|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
The |
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.
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).
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.
Accelerated filer ☐ | ||
Non-accelerated filer ☐ | Smaller reporting company | |
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
As of February 25, 2022, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was
AeroVironment, Inc.
Table of Contents
| |||
Consolidated Balance Sheets as of January 29, 2022 (Unaudited) and April 30, 2021 | 3 | ||
4 | |||
5 | |||
7 | |||
8 | |||
9 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37 | ||
48 | |||
48 | |||
50 | |||
50 | |||
53 | |||
54 | |||
54 | |||
54 | |||
55 | |||
56 | |||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AeroVironment, Inc.
Consolidated Balance Sheets
(In thousands except share and per share data)
January 29, |
| April 30, | |||||
2022 | 2021 | ||||||
| (Unaudited) |
| |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Short-term investments | | | |||||
Accounts receivable, net of allowance for doubtful accounts of $ |
| |
| | |||
Unbilled receivables and retentions (inclusive of related party unbilled receivables of $ |
| |
| | |||
Inventories |
| |
| | |||
Income taxes receivable | | — | |||||
Prepaid expenses and other current assets |
| |
| | |||
Total current assets |
| |
| | |||
Long-term investments | | | |||||
Property and equipment, net |
| |
| | |||
Operating lease right-of-use assets | | | |||||
Deferred income taxes |
| |
| | |||
Intangibles, net | | | |||||
Goodwill | | | |||||
Other assets |
| |
| | |||
Total assets | $ | | $ | | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Wages and related accruals |
| |
| | |||
Customer advances |
| |
| | |||
Current portion of long-term debt | | | |||||
Current operating lease liabilities | | | |||||
Income taxes payable | | | |||||
Other current liabilities |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt, net of current portion | | | |||||
Non-current operating lease liabilities | | | |||||
Other non-current liabilities | | | |||||
Liability for uncertain tax positions |
| |
| | |||
Deferred income taxes | | — | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $ | |||||||
Authorized shares— |
|
| |||||
Common stock, $ | |||||||
Authorized shares— | |||||||
and shares— |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Accumulated other comprehensive (loss) income |
| ( |
| | |||
Retained earnings |
| |
| | |||
Total AeroVironment, Inc. stockholders’ equity |
| |
| | |||
Noncontrolling interest | | | |||||
Total equity | | | |||||
Total liabilities and stockholders’ equity | $ | | $ | | |||
See accompanying notes to consolidated financial statements (unaudited).
3
AeroVironment, Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)
Three Months Ended | Nine Months Ended | ||||||||||||
January 29, | January 30, | January 29, | January 30, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Revenue: | |||||||||||||
Product sales | $ | | $ | | $ | | $ | | |||||
Contract services (inclusive of related party revenue of $ |
| |
| |
| |
| | |||||
| |
| |
| |
| | ||||||
Cost of sales: | |||||||||||||
Product sales |
| |
| |
| |
| | |||||
Contract services |
| |
| |
| |
| | |||||
| |
| |
| |
| | ||||||
Gross margin: |
|
| |||||||||||
Product sales | | | | | |||||||||
Contract services | | | | | |||||||||
| |
| |
| | ||||||||
Selling, general and administrative |
| |
| |
| |
| | |||||
Research and development |
| |
| |
| |
| | |||||
(Loss) income from operations |
| ( |
| ( |
| ( |
| | |||||
Other (loss) income: | |||||||||||||
Interest (expense) income, net |
| ( |
| |
| ( |
| | |||||
Other income (expense), net |
| |
| ( |
| ( |
| | |||||
(Loss) income before income taxes |
| ( |
| ( |
| ( |
| | |||||
(Benefit from) provision for income taxes | ( | ( |
| ( |
| | |||||||
Equity method investment income (loss), net of tax |
| |
| ( |
| |
| ( | |||||
Net (loss) income | ( | | ( | | |||||||||
Net loss (income) attributable to noncontrolling interest | | ( | ( | | |||||||||
Net income (loss) attributable to AeroVironment, Inc. | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) per share attributable to AeroVironment, Inc. | |||||||||||||
Basic | $ | — | $ | | $ | ( | $ | | |||||
Diluted | $ | — | $ | | $ | ( | $ | | |||||
Weighted-average shares outstanding: | |||||||||||||
Basic |
| |
| |
| |
| | |||||
Diluted |
| |
| |
| |
| | |||||
See accompanying notes to consolidated financial statements (unaudited).
4
AeroVironment, Inc.
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In thousands)
Three Months Ended | Nine Months Ended | ||||||||||||
January 29, | January 30, | January 29, | January 30, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Net (loss) income | $ | ( | $ | | $ | ( | $ | | |||||
Other comprehensive (loss) income: | |||||||||||||
Unrealized (loss) gain on available-for-sale investments, net of deferred tax benefit of $ |
| ( |
| |
| ( |
| ( | |||||
Change in foreign currency translation adjustments | ( | — | ( | | |||||||||
Total comprehensive (loss) income | ( | | ( | | |||||||||
Net loss (income) attributable to noncontrolling interest | | ( | ( | | |||||||||
Comprehensive (loss) income attributable to AeroVironment, Inc. | $ | ( | $ | | $ | ( | $ | | |||||
See accompanying notes to consolidated financial statements (unaudited).
5
AeroVironment, Inc.
Consolidated Statements of Stockholders’ Equity
For the nine months ended January 29, 2022 and January 30, 2021 (Unaudited)
(In thousands except share data)
Accumulated |
| |||||||||||||||||||||||
Additional | Other | Total | Non- |
| ||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | AeroVironment, Inc. | Controlling |
| ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) | Equity | Interest |
| Total |
| ||||||||||
Balance at April 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Net (loss) income |
| — |
| — |
| — |
| ( |
| — | ( | |
| ( | ||||||||||
Unrealized loss on investments | — |
| — |
| — |
| — |
| ( | ( | — |
| ( | |||||||||||
Foreign currency translation | — |
| — |
| — |
| — |
| ( | ( | — |
| ( | |||||||||||
Stock options exercised |
| |
| — |
| |
| — | — | | — |
| | |||||||||||
Restricted stock awards |
| |
| — |
| — |
| — | — | — | — |
| — | |||||||||||
Restricted stock awards forfeited |
| ( |
| — |
| — |
| — | — | — | — |
| — | |||||||||||
Tax withholding payment related to net share settlement of equity awards |
| ( |
| — |
| ( |
| — | — | ( | — |
| ( | |||||||||||
Change in non-controlling interest | — | — | — | — | — | — | | | ||||||||||||||||
Stock based compensation |
| — |
| — |
| |
| — | — | | — |
| | |||||||||||
Balance at January 29, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | Non- | |||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | AeroVironment, Inc. | Controlling | |||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) | Equity | Interest |
| Total | |||||||||||
Balance at April 30, 2020 |
| | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | ||||||||
Net income (loss) |
| — |
| — |
| — |
| |
| — | | ( |
| | ||||||||||
Unrealized loss on investments | — |
| — |
| — |
| — |
| ( | ( | — |
| ( | |||||||||||
Foreign currency translation | — |
| — |
| — |
| — |
| | | — |
| | |||||||||||
Stock options exercised |
| |
| — |
| |
| — | — | | — |
| | |||||||||||
Restricted stock awards |
| |
| — |
| — |
| — | — | — | — |
| — | |||||||||||
Restricted stock awards forfeited |
| ( |
| — |
| — |
| — | — | — | — |
| — | |||||||||||
Tax withholding payment related to net share settlement of equity awards |
| ( |
| — |
| ( |
| — | — | ( | — |
| ( | |||||||||||
Stock based compensation | — |
| — |
| |
| — | — | | — |
| | ||||||||||||
Balance at January 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
6
AeroVironment, Inc.
Consolidated Statements of Stockholders’ Equity
For the three months ended January 29, 2022 and January 30, 2021 (Unaudited)
(In thousands except share data)
Accumulated | |||||||||||||||||||||||
Additional | Other | Total | Non- | ||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | AeroVironment, Inc. | Controlling | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| (Loss) Income | Equity | Interest |
| Total | ||||||||||
Balance at October 30, 2021 |
| | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Net income (loss) |
| — |
| — |
| — |
| |
| — | | ( |
| ( | |||||||||
Unrealized loss on investments |
| — |
| — |
| — |
| — |
| ( | ( | — |
| ( | |||||||||
Foreign currency translation | — | — | — | — | ( | ( | — | ( | |||||||||||||||
Stock options exercised | |
| — |
| |
| — |
| — | | — |
| | ||||||||||
Restricted stock awards | | — | — | — | — | — | — | — | |||||||||||||||
Restricted stock awards forfeited |
| ( |
| — |
| — |
| — | — | — | — |
| — | ||||||||||
Stock based compensation |
| — |
| — |
| |
| — | — | | — |
| | ||||||||||
Balance at January 29, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Accumulated | |||||||||||||||||||||||
Additional | Other | Total | Non- | ||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | AeroVironment, Inc. | Controlling | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) | Equity | Interest |
| Total | ||||||||||
Balance at October 31, 2020 |
| | | | | | | ( | | ||||||||||||||
Net income |
| — |
| — |
| — |
| |
| — | | |
| | |||||||||
Unrealized gain on investments | — | — | — | — | | | — | | |||||||||||||||
Restricted stock awards | | — | — | — | — | — | — | — | |||||||||||||||
Restricted stock awards forfeited |
| ( | — |
| — |
| — | — | — | — |
| — | |||||||||||
Tax withholding payment related to net share settlement of equity awards |
| ( |
| — |
| ( |
| — | — | ( | — |
| ( | ||||||||||
Stock based compensation | — |
| — |
| |
| — | — | | — |
| | |||||||||||
Balance at January 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
See accompanying notes to consolidated financial statements (unaudited).
