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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 26, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33261
AEROVIRONMENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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95-2705790 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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900 Innovators Way |
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Simi Valley, California |
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93065 |
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(Address of principal executive offices) |
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(Zip Code) |
(805) 520-8350
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 26, 2019, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,932,381.
AeroVironment, Inc.
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Consolidated Balance Sheets as of January 26, 2019 (Unaudited) and April 30, 2018 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
AeroVironment, Inc.
(In thousands except share and per share data)
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January 26, |
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April 30, |
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2019 |
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2018 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
149,369 |
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$ |
143,517 |
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Short-term investments |
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144,815 |
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113,649 |
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Accounts receivable, net of allowance for doubtful accounts of $1,046 at January 26, 2019 and $1,080 at April 30, 2018 |
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34,064 |
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56,813 |
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Unbilled receivables and retentions (inclusive of related party unbilled receivables of $13,638 at January 26, 2019 and $3,145 at April 30, 2018) |
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51,632 |
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16,872 |
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Inventories, net |
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50,379 |
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37,425 |
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Prepaid expenses and other current assets |
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6,616 |
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5,103 |
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Current assets of discontinued operations |
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— |
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25,668 |
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Total current assets |
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436,875 |
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399,047 |
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Long-term investments |
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27,954 |
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40,656 |
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Property and equipment, net |
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20,542 |
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19,219 |
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Deferred income taxes |
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12,708 |
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11,494 |
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Other assets |
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884 |
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3,002 |
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Total assets |
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$ |
498,963 |
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$ |
473,418 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
11,629 |
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$ |
21,340 |
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Wages and related accruals |
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14,363 |
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16,851 |
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Income taxes payable |
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4,857 |
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4,085 |
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Customer advances |
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2,875 |
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3,564 |
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Other current liabilities |
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8,062 |
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6,954 |
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Current liabilities of discontinued operations |
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— |
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9,294 |
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Total current liabilities |
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41,786 |
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62,088 |
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Deferred rent |
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1,352 |
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1,536 |
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Other non-current liabilities |
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160 |
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622 |
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Deferred tax liability |
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67 |
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67 |
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Liability for uncertain tax positions |
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49 |
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49 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $0.0001 par value: |
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Authorized shares—10,000,000; none issued or outstanding at January 26, 2019 and April 30, 2018 |
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— |
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— |
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Common stock, $0.0001 par value: |
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Authorized shares—100,000,000 |
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Issued and outstanding shares—23,932,460 shares at January 26, 2019 and 23,908,736 shares at April 30, 2018 |
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2 |
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2 |
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Additional paid-in capital |
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174,891 |
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170,139 |
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Accumulated other comprehensive income (loss) |
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4 |
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(21) |
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Retained earnings |
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280,669 |
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238,913 |
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Total AeroVironment stockholders’ equity |
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455,566 |
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409,033 |
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Noncontrolling interest |
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(17) |
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23 |
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Total equity |
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455,549 |
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409,056 |
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Total liabilities and stockholders’ equity |
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$ |
498,963 |
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$ |
473,418 |
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See accompanying notes to consolidated financial statements (unaudited).
3
AeroVironment, Inc.
Consolidated Statements of Operation s (Unaudited)
(In thousands except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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January 26, |
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January 27, |
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January 26, |
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January 27, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenue: |
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Product sales |
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$ |
50,024 |
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$ |
39,447 |
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$ |
152,393 |
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$ |
106,647 |
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Contract services (inclusive of related party revenue of: $13,586 and $5,420 for the three months ended January 26, 2019 and January 27, 2018, respectively; and $37,981 and $15,042 for the nine months ended January 26, 2019 and January 27, 2018, respectively) |
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25,298 |
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15,186 |
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73,951 |
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48,148 |
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75,322 |
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54,633 |
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226,344 |
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154,795 |
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Cost of sales: |
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Product sales |
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26,780 |
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24,870 |
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83,158 |
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66,038 |
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Contract services |
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18,150 |
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11,513 |
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51,806 |
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31,666 |
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44,930 |
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36,383 |
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134,964 |
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97,704 |
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Gross margin: |
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Product sales |
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23,244 |
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14,577 |
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69,235 |
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40,609 |
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Contract services |
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7,148 |
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3,673 |
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22,145 |
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16,482 |
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30,392 |
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18,250 |
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91,380 |
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57,091 |
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Selling, general and administrative |
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14,464 |
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11,484 |
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40,066 |
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35,539 |
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Research and development |
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8,087 |
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6,607 |
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22,631 |
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18,993 |
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Income from continuing operations |
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7,841 |
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159 |
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28,683 |
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2,559 |
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Other income: |
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Interest income, net |
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1,272 |
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545 |
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3,246 |
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1,489 |
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Other income (expense), net |
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962 |
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(108) |
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10,641 |
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(159) |
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Income from continuing operations before income taxes |
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10,075 |
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596 |
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42,570 |
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3,889 |
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Provision for income taxes |
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946 |
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834 |
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4,724 |
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971 |
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Equity method investment activity, net of tax |
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(717) |
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(418) |
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(2,071) |
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(418) |
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Net income (loss) from continuing operations |
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8,412 |
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(656) |
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35,775 |
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2,500 |
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Discontinued operations: |
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Gain on sale of business, net of tax expense of $2,463 for the nine months ended January 26, 2019 |
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— |
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— |
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8,452 |
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— |
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Loss from discontinued operations, net of tax |
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(62) |
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(129) |
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(2,511) |
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(1,650) |
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Net (loss) income from discontinued operations |
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(62) |
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(129) |
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5,941 |
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(1,650) |
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Net income (loss) |
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8,350 |
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(785) |
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41,716 |
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850 |
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Net loss attributable to noncontrolling interest |
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19 |
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9 |
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40 |
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238 |
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Net income (loss) attributable to AeroVironment |
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$ |
8,369 |
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$ |
(776) |
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$ |
41,756 |
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$ |
1,088 |
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Net income (loss) per share attributable to AeroVironment—Basic |
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Continuing operations |
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$ |
0.35 |
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$ |
(0.02) |
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$ |
1.52 |
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$ |
0.12 |
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Discontinued operations |
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— |
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(0.01) |
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0.25 |
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(0.07) |
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Net income (loss) per share attributable to AeroVironment—Basic |
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$ |
0.35 |
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$ |
(0.03) |
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$ |
1.77 |
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$ |
0.05 |
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Net income (loss) per share attributable to AeroVironment—Diluted |
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Continuing operations |
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$ |
0.35 |
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$ |
(0.02) |
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$ |
1.49 |
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$ |
0.12 |
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Discontinued operations |
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— |
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(0.01) |
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0.25 |
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(0.07) |
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Net income (loss) per share attributable to AeroVironment—Diluted |
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$ |
0.35 |
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$ |
(0.03) |
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$ |
1.74 |
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$ |
0.05 |
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Weighted-average shares outstanding: |
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Basic |
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23,687,672 |
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23,515,622 |
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23,643,866 |
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23,443,673 |
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Diluted |
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24,081,819 |
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23,515,622 |
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24,064,008 |
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23,774,946 |
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See accompanying notes to consolidated financial statements (unaudited).
4
AeroVironment, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
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Three Months Ended |
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Nine Months Ended |
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January 26, |
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January 27, |
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January 26, |
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January 27, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income (loss) |
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$ |
8,350 |
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$ |
(785) |
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$ |
41,716 |
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$ |
850 |
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Other comprehensive income: |
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Change in foreign currency translation adjustments |
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(1) |
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62 |
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(32) |
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62 |
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Unrealized gain on investments, net of deferred tax expense of: $0 and $10 for the three months ended January 26, 2019 and January 27, 2018, respectively; and $51 and $29 for the nine months ended January 26, 2019 and January 27, 2018, respectively |
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— |
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13 |
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57 |
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42 |
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Total comprehensive income (loss) |
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8,349 |
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$ |
(710) |
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41,741 |
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|
954 |
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Net loss attributable to noncontrolling interest |
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19 |
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9 |
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40 |
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|
238 |
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Comprehensive income (loss) attributable to AeroVironment |
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$ |
8,368 |
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$ |
(701) |
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$ |
41,781 |
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$ |
1,192 |
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See accompanying notes to consolidated financial statements (unaudited).
5
AeroVironment, Inc.
