the Company.
The parties to the ISG Purchase Agreement have made representations, warranties, and covenants that are customary for a transaction of this type, including, among other things, restrictions on the ISG Seller and the Beneficial Owner from engaging in certain competitive activities, as well as mutual indemnification obligations between the Company and the ISG Seller. To supplement certain indemnifications provided by the ISG Seller, the Company obtained a representation and warranty insurance policy.
119
The Company accounted for the acquisition under the acquisition method of accounting for business combinations. During the fiscal year ended April 30, 2022, the Company finalized its determination of the fair value of the assets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):
| | | | |
| | February 23, | | |
| | 2021 | | |
Fair value of assets acquired: | | | | |
Technology |
| $ | 11,400 | |
Customer relationships | | | 4,500 | |
Other assets | | | 217 | |
Goodwill | | | 19,254 | |
Total identifiable net assets | | $ | 35,371 | |
| | | | |
Fair value of consideration transferred: | | | | |
Cash | | $ | 29,700 | |
Holdback | | | 150 | |
Contingent consideration | | | 5,521 | |
Total consideration | | $ | 35,371 | |
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s preliminary estimates of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers. For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.
Supplemental Pro Forma Information (unaudited)
ISG revenue for the year ended April 30, 2021 since acquisition on February 23, 2021 was $1,724,000. Other than the aforementioned revenue and intangible asset amortization expense of $474,000 for the year ended April 30, 2021 since the acquisition on February 23, 2021, the ISG financial results were not significant. The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):
| | | | | | |
| | Year Ended | ||||
| | April 30, | | April 30, | ||
|
| 2021 |
| 2020 | ||
Revenue | | $ | 406,444 | | $ | 379,627 |
Net income attributable to AeroVironment, Inc. | | $ | 23,787 | | $ | 39,025 |
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 27, 2019, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2019 with the consequential tax effects, and including the results of ISG prior to acquisition.
120
The Company incurred approximately $954,000 acquisition-related expenses for the year ended April 30, 2021. These expenses are included in selling, general and administrative expenses on the Company’s consolidated statement of operations.
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2015.
20. Geographic Information
Sales to non‑U.S. customers accounted for 52%, 47% and 36%2019, nor are they indicative of revenue for each of the fiscal years ended April 30, 2019, 2018 and 2017, respectively.
95
21. Impact of Adoption of New Accounting Standards
During the year ended April 30, 2019, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The impact to the Company’s balance sheet as a result of adopting the standard was as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of the |
|
|
|
| |
|
| April 30, 2018 |
| Adoption of |
| April 30, 2018 |
| |||
|
| As Reported |
| ASC Topic 606 |
| As Adjusted |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 143,517 |
| $ | — |
| $ | 143,517 |
|
Short-term investments |
|
| 113,649 |
|
| — |
|
| 113,649 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,080 at April 30, 2018 |
|
| 56,813 |
|
| — |
|
| 56,813 |
|
Unbilled receivables and retentions (inclusive of related party unbilled receivables of $3,145 at April 30, 2018) |
|
| 13,076 |
|
| 3,796 |
|
| 16,872 |
|
Inventories, net |
|
| 38,640 |
|
| (1,215) |
|
| 37,425 |
|
Prepaid expenses and other current assets |
|
| 5,103 |
|
| — |
|
| 5,103 |
|
Current assets of discontinued operations |
|
| 28,349 |
|
| (2,681) |
|
| 25,668 |
|
Total current assets |
|
| 399,147 |
|
| (100) |
|
| 399,047 |
|
Long-term investments |
|
| 40,656 |
|
| — |
|
| 40,656 |
|
Property and equipment, net |
|
| 19,219 |
|
| — |
|
| 19,219 |
|
Deferred income taxes |
|
| 11,168 |
|
| 326 |
|
| 11,494 |
|
Other assets |
|
| 2,721 |
|
| 281 |
|
| 3,002 |
|
Total assets |
| $ | 472,911 |
| $ | 507 |
| $ | 473,418 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 21,340 |
| $ | — |
| $ | 21,340 |
|
Wages and related accruals |
|
| 16,851 |
|
| — |
|
| 16,851 |
|
Income taxes payable |
|
| 4,085 |
|
| — |
|
| 4,085 |
|
Customer advances |
|
| 2,145 |
|
| 1,419 |
|
| 3,564 |
|
Other current liabilities |
|
| 6,892 |
|
| 62 |
|
| 6,954 |
|
Current liabilities of discontinued operations |
|
| 9,184 |
|
| 110 |
|
| 9,294 |
|
Total current liabilities |
|
| 60,497 |
|
| 1,591 |
|
| 62,088 |
|
Deferred rent |
|
| 1,536 |
|
| — |
|
| 1,536 |
|
Other non-current liabilities |
|
| 622 |
|
| — |
|
| 622 |
|
Deferred tax liability |
|
| 67 |
|
| — |
|
| 67 |
|
Liability for uncertain tax positions |
|
| 49 |
|
| — |
|
| 49 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value: |
|
|
|
|
|
|
|
|
|
|
Authorized shares—10,000,000; none issued or outstanding at April 30, 2018 |
|
| — |
|
| — |
|
| — |
|
Common stock, $0.0001 par value: |
|
|
|
|
|
|
|
|
|
|
Authorized shares—100,000,000 |
|
|
|
|
|
|
|
|
|
|
Issued and outstanding shares—23,908,736 at April 30, 2018 |
|
| 2 |
|
| — |
|
| 2 |
|
Additional paid-in capital |
|
| 170,139 |
|
| — |
|
| 170,139 |
|
Accumulated other comprehensive loss |
|
| (21) |
|
| — |
|
| (21) |
|
Retained earnings |
|
| 239,997 |
|
| (1,084) |
|
| 238,913 |
|
Total AeroVironment stockholders’ equity |
|
| 410,117 |
|
| (1,084) |
|
| 409,033 |
|
Noncontrolling interest |
|
| 23 |
|
| — |
|
| 23 |
|
Total equity |
|
| 410,140 |
|
| (1,084) |
|
| 409,056 |
|
Total liabilities and stockholders’ equity |
| $ | 472,911 |
| $ | 507 |
| $ | 473,418 |
|
96
The tables below presents the impact of adoption on the Company’s statementresults of operations forthat may occur in the fiscal years ended April 30, 2018 and 2017 (in thousands except share and per share data).future.