7
AeroVironment, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended | |||||||
| January 29, |
| January 30, |
| |||
2022 | 2021 | ||||||
Operating activities | |||||||
Net (loss) income | $ | ( | $ | | |||
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
(Income) loss from equity method investments, net | ( | | |||||
Amortization of debt issuance costs | | — | |||||
Realized gain from sale of available-for-sale investments | — | ( | |||||
Provision for doubtful accounts |
| ( |
| ( | |||
Other non-cash expense (income) | | ( | |||||
Non-cash lease expense | | | |||||
Loss on foreign currency transactions |
| |
| | |||
Deferred income taxes |
| ( |
| ( | |||
Stock-based compensation |
| |
| | |||
Loss on disposal of property and equipment | | | |||||
Amortization of debt securities | | | |||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||
Accounts receivable |
| |
| | |||
Unbilled receivables and retentions |
| ( |
| | |||
Inventories |
| ( |
| ( | |||
Income taxes receivable | ( | — | |||||
Prepaid expenses and other assets |
| |
| ( | |||
Accounts payable |
| ( |
| ( | |||
Other liabilities | ( | ( | |||||
Net cash (used in) provided by operating activities |
| ( |
| | |||
Investing activities | |||||||
Acquisition of property and equipment |
| ( |
| ( | |||
Equity method investments | ( | ( | |||||
Business acquisitions, net of cash acquired | ( | — | |||||
Redemptions of available-for-sale investments |
| |
| | |||
Purchases of available-for-sale investments | ( | ( | |||||
Other | | — | |||||
Net cash used in investing activities |
| ( |
| ( | |||
Financing activities | |||||||
Principal payments of loan | ( | — | |||||
Holdback and retention payments for business acquisition | ( | ( | |||||
Tax withholding payment related to net settlement of equity awards | ( | ( | |||||
Exercise of stock options |
| |
| | |||
Other | ( | — | |||||
Net cash used in financing activities |
| ( |
| ( | |||
Effects of currency translation on cash and cash equivalents | ( | — | |||||
Net (decrease) increase in cash, cash equivalents, and restricted cash |
| ( |
| | |||
Cash, cash equivalents and restricted cash at beginning of period |
| |
| | |||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
Supplemental disclosures of cash flow information | |||||||
Cash paid, net during the period for: | |||||||
Income taxes | $ | | $ | | |||
Interest | $ | | $ | — | |||
Non-cash activities | |||||||
Unrealized loss on available-for-sale investments, net of deferred tax benefit of $ | $ | | $ | | |||
Change in foreign currency translation adjustments | $ | ( | $ | | |||
Issuances of inventory to property and equipment, ISR in-service assets | $ | | $ | — | |||
Acquisitions of property and equipment included in accounts payable | $ | | $ | | |||
See accompanying notes to consolidated financial statements (unaudited).
8
AeroVironment, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Organization and Significant Accounting Policies
Organization
AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, delivery and support of a technologically advanced portfolio of intelligent, multi-domain robotic systems and related services for government agencies and businesses. AeroVironment, Inc. supplies unmanned aircraft systems (“UAS”), tactical missile systems (“TMS”), unmanned ground vehicles (“UGV”) and related services primarily to organizations within the U.S. Department of Defense (“DoD”) and to international allied governments.
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 29, 2022 are not necessarily indicative of the results for the full year ending April 30, 2022. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2021, 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 unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The Company’s unaudited consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
On February 19, 2021, the Company closed its acquisition of Arcturus UAV, Inc. (“Arcturus”), a California corporation, pursuant to a Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus and each of the shareholders and other equity interest holders of Arcturus (collectively, the “Arcturus Sellers”), purchasing
On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation, a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date, by and among the Company, ISG Seller and the sole shareholder of ISG Seller (the “Beneficial Owner,” and such acquisition of ISG, the “ISG Acquisition”). The assets, liabilities and operating results of ISG have been included in the Company’s unaudited consolidated financial statements. Refer to Note 18—Business Acquisitions for further details.
On May 3, 2021, the Company closed its acquisition of Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company based in Ostfildern (near Stuttgart), Germany (“Telerob GmbH”), including Telerob GmbH’s wholly-owned
9
subsidiary, Telerob USA, Inc. (“Telerob USA,” and collectively with Telerob GmbH, “Telerob”) pursuant to its previously announced Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Seller (collectively, the “Telerob Shareholders”), to purchase 100% of the issued and outstanding shares of Telerob Seller’s wholly-owned subsidiary Telerob GmbH (the “Telerob Acquisition”). The assets, liabilities and operating results of Telerob GmbH have been included in the Company’s unaudited consolidated financial statements. Refer to Note 18—Business Acquisitions for further details.
On September 15, 2021, the Company entered into a Share Sale and Purchase Agreement (the “Purchase Agreement”) with Toygun Savunma Sanayi ve Havacilik Anonim Sirketi (“Toygun”) whereby the Company sold
Recently Adopted Accounting Standards
Effective May 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including removing the requirement to limit income tax expense (benefit) in an interim period to the full year projected amounts. The Company adopted ASU 2019-12 using the prospective method, applying the new guidance accounting for income taxes after adoption. The adoption of ASU 2019-12 did not have an impact on the Company’s consolidated financial statements.
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 (“TM”). The Company considers all such contracts to be within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
Performance Obligations
A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC 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 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
10
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 Research and Development contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue is recognized over time as services are rendered. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract services revenue, including revenue from intelligence, surveillance, and reconnaissance (“ISR”) services, is recognized over time as services are rendered. In accordance with ASC Topic 606, the Company elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed.
For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. The Company’s small UAS, medium UAS (“MUAS”) and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts, respectively. 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.
Performance obligations satisfied over time accounted for
On January 29, 2022, the Company had approximately $
The Company collects sales, value added, 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.
11
These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer.
The nature of the Company’s contracts gives rise to several types of variable consideration, including penalty fees and incentive awards generally for late delivery and early delivery, respectively. The Company generally estimates such variable consideration as the most likely amount. In addition, the Company includes the estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. Based on experience 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, and it is recorded in other current liabilities.
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 three or nine month periods ended January 29, 2022 and January 30, 2021.
Revenue by Category
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 29, | January 30, |
| January 29, | January 30, | ||||||||
Revenue by major product line/program | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Small UAS | $ | | $ | | $ | | $ | | |||||
TMS | | | | | |||||||||
MUAS | | — | | — | |||||||||
Other |
| |
| |
| |
| | |||||
Total revenue | $ | | $ | | $ | | $ | | |||||
Three Months Ended | Nine Months Ended | ||||||||||||
| January 29, | January 30, |
| January 29, | January 30, | ||||||||
Revenue by contract type | 2022 |
| 2021 | 2022 |
| 2021 | |||||||
FFP | $ | | $ | | $ | | $ | | |||||
CPFF | | | | | |||||||||
TM |
| |
| |
|
| |
| | ||||
Total revenue | $ | | $ | | $ | | $ | | |||||
12
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 TM 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 29, | January 30, |
| January 29, | January 30, | ||||||||
Revenue by customer category | 2022 |
| 2021 | 2022 |
| 2021 | |||||||
U.S. government | $ | | $ | | $ | | $ | | |||||
Non-U.S. government | | | | | |||||||||
Total revenue | $ | | $ | | $ | | $ | | |||||
Three Months Ended | Nine Months Ended | ||||||||||||
January 29, | January 30, | January 29, | January 30, | ||||||||||
Revenue by geographic location | 2022 |
| 2021 | 2022 |
| 2021 | |||||||
Domestic | $ | | $ | | $ | | $ | | |||||
International | | | | | |||||||||
Total revenue | $ | | $ | | $ | | $ | | |||||
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 29, 2022 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 and nine month periods ended January 29, 2022 that was included in contract liability balances at the beginning of April 30, 2021 was $
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 assess performance. As of January 29, 2022, the Company’s CODM, collectively the Chief Executive Officer and Chief Operations Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the allocation for research and development (“RD”). Accordingly, the Company identifies three reportable segments. Refer to Note 20—Segments for further details.
Subsequent to January 29, 2022, the Company's Chief Executive Officer functions as the CODM, concurrent with the stepping down of the Chief Operations Officer. The Company does not expect any changes to its reportable segments.
13
Restricted Cash
The Company classifies cash accounts which are not available for general use as restricted cash. Pursuant to the terms of the Arcturus Purchase Agreement, the Company maintains escrow accounts to address final purchase price adjustments post-Arcturus Closing, if any and to address Arcturus UAV’s and/or the Sellers’ indemnification obligations. The restricted funds in the escrow account are recorded in other assets on the consolidated balance sheet. As of January 29, 2022 and April 30, 2021 restricted cash was $
Investments
The Company’s investments are accounted for as available-for-sale and are reported at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes for available-for-sale investments. Gains and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.