Consolidated Statements of Cash Flow s (Unaudited)
(In thousands)
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Nine Months Ended |
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January 26, |
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January 27, |
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2019 |
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2018 |
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Operating activities |
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Net income |
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$ |
41,716 |
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$ |
850 |
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Gain on sale of business, net of tax |
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(8,452) |
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— |
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Loss from discontinued operations, net of tax |
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2,511 |
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1,650 |
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Net income from continuing operations |
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35,775 |
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|
2,500 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization |
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|
5,530 |
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|
4,277 |
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Loss from equity method investment |
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|
2,071 |
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|
418 |
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Impairment of long-lived assets |
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— |
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255 |
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Provision for doubtful accounts |
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(33) |
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|
940 |
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Impairment of intangible assets and goodwill |
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— |
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1,021 |
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Gains on foreign currency transactions |
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(10) |
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(36) |
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Deferred income taxes |
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(1,214) |
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174 |
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Stock-based compensation |
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5,599 |
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|
3,702 |
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Loss on disposition of property and equipment |
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51 |
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15 |
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Amortization of held-to-maturity investments |
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(941) |
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1,250 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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22,817 |
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|
48,871 |
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Unbilled receivables and retentions |
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(34,760) |
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|
(12,068) |
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|
Inventories |
|
|
(12,954) |
|
|
(15,308) |
|
|
Income tax receivable |
|
|
— |
|
|
(720) |
|
|
Prepaid expenses and other assets |
|
|
(1,791) |
|
|
417 |
|
|
Accounts payable |
|
|
(10,645) |
|
|
(4,451) |
|
|
Other liabilities |
|
|
(2,598) |
|
|
575 |
|
|
Net cash provided by operating activities of continuing operations |
|
|
6,897 |
|
|
31,832 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(6,806) |
|
|
(7,713) |
|
|
Equity method investments |
|
|
— |
|
|
(1,860) |
|
|
Proceeds from sale of business |
|
|
31,994 |
|
|
— |
|
|
Redemptions of held-to-maturity investments |
|
|
191,455 |
|
|
163,813 |
|
|
Purchases of held-to-maturity investments |
|
|
(211,120) |
|
|
(151,740) |
|
|
Redemptions of available-for-sale investments |
|
|
2,250 |
|
|
450 |
|
|
Net cash provided by investing activities from continuing operations |
|
|
7,773 |
|
|
2,950 |
|
|
Financing activities |
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations |
|
|
(154) |
|
|
(231) |
|
|
Tax withholding payment related to net settlement of equity awards |
|
|
(1,033) |
|
|
(389) |
|
|
Exercise of stock options |
|
|
71 |
|
|
2,691 |
|
|
Net cash (used in) provided by financing activities from continuing operations |
|
|
(1,116) |
|
|
2,071 |
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
Operating activities of discontinued operations |
|
|
(7,250) |
|
|
(3,716) |
|
|
Investing activities of discontinued operations |
|
|
(452) |
|
|
(737) |
|
|
Financing activities of discontinued operations |
|
|
— |
|
|
— |
|
|
Net cash used in discontinued operations |
|
|
(7,702) |
|
|
(4,453) |
|
|
Net increase in cash and cash equivalents |
|
|
5,852 |
|
|
32,400 |
|
|
Cash and cash equivalents at beginning of period |
|
|
143,517 |
|
|
79,904 |
|
|
Cash and cash equivalents at end of period |
|
$ |
149,369 |
|
$ |
112,304 |
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid, net during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
6,777 |
|
$ |
1,812 |
|
|
Non-cash activities |
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of deferred tax expense of $51 and $29, respectively |
|
$ |
57 |
|
$ |
42 |
|
|
Reclassification from share-based liability compensation to equity |
|
$ |
— |
|
$ |
384 |
|
|
Change in foreign currency translation adjustments |
|
$ |
(32) |
|
$ |
62 |
|
|
Acquisitions of property and equipment included in accounts payable |
|
$ |
58 |
|
$ |
332 |
|
See accompanying notes to consolidated financial statements (unaudited).
6
AeroVironment, Inc.
Notes to Consolidated Financia l Statements (Unaudited)
1. Organization and Significant Accounting Policies
Organization
AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, support and operation of unmanned aircraft systems (“UAS”) for various industries and governmental agencies.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and nine months ended January 26, 2019 are not necessarily indicative of the results for the full year ending April 30, 2019. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2018, included in the Company’s Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements include the balance sheet and results of operations of Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”), in which the Company increased its ownership to a controlling interest of 85% during the fourth quarter of the fiscal year ended April 30, 2017. Prior to the increase in ownership, the Company's investment in Altoy was accounted for under the equity method.
In December 2017, the Company and SoftBank Corp. (“SoftBank”) formed a joint venture, HAPSMobile, Inc. (“HAPSMobile”). As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment has been accounted for as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in “Equity method investment activity, net of tax” in the consolidated statements of operations. The carrying value of the investment in HAPSMobile was recorded in “Other assets.” Refer to Note 6—Equity Method Investments for further details.
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 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 represents 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.
Recently Adopted Accounting Standards
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts and
7
payments in the statement of cash flows. 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 January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework 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 applying 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, Revenue from Contracts with Customers (Topic 606), 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. 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 decrease retained earnings by $1,084,000 at May 1, 2018 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 $1,063,000 at May 1, 2018.
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.
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.
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 Topic 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
8
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 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 or at a point in time. 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 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. 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 product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS 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.
On January 26, 2019, the Company had approximately $132,515,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog. The Company currently expects to recognize approximately 56% of the remaining performance obligations as revenue in fiscal 2019, an additional 33% in fiscal 2020, and the balance thereafter.
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
9
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 nine month period ended January 26, 2019 or the three and nine month periods ended January 27, 2018. No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the nine month period ended January 26, 2019 or the three and nine month periods ended and January 27, 2018. The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was approximately $1,705,000 for the three months ended January 26, 2019. For the three months ended January 26, 2019, the Company revised its estimates of the total expected costs to complete a TMS contract due to ongoing test and evaluation resulting from some systems not passing the customer’s final lot acceptance tests which the Company anticipates to be resolved in a future period. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was approximately $1,519,000.
Revenue by Category
Revenue from products and services during the nine months ended January 26, 2019 consisted of revenue derived from 250 active contracts. The following tables present the Company’s revenue disaggregated by major product line, contract type, customer category and geographic location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, |
|
January 27, |
|
January 26, |
|
January 27, |
|
||||
|
Revenue by major product line/program |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Small UAS |
|
$ |
47,704 |
|
$ |
31,705 |
|
$ |
131,119 |
|
$ |
98,787 |
|
|
TMS |
|
|
11,270 |
|
|
16,426 |
|
|
49,055 |
|
|
35,357 |
|
|
HAPS |
|
|
13,586 |
|
|
5,420 |
|
|
37,981 |
|
|
15,042 |
|
|
Other |
|
|
2,762 |
|
|
1,082 |
|
|
8,189 |
|
|
5,609 |
|
|
Total revenue |
|
$ |
75,322 |
|
$ |
54,633 |
|
$ |
226,344 |
|
$ |
154,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, |
|
January 27, |
|
January 26, |
|
January 27, |
|
||||
|
Revenue by contract type |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
FFP |
|
$ |
52,833 |
|
$ |
41,759 |
|
$ |
160,890 |
|
$ |
124,374 |
|
|
CPFF |
|
|
22,370 |
|
|
12,862 |
|
|
65,223 |
|
|
30,183 |
|
|
T&M |
|
|
119 |
|
|
12 |
|
|
231 |
|
|
238 |
|
|
Total revenue |
|
$ |
75,322 |
|
$ |
54,633 |
|
$ |
226,344 |
|
$ |
154,795 |
|
10
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, |
|
January 27, |
|
January 26, |
|
January 27, |
|
||||
|
Revenue by customer category |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
U.S. government: |
|
$ |
52,383 |
|
$ |
31,020 |
|
$ |
135,232 |
|
$ |
94,491 |
|
|
Non-U.S. government |
|
|
22,939 |
|
|
23,613 |
|
|
91,112 |
|
|
60,304 |
|
|
Total revenue |
|
$ |
75,322 |
|
$ |
54,633 |
|
$ |
226,344 |
|
$ |
154,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, |
|
January 27, |
|
January 26, |
|
January 27, |
|
||||
|
Revenue by geographic location |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Domestic |
|
$ |
34,436 |
|
$ |
28,843 |
|
$ |
116,514 |
|
$ |
89,583 |
|
|
International |
|
|
40,886 |
|
|
25,790 |
|
|
109,830 |
|
|
65,212 |
|
|
Total revenue |
|
$ |
75,322 |
|
$ |
54,633 |
|
$ |
226,344 |
|
$ |
154,795 |
|
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 revenue recognition, resulting in contract assets recorded in “Unbilled receivables and 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” 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 the nine month period ended January 26, 2019 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 three month periods ended January 26, 2019 and January 27, 2018 that was included in contract liability balances at the beginning of each year were $10,000 and $62,000, respectively; and revenue recognized for the nine month periods ended January 26, 2019 and January 27, 2018 that was included in contract liability balances at the beginning of each year were $1,587,000 and $977,000, respectively.
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 R&D, on a consolidated basis for the Company’s continuing operations. Accordingly, the Company operates its business as a single reportable segment.
Investments
The Company’s investments are accounted for as held-to-maturity and reported at amortized cost and fair value,
11
respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables and retentions, and accounts payable approximate cost due to the short period of time to maturity.
Government Contracts
Payments to the Company on government CPFF or T&M 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.
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 CPFF or T&M government contracts to be recorded at actual rates to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. During the fiscal year ended April 30, 2017, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 without payment of any consideration. During the current fiscal year ending April 30, 2019, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2016 and 2017 without payment of any consideration. At January 26, 2019 and April 30, 2018, the Company had $93,000 and $77,000 reserved for incurred cost claim audits, respectively.
Earnings Per Share
Basic earnings per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.