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2018 | |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted | |||
Revenue: |
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 195,330 |
| $ | (3,618) |
| $ | 191,712 |
Contract services (inclusive of related party revenue of $29,594 for the year ended April 30, 2018) |
|
| 75,722 |
|
| 990 |
|
| 76,712 |
|
|
| 271,052 |
|
| (2,628) |
|
| 268,424 |
Cost of sales: |
|
|
|
|
|
|
|
|
|
Product sales |
|
| 111,990 |
|
| (2,597) |
|
| 109,393 |
Contract services |
|
| 50,174 |
|
| 1,172 |
|
| 51,346 |
|
|
| 162,164 |
|
| (1,425) |
|
| 160,739 |
Gross margin: |
|
|
|
|
|
|
|
|
|
Product sales |
|
| 83,340 |
|
| (1,021) |
|
| 82,319 |
Contract services |
|
| 25,548 |
|
| (182) |
|
| 25,366 |
|
|
| 108,888 |
|
| (1,203) |
|
| 107,685 |
Selling, general and administrative |
|
| 50,826 |
|
| — |
|
| 50,826 |
Research and development |
|
| 26,433 |
|
| — |
|
| 26,433 |
Loss (income) from continuing operations |
|
| 31,629 |
|
| (1,203) |
|
| 30,426 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
| 2,240 |
|
| — |
|
| 2,240 |
Other expense, net |
|
| (49) |
|
| — |
|
| (49) |
Income from continuing operations before income taxes |
|
| 33,820 |
|
| (1,203) |
|
| 32,617 |
Provision for income taxes |
|
| 10,177 |
|
| (377) |
|
| 9,800 |
Equity method investment loss, net of tax |
|
| (1,283) |
|
| — |
|
| (1,283) |
Net (loss) income from continuing operations |
|
| 22,360 |
|
| (826) |
|
| 21,534 |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of tax |
|
| — |
|
| — |
|
| — |
Income (loss) from discontinued operations, net of tax |
|
| (2,508) |
|
| (1,379) |
|
| (3,887) |
Net income (loss) from discontinued operations |
|
| (2,508) |
|
| (1,379) |
|
| (3,887) |
Net (loss) income |
|
| 19,852 |
|
| (2,205) |
|
| 17,647 |
Net loss attributable to noncontrolling interest |
|
| 216 |
|
| — |
|
| 216 |
Net (loss) income attributable to AeroVironment |
| $ | 20,068 |
| $ | (2,205) |
| $ | 17,863 |
Net (loss) income per share attributable to AeroVironment—Basic |
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.97 |
| $ | (0.03) |
| $ | 0.93 |
Discontinued operations |
|
| (0.11) |
|
| (0.06) |
|
| (0.17) |
Net loss per share attributable to AeroVironment—Basic |
| $ | 0.86 |
| $ | (0.09) |
| $ | 0.76 |
Net (loss) income per share attributable to AeroVironment—Diluted |
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.95 |
| $ | (0.03) |
| $ | 0.91 |
Discontinued operations |
|
| (0.11) |
|
| (0.06) |
|
| (0.16) |
Net (loss) per share attributable to AeroVironment—Diluted |
| $ | 0.84 |
| $ | (0.09) |
| $ | 0.75 |
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
| 23,471,241 |
|
| 23,471,241 |
|
| 23,471,241 |
Diluted |
|
| 23,813,772 |
|
| 23,813,772 |
|
| 23,813,772 |
97
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2017 |
| |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 159,630 |
| $ | (706) |
| $ | 158,924 |
|
Contract services |
|
| 69,310 |
|
| 4,871 |
|
| 74,181 |
|
|
|
| 228,940 |
|
| 4,165 |
|
| 233,105 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 88,963 |
|
| 76 |
|
| 89,039 |
|
Contract services |
|
| 44,792 |
|
| 2,401 |
|
| 47,193 |
|
|
|
| 133,755 |
|
| 2,477 |
|
| 136,232 |
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 70,667 |
|
| (782) |
|
| 69,885 |
|
Contract services |
|
| 24,518 |
|
| 2,470 |
|
| 26,988 |
|
|
|
| 95,185 |
|
| 1,688 |
|
| 96,873 |
|
Selling, general and administrative |
|
| 47,642 |
|
| — |
|
| 47,642 |
|
Research and development |
|
| 28,465 |
|
| — |
|
| 28,465 |
|
Loss (income) from continuing operations |
|
| 19,078 |
|
| 1,688 |
|
| 20,766 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
| 1,618 |
|
| — |
|
| 1,618 |
|
Other expense, net |
|
| 172 |
|
| — |
|
| 172 |
|
Income from continuing operations before income taxes |
|
| 20,868 |
|
| 1,688 |
|
| 22,556 |
|
Provision for income taxes |
|
| 4,138 |
|
| 620 |
|
| 4,758 |
|
Equity method investment loss, net of tax |
|
| (119) |
|
| — |
|
| (119) |
|
Net (loss) income from continuing operations |
|
| 16,611 |
|
| 1,068 |
|
| 17,679 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of tax |
|
| — |
|
| — |
|
| — |
|
Income (loss) from discontinued operations, net of tax |
|
| (4,154) |
|
| (447) |
|
| (4,601) |
|
Net income (loss) from discontinued operations |
|
| (4,154) |
|
| (447) |
|
| (4,601) |
|
Net (loss) income |
|
| 12,457 |
|
| 621 |
|
| 13,078 |
|
Net loss attributable to noncontrolling interest |
|
| 22 |
|
| — |
|
| 22 |
|
Net (loss) income attributable to AeroVironment |
| $ | 12,479 |
| $ | 621 |
| $ | 13,100 |
|
Net (loss) income per share attributable to AeroVironment—Basic |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.72 |
| $ | 0.05 |
| $ | 0.77 |
|
Discontinued operations |
|
| (0.18) |
|
| (0.02) |
|
| (0.20) |
|
Net loss per share attributable to AeroVironment—Basic |
| $ | 0.54 |
| $ | 0.03 |
| $ | 0.57 |
|
Net (loss) income per share attributable to AeroVironment—Diluted |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.72 |
| $ | 0.05 |
| $ | 0.76 |
|
Discontinued operations |
|
| (0.18) |
|
| (0.02) |
|
| (0.20) |
|
Net (loss) per share attributable to AeroVironment—Diluted |
| $ | 0.54 |
| $ | 0.03 |
| $ | 0.56 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 23,059,045 |
|
| 23,059,045 |
|
| 23,059,045 |
|
Diluted |
|
| 23,307,738 |
|
| 23,307,738 |
|
| 23,307,738 |
|
Pulse Acquisition
98
The tables below presents the impact of adoption on the Company’s statement of comprehensive (loss) income for the fiscal years ended April 30, 2018 and 2017 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2018 | |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted | |||
Net (loss) income |
| $ | 19,852 |
| $ | (2,205) |
| $ | 17,647 |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
| 36 |
|
| — |
|
| 36 |
Unrealized gain on investments, net of deferred tax expense of $25 and $43 for the fiscal years ended 2018 and 2017 |
|
| 70 |
|
| — |
|
| 70 |
Total comprehensive (loss) income |
|
| 19,958 |
|
| (2,205) |
| $ | 17,753 |
Net loss attributable to noncontrolling interest |
|
| 216 |
|
| — |
|
| 216 |
Comprehensive (loss) income attributable to AeroVironment |
| $ | 20,174 |
| $ | (2,205) |
| $ | 17,969 |
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2017 | |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted | |||
Net (loss) income |
| $ | 12,457 |
| $ | 621 |
| $ | 13,078 |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
| — |
|
| — |
|
| — |
Unrealized gain on investments, net of deferred tax expense of $25 and $43 for the fiscal years ended 2018 and 2017 |
|
| 74 |
|
| — |
|
| 74 |
Total comprehensive (loss) income |
|
| 12,531 |
|
| 621 |
| $ | 13,152 |
Net loss attributable to noncontrolling interest |
|
| 22 |
|
| — |
|
| 22 |
Comprehensive (loss) income attributable to AeroVironment |
| $ | 12,553 |
| $ | 621 |
| $ | 13,174 |
99
The table below presents the impact of adoption on the Company’s statement of cash flows for the fiscal years ended April 30, 2018 and 2017 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2018 | |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted | |||
Operating activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 19,852 |
| $ | (2,205) |
| $ | 17,647 |
Gain on sale of business, net of tax |
|
| — |
|
| — |
|
| — |
Loss from discontinued operations, net of tax |
|
| 2,508 |
|
| 1,379 |
|
| 3,887 |
Net income from continuing operations |
|
| 22,360 |
|
| (826) |
|
| 21,534 |
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 5,982 |
|
| — |
|
| 5,982 |
Loss from equity method investments |
|
| 1,283 |
|
| — |
|
| 1,283 |
Impairment of long-lived assets |
|
| 255 |
|
| — |
|
| 255 |
Provision for doubtful accounts |