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 TM 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 CPFF and TM contracts.
For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured. At January 29, 2022 and April 30, 2021, the Company had no reserve for incurred cost claim audits.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.
14
The reconciliation of basic to diluted shares is as follows (in thousands except share data):
Three Months Ended | Nine Months Ended |
| |||||||||||
| January 29, 2022 |
| January 30, 2021 |
| January 29, 2022 |
| January 30, 2021 |
| |||||
Net income (loss) attributable to AeroVironment, Inc. | $ | | $ | | $ | ( | $ | | |||||
Denominator for basic earnings (loss) per share: | |||||||||||||
Weighted average common shares |
| |
| |
| |
| | |||||
Dilutive effect of employee stock options, restricted stock and restricted stock units |
| |
| |
| — |
| | |||||
Denominator for diluted earnings (loss) 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
Recently Issued Accounting Standards
Accounting pronouncements issued but not effective until after January 29, 2022 are not expected to be applicable to the Company.
2. Discontinued Operations
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. 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 $
The Company was entitled to receive additional cash consideration of $
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. Under the terms of the Purchase Agreement, the Company may be responsible for certain costs of such recall of named products the Company manufactured, sold or serviced prior to the closing of the sale of the EES Business. On August 14, 2019, Benchmark Electronics, Inc. (“Benchmark”), the company that assembled the products subject to the recall, served a demand for arbitration to the Company and Webasto, and a third-party part supplier pursuant to its contracts with the Company and Webasto, respectively. The Company filed a responsive pleading in the Benchmark arbitration on October 29, 2019, consisting of a general denial, affirmative defenses, and a reservation of the right to file counter-claims at a later date. Webasto challenged the validity of the Benchmark arbitration by filing an action in New York Superior Court. In December 2019, Webasto and Benchmark reached a settlement of their disputed claims. Benchmark withdrew its Notice of Arbitration against Webasto and the Company, but reserved its right to pursue indemnity claims against suppliers.
15
On February 22, 2019, Webasto filed a lawsuit, which was amended in April 2019, alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures and failure to provide certain consents to contract assignments, and related to a previously announced product recall. Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $
In order to avoid the future cost, expense, and distraction of continued litigation, the Company engaged in settlement negotiations with Webasto in May 2021. While the negotiations did not result in a settlement of any of the Company’s or Webasto’s claims at such time, as a result of the settlement negotiations, the Company established a litigation reserve, which reflected the scope of a rejected offer intended to communicate the Company’s serious and good faith intention to attempt to reach a settlement for the stated purposes. The offer did not reflect the Company’s view of the merits of the claims made; however, as a result of the preparation of the good faith offer and the Company’s willingness to pursue settlement for that amount, the Company recorded litigation reserve expenses in the amount of $
3. Investments
Investments consist of the following (in thousands):
January 29, | April 30, | ||||||
| 2022 |
| 2021 |
| |||
Short-term investments: | |||||||
Available-for-sale securities: | |||||||
Municipal securities | | | |||||
U.S. government securities | — | | |||||
Corporate bonds | — | | |||||
Total short-term investments | $ | | $ | | |||
Long-term investments: | |||||||
Available-for-sale securities: | |||||||
Municipal securities | — | | |||||
U.S. government securities | — | | |||||
Total long-term available-for-sale investments |
| — |
| | |||
Equity method investments | |||||||
Investment in limited partnership fund |
| |
| | |||
Total equity method investments |
| |
| | |||
Total long-term investments | $ | | $ | | |||
Available-For-Sale Securities
As of January 29, 2022 and April 30, 2021, the balance of available-for-sale securities consisted of state and local government municipal securities, U.S. government securities, U.S. government agency securities, and investment grade
16
corporate bonds. Interest earned from these investments is recorded in interest income. Realized gains on sales of these investments on the basis of specific identification are recorded in interest (expense) income.
The following table is a summary of the activity related to the available-for-sale investments recorded in short-term and long-term investments as of January 29, 2022 and April 30, 2021, respectively (in thousands):
January 29, 2022 | ||||||||||||||
|
| Gross |
| Gross |
|
|
| |||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||
Cost | Gains | Losses | Value | |||||||||||
Municipal securities | $ | | $ | — | $ | ( | $ | | ||||||
Total available-for-sale investments | $ | | $ | — | $ | ( | $ | | ||||||
April 30, 2021 | |||||||||||||
Gross | Gross | ||||||||||||
Amortized | Unrealized | Unrealized | Fair |
| |||||||||
Cost |
| Gains | Losses |
| Value |
| |||||||
Municipal securities |
| $ | | $ | | $ | ( | $ | | ||||
U.S. government securities |
| | | — | | ||||||||
Corporate bonds |
| | — | ( | | ||||||||
Total available-for-sale investments |
| $ | |
| $ | | $ | ( |
| $ | | ||
The amortized cost and fair value of the available-for-sale debt securities by contractual maturity at January 29, 2022 were as follows (in thousands):
| Cost |
| Fair Value |
| |||
Due within one year | $ | | $ | | |||
Due after one year through five years |
| — |
| — | |||
Total | $ | | $ | | |||
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:
17
The Company’s financial assets measured at fair value on a recurring basis at January 29, 2022, were as follows (in thousands):
Fair Value Measurement Using |
| ||||||||||||
|
| Significant |
|
|
| ||||||||
Quoted prices in | other | Significant |
| ||||||||||
active markets for | observable | unobservable |
| ||||||||||
identical assets | inputs | inputs |
| ||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total |
| ||||||||
Available-for-sale securities | $ | — | $ | | $ | — | $ | | |||||
Contingently returnable consideration | — | — | | | |||||||||
Total | $ | — | $ | | $ | | $ | | |||||
The Company’s financial liabilities measured at fair value on a recurring basis at January 29, 2022, were as follows (in thousands):
Fair Value Measurement Using |
| ||||||||||||
|
| Significant |
|
|
| ||||||||
Quoted prices in | other | Significant |
| ||||||||||
active markets for | observable | unobservable |
| ||||||||||
identical assets | inputs | inputs |
| ||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total |
| ||||||||
Contingent consideration | $ | — | $ | — | $ | | $ | | |||||
Total | $ | — | $ | — | $ | | $ | | |||||
The Company’s financial assets measured at fair value on a recurring basis at April 30, 2021, were as follows (in thousands):
Fair Value Measurement Using | ||||||||||||
|
| Significant |
|
| ||||||||
Quoted prices in | other | Significant | ||||||||||
active markets for | observable | unobservable | ||||||||||
identical assets | inputs | inputs | ||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||
Available-for-sale securities | $ | — | $ | | $ | — | $ | | ||||
Contingently returnable consideration | — | — | | | ||||||||
Total | $ | — | $ | | $ | | $ | | ||||
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value
18
on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):
| Fair Value | Fair Value |
| ||||
Measurements Using | Measurements Using |
| |||||
Significant | Significant |
| |||||
Unobservable Inputs | Unobservable Inputs |
| |||||
Assets | Liabilities | ||||||
Description | (Level 3) | (Level 3) |
| ||||
Balance at May 1, 2021 | $ | | $ | — | |||
Business acquisition | — | | |||||
Transfers to Level 3 |
| — |
| — | |||
Included in selling, general and administrative | | — | |||||
Settlements |
| — |
| — | |||
Balance at January 29, 2022 | $ | | $ | | |||
The amount of total (gains) or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at January 29, 2022 | $ | — | $ | — | |||
The fair value measurement tables above have been corrected to present the fair value of the contingently returnable consideration associated with the acquisition of ISG of $
Pursuant to the ISG Purchase Agreement, the sellers may receive up to a maximum of $
Pursuant to the Telerob Purchase Agreement, the Telerob Sellers may receive up to a maximum of €
Refer to Note 18—Business Acquisitions.
19
5. Inventories, net
Inventories consist of the following (in thousands):
January 29, | April 30, | ||||||
| 2022 |
| 2021 |
| |||
Raw materials | $ | | $ | | |||
Work in process |
| |
| | |||
Finished goods |
| |
| | |||
Inventories, gross |
| |
| | |||
Reserve for inventory excess and obsolescence |
| ( |
| ( | |||
Inventories, net | $ | | $ | | |||
6. Equity Method Investments
In December 2017, the Company and SoftBank Corp. (“Softbank”) formed a joint venture, HAPSMobile Inc. (“HAPSMobile”), which is a Japanese corporation. Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile. As of January 29, 2022, the Company’s ownership stake in HAPSMobile was approximately
On May 29, 2021, the Company entered into an amendment to the DDA with HAPSMobile. The parties agreed to the amendment in anticipation of the Company and SoftBank entering into a Master Design and Development Agreement (“MDDA”) with each other to continue the design and development of the Solar High Altitude Pseudo-Satellite (“Solar HAPS”) aircraft developed under the DDA.
On May 29, 2021, the Company and SoftBank entered into a MDDA to continue the development of Solar HAPS. Pursuant to the MDDA, which has a
As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile pursuant to the applicable Joint Venture Agreement and related organizational documents, the Company’s investment is accounted for as an equity method investment. For the three and nine months ended January 29, 2022, the
20
Company recorded its proportionate net loss of HAPSMobile, or $
Investment in Limited Partnership Fund
In July 2019, the Company made its initial capital contribution to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets. During the nine months ended January 29, 2022 and January 30, 2021, the Company made additional contributions of $
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 on the unaudited consolidated balance sheet. The related expense is included in cost of sales.