The reconciliation of basic to diluted shares is as follows (in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||
|
Income (loss) from |
|
January 26, 2019 |
|
January 27, 2018 |
|
January 26, 2019 |
|
January 27, 2018 |
|
||||
|
Continuing operations attributable to AeroVironment |
|
$ |
8,431 |
|
$ |
(647) |
|
$ |
35,815 |
|
$ |
2,738 |
|
|
Discontinued operations, net of tax |
|
|
(62) |
|
|
(129) |
|
|
5,941 |
|
|
(1,650) |
|
|
Net income (loss) attributable to AeroVironment |
|
$ |
8,369 |
|
$ |
(776) |
|
$ |
41,756 |
|
$ |
1,088 |
|
|
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
23,687,672 |
|
|
23,515,622 |
|
|
23,643,866 |
|
|
23,443,673 |
|
|
Dilutive effect of employee stock options, restricted stock and restricted stock units |
|
|
394,147 |
|
|
— |
|
|
420,142 |
|
|
331,273 |
|
|
Denominator for diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 1,705 and 5,519 for the three and nine months ended January 26, 2019, respectively. Due to the net loss for the three months ended January 27, 2018, no 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. Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been anti-dilutive were 379,749 and 27,139 for the
12
three and nine months ended January 27, 2018.
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 beginning after December 15, 2018 and interim periods therein, 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 the Company’s various property leases.
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 the Company 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.
2. Discontinued Operations
On June 29, 2018, the Company completed the sale of the EES Business to Webasto. In accordance with the terms of the Purchase Agreement, as amended by a Side Letter Agreement executed at the closing, the Company received cash consideration of $31,994,000 upon closing, which resulted in a gain of $11,420,000 which has been recorded in “Gain on
13
sale of business, net of tax” in the consolidated statements of operations. During the nine months ended January 26, 2019, the Company recorded a reduction to the gain resulting from a working capital adjustment of $505,000. 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.
The Company is entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of two 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 January 26, 2019. The Company’s satisfaction of the requirements for the payment of the Holdback is currently in dispute.
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.
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 $657,000 and $2,013,000 and has been recorded in “Other income, net” in the consolidated statements of operations for three and nine months ended January 26, 2019, respectively.
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 operations data for the EES Business (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, 2019 |
|
January 27, 2018 |
|
January 26, 2019 |
|
January 27, 2018 |
|
||||
|
Net sales |
|
$ |
— |
|
$ |
10,623 |
|
$ |
4,256 |
|
$ |
28,198 |
|
|
Cost of sales |
|
|
54 |
|
|
8,356 |
|
|
5,080 |
|
|
23,159 |
|
|
Gross margin |
|
|
(54) |
|
|
2,267 |
|
|
(824) |
|
|
5,039 |
|
|
Selling, general and administrative |
|
|
14 |
|
|
2,016 |
|
|
1,517 |
|
|
5,756 |
|
|
Research and development |
|
|
34 |
|
|
707 |
|
|
1,075 |
|
|
2,055 |
|
|
Other income, net |
|
|
— |
|
|
— |
|
|
1 |
|
|
— |
|
|
Loss from discontinued operations before income taxes |
|
|
(102) |
|
|
(456) |
|
|
(3,415) |
|
|
(2,772) |
|
|
Benefit for income taxes |
|
|
(41) |
|
|
(327) |
|
|
(904) |
|
|
(1,122) |
|
|
Net loss from discontinued operations |
|
$ |
(61) |
|
$ |
(129) |
|
$ |
(2,511) |
|
$ |
(1,650) |
|
|
Gain on sale of business, net of tax expense of $2,463 for the nine months ended January 26, 2019 |
|
|
(1) |
|
|
— |
|
|
8,452 |
|
|
— |
|
|
Net (loss) income from discontinued operations |
|
$ |
(62) |
|
$ |
(129) |
|
$ |
5,941 |
|
$ |
(1,650) |
|
14
The major classes of assets and liabilities included in discontinued operations related to the EES Business are presented in the table below (in thousands).
|
|
|
|
|
|
|
|
|
April 30, |
|
|
|
|
|
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 |
|
|
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 |
|
3. Investments
Investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 26, |
|
April 30, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
Short-term investments: |
|
|
|
|
|
|
|
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Municipal securities |
|
$ |
12,542 |
|
$ |
35,344 |
|
|
U.S. government securities |
|
|
45,325 |
|
|
31,620 |
|
|
Corporate bonds |
|
|
81,948 |
|
|
46,685 |
|
|
Certificates of deposit |
|
|
5,000 |
|
|
— |
|
|
Total held-to-maturity and short-term investments |
|
$ |
144,815 |
|
$ |
113,649 |
|
|
Long-term investments: |
|
|
|
|
|
|
|
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Municipal securities |
|
$ |
— |
|
$ |
2,046 |
|
|
U.S. government securities |
|
|
25,228 |
|
|
27,356 |
|
|
Corporate bonds |
|
|
2,726 |
|
|
9,112 |
|
|
Total held-to-maturity investments |
|
|
27,954 |
|
|
38,514 |
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
— |
|
|
2,142 |
|
|
Total available-for-sale investments |
|
|
— |
|
|
2,142 |
|
|
Total long-term investments |
|
$ |
27,954 |
|
$ |
40,656 |
|
Held-To-Maturity Securities
As of January 26, 2019 and April 30, 2018, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities, U.S. government-guaranteed agency securities, U.S. government-sponsored agency debt securities, highly rated corporate bonds, and certificates of deposit. Interest earned from these investments is recorded in interest income.
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity
15
investments as of January 26, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 26, 2019 |
|
||||||||||
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
|
Municipal securities |
|
$ |
12,542 |
|
$ |
6 |
|
$ |
(5) |
|
$ |
12,543 |
|
|
U.S. government securities |
|
|
70,553 |
|
|
30 |
|
|
(143) |
|
|
70,440 |
|
|
Corporate bonds |
|
|
84,674 |
|
|
3 |
|
|
(32) |
|
|
84,645 |
|
|
Certificates of deposit |
|
|
5,000 |
|
|
— |
|
|
— |
|
|
5,000 |
|
|
Total held-to-maturity investments |
|
$ |
172,769 |
|
$ |
39 |
|
$ |
(180) |
|
$ |
172,628 |
|
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018 |
|
||||||||||
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
|
Municipal securities |
|
$ |
37,390 |
|
$ |
9 |
|
$ |
(36) |
|
$ |
37,363 |
|
|
U.S. government securities |
|
|
58,976 |
|
|
— |
|
|
(367) |
|
|
58,609 |
|
|
Corporate bonds |
|
|
55,797 |
|
|
2 |
|
|
(71) |
|
|
55,728 |
|
|
Certificates of deposit |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Total held-to-maturity investments |
|
$ |
152,163 |
|
$ |
11 |
|
$ |
(474) |
|
$ |
151,700 |
|
The amortized cost and fair value of the held-to-maturity securities by contractual maturity at January 26, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
Fair Value |
|
||
|
Due within one year |
|
$ |
144,815 |
|
$ |
144,654 |
|
|
Due after one year through five years |
|
|
27,954 |
|
|
27,974 |
|
|
Total |
|
$ |
172,769 |
|
$ |
172,628 |
|
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 gains, gross unrealized losses, and estimated fair value of the auction rate securities
16
as of April 30, 2018, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
|
|
|||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
Auction rate securities |
|
$ |
2,250 |
|
$ |
— |
|
$ |
(108) |
|
$ |
2,142 |
|
|
Total available-for-sale investments |
|
$ |
2,250 |
|
$ |
— |
|
$ |
(108) |
|
$ |
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 any financial assets measured at fair value on a recurring basis at January 26, 2019 as the Company’s remaining auction rate securities were redeemed during the three months ended July 28, 2018 at par value. 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 January 26, 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 January 26, 2019 |
|
$ |
— |
|
The auction rate securities were valued using a discounted cash flow model. The analysis considered, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows and the estimated date upon which the security is expected to have a successful auction.
17
5. Inventories, net
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 26, |
|
April 30, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
Raw materials |
|
$ |
16,495 |
|
$ |
12,020 |
|
|
Work in process |
|
|
15,352 |
|
|
14,780 |
|
|
Finished goods |
|
|
25,076 |
|
|
14,578 |
|
|
Inventories, gross |
|
|
56,923 |
|
|
41,378 |
|
|
Reserve for inventory excess and obsolescence |
|
|
(6,544) |
|
|
(3,953) |
|
|
Inventories, net |
|
$ |
50,379 |
|
$ |
37,425 |
|
6. Equity Method Investments
In December 2017, the Company and SoftBank formed a joint venture, HAPSMobile. HAPSMobile is a Japanese corporation that is 5% owned by the Company and 95% owned by SoftBank and is governed by a Joint Venture Agreement (the “JVA”). The Company purchased its 5% stake in HAPSMobile for 210,000,000 yen ($1,860,000) effective as of December 27, 2017; 150,000,000 yen ($1,407,000) on April 17, 2018; and 209,500,000 yen ($1,926,000) on January 29, 2019 to maintain its 5% ownership stake. Additionally, under the JVA, the Company may purchase additional shares of HAPSMobile, at the same per share price for the purchase of its original 5% stake, to increase its ownership percentage of HAPSMobile up to 19% prior to the first flight test of the prototype aircraft produced under a design and development agreement between HAPSMobile and the Company. On February 9, 2019, the Company elected to purchase 632,800,000 yen (approximately $5,700,000 million) of additional shares of HAPSMobile to increase the Company’s ownership in the joint venture from 5% to 10% pursuant to the terms of the JVA. The Company anticipates that the purchase of additional shares will be completed during the three months ending April 30, 2019. As of the date of this report, the Company’s option to purchase additional shares of HAPSMobile has expired.