|
| 977 |
|
| — |
|
| 977 |
Impairment of intangible assets and goodwill |
|
| 1,021 |
|
| — |
|
| 1,021 |
Gains on foreign currency transactions |
|
| (87) |
|
| — |
|
| (87) |
Deferred income taxes |
|
| 3,835 |
|
| (982) |
|
| 2,853 |
Gain on business acquisition |
|
| — |
|
| — |
|
| — |
Stock-based compensation |
|
| 4,956 |
|
| — |
|
| 4,956 |
Loss on disposition of property and equipment |
|
| 20 |
|
| — |
|
| 20 |
Amortization of held-to-maturity investments |
|
| 1,424 |
|
| — |
|
| 1,424 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 11,211 |
|
| (141) |
|
| 11,070 |
Unbilled receivables and retentions |
|
| 903 |
|
| 1,350 |
|
| 2,253 |
Inventories |
|
| 2,268 |
|
| (1,076) |
|
| 1,192 |
Income tax receivable |
|
| — |
|
| — |
|
| — |
Prepaid expenses and other assets |
|
| 419 |
|
| (280) |
|
| 139 |
Accounts payable |
|
| 5,736 |
|
| — |
|
| 5,736 |
Other liabilities |
|
| 7,873 |
|
| 1,351 |
|
| 9,224 |
Net cash provided by (used in) operating activities of continuing operations |
|
| 70,436 |
|
| (604) |
|
| 69,832 |
Investing activities |
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
| (9,563) |
|
| — |
|
| (9,563) |
Equity method investments |
|
| (3,267) |
|
| — |
|
| (3,267) |
Business acquisitions, net of tax |
|
| — |
|
| — |
|
| — |
Proceeds from sale of business |
|
| — |
|
| — |
|
| — |
Redemptions of held-to-maturity investments |
|
| 227,663 |
|
| — |
|
| 227,663 |
Purchases of held-to-maturity investments |
|
| (221,680) |
|
| — |
|
| (221,680) |
Redemptions of available-for-sale investments |
|
| 450 |
|
| — |
|
| 450 |
Net cash provided by investing activities from continuing operations |
|
| (6,397) |
|
| — |
|
| (6,397) |
Financing activities |
|
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations |
|
| (288) |
|
| — |
|
| (288) |
Tax withholding payment related to net settlement of equity awards |
|
| (397) |
|
| — |
|
| (397) |
Exercise of stock options |
|
| 2,705 |
|
| — |
|
| 2,705 |
Net cash provided by financing activities from continuing operations |
|
| 2,020 |
|
| — |
|
| 2,020 |
Discontinued operations |
|
|
|
|
|
|
|
|
|
Operating activities of discontinued operations |
|
| (1,227) |
|
| 604 |
|
| (623) |
Investing activities of discontinued operations |
|
| (1,219) |
|
| — |
|
| (1,219) |
Financing activities of discontinued operations |
|
| — |
|
| — |
|
| — |
Net cash (used in) provided by discontinued operations |
|
| (2,446) |
|
| 604 |
|
| (1,842) |
Net increase in cash and cash equivalents |
|
| 63,613 |
|
| — |
|
| 63,613 |
Cash and cash equivalents at beginning of period |
|
| 79,904 |
|
| — |
|
| 79,904 |
Cash and cash equivalents at end of period |
| $ | 143,517 |
| $ | — |
| $ | 143,517 |
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
Cash paid, net during the period for: |
|
|
|
|
|
|
|
|
|
Income taxes |
| $ | 1,813 |
|
| — |
| $ | 1,813 |
Non-cash activities |
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of deferred tax expense of $25 and $43 |
| $ | 70 |
|
| — |
| $ | 70 |
Reclassification from share-based liability compensation to equity |
| $ | 384 |
|
| — |
| $ | 384 |
Change in foreign currency translation adjustments |
| $ | 36 |
|
| — |
| $ | 36 |
Acquisitions of property and equipment included in accounts payable |
| $ | 379 |
|
| — |
| $ | 379 |
100
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, 2017 | |||||||
|
| As Reported |
| ASC Topic 606 Impact |
| As Adjusted | |||
Operating activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 12,457 |
| $ | 621 |
| $ | 13,078 |
Gain on sale of business, net of tax |
|
| — |
|
| — |
|
| — |
Loss from discontinued operations, net of tax |
|
| 4,154 |
|
| 447 |
|
| 4,601 |
Net income from continuing operations |
|
| 16,611 |
|
| 1,068 |
|
| 17,679 |
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 5,054 |
|
| — |
|
| 5,054 |
Loss from equity method investments |
|
| 119 |
|
| — |
|
| 119 |
Impairment of long-lived assets |
|
| 46 |
|
| — |
|
| 46 |
Provision for doubtful accounts |
|
| 48 |
|
| — |
|
| 48 |
Impairment of intangible assets and goodwill |
|
| — |
|
| — |
|
| — |
Gains on foreign currency transactions |
|
| 284 |
|
| — |
|
| 284 |
Deferred income taxes |
|
| (52) |
|
| 361 |
|
| 309 |
Gain on business acquisition |
|
| (584) |
|
| — |
|
| (584) |
Stock-based compensation |
|
| 3,392 |
|
| — |
|
| 3,392 |
Loss on disposition of property and equipment |
|
| 44 |
|
| — |
|
| 44 |
Amortization of held-to-maturity investments |
|
| 2,382 |
|
| — |
|
| 2,382 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (19,608) |
|
| (112) |
|
| (19,720) |
Unbilled receivables and retentions |
|
| 4,667 |
|
| (4,052) |
|
| 615 |
Inventories |
|
| (19,225) |
|
| 2,409 |
|
| (16,816) |
Income tax receivable |
|
| — |
|
| — |
|
| — |
Prepaid expenses and other assets |
|
| (1,484) |
|
| — |
|
| (1,484) |
Accounts payable |
|
| 545 |
|
| — |
|
| 545 |
Other liabilities |
|
| (233) |
|
| 67 |
|
| (166) |
Net cash provided by (used in) operating activities of continuing operations |
|
| (7,994) |
|
| (259) |
|
| (8,253) |
Investing activities |
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
| (9,017) |
|
| — |
|
| (9,017) |
Equity method investments |
|
| — |
|
| — |
|
| — |
Business acquisitions, net of tax |
|
| (430) |
|
| — |
|
| (430) |
Proceeds from sale of business |
|
| — |
|
| — |
|
| — |
Redemptions of held-to-maturity investments |
|
| 121,522 |
|
| — |
|
| 121,522 |
Purchases of held-to-maturity investments |
|
| (148,991) |
|
| — |
|
| (148,991) |
Redemptions of available-for-sale investments |
|
| 400 |
|
| — |
|
| 400 |
Net cash provided by investing activities from continuing operations |
|
| (36,516) |
|
| — |
|
| (36,516) |
Financing activities |
|
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations |
|
| (390) |
|
| — |
|
| (390) |
Tax withholding payment related to net settlement of equity awards |
|
| (5) |
|
| — |
|
| (5) |
Exercise of stock options |
|
| 3,865 |
|
| — |
|
| 3,865 |
Net cash provided by financing activities from continuing operations |
|
| 3,470 |
|
| — |
|
| 3,470 |
Discontinued operations |
|
|
|
|
|
|
|
|
|
Operating activities of discontinued operations |
|
| (2,505) |
|
| 259 |
|
| (2,246) |
Investing activities of discontinued operations |
|
| (838) |
|
| — |
|
| (838) |
Financing activities of discontinued operations |
|
| — |
|
| — |
|
| — |
Net cash (used in) provided by discontinued operations |
|
| (3,343) |
|
| 259 |
|
| (3,084) |
Net increase in cash and cash equivalents |
|
| (44,383) |
|
| — |
|
| (44,383) |
Cash and cash equivalents at beginning of period |
|
| 124,287 |
|
| — |
|
| 124,287 |
Cash and cash equivalents at end of period |
| $ | 79,904 |
| $ | — |
| $ | 79,904 |
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
Cash paid, net during the period for: |
|
|
|
|
|
|
|
|
|
Income taxes |
| $ | 1,804 |
|
| — |
| $ | 1,804 |
Non-cash activities |
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of deferred tax expense of $25 and $43 |
| $ | 74 |
|
| — |
| $ | 74 |
Reclassification from share-based liability compensation to equity |
| $ | 307 |
|
| — |
| $ | 307 |
Change in foreign currency translation adjustments |
| $ | — |
|
| — |
| $ | — |
Acquisitions of property and equipment included in accounts payable |
| $ | 724 |
|
| — |
| $ | 724 |
101
22. Subsequent Events
On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unitthe Pulse Purchase Agreement (the “Pulse Purchase Agreement”).Agreement. The Company’s acquisition of Pulse’s Vertical Takeoff and Landing (VTOL)helicopter UAS product family strengthens AeroVironment’s leading family of fixed-wing small unmanned aircraft systems and increases the mission capabilities of AeroVironment’s family of systems.