Three Months Ended | Nine Months Ended | ||||||||||||
| January 29, | January 30, | January 29, | January 30, | |||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
Beginning balance | $ | | $ | | $ | | $ | | |||||
Balance acquired from acquisition | — | — | | — | |||||||||
Warranty expense |
| ( |
| |
| |
| | |||||
Warranty costs settled |
| ( |
| ( |
| ( |
| ( | |||||
Ending balance | $ | | $ | | $ | | $ | | |||||
21
8. Intangibles, net
The components of intangibles are as follows (in thousands):
January 29, | April 30, | ||||||
| 2022 |
| 2021 | ||||
Technology | $ | | $ | | |||
Licenses | | | |||||
Customer relationships | | | |||||
Backlog | | — | |||||
In-process research and development | | | |||||
Non-compete agreements | | | |||||
Trademarks and tradenames | | | |||||
Other | | | |||||
Intangibles, gross | | | |||||
Less accumulated amortization |
| ( |
| ( | |||
Intangibles, net | $ | | $ | | |||
The weighted average amortization period at January 29, 2022 and April 30, 2021 was and
Technology, backlog and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of Telerob on May 3, 2021. The intangibles recognized in conjunction with the acquisition of Telerob are recorded in Euros, and the balances change in accordance with the foreign currency translation at reporting date. Technology and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of Arcturus on February 19, 2021. Technology and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of ISG on February 23, 2021. Refer to Note 18—Business Acquisitions for further details.
Estimated amortization expense for the next five years is as follows (in thousands):
| Year ending |
| ||
April 30, |
| |||
2022 | $ | | ||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
2026 |
| | ||
$ | | |||
9. Goodwill
The following table presents the changes in the Company’s goodwill balance (in thousands):
Small UAS | TMS | MUAS | All other | Total | |||||||||||
Balance at April 30, 2021 | $ | | $ | — | $ | | $ | | $ | | |||||
Additions to goodwill | — | — | | | | ||||||||||
Impairment of goodwill | — | — | — | — | — | ||||||||||
Balance at January 29, 2022 | $ | | $ | - | $ | | $ | | $ | | |||||
The goodwill balance at April 30, 2021 is attributable to the acquisitions of Pulse, ISG, and Arcturus acquisitions. The MUAS addition to goodwill relates to measurement period adjustments for pre-acquisition tax returns. The addition to
22
All other goodwill is attributable to the Telerob acquisition, which was recorded in Euros and translated to dollars at each reporting date. Refer to Note 18—Business Acquisitions for further details.
10. Debt
In connection with the consummation of the Arcturus Acquisition on February 19, 2021, the Company, as borrower, and Arcturus, as guarantor, entered into a Credit Agreement with certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S. Bank National Association, as joint lead arrangers and joint bookrunners (the “Credit Agreement”).
The Credit Agreement and its associated Security and Pledge Agreement set forth the terms and conditions for (i) a
Any borrowing under the Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid under the Revolving Facility may be reborrowed. Mandatory prepayments are required under the revolving loans when borrowings and letter of credit usage exceed the aggregate revolving commitments of all lenders. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested and unpermitted debt transactions.
In support of its obligations pursuant to the Credit Facilities, the Company has granted security interests in substantially all of the personal property of the Company and its domestic subsidiaries, including a pledge of the equity interests in its subsidiaries (limited to
The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including certain restrictions on the ability of the Company and its subsidiaries (as defined in the Credit Agreement) to incur any additional indebtedness or guarantee indebtedness of others, to create liens on properties or assets, or to enter into certain asset and stock-based transactions. In addition, the Credit Agreement includes certain financial maintenance covenants, requiring that (x) the Consolidated Leverage Ratio (as defined in the Credit Agreement) shall not be more than
On February 4, 2022, the Company entered into a First Amendment to Credit Agreement and Waiver relating to its existing Credit Agreement (the “First Amendment to Credit Agreement”). The First Amendment to Credit Agreement waives any event of default that may have occurred as a result of the potential failure by the Company to comply with the consolidated leverage ratio covenant set forth in the Credit Agreement for the fiscal quarter ended January 29, 2022. In addition, the parties amended the maximum permitted Consolidated Leverage Ratio, such that such ratio may not exceed
The First Amendment to Credit Agreement also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from
23
LIBOR as a reference interest rate. Following the First Amendment to Credit Agreement, the Company has a choice of interest rates between (a) Term SOFR (with a
The Credit Agreement Amendment also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from LIBOR as a reference interest rate. Following the Credit Agreement Amendment, the Company has a choice of interest rates between (a) Term SOFR (with a
The Credit Agreement, as amended by the First Amendment to Credit Agreement, contains certain customary events of default, which include failure to make payments when due thereunder, the material inaccuracy of representations or warranties, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, certain judgments, certain ERISA-related events, invalidity of loan documents, or a Change of Control (as defined in the Credit Agreement). Upon the occurrence and continuation of an event of default, the Lenders may cease making future loans under the Credit Agreement and may declare all amounts owing under the Credit Agreement to be immediately due and payable.
Long-term debt and the current period interest rates were as follows:
Nine Months Ended | |||
January 29, | |||
2022 | |||
(In thousands) | |||
Term loans | $ | | |
Revolving credit facility | — | ||
Total debt | | ||
Less current portion | | ||
Total long-term debt, less current portion | | ||
Less unamortized debt issuance costs - term loans | | ||
Total long-term debt, net of unamortized debt issuance costs - term loans | $ | | |
Unamortized debt issuance costs - revolving credit facility | $ | | |
Current period interest rate | |||
24
Future long-term debt principal payments at January 29, 2022 were as follows:
(In thousands) | |||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
$ | | ||
11. Leases
The Company leases certain buildings, land and equipment. At contract inception the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are recorded in operating lease right-of-use assets, current operating lease liabilities and non-current operating lease liabilities on the unaudited consolidated balance sheet.
The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. The Company defines the initial lease term to include renewal options determined to be reasonably certain. The Company’s leases have remaining lease terms of less than
Many of the Company’s real estate lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, if the incentive is determined to be a leasehold improvement owned by the lessee, the Company generally records incentive as a reduction to fixed lease payments thereby reducing rent expense. For rent holidays and rent escalation clauses during the lease term, the Company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.
The Company does not have any material restrictions or covenants in its lease agreements, sale-leaseback transactions, land easements or residual value guarantees.
In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. Additionally, the Company makes judgments around contractual asset substitution rights in determining whether a contract contains a lease.
25
The components of lease costs recorded in cost of sales and selling, general and administrative (“SGA”) expense were as follows (in thousands):
Nine Months Ended | Nine Months Ended | |||||
January 29, | January 30, | |||||
| 2022 | 2021 | ||||
Operating lease cost | $ | | $ | | ||
Short term lease cost | | | ||||
Variable lease cost | | | ||||
Sublease income | ( | ( | ||||
Total lease costs, net | $ | | $ | | ||
Supplemental lease information were as follows:
Nine Months Ended | Nine Months Ended | |||||
January 29, | January 30, | |||||
| 2022 | 2021 | ||||
(In thousands) | (In thousands) | |||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | | $ | | ||
Right-of-use assets obtained in exchange for new lease liabilities | $ | | $ | | ||
Weighted average remaining lease term | ||||||
Weighted average discount rate | ||||||
Maturities of operating lease liabilities as of January 29, 2022 were as follows (in thousands):
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter | | ||
Total lease payments | | ||
Less: imputed interest | ( | ||
Total present value of operating lease liabilities | $ | |
12. Accumulated Other Comprehensive Income (Loss) and Reclassifications Adjustments
The components of accumulated other comprehensive income (loss) and adjustments are as follows (in thousands):
Nine Months Ended | Nine Months Ended | |||||
January 29, | January 30, | |||||
| 2022 |
| 2021 | |||
Balance, net of $ |
| $ | | $ | | |
Unrealized loss on available-for-sale investments, net of deferred tax benefit of $ | ( | ( | ||||
Change in foreign currency translation adjustments | ( | | ||||
Balance, net of $ |
| $ | ( | $ | | |
26
13. Customer-Funded Research Development
Customer-funded RD costs are incurred pursuant to contracts (revenue arrangements) to perform RD 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 RD contracts is recognized in accordance with Topic 606 over time as costs are incurred. Revenue from customer-funded RD was approximately $
14. Long-Term Incentive Awards
During the three months ended July 31, 2021, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2022 LTIP”). Awards under the Fiscal 2022 LTIP consist of: (i) time-based restricted stock awards and time-based restricted stock units, which vest in equal tranches in July 2022, July 2023 and July 2024, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the
During the three months ended August 1, 2020, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2021 LTIP”). Awards under the Fiscal 2021 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2021, July 2022 and July 2023, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the
During the three months ended July 27, 2019, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2020 LTIP”). Awards under the Fiscal 2020 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2020, July 2021 and July 2022, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the
27
$(
During the three months ended July 28, 2018, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2019 LTIP”). Awards under the Fiscal 2019 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2019, July 2020 and July 2021, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the
At each reporting period, the Company reassesses the probability of achieving the performance targets for the PRSUs. 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. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.