As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment is accounted for as an equity method investment. For the three and nine months ended January 26, 2019, the Company recorded 5% of the net loss of HAPSMobile, or $717,000 and $2,071,000, respectively, in “Equity method investment activity, net of tax” in the unaudited consolidated statement of operations. At January 26, 2019, the cumulative equity method losses have exceeded the Company’s investments in HAPSMobile by $92,000 which was recorded in “Other current liabilities.”
7. Warranty Reserves
The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The warranty reserve is included in other current liabilities. The related expense is included in cost of sales. Warranty reserve activity is summarized as follows for the three and nine months ended January 26, 2019 and January 27, 2018, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
January 26, |
|
|
January 27, |
|
January 26, |
|
January 27, |
|
|||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Beginning balance |
|
$ |
2,431 |
|
$ |
1,930 |
|
$ |
2,090 |
|
$ |
1,947 |
|
|
Warranty expense |
|
|
53 |
|
|
1,219 |
|
|
414 |
|
|
2,131 |
|
|
Changes in estimates related to pre-existing warranties |
|
|
— |
|
|
— |
|
|
519 |
|
|
— |
|
|
Warranty costs settled |
|
|
(354) |
|
|
(330) |
|
|
(893) |
|
|
(1,259) |
|
|
Ending balance |
|
$ |
2,130 |
|
$ |
2,819 |
|
$ |
2,130 |
|
$ |
2,819 |
|
During the nine months ended January 26, 2019, the Company revised its estimates based on the results of additional engineering studies and recorded incremental warranty reserve charges totaling $519,000 related to the estimated costs to repair a component of certain small UAS that were delivered in prior periods. At January 26, 2019, the total remaining warranty reserve related to the estimated costs to repair the impacted UAS was $344,000. As of January 26, 2019 a total
18
of $175,000 of costs related to this warranty have been incurred.
8. Intangibles
Intangibles are included in other assets on the consolidated balance sheets. The components of intangibles are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
January 26, |
|
April 30, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
(In thousands) |
|
||||
|
Licenses |
|
$ |
1,006 |
|
$ |
818 |
|
|
Customer relationships |
|
|
733 |
|
|
733 |
|
|
Trademarks and tradenames |
|
|
28 |
|
|
28 |
|
|
Other |
|
|
3 |
|
|
3 |
|
|
Intangibles, gross |
|
|
1,770 |
|
|
1,582 |
|
|
Less accumulated amortization |
|
|
(1,208) |
|
|
(954) |
|
|
Intangibles, net |
|
$ |
562 |
|
$ |
628 |
|
The customer relationships, trademarks and tradenames, and other intangible assets were recognized in conjunction with the Company’s acquisition of a controlling interest in Altoy on February 1, 2017.
9. Accumulated Other Comprehensive Income (Loss) and Reclassifications Adjustments
The components of accumulated other comprehensive income (loss) and adjustments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
Foreign Currency |
|
Accumulated Other |
|
|||
|
|
|
Securities |
|
Translation Adjustments |
|
Comprehensive Income (Loss) |
|
|||
|
Balance, net of $76 of taxes, as of April 30, 2018 |
|
$ |
(57) |
|
$ |
36 |
|
$ |
(21) |
|
|
Reclassifications out of accumulated other comprehensive loss, net of taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
Change in foreign currency translation adjustments, net of $0 taxes |
|
|
— |
|
|
(32) |
|
|
(32) |
|
|
Unrealized gains, net of $51 of taxes |
|
|
57 |
|
|
— |
|
|
57 |
|
|
Balance, net of $0 of taxes, as of January 26, 2019 |
|
$ |
— |
|
$ |
4 |
|
$ |
4 |
|
10. Customer-Funded Research & Development
Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales as costs are incurred. Revenue from customer-funded R&D contracts are recognized in accordance with Topic 606 over time as costs are incurred. Revenue from customer-funded R&D was approximately $19,437,000 and $55,344,000 for the three and nine months ended January 26, 2019, respectively. Revenue from customer-funded R&D was approximately $10,198,000 and $30,860,000 for the three and nine months ended January 27, 2018, respectively.
11. Long-Term Incentive Awards
During the three months ended July 28, 2018, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (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) 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. 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
19
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. For the three and nine months ended January 26, 2019, the Company recorded $226,00 and $482,000 of compensation expense related to the Fiscal 2019 LTIP, respectively. The Company recorded no compensation expense related to the Fiscal 2019 LTIP for the three and nine months ended January 27, 2018. At January 26, 2019, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2019 LTIP is $3,733,000.
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) 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% 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. For the three and nine months ended January 26, 2019, the Company recorded $317,000 and $653,000 of compensation expense related to the Fiscal 2018 LTIP, respectively. The Company recorded no compensation expense related to the Fiscal 2018 LTIP for the three and nine months ended January 27, 2018. At January 26, 2019, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2018 LTIP is $2,850,000.
During the three months ended July 29, 2017, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2017 LTIP”). Awards under the Fiscal 2017 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2017, July 2018 and July 2019, 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, 2019. 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. For the three and nine months ended January 26, 2019, the Company recorded $134,000 and $266,000 of compensation expense related to the Fiscal 2017 LTIP, respectively. The Company recorded no compensation expense related to the Fiscal 2017 LTIP for the three and nine months ended January 27, 2018. At January 26, 2019, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2017 LTIP is $2,630,000.
At January 26, 2019 and April 30, 2018, the Company recorded cumulative stock-based compensation expense from these long-term incentive awards of $1,829,000 and $428,000, 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.
12. Income Taxes
On December 22, 2017, the Tax Act was signed into law, which resulted in 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, 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 , the Company is required to record the effects of tax law changes in the period enacted. As the Company has an April 30 fiscal year end, its U.S. federal corporate income tax rate was blended
20
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 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 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 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 three months ended January 26, 2019. The Company has finalized its accounting for the impact of the Tax Act during the three months ended January 26, 2019 and reached the following conclusions on the previous provisional estimates.
The Company has concluded it will be eligible to claim the FDII deduction and will continue to reflect a rate benefit in the provision for income taxes. The Company expects the IRS will be issuing additional guidance that will ultimately 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. As such, there are no changes to the provision estimates of these items.
In relation to the one-time deferred tax remeasurement, the Company has completed its tax return and has concluded that the impact recorded at the date of enactment was appropriate. The Company filed its fiscal 2018 tax return on February 15, 2019 and will have insignificant return to provision true-up entries related to fixed asset gain or loss, accrued vacation, and accrued expenses recorded during the three months ending April 30, 2019. These true-up entries represent a change in estimate of the ending timing differences for the fiscal year ending April 30, 2019 and not a change to the provision estimate of the impact of the Tax Act at the date of enactment. As such, there are no changes to the provision estimate of this item.
For the three and nine months ended January 26, 2019, the Company recorded a provision for income taxes of $946,000 and $4,724,000, respectively, yielding effective tax rates of 9.4% and 11.1%, respectively. For the three and nine months ended January 27, 2018, the Company recorded a provision for income taxes of $834,000 and $971,000, respectively, yielding effective tax rates of 139.9% and 25.0%, respectively. The variance from statutory rates for the three and nine months ended January 26, 2019 was primarily due to federal R&D credits and the recording of discrete excess tax benefits of $175,000 and $1,683,000, respectively, resulting from the vesting of restricted stock awards and exercises of stock options. The variance from statutory rates for the three and nine months ended January 27, 2018 was primarily due to a $3,100,000 remeasurement charge of the Company’s deferred tax assets and liabilities and a reduction in the fiscal 2018 federal statutory rate to 30.4%, both of which are impacts of the Tax Act. In addition, during the three and nine months ended January 27, 2018, the Company recorded discrete excess tax benefits of $212,000 and $1,614,000 resulting from the vesting of restricted stock awards and exercises of stock options.
13. Share Repurchase
In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $25,000,000 of the Company’s common stock with no specified termination date for the program. No shares were repurchased under the program during the three and nine months ended January 26, 2019. As of January 26, 2019 and April 30, 2018, approximately $21.2 million remained authorized for future repurchases under this program.
21
14. Related Party Transactions
Related party transactions are defined as transactions between the Company and entities either controlled by the Company or that the Company can significantly influence. Although SoftBank has a controlling interest in HAPSMobile, the Company determined that it has the ability to exercise significant influence over HAPSMobile. As such, HAPSMobile and SoftBank are considered related parties of the Company. Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile. Under the DDA, the Company will use its best efforts, up to a maximum net value of $76,589,000, to design and build prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conduct low altitude and high altitude flight tests of the prototype aircraft.
The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $13,586,000 and $37,981,000 for the three and nine months ended January 26, 2019, respectively. The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $5,420,000 and $15,042,000 for the three and nine months ended January 27, 2018, respectively. At January 26, 2019 and April 30, 2018, the Company had unbilled related party receivables from HAPSMobile of $13,638,000 and $3,145,000 recorded in “Unbilled receivables and retentions” on the consolidated balance sheets, respectively. During the year ended April 30, 2018, the Company purchased a 5% stake in accordance with the JVA. Refer to Note 6—Equity Method Investments for further details.