Pursuant to the Pulse Purchase Agreement, at closing, the Company paid $20,650,000 in cash, less closing indebtedness and transaction costs as defined in the Pulse Purchase Agreement, less a $250,000 retention to cover any post-closing indemnification claims, and less a $1,250,000 holdback amount, with the retention and holdback to be released to the member unit holders of Pulse, Aerospace, less any amounts paid or reserved, 18 months after the closing of the transactions in accordance with the terms of the Pulse Purchase Agreement. The closing cash consideration included the payoff of the outstanding indebtedness of Pulse Aerospace as of the closing date. In addition to the consideration paid at closing, the Sellers may receive up to a maximum of $5,000,000 in additional cash consideration, which amount has been placed into escrow, if specific research and development milestones are achieved by December 10, 2021. The Company financed the acquisition entirely from available cash on hand. During fiscal year ended April 30, 2021, the Company paid a total of $1,492,000 in holdback and retention payments.
DueIn addition to the timingconsideration paid at closing, the acquisition of Pulse included contingent consideration arrangements that required additional consideration to be paid by the Company to the sellers of Pulse if 2 specified research and development milestones were achieved by December 10, 2021 and the continued employment of specified employees. Amounts were payable upon the achievement of the milestones. The range of the undiscounted amounts the Company could pay under each of the contingent consideration agreements was 0 or $2,500,000 ($5,000,000 in total if both milestones are achieved and specific key employees continued employment). The fair value of the contingent consideration recognized on the acquisition date of $1,703,000 was estimated by applying the purchase accountingincome approach. That measure was based on significant Level 3 inputs not observable in the market. Key assumptions include (1) a discount rate of 4.5% and (2) the probability that each of the milestones would be achieved.
During the year ended April 30, 2020, one of the research and development milestones was achieved, and the requirements for the business combination is incomplete at the timepayout of this filing.remaining contingent consideration were concluded to not have been met. As a result, the Company is unablerecorded a gain of $832,000 which was recorded in selling, general, and administrative expense in the consolidated statements of income. On February 26, 2020, $2,500,000 of contingent consideration was paid to provide the amounts recognizedsellers for the achieved milestone.
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The Company accounted for the acquisition under the acquisition method of accounting for business combinations. During the fiscal year ended April 30, 2020, the Company finalized its determination of the fair value of the assets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):
| | | | |
| | June 10, | | |
| | 2019 | | |
Technology |
| $ | 14,950 | |
Goodwill | | | 6,340 | |
In-process R&D | | | 550 | |
Inventory | | | 334 | |
Non-compete agreements | | | 320 | |
Other assets, net of liabilities assumed | | | (614) | |
Total net identified assets acquired | | $ | 21,880 | |
| | | | |
Fair value of consideration: | | | | |
Cash | | $ | 18,677 | |
Holdback | | | 1,250 | |
Retention | | | 250 | |
Contingent consideration | | | 1,703 | |
Total | | $ | 21,880 | |
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Pulse and expected future customers in the helicopter UAS market. For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.
Supplemental Pro Forma Information (unaudited)
Pulse revenue for the major classesyear ended April 30, 2020 since acquisition on June 10, 2019 was $6,607,000. Other than the aforementioned revenue and intangible asset amortization expense of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill. In addition,$2,461,000 for the year ended April 30, 2020 since the acquisition on June 10, 2019, the Pulse financial results were not significant. The following unaudited pro forma summary presents consolidated information of the Company is unable to provideas if the business acquisition had occurred on May 1, 2018 (in thousands):
| | | | | | |
| | Year Ended | ||||
| | April 30, | | April 30, | ||
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| 2020 |
| 2019 | ||
Revenue | | $ | 367,523 | | $ | 316,878 |
Net income attributable to AeroVironment, Inc. | | $ | 41,481 | | $ | 43,204 |
The Company did not have any material, nonrecurring pro forma revenues and earnings ofadjustments directly attributable to the combined entity. All required disclosures will bebusiness acquisition included in the Company's Quarterly Report on Form 10-Qreported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 28, 2018, reflecting the additional amortization
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that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2018 with the consequential tax effects, and including the results of Pulse prior to acquisition.
The Company did not incur significant acquisition-related expenses for the quarteryear ended July 27, 2019.April 30, 2020. These expenses are included in selling, general and administrative, research and development, and product cost of sales on the Company’s consolidated statement of operations.
23. Quarterly Results of Operations (Unaudited)
The followingunaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables present selected unauditedabove as of May 1, 2018, nor are they indicative of results of operations that may occur in the future.
22. Pension
As part of the Telerob acquisition, the Company acquired a small foreign-based defined benefit pension plan. The Rheinmetall-Zusatzversorgung (“RZV”) service plan covers three former employees based on individual contracts issued to the employees. No other employees are eligible to participate. The Company has reinsurance policies were taken out for participating former employees, which were pledged to the employees. The measurement date for the Company’s pension plan was April 30, 2022.