15. Income Taxes
For the three and nine months ended January 29, 2022, the Company recorded a benefit from income taxes of $(
16. Share Repurchase
In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $
17. 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. Under the DDA and related efforts with HAPSMobile, the Company designed and built prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conducted low altitude and high altitude flight tests of the prototype aircraft on a best efforts basis, up to a maximum net value of $
The Company recorded revenue under both the MDDA and DDA of $
28
receivables from HAPSMobile of $
18. Business Acquisitions
Telerob Acquisition
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to the terms of the Telerob Purchase Agreement. Telerob develops, manufactures, sells, and services remote-controlled unmanned ground robots and transport vehicles for civil and defense applications.
Pursuant to the Telerob Purchase Agreement at closing, the Company paid €
In addition to the consideration paid at closing, the Telerob Seller may receive €
29
The following table summarizes the provisional allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the acquisition of Telerob (in thousands):
May 3, | ||||
2021 | ||||
Fair value of assets acquired: | ||||
Accounts receivable |
| $ | | |
Unbilled receivable | | |||
Inventories, net | | |||
Prepaid and other current assets | | |||
Property and equipment, net | | |||
Operating lease assets | | |||
Other assets | | |||
Technology | | |||
Backlog | | |||
Customer relationships | | |||
Other intangible assets | | |||
Goodwill | | |||
Total assets acquired | $ | | ||
Fair value of liabilities assumed: | ||||
Accounts payable | $ | | ||
Wages and related accruals | | |||
Customer advances | | |||
Current operating lease liabilities | | |||
Other current liabilities | | |||
Non-current operating lease liabilities | | |||
Other non-current liabilities | | |||
Deferred income taxes | | |||
Total liabilities assumed | | |||
Total identifiable net assets | $ | | ||
Fair value of consideration: | ||||
Cash consideration, net of cash acquired | $ | | ||
Contingent consideration | | |||
Total | $ | | ||
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Telerob and expected future customers in the UGV market. For tax purposes the acquisition was treated as a stock purchase and the goodwill is not deductible.
30
Telerob Supplemental Pro Forma Information (unaudited)
The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2020 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
January 29, | January 30, | January 29, | January 30, | |||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Revenue | $ | | $ | | $ | | $ | | ||||
Net (loss) income attributable to AeroVironment, Inc. | $ | | $ | | $ | ( | $ | | ||||
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended August 1, 2020, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2020 with the consequential tax effects and including the results of Telerob prior to acquisition.
The Company incurred approximately $
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above as of May 1, 2020, nor are they indicative of results of operations that may occur in the future.
Arcturus Acquisition
On February 19, 2021, the Company closed its acquisition of Arcturus pursuant to the terms of the Arcturus Purchase Agreement. Arcturus, headquartered in Petaluma, California, designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems.
Pursuant to the Arcturus Purchase Agreement at the closing of the Arcturus Acquisition, the Company paid approximately $
The final cash consideration is subject to certain customary adjustments, including for net working capital, cash, debt and unpaid transaction expenses (including change in control related payments triggered by the transaction) of Arcturus at the Arcturus closing, less $
31
The following table summarizes the allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the acquisition of Arcturus (in thousands):
February 19, | ||||
2021 | ||||
Fair value of assets acquired: | ||||
Accounts receivable | $ | | ||
Unbilled receivable | | |||
Inventories, net | | |||
Prepaid and other current assets | | |||
Property and equipment, net | | |||
Operating lease assets | | |||
Other assets | | |||
Technology | | |||
Customer relationships | | |||
Goodwill | | |||
Total assets acquired | $ | | ||
Fair value of liabilities assumed: | ||||
Accounts payable | $ | | ||
Wages and related accruals | | |||
Customer advances | | |||
Other current liabilities | | |||
Operating lease liabilities | | |||
Other non-current liabilities | | |||
Deferred income taxes, net | | |||
Total liabilities assumed | | |||
Total identifiable net assets | $ | | ||
Fair value of consideration transferred: |
| |||
Cash consideration, net of cash acquired | $ | | ||
Equity consideration | | |||
Total consideration | $ | | ||
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s preliminary estimates of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Arcturus and expected future customers in the MUAS market. For tax purposes the acquisition was treated as a stock purchase and the goodwill is not deductible.
32
Arcturus Supplemental Pro Forma Information (unaudited)
The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
January 30, | January 30, | |||||||||||
|
| 2021 |
| 2021 | ||||||||
Revenue | $ | | $ | | ||||||||
Net income attributable to AeroVironment, Inc. | $ | ( | $ | | ||||||||
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 27, 2019, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2019 with the consequential tax effects, and including the results of Arcturus prior to acquisition.
The Company incurred approximately $
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above as of May 1, 2019, nor are they indicative of results of operations that may occur in the future.
ISG Acquisition
On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, ISG pursuant to the terms of the ISG Purchase Agreement. ISG is engaged in development of artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services to United States government customers.
In connection with the ISG Acquisition, the Company (i) paid a base purchase price of $
As a condition to closing pursuant to the ISG Purchase Agreement, the Company and the ISG Seller entered into certain ancillary agreements, including a transition services agreement and two subleases pursuant to which the ISG Seller will provide the Company certain services and facilities space to accommodate the transition of ISG to the Company.
The parties to the ISG Purchase Agreement have made representations, warranties, and covenants that are customary for a transaction of this type, including, among other things, restrictions on the ISG Seller and the Beneficial Owner from engaging in certain competitive activities, as well as mutual indemnification obligations between the Company and the ISG Seller. To supplement certain indemnifications provided by the ISG Seller, the Company obtained a representation and warranty insurance policy.
33
The following table summarizes the allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the ISG Acquisition (in thousands):
February 23, | ||||
2021 | ||||
Fair value of assets acquired: | ||||
Technology |
| $ | | |
Customer relationships | | |||
Other assets | | |||
Goodwill | | |||
Total identifiable net assets | $ | | ||
Fair value of consideration transferred: | ||||
Cash | $ | | ||
Holdback | | |||
Contingent consideration | | |||
Total consideration | $ | | ||
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s preliminary estimates of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers. For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.
ISG Supplemental Pro Forma Information (unaudited)
The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
January 30, | January 30, | |||||||||||
|
| 2021 |
| 2021 | ||||||||
Revenue | $ | | $ | | ||||||||
Net income attributable to AeroVironment, Inc. | $ | | $ | | ||||||||
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 27, 2019, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2019 with the consequential tax effects, and including the results of ISG prior to acquisition.
The Company incurred approximately $
34
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above as of May 1, 2019, nor are they indicative of results of operations that may occur in the future.
19. Pension
As part of the Telerob acquisition, the Company acquired a small foreign-based defined benefit pension plan. The Rheinmetall-Zusatzversorgung (“RZV”) service plan covers three former employees based on individual contracts issued to the employees. No other employees are eligible to participate. The Company has reinsurance policies were taken out for participating former employees, which were pledged to the employees. The measurement date for the Company’s pension plan was May 3, 2021 in conjunction with the acquisition.
The table below includes the projected benefit obligation and fair value of plan assets as of May 3, 2021. The net projected benefit obligation (in thousands) is recorded in other non-current liabilities on the unaudited consolidated balance sheet.
$ | ( | ||
Fair value of plan assets |
| | |
Unfunded status of the plan | $ | ( |
The projected benefit obligation includes assumptions of a discount rate of
Expected benefits payments as of May 3, 2021 (in thousands):
2022 | $ | | |
2023 | | ||
2024 |
| | |
2025 |
| | |
2026 | | ||
2027-2031 |
| | |
Total expected benefit payments | $ | |
Net periodic benefit cost (in thousands) is recorded in interest (expense) income, net.
Three Months Ended | Nine Months Ended | |||||
January 29, | January 29, | |||||
2022 | 2022 | |||||
(In thousands) | (In thousands) | |||||
Expected return on plan assets | $ | | $ | | ||
Interest cost |
| ( |
| ( | ||
Foreign currency exchange rate changes | | | ||||
Net periodic benefit cost | $ | | $ | | ||
35
20. Segments
The Company’s reportable segments are as follows:
Small Unmanned Aircraft Systems —The Small UAS segment focuses primarily on products designed to operate reliably at very low altitudes in a wide range of environmental conditions, providing a vantage point from which to collect and deliver valuable information as well as related support services including training, spare parts, product repair, product replacement, and the customer contracted operation.
Tactical Missile Systems – The TMS segment focuses primarily on TMS products, which are tube-launched aircraft that deploy with the push of a button, fly at higher speeds than small UAS products, and perform either effects delivery or reconnaissance missions, and related support services including training, spare parts, product repair, and product replacement. The TMS segment also includes customer-funded research and development programs.
Medium Unmanned Aircraft Systems—The MUAS segment, which originates with the acquisition of Arcturus, focuses on designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems including ISR services.
All other—All other segments include HAPS, MacCready Works and the recently acquired ISG and Telerob businesses.
The accounting policies of the segments are the same as those described in Note 1, “Organization and Significant Accounting Policies.” The operating segments do not make sales to each other. The following table (in thousands) sets forth segment revenue, gross margin, operating (loss) income and adjusted operating (loss) income from operations for the periods indicated. Adjusted operating (loss) income is defined as operating (loss) income before intangible amortization, amortization of purchase accounting adjustment related to increasing the carrying value of certain assets to fair value, and acquisition related expenses.