On February 9, 2019, the Company elected to purchase 632,800,000 yen (approximately $5,700,000 million) of additional shares of HAPSMobile to increase the Company’s ownership in the joint venture from 5% to 10% pursuant to the terms of the JVA. Refer to Note 6—Equity Method Investments for further details.
15. Legal Settlements
In May 2018, the Company entered into a settlement agreement to dismiss its claims against MicaSense Inc. and former AeroVironment employees, Gabriel Torres, Justin McAllister, and Jeff McBride. The terms and amount of the settlement agreement are confidential. The proceeds of the settlement were received during the three months ended July 28, 2018 and have been recorded in “Other income, net” on the consolidated statements of operations.
22
16. Impact of Adoption of New Accounting Standards
During the three months ended July 28, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The impact to the Company’s unaudited 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 |
|
23
The tables below presents the impact of adoption on the Company’s unaudited statement of operations for the three and nine months ended January 27, 2018 (in thousands except share and per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Effect of the |
|
Three Months Ended |
|
|||
|
|
|
January 27, 2018 |
|
Adoption of |
|
January 27, 2018 |
|
|||
|
|
|
As Reported |
|
ASC Topic 606 |
|
As Adjusted |
|
|||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
39,128 |
|
$ |
319 |
|
$ |
39,447 |
|
|
Contract services (inclusive of related party revenue of $5,420 for the three months ended January 27, 2018) |
|
|
14,305 |
|
|
881 |
|
|
15,186 |
|
|
|
|
|
53,433 |
|
|
1,200 |
|
|
54,633 |
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
24,548 |
|
|
322 |
|
|
24,870 |
|
|
Contract services |
|
|
10,964 |
|
|
549 |
|
|
11,513 |
|
|
|
|
|
35,512 |
|
|
871 |
|
|
36,383 |
|
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
14,580 |
|
|
(3) |
|
|
14,577 |
|
|
Contract services |
|
|
3,341 |
|
|
332 |
|
|
3,673 |
|
|
|
|
|
17,921 |
|
|
329 |
|
|
18,250 |
|
|
Selling, general and administrative |
|
|
11,484 |
|
|
— |
|
|
11,484 |
|
|
Research and development |
|
|
6,607 |
|
|
— |
|
|
6,607 |
|
|
Loss (income) from continuing operations |
|
|
(170) |
|
|
329 |
|
|
159 |
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
545 |
|
|
— |
|
|
545 |
|
|
Other expense, net |
|
|
(108) |
|
|
— |
|
|
(108) |
|
|
Income from continuing operations before income taxes |
|
|
267 |
|
|
329 |
|
|
596 |
|
|
Provision for income taxes |
|
|
819 |
|
|
15 |
|
|
834 |
|
|
Equity method investment activity, net of tax |
|
|
(418) |
|
|
— |
|
|
(418) |
|
|
Net (loss) income from continuing operations |
|
|
(970) |
|
|
314 |
|
$ |
(656) |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of tax expense of $0 for the three months ended January 27, 2018 |
|
|
— |
|
|
— |
|
|
— |
|
|
Income (loss) from discontinued operations, net of tax |
|
|
133 |
|
|
(262) |
|
|
(129) |
|
|
Net income (loss) from discontinued operations |
|
|
133 |
|
|
(262) |
|
|
(129) |
|
|
Net (loss) income |
|
|
(837) |
|
|
52 |
|
|
(785) |
|
|
Net loss attributable to noncontrolling interest |
|
|
9 |
|
|
— |
|
|
9 |
|
|
Net (loss) income attributable to AeroVironment |
|
$ |
(828) |
|
$ |
52 |
|
$ |
(776) |
|
|
Net (loss) income per share attributable to AeroVironment—Basic |
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.05) |
|
$ |
0.01 |
|
$ |
(0.02) |
|
|
Discontinued operations |
|
|
0.01 |
|
|
(0.01) |
|
|
(0.01) |
|
|
Net loss per share attributable to AeroVironment—Basic |
|
$ |
(0.04) |
|
$ |
— |
|
$ |
(0.03) |
|
|
Net (loss) income per share attributable to AeroVironment—Diluted |
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.05) |
|
$ |
0.01 |
|
$ |
(0.02) |
|
|
Discontinued operations |
|
|
0.01 |
|
|
(0.01) |
|
|
(0.01) |
|
|
Net (loss) per share attributable to AeroVironment—Diluted |
|
$ |
(0.04) |
|
$ |
— |
|
$ |
(0.03) |
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
23,515,622 |
|
|
23,515,622 |
|
|
23,515,622 |
|
|
Diluted |
|
|
23,515,622 |
|
|
23,515,622 |
|
|
23,515,622 |
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Effect of the |
|
Nine Months Ended |
|
|||
|
|
|
January 27, 2018 |
|
Adoption of |
|
January 27, 2018 |
|
|||
|
|
|
As Reported |
|
ASC Topic 606 |
|
As Adjusted |
|
|||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
106,901 |
|
$ |
(254) |
|
$ |
106,647 |
|
|
Contract services (inclusive of related party revenue of $15,042 for the nine months ended January 27, 2018) |
|
|
46,770 |
|
|
1,378 |
|
|
48,148 |
|
|
|
|
|
153,671 |
|
|
1,124 |
|
|
154,795 |
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
66,526 |
|
|
(488) |
|
|
66,038 |
|
|
Contract services |
|
|
30,436 |
|
|
1,230 |
|
|
31,666 |
|
|
|
|
|
96,962 |
|
|
742 |
|
|
97,704 |
|
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
40,375 |
|
|
234 |
|
|
40,609 |
|
|
Contract services |
|
|
16,334 |
|
|
148 |
|
|
16,482 |
|
|
|
|
|
56,709 |
|
|
382 |
|
|
57,091 |
|
|
Selling, general and administrative |
|
|
35,539 |
|
|
— |
|
|
35,539 |
|
|
Research and development |
|
|
18,993 |
|
|
— |
|
|
18,993 |
|
|
Income from continuing operations |
|
|
2,177 |
|
|
382 |
|
|
2,559 |
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
1,489 |
|
|
— |
|
|
1,489 |
|
|
Other expense, net |
|
|
(159) |
|
|
— |
|
|
(159) |
|
|
Income from continuing operations before income taxes |
|
|
3,507 |
|
|
382 |
|
|
3,889 |
|
|
Provision for income taxes |
|
|
963 |
|
|
8 |
|
|
971 |
|
|
Equity method investment activity, net of tax |
|
|
(418) |
|
|
— |
|
|
(418) |
|
|
Net income from continuing operations |
|
|
2,126 |
|
|
374 |
|
$ |
2,500 |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of tax expense of $0 for the nine months ended January 27, 2018 |
|
|
— |
|
|
— |
|
|
— |
|
|
Loss from discontinued operations, net of tax |
|
|
(617) |
|
|
(1,033) |
|
|
(1,650) |
|
|
Net loss from discontinued operations |
|
|
(617) |
|
|
(1,033) |
|
|
(1,650) |
|
|
Net income (loss) |
|
|
1,509 |
|
|
(659) |
|
|
850 |
|
|
Net loss attributable to noncontrolling interest |
|
|
238 |
|
|
— |
|
|
238 |
|
|
Net income (loss) attributable to AeroVironment |
|
$ |
1,747 |
|
$ |
(659) |
|
$ |
1,088 |
|
|
Net income (loss) per share attributable to AeroVironment—Basic |
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.10 |
|
$ |
0.01 |
|
$ |
0.12 |
|
|
Discontinued operations |
|
|
(0.03) |
|
|
(0.04) |
|
|
(0.07) |
|
|
Net income (loss) per share attributable to AeroVironment—Basic |
|
$ |
0.07 |
|
$ |
(0.03) |
|
$ |
0.05 |
|
|
Net income (loss) per share attributable to AeroVironment—Diluted |
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.10 |
|
$ |
0.01 |
|
$ |
0.12 |
|
|
Discontinued operations |
|
|
(0.03) |
|
|
(0.04) |
|
|
(0.07) |
|
|
Net income (loss) per share attributable to AeroVironment—Diluted |
|
$ |
0.07 |
|
$ |
(0.03) |
|
$ |
0.05 |
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
23,443,673 |
|
|
23,443,673 |
|
|
23,443,673 |
|
|
Diluted |
|
|
23,774,946 |
|
|
23,774,946 |
|
|
23,774,946 |
|
25
The tables below presents the impact of adoption on the Company’s unaudited statement of comprehensive (loss) income for the three and nine months January 27, 2018 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Effect of the |
|
Three Months Ended |
|
|||
|
|
|
January 27, 2018 |
|
Adoption of |
|
January 27, 2018 |
|
|||
|
|
|
As Reported |
|
ASC Topic 606 |
|
As Adjusted |
|
|||
|
Net (loss) income |
|
$ |
(837) |
|
$ |
52 |
|
$ |
(785) |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
|
62 |
|
|
— |
|
|
62 |
|
|
Unrealized gain on investments, net of deferred tax expense of $10 for the three months ended January 27, 2018 |
|
|
13 |
|
|
— |
|
|
13 |
|
|
Total comprehensive (loss) income |
|
|
(762) |
|
|
52 |
|
$ |
(710) |
|
|
Net loss attributable to noncontrolling interest |
|
|
9 |
|
|
— |
|
|
9 |
|
|
Comprehensive (loss) income attributable to AeroVironment |
|
$ |
(753) |
|
$ |
52 |
|
$ |
(701) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Effect of the |
|
Nine Months Ended |
|
|||
|
|
|
January 27, 2018 |
|
Adoption of |
|
January 27, 2018 |
|
|||
|
|
|
As Reported |
|
ASC Topic 606 |
|
As Adjusted |
|
|||
|
Net income (loss) |
|
$ |
1,509 |
|
$ |
(659) |
|
$ |
850 |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
|
62 |
|
|
— |
|
|
62 |
|
|