The table below includes the projected benefit obligation and fair value of plan assets as of April 30, 2022. The net projected benefit obligation (in thousands) is recorded in other assets on the consolidated financial databalance sheet.
| | | |
Projected benefit obligation | | $ | (3,322) |
Fair value of plan assets | |
| 3,395 |
Funded status of the plan | | $ | 73 |
Change in projected benefit obligation (in thousands):
| | | |
Pension benefit obligation balance as of May 3, 2021 | | $ | (4,126) |
Interest cost | | (39) | |
Actuarial gain | | | 179 |
Benefits paid | | | 176 |
Foreign currency exchange rate changes | | | 488 |
Pension benefit obligation balance as of April 30, 2022 | | $ | (3,322) |
Change in plan assets (in thousands):
| | | |
Fair value of plan assets as of May 3, 2021 | | $ | 3,951 |
Expected return on plan assets | | | 108 |
Benefits paid | | | (176) |
Foreign currency exchange rate changes | | | (488) |
Fair value of plan assets as of April 30, 2022 | | $ | 3,395 |
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The projected benefit obligation includes assumptions of a discount rate of 1.7% and pension increase for in-payment benefits of 1.5% for April 30, 2022. The accumulated benefit obligation is approximately equal to the projected benefit obligation. The plan assets consist of reinsurance policies for each of the eight quartersthree pension commitments. The reinsurance policies are fixed-income investments considered a level 2 fair value hierarchy based on observable inputs of the policy. The Company does not expect to make any contributions to the Plan in the two‑fiscal year periodending April 30, 2023. The Company assumed expected return on plan assets of 2.9% for April 30, 2022.
Expected benefits payments as of April 30, 2022 (in thousands):
| | | |
2023 | | $ | 161 |
2024 | | | 164 |
2025 | |
| 165 |
2026 | |
| 165 |
2027 | | | 166 |
2028-2032 | |
| 828 |
Total expected benefit payments | | $ | 1,649 |
Net periodic benefit cost (in thousands) is recorded in interest (expense) income, net.
| | | |
| | Year Ended | |
| | April 30, | |
| | 2022 | |
| | (In thousands) | |
Expected return on plan assets | | $ | 108 |
Interest cost | |
| (39) |
Actuarial gain | | | 179 |
Net periodic benefit cost | | $ | 248 |
23. Segments
The Company’s reportable segments are as follows:
Small Unmanned Aircraft Systems —The Small UAS segment focuses primarily on products designed to operate reliably at very low altitudes in a wide range of environmental conditions, providing a vantage point from which to collect and deliver valuable information as well as related support services including training, spare parts, product repair, product replacement, and the customer contracted operation.
Tactical Missile Systems – The TMS segment focuses primarily on TMS products, which are tube-launched aircraft that deploy with the push of a button, fly at higher speeds than small UAS products, and perform either effects delivery or reconnaissance missions, and related support services including training, spare parts, product repair, and product replacement. The TMS segment also includes customer-funded research and development programs.
Medium Unmanned Aircraft Systems—The MUAS segment, which originates with the acquisition of Arcturus, focuses on designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne
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platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems including ISR services.
High Altitude Pseudo-Satellite Unmanned Aircraft Systems (“HAPS”)—The HAPS segment consists of the Company’s existing development of High Altitude Pseudo-Satellite systems in conjunction with SoftBank.
All other—All other segments include MacCready Works and the recently acquired ISG and Telerob businesses.
The accounting policies of the segments are the same as those described in Note 1–Organization and Significant Accounting Policies. The operating segments do not make sales to each other. The following table (in thousands) sets forth segment revenue, gross margin, operating (loss) income and adjusted operating (loss) income from operations for the periods indicated. Adjusted operating (loss) income is defined as operating (loss) income before intangible amortization, amortization of purchase accounting adjustment related to increasing the carrying value of certain assets to fair value, and acquisition related expenses.
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| | Year Ended April 30, 2022 | ||||||||||||||||
|
| Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 178,201 | | $ | 76,415 | | $ | 93,156 | | $ | 43,325 | | $ | 54,635 | | $ | 445,732 |
Gross margin | | | 83,759 | | | 24,486 | | | 6,155 | | | 15,533 | | | 11,303 | | | 141,236 |
| | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 28,980 | | | (3,120) | | | (27,715) | | | 8,056 | | | (16,088) | | | (9,887) |
Acquisition-related expenses | | | 502 | | | 297 | | | 1,994 | | | 123 | | | 1,938 | | | 4,854 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,828 | | | - | | | 22,170 | | | - | | | 11,709 | | | 36,707 |
Adjusted income (loss) from operations | | $ | 32,310 | | $ | (2,823) | | $ | (3,551) | | $ | 8,179 | | $ | (2,441) | | $ | 31,674 |
| | | | | | | | | | | | | | | | | | |
| | Year Ended April 30, 2021 | ||||||||||||||||
| | Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 235,854 | | $ | 87,268 | | $ | 15,837 | | $ | 42,426 | | $ | 13,527 | | $ | 394,912 |
Gross margin | | | 119,062 | | | 26,675 | | | 2,965 | | | 13,038 | | | 2,818 | | | 164,558 |
| | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 58,194 | | | (3,131) | | | (1,869) | | | 268 | | | (10,149) | | | 43,313 |
Acquisition-related expenses | | | 3,026 | | | 1,661 | | | 1,682 | | | 593 | | | 1,019 | | | 7,981 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,649 | | | - | | | 4,356 | | | - | | | 453 | | | 7,458 |
Adjusted income (loss) from operations | | $ | 63,869 | | $ | (1,470) | | $ | 4,169 | | $ | 861 | | $ | (8,677) | | $ | 58,752 |
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| | | | | | | | | | | | | | | | | | |
| | Year Ended April 30, 2020 | ||||||||||||||||
| | Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Total | ||||||
Revenue | | $ | 225,888 | | $ | 63,781 | | $ | - | | $ | 60,864 | | $ | 16,763 | | $ | 367,296 |
Gross margin | | | 117,538 | | | 18,082 | | | - | | | 17,436 | | | 46 | | | 153,102 |
| | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 64,680 | | | (15,822) | | | - | | | 9,744 | | | (11,467) | | | 47,135 |
Acquisition-related expenses | | | 537 | | | 336 | | | - | | | 134 | | | 112 | | | 1,119 |
Amortization of acquired intangible assets and other purchase accounting adjustments | | | 2,467 | | | - | | | - | | | - | | | - | | | 2,467 |
Adjusted income (loss) from operations | | $ | 67,684 | | $ | (15,486) | | $ | - | | $ | 9,878 | | $ | (11,355) | | $ | 50,721 |
Segment assets are summarized in the table below. Corporate assets primarily consist of cash and cash equivalents, short-term investments, prepaid expenses and other current assets, long-term investments, property and equipment, net, operating lease right-of-use assets, deferred income taxes and other assets managed centrally on behalf of the business segments.
| | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2022 | | |||||||||||||||||||
|
| Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Corporate | | Total | | |||||||
Identifiable assets | | $ | 110,286 | | $ | 91,862 | | $ | 388,058 | | $ | 8,148 | | $ | 86,617 | | $ | 229,229 | | $ | 914,200 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2021 | | |||||||||||||||||||
|
| Small UAS |
| TMS |
| MUAS |
| HAPS |
| All other |
| Corporate | | Total | | |||||||
Identifiable assets | | $ | 115,156 | | $ | 72,073 | | $ | 400,901 | | $ | 598 | | $ | 37,677 | | $ | 302,161 | | $ | 928,566 | |
24. Geographic Information
Sales to non-U.S. customers, including U.S. government foreign military sales in which an end user is a foreign government, accounted for 41%, 39% and 45% of revenue for each of the fiscal years ended April 30, 2019. In2022, 2021 and 2020, respectively. With the Company’s opinion, this unaudited information has been prepared onacquisition of Arcturus and Telerob, the same basisCompany deploys in-service assets internationally, which as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial information for the period presented. The Company’s fiscal year ends on April 30. Due to the fixed year end date of April 30, 2022 was $48,496,000 and $1,601,000, respectively. As of April 30, 2021, the first and fourth quarters each consistCompany deployed in-service assets internationally for Arcturus of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. The first three quarters end on a Saturday.$36,047,000.