Three Months Ended January 29, 2022 | |||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Total | ||||||
Revenue | $ | | $ | | $ | | $ | | $ | | |||||
Gross margin | | | | | | ||||||||||
Income (loss) from operations | ( | ( | ( | ( | ( | ||||||||||
Acquisition-related expenses | | | | | | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | | - | | | | ||||||||||
Adjusted income (loss) from operations | $ | ( | $ | ( | $ | ( | $ | | $ | ( | |||||
Three Months Ended January 30, 2021 | |||||||||||||||
Small UAS |
| TMS |
| MUAS |
| All other |
| Total | |||||||
Revenue | $ | | $ | | $ | - | $ | | $ | | |||||
Gross margin | | | - | | | ||||||||||
Income (loss) from operations | | ( | - | ( | ( | ||||||||||
Acquisition-related expenses | | | | | | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | | - | - | | | ||||||||||
Adjusted income (loss) from operations | $ | | $ | ( | $ | | $ | ( | $ | | |||||
36
Nine Months Ended January 29, 2022 | |||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Total | ||||||
Revenue | $ | | $ | | $ | | $ | | $ | | |||||
Gross margin | | | | | | ||||||||||
Income (loss) from operations | | ( | ( | ( | ( | ||||||||||
Acquisition-related expenses | | | | | | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | | - | | | | ||||||||||
Adjusted income (loss) from operations | $ | | $ | ( | $ | ( | $ | | $ | | |||||
Nine Months Ended January 30, 2021 | |||||||||||||||
Small UAS |
| TMS |
| MUAS |
| All other |
| Total | |||||||
Revenue | $ | | $ | | $ | - | $ | | $ | | |||||
Gross margin | | | - | | | ||||||||||
Income (loss) from operations | | ( | - | ( | | ||||||||||
Acquisition-related expenses | | | | | | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | | - | - | - | | ||||||||||
Adjusted income (loss) from operations | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Segment assets are summarized in the table below. Corporate assets primarily consist of cash and cash equivalents, short-term investments, prepaid expenses and other current assets, long-term investments, property and equipment, net, operating lease right-of-use assets, deferred income taxes and other assets managed centrally on behalf of the business segments.
January 29, 2022 | |||||||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Corporate | Total | |||||||||
Identifiable assets | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
April 30, 2021 | |||||||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Corporate | Total | |||||||||
Identifiable assets | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
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, 2021, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”).
37
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, 2021.
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, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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 TMS product deliveries and customer-funded research and development contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, including ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts, respectively. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.
We review cost performance and estimates-to-complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in 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 29, 2022 and January 30, 2021, changes in accounting estimates on contracts recognized over time are presented below.
38
For the three months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):
Three Months Ended |
| ||||||
| January 29, |
| January 30, |
| |||
2022 | 2021 |
| |||||
Gross favorable adjustments | $ | 1,073 | $ | 428 | |||
Gross unfavorable adjustments |
| (1,704) |
| (228) | |||
Net (unfavorable) favorable adjustments | $ | (631) | $ | 200 | |||
For the three months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.1 million were primarily due to final cost adjustments on six 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 10 contracts, which individually were not material.
For the three months ended January 30, 2021, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on nine contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 12 contracts, which individually were not material.
For the nine months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):
Nine Months Ended |
| ||||||
| January 29, |
| January 30, |
| |||
2022 | 2021 |
| |||||
Gross favorable adjustments | $ | 1,156 | $ | 1,898 | |||
Gross unfavorable adjustments |
| (2,223) |
| (1,103) | |||
Net (unfavorable) favorable adjustments | $ | (1,067) | $ | 795 | |||
For the nine months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.2 million were primarily due to final cost adjustments on 18 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $2.2 million were primarily related to higher than expected costs on 15 contracts, which individually were not material.
For the nine months ended January 30, 2021, favorable cumulative catch-up adjustments of $1.9 million were primarily due to final cost adjustments on 15 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 23 contracts, which individually were not material.
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 2022 fiscal year ends on April 30, 2022 and our fiscal quarters end on July 31, 2021, October 30, 2021 and January 29, 2022, respectively.
39
Results of Operations
The following tables set forth our results of operations for the periods indicated (in thousands):
Three Months Ended January 29, 2022 Compared to Three Months Ended January 30, 2021
Three Months Ended |
| ||||||
| January 29, |
| January 30, |
| |||
2022 | 2021 |
| |||||
Revenue | $ | 90,093 | $ | 78,782 | |||
Cost of sales |
| 68,657 |
| 50,141 | |||
Gross margin |
| 21,436 |
| 28,641 | |||
Selling, general and administrative |
| 22,549 |
| 15,652 | |||
Research and development |
| 13,013 |
| 13,631 | |||
Loss from operations |
| (14,126) |
| (642) | |||
Other (loss) income: | |||||||
Interest (expense) income, net |
| (1,510) |
| 94 | |||
Other income (expense), net |
| 34 |
| (37) | |||
Loss before income taxes | (15,602) | (585) | |||||
Benefit from income taxes | (15,396) | (924) | |||||
Equity method investment income (loss), net of tax | 171 | (81) | |||||
Net (loss) income | $ | (35) | $ | 258 | |||
We operate the business as three reportable segments, Small Unmanned Aircraft Systems (“Small UAS”), Tactical Missile Systems (“TMS”) and Medium Unmanned Aircraft Systems (“MUAS”). The Small UAS segment consists of our existing small UAS product lines. The TMS segment consists of our existing tactical missile systems product lines. The MUAS segment consists of our recently acquired Arcturus business. All other includes HAPS, MacCready Works, which includes the recently acquired ISG and Telerob businesses. The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.
Three Months Ended January 29, 2022 | |||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Total | ||||||
Revenue | $ | 24,366 | $ | 18,603 | $ | 21,168 | $ | 25,956 | $ | 90,093 | |||||
Gross margin | 8,656 | 5,209 | 335 | 7,236 | 21,436 | ||||||||||
Income (loss) from operations | (3,606) | (1,289) | (8,623) | (608) | (14,126) | ||||||||||
Acquisition-related expenses | 99 | 54 | 41 | 174 | 368 | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | 707 | - | 5,641 | 3,035 | 9,383 | ||||||||||
Adjusted income (loss) from operations | $ | (2,800) | $ | (1,235) | $ | (2,941) | $ | 2,601 | $ | (4,375) | |||||
40
Three Months Ended January 30, 2021 | |||||||||||||||
Small UAS |
| TMS |
| MUAS |
| All other |
| Total | |||||||
Revenue | $ | 50,536 | $ | 19,598 | $ | - | $ | 8,648 | $ | 78,782 | |||||
Gross margin | 22,017 | 4,889 | - | 1,735 | 28,641 | ||||||||||
Income (loss) from operations | 6,702 | (2,314) | - | (5,030) | (642) | ||||||||||
Acquisition-related expenses | 1,408 | 773 | 477 | 750 | 3,408 | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | 661 | - | - | 1 | 662 | ||||||||||
Adjusted income (loss) from operations | $ | 8,771 | $ | (1,541) | $ | 477 | $ | (4,279) | $ | 3,428 | |||||
The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying unaudited consolidated statements of operations:
Three Months Ended | Nine Months Ended |
| |||||||||||
| January 29, |
| January 30, | January 29, |
| January 30, |
| ||||||
2022 | 2021 | 2022 | 2021 |
| |||||||||
Cost of sales: | |||||||||||||
Product sales | $ | 2,359 | $ | 624 | $ | 6,346 | $ | 1,919 | |||||
Contract services |
| 2,762 |
| — |
| 8,265 |
| — | |||||
Selling, general and administrative | 4,262 | 38 | 14,226 | 118 | |||||||||
Total | $ | 9,383 | $ | 662 | $ | 28,837 | $ | 2,037 | |||||
Revenue. Revenue for the three months ended January 29, 2022 was $90.1 million, as compared to $78.8 million for the three months ended January 30, 2021, representing an increase of $11.3 million, or 14%. The increase in revenue was due to an increase in service revenue of $27.1 million, partially offset by a decrease in product revenue of $15.7 million. The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021 and increases in revenue from customer-funded research and development efforts, partially offset by a decrease in TMS service revenue. The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset by an increases in UGV product revenue, resulting from our acquisitions of Telerob.
Cost of Sales. Cost of sales for the three months ended January 29, 2022 was $68.7 million, as compared to $50.1 million for the three months ended January 30, 2021, representing an increase of $18.5 million, or 37%. The increase in cost of sales was a result of an increase in service cost of sales of $25.0 million, partially offset by a decrease in product costs of sales of $6.5 million. The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments. The decrease in product costs of sales was primarily due to a decrease in product revenue and an unfavorable product mix, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments. Cost of sales for the three months ended January 29, 2022 included $5.1 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $0.6 million for the three months ended January 30, 2021. As a percentage of revenue, cost of sales increased from 64% to 76%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.