Unrealized gain on investments, net of deferred tax expense of $29 for the nine months ended January 27, 2018 |
|
|
42 |
|
|
— |
|
|
42 |
|
|
Total comprehensive income (loss) |
|
|
1,613 |
|
|
(659) |
|
$ |
954 |
|
|
Net loss attributable to noncontrolling interest |
|
|
238 |
|
|
— |
|
|
238 |
|
|
Comprehensive income (loss) attributable to AeroVironment |
|
$ |
1,851 |
|
$ |
(659) |
|
$ |
1,192 |
|
26
The table below presents the impact of adoption on the Company’s unaudited statement of cash flows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Effect of the |
|
Nine Months Ended |
|
|||
|
|
|
January 27, 2018 |
|
Adoption of |
|
January 27, 2018 |
|
|||
|
|
|
As Reported |
|
ASC Topic 606 |
|
As Adjusted |
|
|||
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,509 |
|
$ |
(659) |
|
$ |
850 |
|
|
Gain on sale of business, net of tax |
|
|
— |
|
|
— |
|
|
— |
|
|
Loss from discontinued operations, net of tax |
|
|
617 |
|
|
1,033 |
|
|
1,650 |
|
|
Net income from continuing operations |
|
|
2,126 |
|
|
374 |
|
|
2,500 |
|
|
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,277 |
|
|
— |
|
|
4,277 |
|
|
Loss from equity method investments |
|
|
418 |
|
|
— |
|
|
418 |
|
|
Impairment of long-lived assets |
|
|
255 |
|
|
— |
|
|
255 |
|
|
Provision for doubtful accounts |
|
|
940 |
|
|
— |
|
|
940 |
|
|
Impairment of intangible assets and goodwill |
|
|
1,021 |
|
|
— |
|
|
1,021 |
|
|
Gains on foreign currency transactions |
|
|
(36) |
|
|
— |
|
|
(36) |
|
|
Deferred income taxes |
|
|
174 |
|
|
— |
|
|
174 |
|
|
Stock-based compensation |
|
|
3,702 |
|
|
— |
|
|
3,702 |
|
|
Loss on disposition of property and equipment |
|
|
15 |
|
|
— |
|
|
15 |
|
|
Amortization of held-to-maturity investments |
|
|
1,250 |
|
|
— |
|
|
1,250 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
48,871 |
|
|
— |
|
|
48,871 |
|
|
Unbilled receivables and retentions |
|
|
(10,842) |
|
|
(1,226) |
|
|
(12,068) |
|
|
Inventories |
|
|
(16,094) |
|
|
786 |
|
|
(15,308) |
|
|
Income tax receivable |
|
|
(293) |
|
|
(427) |
|
|
(720) |
|
|
Prepaid expenses and other assets |
|
|
417 |
|
|
— |
|
|
417 |
|
|
Accounts payable |
|
|
(4,451) |
|
|
— |
|
|
(4,451) |
|
|
Other liabilities |
|
|
518 |
|
|
57 |
|
|
575 |
|
|
Net cash provided by (used in) operating activities of continuing operations |
|
|
32,268 |
|
|
(436) |
|
|
31,832 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(7,713) |
|
|
— |
|
|
(7,713) |
|
|
Equity method investments |
|
|
(1,860) |
|
|
— |
|
|
(1,860) |
|
|
Proceeds from sale of business |
|
|
— |
|
|
— |
|
|
— |
|
|
Redemptions of held-to-maturity investments |
|
|
163,813 |
|
|
— |
|
|
163,813 |
|
|
Purchases of held-to-maturity investments |
|
|
(151,740) |
|
|
— |
|
|
(151,740) |
|
|
Redemptions of available-for-sale investments |
|
|
450 |
|
|
— |
|
|
450 |
|
|
Net cash provided by investing activities from continuing operations |
|
|
2,950 |
|
|
— |
|
|
2,950 |
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations |
|
|
(231) |
|
|
— |
|
|
(231) |
|
|
Tax withholding payment related to net settlement of equity awards |
|
|
(389) |
|
|
— |
|
|
(389) |
|
|
Exercise of stock options |
|
|
2,691 |
|
|
— |
|
|
2,691 |
|
|
Net cash provided by financing activities from continuing operations |
|
|
2,071 |
|
|
— |
|
|
2,071 |
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
Operating activities of discontinued operations |
|
|
(4,152) |
|
|
436 |
|
|
(3,716) |
|
|
Investing activities of discontinued operations |
|
|
(737) |
|
|
— |
|
|
(737) |
|
|
Financing activities of discontinued operations |
|
|
— |
|
|
— |
|
|
— |
|
|
Net cash (used in) provided by discontinued operations |
|
|
(4,889) |
|
|
436 |
|
|
(4,453) |
|
|
Net increase in cash and cash equivalents |
|
|
32,400 |
|
|
— |
|
|
32,400 |
|
|
Cash and cash equivalents at beginning of period |
|
|
79,904 |
|
|
— |
|
|
79,904 |
|
|
Cash and cash equivalents at end of period |
|
$ |
112,304 |
|
$ |
— |
|
$ |
112,304 |
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
Cash paid, net during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,812 |
|
|
— |
|
$ |
1,812 |
|
|
Non-cash activities |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of deferred tax expense of $29 |
|
$ |
42 |
|
|
— |
|
$ |
42 |
|
|
Reclassification from share-based liability compensation to equity |
|
$ |
384 |
|
|
— |
|
$ |
384 |
|
|
Change in foreign currency translation adjustments |
|
$ |
62 |
|
|
— |
|
$ |
62 |
|
|
Acquisitions of property and equipment included in accounts payable |
|
$ |
332 |
|
|
— |
|
$ |
332 |
|
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”).
Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The following should be read in conjunction with the critical accounting estimates presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
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 and reserves for excess and obsolescence, warranty liabilities, self-insured liabilities, accounting for stock-based awards, 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.
In the first quarter of our fiscal 2019, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 we expect to be entitled in exchange for those goods or services.
Revenue for small unmanned aircraft systems (“UAS”) product contracts with both the U.S. government and foreign governments under the new standard revenue 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. generally accepted accounting principles (U.S. GAAP), revenue was generally recognized when deliveries of the related products were made. 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.
28
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 estimate of completion for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the three and nine months ended January 26, 2019 and January 27, 2018, changes in accounting estimates on contracts recognized over time are presented below.
For the three months ended January 26, 2019 and January 27, 2018, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
|
January 26, |
|
January 27, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
|
Gross favorable adjustments |
|
$ |
878 |
|
$ |
191 |
|
|
Gross unfavorable adjustments |
|
|
(2,583) |
|
|
(1,111) |
|
|
Net favorable adjustments |
|
$ |
(1,705) |
|
$ |
(920) |
|
For the three months ended January 26, 2019, favorable cumulative catch-up adjustments of $0.9 million were primarily due to final cost adjustments on five contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $2.6 million were primarily related to higher than expected costs on nine contracts. For the three months ended January 26, 2019, we revised our estimates of the total expected costs to complete a TMS contract due to ongoing test and evaluation resulting from some systems not passing the customer’s final lot acceptance tests which we anticipate to be resolved in a future period. These revised estimates resulted in an unfavorable cumulative catch-up adjustment of approximately $1.5 million.
For the three months ended January 27, 2018, favorable cumulative catch-up adjustments of $0.2 million were primarily due to final cost adjustments on seven contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on seven contracts, which individually were not material.
For the nine months ended January 26, 2019 and January 27, 2018, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
|
January 26, |
|
January 27, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
|
Gross favorable adjustments |
|
$ |
859 |
|
$ |
1,553 |
|
|
Gross unfavorable adjustments |
|
|
(1,132) |
|
|
(1,718) |
|
|
Net favorable adjustments |
|
$ |
(273) |
|
$ |
(165) |
|
For the nine months ended January 26, 2019, favorable cumulative catch-up adjustments of $0.9 million were primarily due to final cost adjustments on five contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on 12 contracts, which individually were not material.
For the nine months ended January 27, 2018, favorable cumulative catch-up adjustments of $1.6 million were primarily due to final cost adjustments on seven contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.7 million were primarily related to higher than expected costs on six contracts, which individually were not material.
29
Fiscal Periods
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. Our 2019 fiscal year ends on April 30, 2019 and our fiscal quarters end on July 28, 2018, October 27, 2018 and January 26, 2019, respectively.