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| October 27, 2018 |
| January 26, 2019 |
| April 30, 2019 |
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Year ended April 30, 2019 |
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Revenue |
| $ | 78,043 |
| $ | 72,979 |
| $ | 75,322 |
| $ | 87,930 |
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Gross margin |
| $ | 32,589 |
| $ | 28,399 |
| $ | 30,392 |
| $ | 37,023 |
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Net income attributable to AeroVironment from continuing operations |
| $ | 20,337 | (1) | $ | 7,047 |
| $ | 8,431 |
| $ | 6,097 | (2) |
Net income per share attributable to AeroVironment from continuing operations—basic(5) |
| $ | 0.86 | (1) | $ | 0.30 |
| $ | 0.35 |
| $ | 0.26 |
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Net income per share attributable to AeroVironment from continuing operations—diluted(5) |
| $ | 0.85 | (1) | $ | 0.29 |
| $ | 0.35 |
| $ | 0.26 |
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Year ended April 30, 2018 |
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Revenue |
| $ | 34,361 |
| $ | 65,801 |
| $ | 54,633 |
| $ | 113,629 |
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Gross margin |
| $ | 8,698 |
| $ | 30,143 |
| $ | 18,250 |
| $ | 50,594 |
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Net (loss) income attributable to AeroVironment from continuing operations |
| $ | (4,371) |
| $ | 7,756 | (3) | $ | (647) | (4) | $ | 19,012 |
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Net (loss) income per share attributable to AeroVironment from continuing operations—basic(5) |
| $ | (0.19) |
| $ | 0.33 |
| $ | (0.02) |
| $ | 0.80 |
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Net (loss) income per share attributable to AeroVironment from continuing operations—diluted(5) |
| $ | (0.19) |
| $ | 0.32 |
| $ | (0.02) |
| $ | 0.79 |
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103
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
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Allowance for doubtful accounts for the year ended April 30: |
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2017 |
| $ | 56 |
| $ | 56 |
| $ | — |
| $ | (8) |
| $ | 104 |
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2018 |
| $ | 104 |
| $ | 976 |
| $ | — |
| $ | — |
| $ | 1,080 |
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2019 |
| $ | 1,080 |
| $ | 198 |
| $ | — |
| $ | (237) |
| $ | 1,041 |
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Warranty reserve for the year ended April 30: |
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2017 |
| $ | 3,094 |
| $ | 1,838 |
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| $ | (2,985) |
| $ | 1,947 |
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2018 |
| $ | 1,947 |
| $ | 1,884 |
| $ | — |
| $ | (1,741) |
| $ | 2,090 |
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2019 |
| $ | 2,090 |
| $ | 702 |
| $ | — |
| $ | (1,088) |
| $ | 1,704 |
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Reserve for inventory excess and obsolescence for the year ended April 30: |
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| $ | 2,542 |
| $ | 1,115 |
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| $ | (901) |
| $ | 2,756 |
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2018 |
| $ | 2,756 |
| $ | 2,758 |
| $ | — |
| $ | (1,561) |
| $ | 3,953 |
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| $ | 3,953 |
| $ | 5,054 |
| $ | — |
| $ | (1,183) |
| $ | 7,824 |
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Reserve for self-insured medical claims for the year ended April 30: |
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| $ | 979 |
| $ | 7,037 |
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| $ | (6,883) |
| $ | 1,133 |
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| $ | 1,133 |
| $ | 9,100 |
| $ | — |
| $ | (9,230) |
| $ | 1,003 |
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2019 |
| $ | 1,003 |
| $ | 10,808 |
| $ | — |
| $ | (10,867) |
| $ | 944 |
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Allowance for doubtful accounts for the year ended April 30: | | | | | | | | | | | | | | | | | | | |
2020 | | $ | 1,041 | | $ | — | | $ | 219 | | $ | — | | $ | (70) | | $ | 1,190 | |
2021 | | $ | 1,190 | | $ | — | | $ | 82 | | $ | — | | $ | (677) | | $ | 595 | |
2022 | | $ | 595 | | $ | 5 | | $ | 52 | | $ | — | | $ | (60) | | $ | 592 | |
Warranty reserve for the year ended April 30: | | | | | | | | | | | | | | | | | | | |
2020 | | $ | 1,704 | | $ | — | | $ | 2,069 | | $ | — | | $ | (1,758) | | $ | 2,015 | |
2021 | | $ | 2,015 | | $ | — | | $ | 1,650 | | $ | — | | $ | (1,324) | | $ | 2,341 | |
2022 | | $ | 2,341 | | $ | 256 | | $ | 1,089 | | $ | — | | $ | (1,496) | | $ | 2,190 | |
Reserve for inventory excess and obsolescence for the year ended April 30: | | | | | | | | | | | | | | | | | | | |
2020 | | $ | 7,824 | | $ | — | | $ | 5,377 | | $ | — | | $ | (2,969) | | $ | 10,232 | |
2021 | | $ | 10,232 | | $ | 1,415 | | $ | 1,178 | | $ | — | | $ | (2,536) | | $ | 10,289 | |
2022 | | $ | 10,289 | | $ | 1,561 | | $ | 2,271 | | $ | — | | $ | (1,787) | | $ | 12,334 | |
Reserve for self-insured medical claims for the year ended April 30: | | | | | | | | | | | | | | | | | | | |
2020 | | $ | 944 | | $ | — | | $ | 13,031 | | $ | — | | $ | (13,222) | | $ | 753 | |
2021 | | $ | 753 | | $ | — | | $ | 11,329 | | $ | — | | $ | (10,789) | | $ | 1,293 | |
2022 | | $ | 1,293 | | $ | — | | $ | 14,724 | | $ | — | | $ | (14,364) | | $ | 1,653 | |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost‑benefitcost-benefit relationship of possible controls and procedures. As required by Rule 13a‑15(b)Rules 13a-15(e) and 15d-15(e) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective and were operating at a reasonable level.due to the material weaknesses in internal control over financial reporting described below.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our principal executive and financial officers, we have assessed our internal control over financial reporting as of April 30, 2019,2022, based on criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO)(“COSO”). Based on this assessment, management concluded that the Company maintained effectiveits internal control over financial reporting was not effective as of April 30, 2019 based on2022, due to the specified criteria.material weaknesses as described below.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses, related to certain newly acquired businesses, have been identified:
Management identified deficiencies related to inadequate design and operation of certain controls at certain newly acquired businesses. Specifically, management did not effectively select and develop certain information technology (“IT”) general controls related to access, computer operations and change management controls that led to deficiencies in the design and operation of control activities, including segregation of duties at certain newly acquired businesses. The Company also had deficiencies in the design and operation of account reconciliations at certain newly acquired businesses.