Gross Margin. Gross margin for the three months ended January 29, 2022 was $21.4 million, as compared to $28.6 million for the three months ended January 30, 2021, representing a decrease of $7.2 million, or 25%. The decrease in gross margin was due to a decrease in product margin of $9.3 million, partially offset by an increase in service margin of $2.1 million. The decrease in product margin was primarily due to the decrease in product sales, an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix. The increase in service margin was primarily due to an increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments. As a percentage of revenue, gross margin decreased
41
from 36% to 24%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally has lower gross margins than our product sales, in future quarters as compared to our historical trends.
Selling, General and Administrative. SGA expense for the three months ended January 29, 2022 was $22.5 million, or 25% of revenue, as compared to SGA expense of $15.7 million, or 20% of revenue, for the three months ended January 30, 2021. The increase in SGA expense was primarily due to an increase in intangible amortization and acquisition related expenses and an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions, partially offset by a decrease in bonus and equity based compensation expense. SGA included $4.8 million and $3.5 million of acquisition-related expenses and intangible amortization expenses for the three months ended January 29, 2022 and January 30, 2021, respectively.
Research and Development. RD expense for the three months ended January 29, 2022 was $13.0 million, or 14% of revenue, as compared to RD expense of $13.6 million, or 17% of revenue, for the three months ended January 30, 2021. RD expense decreased by $0.6 million, or 5%, for the three months ended January 29, 2022, primarily due to a decrease in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.
Interest (Expense) Income, net. Interest expense, net for the three months ended January 29, 2022 was $1.5 million compared to interest income, net of $0.1 million for the three months ended January 30, 2021. The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other Income (Expense), net. Other income, net, for the three months ended January 29, 2022 was $34 thousand compared to other expense, net of $37 thousand for the three months ended January 30, 2021.
Benefit from Income Taxes. Our effective income tax rate was 98.7% for the three months ended January 29, 2022, as compared to 157.9% for the three months ended January 30, 2021. The decrease in the effective income tax rate was primarily due to a change in estimate during the current quarter to reduce projected annual income (loss) before income taxes, combined with the year over year decrease in projected annual income (loss) before income taxes.
Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the three months ended January 29, 2022 was $0.2 million compared to a loss of $(0.1) million for the three months ended January 30, 2021. The equity method investment income during the current quarter was due to an increase in income from our limited partnership investment.
42
Nine Months Ended January 29, 2022 Compared to Nine Months Ended January 30, 2021
Nine Months Ended |
| ||||||
| January 29, |
| January 30, |
| |||
2022 | 2021 |
| |||||
Revenue | $ | 313,110 | $ | 258,897 | |||
Cost of sales |
| 220,496 |
| 153,994 | |||
Gross margin |
| 92,614 |
| 104,903 | |||
Selling, general and administrative | 74,496 | 42,640 | |||||
Research and development |
| 41,018 |
| 36,710 | |||
(Loss) income from operations |
| (22,900) |
| 25,553 | |||
Other (loss) income: |
|
| |||||
Interest (expense) income, net | (4,164) | 417 | |||||
Other (expense) income, net |
| (10,360) |
| 68 | |||
(Loss) income before income taxes |
| (37,424) |
| 26,038 | |||
(Benefit from) provision for income taxes |
| (25,864) |
| 2,774 | |||
Equity method investment income (loss), net of tax |
| 163 |
| (10,891) | |||
Net (loss) income | $ | (11,397) | $ | 12,373 | |||
The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.
Nine Months Ended January 29, 2022 | |||||||||||||||
| Small UAS |
| TMS |
| MUAS |
| All other |
| Total | ||||||
Revenue | $ | 119,004 | $ | 56,197 | $ | 70,072 | $ | 67,837 | $ | 313,110 | |||||
Gross margin | 53,330 | 17,420 | 5,739 | 16,125 | 92,614 | ||||||||||
Income (loss) from operations | 11,729 | (1,705) | (22,004) | (10,920) | (22,900) | ||||||||||
Acquisition-related expenses | 819 | 468 | 1,533 | 1,649 | 4,469 | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | 2,121 | - | 17,190 | 9,526 | 28,837 | ||||||||||
Adjusted income (loss) from operations | $ | 14,669 | $ | (1,237) | $ | (3,281) | $ | 255 | $ | 10,406 | |||||
Nine Months Ended January 30, 2021 | |||||||||||||||
Small UAS |
| TMS |
| MUAS |
| All other |
| Total | |||||||
Revenue | $ | 165,003 | $ | 48,093 | $ | - | $ | 45,801 | $ | 258,897 | |||||
Gross margin | 79,195 | 12,752 | - | 12,956 | 104,903 | ||||||||||
Income (loss) from operations | 37,285 | (7,454) | - | (4,278) | 25,553 | ||||||||||
Acquisition-related expenses | 1,579 | 867 | 535 | 841 | 3,822 | ||||||||||
Amortization of acquired intangible assets and other purchase accounting adjustments | 2,037 | - | - | - | 2,037 | ||||||||||
Adjusted income (loss) from operations | $ | 40,901 | $ | (6,587) | $ | 535 | $ | (3,437) | $ | 31,412 | |||||
Revenue. Revenue for the nine months ended January 29, 2022 was $313.1 million, as compared to $258.9 million for the nine months ended January 30, 2021, representing an increase of $54.2 million, or 21%. The increase in revenue was due to an increase in service revenue of $69.7 million, partially offset by a decrease in product revenue of $15.5 million. The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and small UAS service revenue, partially offset by a decrease in TMS service revenue. The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset
43
by an increase in TMS revenue, an increase in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus, respectively.
Cost of Sales. Cost of sales for the nine months ended January 29, 2022 was $220.5 million, as compared to $154.0 million for the nine months ended January 30, 2021, representing an increase of $66.5 million, or 43%. The increase in cost of sales was a result of an increase in service cost of sales of $67.7 million, partially offset by a decrease in product costs of sales of $1.2 million. The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments. The decrease in product costs of sales was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments. Cost of sales for the nine months ended January 29, 2022 included $14.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $1.9 million for the nine months ended January 30, 2021. As a percentage of revenue, cost of sales increased from 59% to 70%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.
Gross Margin. Gross margin for the nine months ended January 29, 2022 was $92.6 million, as compared to $104.9 million for the nine months ended January 30, 2021, representing a decrease of $12.3 million, or 12%. The decrease in gross margin was due to a decrease in product margin of $14.3 million, partially offset by an increase in service margin of $2.0 million. The decrease in product margin was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments. The increase in service margin was primarily due to the increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments. As a percentage of revenue, gross margin decreased from 41% to 30%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally has lower gross margins than our product sales, in future quarters as compared to our historical trends.
Selling, General and Administrative. SGA expense for the nine months ended January 29, 2022 was $74.5 million, or 24% of revenue, as compared to SGA expense of $42.6 million, or 16% of revenue, for the nine months ended January 30, 2021. The increase in SGA expense was primarily due to an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions and an increase in intangible amortization and acquisition related expenses. SGA included $19.3 million and $3.9 million of acquisition-related expenses and intangible amortization expenses for the nine months ended January 29, 2022 and January 30, 2021, respectively.
Research and Development. RD expense for the nine months ended January 29, 2022 was $41.0 million, or 13% of revenue, as compared to RD expense of $36.7 million, or 14% of revenue, for the nine months ended January 30, 2021. RD expense increased by $4.3 million, or 12%, for the nine months ended January 29, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.
Interest (Expense) Income, net. Interest expense, net for the nine months ended January 29, 2022 was $4.2 million compared to interest income, net of $0.4 million for the nine months ended January 30, 2021. The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other (Expense) Income, net. Other expense, net, for the nine months ended January 29, 2022 was $10.4 million compared to other income, net of $0.1 million for the nine months ended January 30, 2021. The increase was due to an additional legal accrual of $10.0 million associated with the settlement of all claims made by the buyers of our former EES business.
(Benefit from) Provision for Income Taxes. Our effective income tax rate was 69.1% for the nine months ended January 29, 2022, as compared to a provision for 10.7% for the nine months ended January 30, 2021. The increase in the
44
effective income tax rate was primarily due to lower projected annual income (loss) before income taxes in the current fiscal year as compared to the prior fiscal year.
Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the nine months ended January 29, 2022 was $0.2 million compared to equity method investment loss, net of tax of $10.9 million for the nine months ended January 30, 2021. The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC during the three months ended October 31, 2020. During the nine months ended January 29, 2022 equity method income from our limited partnership investment were largely offset by equity method losses from HAPSMobile.
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 29, 2022, our funded backlog was approximately $226.3 million.
In addition to our funded backlog, we also had unfunded backlog of $143.4 million as of January 29, 2022. 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 (i) multiple one-year options and indefinite delivery, indefinite quantity (“IDIQ”) contracts, or (ii) incremental funding. Unfunded backlog does not obligate the customer 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, with the exception of the remaining potential value of the Flight Control Systems (“FCS”) domain, does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because values for each of the other domains within the contract have not been disclosed by the customer, and we cannot be certain that we will secure all 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.
45
Liquidity and Capital Resources
On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into a Credit Agreement for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit, and (ii) a five-year amortized $200 million term A loan (together the “Credit Facilities”). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 10—Debt to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. In addition, Telerob has a line of credit of €5.5 million available for issuing letters of credit of which €1.6 million ($1.8 million) was outstanding as of January 29, 2022.