Results of Operations
The following tables set forth our results of operations for the periods indicated (in thousands):
Three Months Ended January 26, 2019 Compared to Three Months Ended January 27, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
|
January 26, |
|
January 27, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
75,322 |
|
$ |
54,633 |
|
|
Cost of sales |
|
|
44,930 |
|
|
36,383 |
|
|
Gross margin |
|
|
30,392 |
|
|
18,250 |
|
|
Selling, general and administrative |
|
|
14,464 |
|
|
11,484 |
|
|
Research and development |
|
|
8,087 |
|
|
6,607 |
|
|
Income from operations |
|
|
7,841 |
|
|
159 |
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income, net |
|
|
1,272 |
|
|
545 |
|
|
Other income (expense), net |
|
|
962 |
|
|
(108) |
|
|
Income from continuing operations before income taxes |
|
|
10,075 |
|
|
596 |
|
|
Provision for income taxes |
|
|
946 |
|
|
834 |
|
|
Equity method investment activity, net of tax |
|
|
(717) |
|
|
(418) |
|
|
Net income (loss) from continuing operations |
|
$ |
8,412 |
|
$ |
(656) |
|
Revenue. Revenue for the three months ended January 26, 2019 was $75.3 million, as compared to $54.6 million for the three months ended January 27, 2018, representing an increase of $20.7 million, or 38%. The increase in revenue was due to an increase in product deliveries of $10.6 million and an increase in service revenue of $10.1 million. The increase in product deliveries was primarily due to an increase in product deliveries of small UAS, partially offset by a decrease in product deliveries of TMS. During the three months ended January 26, 2019, we continued to experience expansion in small UAS product deliveries to international customers. The increase in service revenue was primarily due to an increase in customer-funded R&D primarily associated with the design and development agreement (“DDA”) with HAPSMobile, Inc. (“HAPSMobile”), a joint venture we formed with SoftBank Corp. (“Softbank”), as well as an increase in TMS variant programs.
Cost of Sales. Cost of sales for the three months ended January 26, 2019 was $44.9 million, as compared to $36.4 million for the three months ended January 27, 2018, representing an increase of $8.5 million, or 23%. The increase in cost of sales was a result of an increase in service costs of sales of $6.6 million and an increase in product cost of sales of $1.9 million. The increase in service costs of sales was primarily due to an increase in service revenue. The increase in product costs was primarily due to an increase in product deliveries and an increase in reserves for excess and obsolescence inventory, partially offset by a favorable product mix. As a percentage of revenue, cost of sales decreased from 67% to 60%, primarily due to the increased sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support cost, and favorable product mix, partially offset by an increase in reserves for excess and obsolescence inventory.
Gross Margin. Gross margin for the three months ended January 26, 2019 was $30.4 million, as compared to $18.3 million for the three months ended January 27, 2018, representing an increase of $12.1 million, or 67%. The increase in gross margin was primarily due to an increase in product margin of $8.7 million and an increase in service margin of
30
$3.5 million. The increase in product margin was primarily due to an increase in product deliveries and favorable product mix, partially offset by an increase in reserves for excess and obsolescence inventory. The increase in service margin was primarily due to an increase in service revenue. As a percentage of revenue, gross margin increased from 33% to 40%, primarily due to the increased sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support cost, and favorable product mix, partially offset by an increase in reserves for excess and obsolescence inventory.
Selling, General and Administrative . Selling, general and administrative (“SG&A”) expense for the three months ended January 26, 2019 was $14.5 million, or 19% of revenue, compared to SG&A expense of $11.5 million, or 21% of revenue, for the three months ended January 27, 2018. The increase in SG&A expense was primarily due to an increase in employee related costs as well as a number of miscellaneous expenses that were not individually significant.
Research and Development. R&D expense for the three months ended January 26, 2019 was $8.1 million, or 11% of revenue, compared to R&D expense of $6.6 million, or 12% of revenue, for the three months ended January 27, 2018. R&D expense increased by $1.5 million, or 22%, for the three months ended January 26, 2019, primarily due to an increase in development activities for certain strategic initiatives.
Interest Income, net. Interest income, net for the three months ended January 26, 2019 was $1.3 million compared to interest income, net of $0.5 million for the three months ended January 27, 2018. The increase in interest income was due to an increase in the interest rates earned on our investment portfolio and an increase in investment balances.
Other Income (Expense), net. Other income, net, for the three months ended January 26, 2019 was $1.0 million compared to other expense, net of $0.1 million for the three months ended January 27, 2018. The increase in other income, net was primarily due to income earned under a transition services agreement with the buyer of our former efficient energy systems business segment (“EES Business”).
Provision for Income Taxes. Our effective income tax rate was 9.4% for the three months ended January 26, 2019, as compared to 139.9% for the three months ended January 27, 2018. The three months ended January 27, 2018 included the impacts of the one-time deferred tax expense resulting from the remeasurement of our existing deferred tax assets and liabilities of $3.1 million. The decrease in our effective income tax rate was also due to the reduction in the fiscal 2019 federal statutory rate from 30.4% to 21% resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
Equity Method Investment Activity, net of tax. Equity method investment activity, net of tax for the three months ended January 26, 2019 was a loss of $0.7 million compared to a loss of $0.4 million for the three months ended January 27, 2018. The increase was due to the equity method loss associated with our investment in the HAPSMobile joint venture formed in December 2017.
31
Nine Months Ended January 26, 2019 Compared to Nine Months Ended January 27, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
|
January 26, |
|
January 27, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
226,344 |
|
$ |
154,795 |
|
|
Cost of sales: |
|
|
134,964 |
|
|
97,704 |
|
|
Gross margin |
|
|
91,380 |
|
|
57,091 |
|
|
Selling, general and administrative |
|
|
40,066 |
|
|
35,539 |
|
|
Research and development |
|
|
22,631 |
|
|
18,993 |
|
|
Income from operations |
|
|
28,683 |
|
|
2,559 |
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income, net |
|
|
3,246 |
|
|
1,489 |
|
|
Other income (expense), net |
|
|
10,641 |
|
|
(159) |
|
|
Income from continuing operations before income taxes |
|
|
42,570 |
|
|
3,889 |
|
|
Provision for income taxes |
|
|
4,724 |
|
|
971 |
|
|
Equity method investment activity, net of tax |
|
|
(2,071) |
|
|
(418) |
|
|
Net income from continuing operations |
|
$ |
35,775 |
|
$ |
2,500 |
|
Revenue. Revenue for the nine months ended January 26, 2019 was $226.3 million, as compared to $154.8 million for the nine months ended January 27, 2018, representing an increase of $71.5 million, or 46%. The increase in revenue was due an increase in product deliveries of $45.7 million and an increase in service revenue of $25.8 million. The increase in product deliveries was primarily due to an increase in product deliveries of small UAS and an increase in product deliveries of TMS. During the nine months ended January 26, 2019, we continued to experience expansion in small UAS product deliveries to international customers. The increase in service revenue was primarily due to an increase in customer-funded R&D primarily associated with the HAPSMobile DDA and services for TMS and TMS variant programs, partially offset by decreases in sustainment activities in support of small UAS.
Cost of Sales. Cost of sales for the nine months ended January 26, 2019 was $135.0 million, as compared to $97.7 million for the nine months ended January 27, 2018, representing an increase of $37.3 million, or 38%. The increase in cost of sales was a result of an increase in service costs of sales of $20.1 million and an increase in product cost of sales of $17.1 million. The increase in service costs of sales was primarily due to the increase in service revenue and unfavorable mix. The increase in product costs was primarily due to the increase in product deliveries and an increase in reserves for excess and obsolescence inventory. As a percentage of revenue, cost of sales decreased from 63% to 60%, primarily due to an increase in sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support cost, partially offset by an increase in reserves for excess and obsolescence inventory.
Gross Margin. Gross margin for the nine months ended January 26, 2019 was $91.4 million, as compared to $57.1 million for the nine months ended January 27, 2018, representing an increase of $34.3 million, or 60%. The increase in gross margin was primarily due to an increase in product margin of $28.6 million and an increase in service margin of $5.7 million. The increase in product margin was primarily due to an increase in product deliveries, partially offset by an increase in reserves for excess and obsolescence inventory. The increase in service margin was primarily due to an increase in service revenue, partially offset by unfavorable mix. As a percentage of revenue, gross margin increased from 37% to 40%, primarily due to an increase in sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support cost, partially offset by and an increase in reserves for excess and obsolescence inventory.
Selling, General and Administrative . Selling, general and administrative (“SG&A”) expense for the nine months ended January 26, 2019 was $40.1 million, or 18% of revenue, compared to SG&A expense of $35.5 million, or 23% of revenue, for the nine months ended January 27, 2018. The increase in SG&A expense was primarily due to an increase in corporate development expenses primarily related to the sale of our EES business and an increase in employee-related costs, partially offset by a decrease in litigation-related expenses and a decrease in bad debt expense. The nine months
32
ended January 27, 2018 also included impairment charges totaling $1.0 million related to the identifiable intangible assets and goodwill of Altoy.