The material weaknesses within certain IT systems at certain newly acquired businesses had a pervasive impact to various business activity level processes and accounts, including but not limited to financial reporting, inventory and cost of sales, fixed assets and depreciation. The material weaknesses could also impact the effectiveness of IT-dependent controls, such as automated controls that address the risk of a material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports. These deficiencies and a lack of sufficient resources contributed to the potential for there to have been material errors in the Company’s financial statements and therefore resulted in the following additional material weaknesses:
| ● | Control Environment – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) establishing structures with the appropriate segregation of duties in the pursuit of objectives and (ii) demonstrating a commitment to attract, develop, and retain competent individuals in alignment with objectives; |
| ● | Risk Assessment – control deficiencies constituting material weaknesses, relating to identifying and analyzing risks to achieve their objectives; |
| ● | Control Activities – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing general control activities over technology to support the achievement of objectives, and (ii) selecting and developing control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels; |
| ● | Information and Communication – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information used in business process and related control activities, and (ii) internally communicating information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control; |
| ● | Monitoring – control deficiencies constituting material weaknesses relating to monitoring activities to ascertain whether the components of internal control are present and functioning. |
While these deficiencies did not result in any material misstatements of the Company’s consolidated financial statements, they did, however, collectively represent material weaknesses in internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of April 30, 20192022 has been audited by ErnstDeloitte & YoungTouche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Remediation of Material Weakness
As of the date of this report, management has implemented measures it believes will remediate the identified deficiencies for one of the newly acquired businesses as certain IT systems at certain newly acquired businesses related to inventory and cost of sales was transitioned to the Corporate ERP system in late May 2022. Regarding the material weakness identified in the other acquisition, management’s remediation efforts are ongoing, and management has
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committed to a remediation plan to address the deficiencies and enhance the internal control environment. The remediation plan includes, but is not limited to:
| ● | rationalizing access privileges for all system users and documenting the assignment of access privileges and the rationale for allowing access for each authorized user to address segregation of duties; |
| ● | implementing controls that require the periodic re-evaluation of user access privileges, including administrative access; |
| ● | enhancing system monitoring controls to confirm the adequacy of program change management controls; and |
| ● | training of personnel on the design and operation of our internal controls over financial reporting, as well as the hiring of additional resources with experience with COSO. |
However, remedial controls must operate for a sufficient period of time for a definitive conclusion, through testing, that the deficiencies have been fully remediated and, as such, management can give no assurance that the measures it has undertaken have fully remediated the material weaknesses that it has identified or that additional material weaknesses will not arise in the future. Management will continue to monitor the effectiveness of these and other processes, procedures, and controls and will make any further changes that management determines to be appropriate.
Changes in Internal Control over Financial Reporting
ThereExcept for the identification of the material weaknesses described above, there were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a‑1513a-15(f) or 15d‑1515d-15(f) that occurred during the quarter ended April 30, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholdersshareholders and the Board of Directors of AeroVironment, Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited AeroVironment, Inc. and subsidiaries’the internal control over financial reporting of AeroVironment, Inc. and subsidiaries (the “Company”) as of April 30, 2019,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)(COSO). In our opinion, AeroVironment, Inc. and subsidiaries (the Company)because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of April 30, 2019,2022, based on the COSO criteria.criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsfinancial statements as of and for the year ended April 30, 2022, of the Company as of April 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated June 25, 201928, 2022, expressed an unqualified opinion thereon.on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Overover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will
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not be prevented or detected on a timely basis. The following material weaknesses, related to certain newly acquired businesses, have been identified and included in management's assessment:
The Company identified deficiencies related to inadequate design and operation of certain controls at certain newly acquired businesses. Specifically, the Company did not effectively select and develop certain information technology (“IT”) general controls related to access, computer operations and change management controls that led to deficiencies in the design and operation of control activities, including segregation of duties at certain newly acquired businesses. The Company also had deficiencies in the design and operation of account reconciliations at certain newly acquired businesses.
The material weaknesses within certain IT systems at certain newly acquired businesses had a pervasive impact to various business activity level processes and accounts, including but not limited to financial reporting, inventory and cost of sales, fixed assets and depreciation. The material weaknesses could also impact the effectiveness of IT-dependent controls, such as automated controls that address the risk of a material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports. These deficiencies and a lack of sufficient resources contributed to the potential for there to have been material errors in the Company’s consolidated financial statements and therefore resulted in the following additional material weaknesses:
| ● | Control Environment – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) establishing structures with the appropriate segregation of duties in the pursuit of objectives and (ii) demonstrating a commitment to attract, develop, and retain competent individuals in alignment with objectives; |
| ● | Risk Assessment – control deficiencies constituting material weaknesses, relating to identifying and analyzing risks to achieve their objectives; |
| ● | Control Activities – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing general control activities over technology to support the achievement of objectives, and (ii) selecting and developing control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels; |
| ● | Information and Communication – control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information used in business process and related control activities, and (ii) internally communicating information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control; |
| ● | Monitoring – control deficiencies constituting material weaknesses relating to monitoring activities to ascertain whether the components of internal control are present and functioning. |
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended April 30, 2022, of the Company, and this report does not affect our report on such financial statements.
/s/ ErnstDeloitte & YoungTouche LLP
Los Angeles, California
June 25, 201928, 2022
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PART III
Item 10. Directors, Executive Officers,Officers, and Corporate Governance.
Certain information required by Item 401 and Item 405 of Regulation S‑KS-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, which will be filed no later than 120 days after April 30, 2019,2022, and that information is incorporated by reference herein.
Codes of Ethics
We have adopted a Code of Business Conduct and Ethics or (“Code of Conduct.Conduct”). The Code of Conduct is posted on our website, http://investor.avinc.com.investor.avinc.com/corporate-governance. We intend to disclose on our website any amendments to, or waivers of, the Code of Conduct covering our Chief Executive Officer, Chief Financial Officer and/or Controller promptly following the date of such amendments or waivers. A copy of the Code of Conduct may be obtained upon request, without charge, by contacting our Secretary at (805) 520‑8350520-8350 or by writing to us at AeroVironment, Inc., Attn: Secretary, 900 Innovators Way, Simi Valley, California 93065. The information contained on or connected to our website is not incorporated by reference into this Annual Report and should not be considered part of this or any reported filed with the SEC.
No family relationships exist among any of our executive officers or directors.
There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
The information required by Item 407(d)(4) and (5) of Regulation S‑KS-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, and that information is incorporated by reference herein.
Item 11. Executive Compensation.
The information required by Item 402 and Item 407(e)(4) and (5) of Regulation S‑KS-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, and that information is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial OwnersOwners and Management and Related Stockholder Matters.
The information required by Item 201(d) and Item 403 of Regulation S‑KS-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, and that information is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 and Item 407(a) of Regulation S‑KS-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, and that information is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services.
Our independent public accounting firm is Deloitte & Touche LLP, Los Angeles, California, PCAOB Auditor ID 34. The information required by this Item 14 of Form 10-K will be included in the definitive proxy statement for our 20192022 Annual Meeting of Stockholders, and that information is incorporated by reference herein.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (a) |
| The following are filed as part of this Annual Report: |
1. Financial Statements
The following consolidated financial statements are included in Item 8:
| Report of Independent Registered Public Accounting Firm |
| Consolidated Balance Sheets at April 30, |
| Consolidated Statements of (Loss) Income for the Years Ended April 30, |
| Consolidated Statements of Comprehensive (Loss) Income for the Years Ended April 30, |
| Consolidated Statements of Stockholders’ Equity for the Years Ended April 30, |
| Consolidated Statements of Cash Flows for the Years Ended April 30, |
| Notes to Consolidated Financial Statements |
2. Financial Statement Schedules
The following Schedule is included in Item 8:
| Schedule II—Valuation and Qualifying Accounts |
All other schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the Notes thereto.