Research and Development. R&D expense for the nine months ended January 26, 2019 was $22.6 million, or 10% of revenue, compared to R&D expense of $19.0 million, or 12% of revenue, for the nine months ended January 27, 2018. R&D expense increased by $3.6 million, or 19%, for the nine months ended January 26, 2019, primarily due to an increase in development activities for certain strategic initiatives.
Interest Income, net. Interest income, net for the nine months ended January 26, 2019 was $3.2 million compared to interest income, net of $1.5 million for the nine months ended January 27, 2018. The increase in interest income was primarily due to an increase in the interest rates earned on our investment portfolio.
Other Income (Expense), net. Other income, net, for the nine months ended January 26, 2019 was $10.6 million compared to other expense, net of $0.2 million for the nine months ended January 27, 2018. The increase in other income, net was primarily due to a litigation settlement and income earned under a transition services agreement with the buyer of our former EES Business.
Provision for Income Taxes. Our effective income tax rate was 11.1% for the nine months ended January 26, 2019, as compared to 25.0% for the nine months ended January 27, 2018. The nine months ended January 27, 2018 included the impacts of the one-time deferred tax expense resulting from the remeasurement of our existing deferred tax assets and liabilities of $3.1 million. The decrease in our effective income tax rate was also due to the reduction in the fiscal 2019 federal statutory rate from 30.4% to 21% resulting from the Tax Act.
Equity Method Investment Activity, net of tax. Equity method investment activity, net of tax for the nine months ended January 26, 2019 was a loss of $2.1 million compared to a loss of $0.4 million for the nine months ended January 27, 2018. The increase was due to the equity method loss associated with our investment in the HAPSMobile joint venture formed in December 2017.
Backlog
Consistent with ASC 606, we define funded backlog as remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract. As of January 26, 2019, our funded backlog was approximately $132.5 million.
In addition to our funded backlog, we also had unfunded backlog of $37.7 million as of January 26, 2019. Unfunded backlog does not meet the definition of a performance obligation under ASC Topic 606. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery, indefinite quantity (“IDIQ”) contracts. Unfunded backlog does not obligate the U.S. government to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfunded backlog does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because the contract was awarded to seven companies in 2018, including AeroVironment, and we cannot be certain that we will receive task orders issued against the contract.
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing contracts expire or are renewed or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.
33
Liquidity and Capital Resources
We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing R&D costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. In addition, 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 and capital expenditure requirements 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 financing. We anticipate that existing sources of liquidity 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, enhancing existing products and marketing to stimulate 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 and commercial industries and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. To the extent that existing cash, cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. 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.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and other expenses incurred during the lead time from contract award until contract deliveries begin.
On February 9, 2019, we elected to purchase 632.8 million yen (approximately $5.7 million) of additional shares of HAPSMobile, to increase our ownership in the joint venture from 5% to 10% pursuant to the terms of the HAPSMobile Joint Venture Agreement. We anticipate that the purchase of additional shares will be completed during the three months ending April 30, 2019.
Cash Flows
The following table provides our cash flow data for the nine months ended January 26, 2019 and January 27, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
|
January 26, |
|
January 27, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
(Unaudited) |
|
||||
|
Net cash provided by operating activities |
|
$ |
6,897 |
|
$ |
31,832 |
|
|
Net cash provided by investing activities |
|
$ |
7,773 |
|
$ |
2,950 |
|
|
Net cash (used in) provided by financing activities |
|
$ |
(1,116) |
|
$ |
2,071 |
|
Cash Provided by Operating Activities. Net cash provided by operating activities for the nine months ended January 26, 2019 decreased by $24.9 million to $6.9 million, compared to net cash provided by operating activities of $31.8 million for the nine months ended January 27, 2018. The decrease in net cash provided by operating activities was primarily due to a decrease in cash as a result of changes in operating assets and liabilities of $57.2 million, largely resulting from increases in accounts receivable and unbilled receivables and retentions primarily due to the timing of revenue recognition and billings, partially offset by an increase in net income from continuing operations of $33.3 million.
Cash Provided by Investing Activities. Net cash provided by investing activities increased by $4.8 million to $7.8 million for the nine months ended January 26, 2019, compared to net cash provided by investing activities of $3.0 million for the nine months ended January 27, 2018. The increase in net cash provided by investing activities was
34
primarily due to proceeds from the sale of our EES Business of $32.0 million, a decrease in equity method investments of $1.9 million and an increase in redemptions of available-for-sale investments of $1.8 million, partially offset by a decrease in net redemptions and purchases of investments of $31.7 million.
Cash (Used in) Provided by Financing Activities. Net cash used in financing activities increased by $3.2 million to $1.1 million for the nine months ended January 26, 2019, compared to net cash provided by financing activities of $2.1 million for the nine months ended January 27, 2018. The increase in cash used in financing activities was primarily due to a decrease in cash provided from the exercise of employee stock options of $2.6 million.
Contractual Obligations
During the three and nine months ended January 26, 2019, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
Off-Balance Sheet Arrangements
As of January 26, 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.
New Accounting Standards
Please refer to Note 1 “Organization and Significant Accounting Policies” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the nine months ended January 26, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, and foreign currency exchange rates.
Interest Rate Risk
It is our policy not to enter into interest rate derivative financial instruments. We do not currently have any significant interest rate exposure.
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 and do not expect to incur significant foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions.
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
35
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 provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of January 26, 2019, the end of the period covered by this Quarterly Report on Form 10-Q.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of January 26, 2019, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
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 Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended January 26, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
36
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 for the racial discrimination and wrongful terminations claims. On August 2, 2018, the defendants filed their answer to the complaint and a demurrer seeking dismissal of the whistle blower retaliation claim against Mr. Nawabi. The defendants filed a supplemental brief in support of the demurrer on October 23, 2018 and a supplemental reply in support of the demurrer on November 20, 2018. On January 23, 2019 the judge granted the demurrer and dismissed Mr. Nawabi as an individual defendant from the whistle blower retaliation claim, the last remaining claim pending against him. 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 against us in Delaware Superior Court, arising from the sale of the EES division to Webasto in June 2018. The lawsuit generally alleges several claims against AeroVironment 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 $6.5 million in addition to attorneys’ fees, costs, and punitive damages. 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. We have not yet been served with the lawsuit, however, we intend 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.
Except as set forth below, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2018. Please refer to that section for disclosures regarding the risks and uncertainties related to our business.
The acquisition of the assets associated with our EES Business by Webasto may disrupt our business.
On June 1, 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Webasto Charging Systems, Inc. (“Webasto”), pursuant to which Webasto agreed to acquire certain properties, assets and rights used or previously held for use in connection with our EES Business. On June 29, 2018, we and Webasto entered into a Side Letter Agreement related to the Purchase Agreement (the “Letter Agreement”), pursuant to which we and Webasto agreed that the purchase price to be paid by Webasto to us at the closing of the transactions contemplated by the Purchase Agreement would be reduced by $6.5 million (the “Holdback Amount”) at closing, with such balance payable when we tendered certain consents of specified EES Business customers to Webasto. On June 29, 2018, we closed our disposition of the EES Business pursuant to the Purchase Agreement. As of March 1, 2019, we had not yet received the Holdback Amount from Webasto.
On February 22, 2019, Webasto filed a lawsuit alleging several claims against us 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 $6.5 million in addition to attorneys’ fees, costs, and punitive damages. Webasto also alleges that we did not meet the requirements to receive the Holdback Amount.
37
We also continue to provide transition services and other support to Webasto in connection with its acquisition of our EES Business, our post-closing activities and obligations under the Purchase Agreement and related transaction agreements. Our provision of the transition services and activities related to defending the lawsuit may disrupt our sales and marketing or other business activities, including our relationships with customers, suppliers 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. Further, in the event that we do not receive the Holdback Amount from Webasto or otherwise incur any further liabilities pursuant to the terms of the Purchase Agreement including as a result of the lawsuit, our financial condition and results of operations may be negatively affected and the price per share of our common stock could decline.
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 our transaction with Webasto. In particular, on August 24, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration 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 could significantly harm our business, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On September 24, 2015, we announced that on September 23, 2015 our Board of Directors 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 Board of Directors. No shares were repurchased in the nine months ended January 26, 2019. As of January 26, 2019, approximately $21.2 million remained authorized for future repurchases under this program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
38
|
|
|
|
|
Exhibit
|
|
Description |
|
3.1(1) |
|
Amended and Restated Certificate of Incorporation of AeroVironment, Inc. |
|
3.2(2) |
|
|
|
10.1 |
|
AeroVironment, Inc. Executive Severance Plan and Summary Description, effective January 1, 2019. |
|
31.1 |
|
|
|
31.2 |
|
|
|
32# |
|
|
|
101.INS |
|
XBRL Instance Document. |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
(1) |
|
Incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10 ‑ Q filed March 9, 2007 (File No. 001 ‑ 33261). |
|
|
(2) |
|
Incorporated by reference herein to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed July 1, 2015 (File No. 001-33261). |
# The information in Exhibit 32 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this report), unless the Company specifically incorporates the foregoing information into those documents by reference.
39
Pursuant to the requirements 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.
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Date: March 5, 2019 |
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AEROVIRONMENT, INC. |
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By: |
/s/ Wahid Nawabi |
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Wahid Nawabi |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ Teresa P. Covington |
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Teresa P. Covington |
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Senior Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
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| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
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No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
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