3. Exhibits
See Item 15(b) of this report below.
| (b) | Exhibits |
Exhibit |
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Exhibit |
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3.1(1) | | Amended and Restated Certificate of Incorporation of AeroVironment, Inc. |
3.3 (2) | | Third Amended and Restated Bylaws of AeroVironment, Inc., amended as of February 25, 2022 |
4.1(3) | | |
| | |
10.1#(5) | | Form of Director and Executive Officer Indemnification Agreement |
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10.2#(3) | | |
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| | AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated effective September 29, 2011 |
| | AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated effective September 30, 2016 |
| | Form of Stock Option Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan |
| | Form of Performance Based Bonus Award pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan |
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Exhibit | Exhibit | |
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10.13#(10) | | |
10.14#(10) | | |
10.15#(10) | | |
10.16#(10) | | |
10.17#(10) | | |
10.18 | | |
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10.22(11) | | |
10.23(12) | | |
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10.25(12) | | |
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10.30(16) | |
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Exhibit | Exhibit | |
10.31(14) | | |
10.32(15) | | |
10.33#(17) | | AeroVironment, Inc. Executive Severance Plan and Summary Description, effective January 1, 2019 |
10.34#(18) | | |
10.35*(19) | | |
10.36(13) | | |
10.37*(13) | | |
10.38ǂ(13) | | |
10.39(20) | | |
10.40ǂ*(21) | | |
21.1 | | |
23.1 | | Consent of |
24.1 | | Power of Attorney (incorporated by reference to the signature page of this Annual Report) |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document |
104 |
| Cover Page Interactive Data File formatted as Inline XBRL and contained in Exhibit 101 |
(1) | Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form |
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| (2) |
| Incorporated by reference herein to the exhibits to the Company’s |
| (3) |
| Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form |
| (4) | Incorporated by reference herein to the exhibits to the Company's Annual Report on Form 10-K filed June 24, 2020 (File No. 001-33261). |
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| (5) |
| Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10 K filed on June 29, 2016 (File No. 001 33261). |
| (6) |
| Incorporated by reference to the exhibits to the Company’s Current Report on Form |
| (7) |
| Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10-K filed June 28, 2017 (File No. 001-33261). |
| (8) |
| Incorporated by reference herein to the exhibits to the Company’s Current Report on Form |
| (9) |
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| Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form |
| (10) | Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-8 filed October 13, 2021 (File No. 333-260227). |
| (11) | Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10-K filed June 26, 2008 (File No. |
| (12) |
| Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form |
| (13) |
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| Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form |
| (14) |
| Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form |
| (15) |
| Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form |
| (16) |
| Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed March 9, 2016 (File No. 001-33261). |
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Agreement have a right to enforce the agreement. Accordingly, security holders should not rely on the representations and warranties in the Asset Purchase Agreement. |
| (17) |
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| Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed March 7, 2018 (File No. 001-33261). |
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| (18) |
| Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8-K/A filed October 22, 2019 (File No. 001-33261). |
| (19) | Incorporated by reference herein to the exhibits to the Company's Annual Report on Form |
The representations and warranties contained in the Stock Purchase Agreement were made for the purposes of allocating contractual risk between the parties and not as a means of establishing facts and are qualified by information in disclosure schedules that the parties exchanged in connection with the signing of the Stock Purchase Agreement. Moreover, the representations and warranties were made only as of the date of execution of the Stock Purchase Agreement and information concerning the subject matter of the representations and warranties may change after the date of the Stock Purchase Agreement. Only parties to the Stock Purchase Agreement have a right to enforce the agreement. Accordingly, security holders should not rely on the representations and warranties in the Stock Purchase Agreement.
All schedules (or similar attachments) have been omitted from this filing pursuant to Item 601 of Regulation S-K. The Company will furnish copies of any schedules to the Securities and Exchange Commission upon request.
| (20) | Incorporated by reference herein to the exhibits to the Company's Quarterly Report on Form 10-Q filed March 4, 2022 (File No. 001-33261). |
| (21) | Incorporated by reference herein to the exhibits to the Company's Annual Report on Form 10-K filed June 29, 2021 (File No. 001-33261). |
The representations and warranties contained in the Share Purchase Agreement were made for the purposes of allocating contractual risk between the parties and not as a means of establishing facts and are qualified by information in disclosure schedules that the parties exchanged in connection with the signing of the Share Purchase Agreement. Moreover, the representations and warranties were made only as of the date of execution of the Share Purchase Agreement and information concerning the subject matter of the representations and warranties may change after the date of the Stock Purchase Agreement. Only parties to the Share Purchase Agreement have a right to enforce the agreement. Accordingly, security holders should not rely on the representations and warranties in the Share Purchase Agreement.
All schedules (or similar attachments) have been omitted from this filing pursuant to Item 601 of Regulation S-K. The Company will furnish copies of any schedules to the Securities and Exchange Commission upon request.
ǂ | Pursuant to Items 601(b)(2) and/or 601(b)(10) of Regulation S-K, certain immaterial provisions of the agreement that would likely cause competitive harm to the Company if publicly disclosed have been redacted or omitted. |
# | Indicates management contract or compensatory plan. |
* | Schedules (or similar attachments) to this Exhibit have been omitted in accordance with Items 601(a)(5) and/or 601(b)(2) of Regulation S-K. The Registrant agrees to furnish supplementary a copy of all omitted schedules to the Securities and Exchange Commission on a confidential basis upon request. |
(c) | Financial Statement Schedules and Separate Financial Statements of Subsidiaries Not Consolidated and Fifty Percent or Less Owned Persons |
†Confidential treatment has been granted for portions of this exhibit.
ǂPursuant to Item 601(b)(2) of Regulation S-K, certain immaterial provisions of the agreement that would likely cause competitive harm to the Company if publicly disclosed have been redacted or omitted.
#Indicates management contract or compensatory plan.
(c)Not applicable.
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HAPSMobile financial statements for its fiscal year ended March 31, 2021 will be filed via an amendment to this Annual Report on Form 10-K on or before September 30, 2021.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AEROVIRONMENT, INC. | |
| | |
Date: June | | /s/ Wahid Nawabi |
| By: | Wahid Nawabi |
| Its: | Chief Executive Officer and President |
| | (Principal Executive Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Wahid Nawabi and Teresa Covington,Kevin P. McDonnell, each of them acting individually, as his attorney‑in‑fact,attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10‑K,10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑ in‑fact,attorneys- in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney‑in‑factattorney-in-fact and any and all amendments to this Annual Report on Form 10‑K.10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name | Title | Date | |||
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/s/ Wahid Nawabi | | President, Chief | | June | |
Wahid Nawabi | | Executive Officer and | | | |
| | (Principal Executive Officer) | | | |
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/s/ | | Senior Vice President and | | June | |
| | Chief Financial Officer (Principal | | | |
| | Financial | | | |
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/s/ | |
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| | Chief Accounting Officer (Principal | | | |
| | Accounting Officer) | | | |
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/s/ Edward R. Muller | | Director | | June | |
Edward R. Muller | | | | | |
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/s/ | | Director | | June | |
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/s/ Stephen F. Page | | Director | | June | |
Stephen F. Page | | | | | |
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/s/ Charles R. Holland | | Director | | June | |
Charles R. Holland | | | | | |
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/s/ Catharine Merigold | | Director | | June | |
Catharine Merigold | | | | | |
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/s/ Charles Thomas Burbage | | Director | | June | |
Charles Thomas Burbage | | | | |
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