The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. On February 4, 2022, the Company entered into a First Amendment to Credit Agreement and Waiver relating to its existing Credit Agreement (the “First Amendment to Credit Agreement”). The First Amendment to Credit Agreement waives any event of default that may have occurred as a result of the potential failure by the Company to comply with the consolidated leverage ratio covenant set forth in the agreement for the Credit Facilities for the fiscal quarter ended January 29, 2022. In addition, the parties amended the maximum permitted Consolidated Leverage Ratio, such that such ratio may not exceed 4.00 to 1.00 for the Company’s fiscal quarters ended January 29, 2022 and April 30, 2022; 3.50 to 1.00 for any of the Company’s fiscal quarters ending during the period from May 1, 2022 to October 31, 2022; and 3.00 to 1.00 for any fiscal quarter ending thereafter, and adjusted various supporting definitions for clarity. The First Amendment to Credit Agreement also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from LIBOR as a reference interest rate. We expect to be in compliance with all financial covenants under the terms of our Credit Agreement, including the First Amendment, during the quarter ending April 30, 2022.
We anticipate funding our normal recurring trade payables, accrued expenses, ongoing RD costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities, including those provided by our recent acquisitions of Arcturus UAV, ISG and Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures and/or draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, and marketing acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
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
46
typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents.
In December 2021, we agreed in principle subject to formal written documentation with Webasto to settle all existing claims related to the sale of our former EES business for $20 million and allowing Webasto to keep the $6.5 million holdback amount. Under the terms of the settlement agreement entered into effective December 16, 2021, payment of the settlement amount will occur over a 24 month period from the date of execution of the settlement agreement. As of January 29, 2022, $5 million of the settlement has been paid.
Although not material in value alone or in aggregate, we made certain commitments outside of the ordinary course of business. We made commitments for capital contributions to a limited partnership fund. Under the terms of the limited partnership agreement, we have made all of the committed contributions totaling $10.0 million to the fund at January 29, 2022. We also made commitments to lend HAPSMobile funds to continue the development of Solar HAPS. The Company committed to and lent 500 million yen ($4.6 million) as of January 29, 2022. As of January 29, 2022, there are no further lending commitments to HAPSMobile. On March 1, 2022, HAPSMobile repaid the loan in full plus accrued interest in the amount of 503.8 million yen ($4.3 million).
Cash Flows
The following table provides our cash flow data for the nine months ended January 29, 2022 and January 30, 2021 (in thousands):
Nine Months Ended | |||||||
January 29, | January 30, | ||||||
| 2022 |
| 2021 |
| |||
(Unaudited) | |||||||
Net cash (used in) provided by operating activities | $ | (23,176) | $ | 78,962 | |||
Net cash used in investing activities | $ | (37,009) | $ | (6,200) | |||
Net cash used in financing activities | $ | (11,914) | $ | (3,361) | |||
Cash (Used in) Provided by Operating Activities. Net cash used in operating activities for the nine months ended January 29, 2022 increased by $102.1 million to $23.1 million, as compared to net cash provided by operating activities of $79.0 million for the nine months ended January 30, 2021. The increase in net cash used in operating activities was primarily due to a decrease in net income of $23.8 million and a decrease in cash as a result of changes in operating assets and liabilities of $112.5 million, largely related to accounts receivable, unbilled retentions and receivables, income taxes receivable and inventories due to year over year timing differences, partially offset by an increase in depreciation and amortization of $39.0 million.
Cash Used in Investing Activities. Net cash used in investing activities increased by $30.8 million to $37.0 million for the nine months ended January 29, 2022, as compared to net cash used by investing activities of $6.2 million for the nine months ended January 30, 2021. The increase in net cash used in investing activities was primarily due an increase in cash used for the acquisition of Telerob of $46.2 million and a decrease in redemptions of available-for-sale investments of $94.2 million, partially offset by a decrease in purchases of available-for-sale investments of $122.7 million.
Cash Used in Financing Activities. Net cash used in financing activities increased by $8.6 million to $11.9 million for the nine months ended January 29, 2022, as compared to net cash used by financing activities of $3.4 million for the nine months ended January 30, 2021. The increase in net cash used by financing activities was primarily due to an increase in payments of loan principal of $7.5 million and an increase in holdback and retention payments related to business acquisitions of $4.5 million.
47
Contractual Obligations
During the three and nine months ended January 29, 2022, 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, 2021.
Off-Balance Sheet Arrangements
As of January 29, 2022, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.
Inflation
Our operations have not been materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs. As it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we cannot assure you that our results of operations and financial condition will not be materially impacted by inflation in the future. See Part II, Item 1A “Risk Factors” below – “Significant inflation could adversely affect our business and financial results.”
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 29, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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. On February 19, 2021 in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Facilities. The current outstanding balance of the Credit Facilities is $192.5 million and bears a variable interest rate. If market interest rates increase significantly, interest due on the Credit Facilities would increase.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions. With the acquisition of Telerob, a portion of our cash balance is denominated in Euros which is Telerob’s functional currency.
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, 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.
48
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 29, 2022, 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 29, 2022, 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
On February 19, 2021 and May 3, 2021, we acquired Arcturus and Telerob, respectively, and, as a result, we have begun integrating certain processes, systems and controls relating to Arcturus and Telerob into our existing system of internal control over financial reporting in accordance with our integration plans. We do not believe these represent a material change. 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 29, 2022 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).
49
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 22, 2019, Webasto filed a lawsuit, which was subsequently amended on April 5, 2019, against us in Delaware Superior Court, arising from the sale of the EES Business to Webasto in June 2018. Webasto again amended the complaint in May 2021 to include additional claims. The lawsuit generally alleges several claims against us for breach of contract, indemnity, declaratory judgment, and fraud and misrepresentation, including allegations regarding inaccuracy of certain diligence disclosures, financial disclosures, failure to provide certain consents to contract assignments and related to the previously announced recall. Webasto seeks to recover the costs of the recall and other damages totaling over $100 million in addition to attorneys’ fees, costs, and punitive damages. Additionally, Webasto is seeking a declaratory judgment that we did not meet the requirements to receive the additional $6.5 million of the purchase price which was held back at the closing of the transaction (the “Holdback Amount”). On August 16, 2019, we filed our answer to Webasto’s amended complaint filed in April 2019 and a counterclaim against Webasto seeking payment of the Holdback Amount and declaratory relief regarding Webasto’s cancellation of an assigned contract. On June 2, 2021, we filed an answer to Webasto’s second amended complaint filed in May 2021.
In order to avoid the future cost, expense, and distraction of continued litigation, we executed a written settlement agreement with Webasto effective December 16, 2021, under which we did not admit to any fault or wrongdoing and fully settled all claims in the lawsuit. The lawsuit was dismissed on December 28, 2021.
On August 9, 2021, a former employee filed a class action complaint against AeroVironment in California Superior Court in Los Angeles, California alleging various claims pursuant to the California Labor Code related to wages, meal breaks, overtime and other recordkeeping matters. The complaint seeks a jury trial and payment of various alleged unpaid wages, penalties, interest and attorneys’ fees in unspecified amounts. We filed our answer on December 16, 2021. Discovery in this lawsuit has begun and is ongoing. We continue to mount a vigorous defense.
We are subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.
ITEM 1A. RISK FACTORS
Except as set for 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, 2021. Please refer to that section for disclosures regarding the risks and uncertainties related to our business.
If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.
We obtain hardware components, various subsystems and systems from a limited group of suppliers, some of which are sole source suppliers. Although we hold long term non-binding contracts with certain key suppliers that establishes pricing, minimizes lead times and to some degree mitigates risk, we do not have long-term agreements with all suppliers that obligate them to continue to sell components, products required to build our systems or products to us. Our reliance on suppliers without long term non-binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality, will increase prices for the components or products and will perform their obligations on a timely basis.
In addition, certain raw materials and components used in the manufacture of our products and in our development programs are periodically subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. Particularly, the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ ongoing timely delivery of
50
these components to us. In the quarter ended January 29, 2022, we experienced delays in receiving of certain electronic components for our product lines resulting from the global shortage and began experiencing delays in receiving other components for our products, which caused delays in production and development programs and negatively affected our revenue and results for the period and could negatively impact our revenue and results in future periods. We expect shortages in certain critical components to continue through at least the remainder of our fiscal year 2022. Should such shortages of components continue or additional shortages occur and we are unable to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may be impaired in our ability to execute development programs on schedule or deliver products on a timely or cost-effective basis to our customers. Shortages in components for our products and delays in obtaining components for our products could cause customers to terminate their contracts with us, delay orders from us or cause us to delay accepting orders, negatively impact our ability to win new programs and/or contracts, negatively impact and disrupt our development programs, increase our costs and seriously harm our business, results of operations and financial condition. Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers. Even if we identify alternate suppliers, we may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish such alternative sources, are required to redesign our products and to complete additional quality control procedures. We have experienced increased costs for components, as well as increased shipping, warehousing and inventory costs. We cannot predict the extent to which these costs will continue and/or continue to increase or if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all.
In particular, governmental measures responsive to the global COVID-19 pandemic have disrupted manufacturing and some supply chains, including our supply chain, which has had, and is expected to continue to have, a significant impact, both direct and indirect, on businesses and commerce worldwide, including our business and operations. We have experienced delays in obtaining certain key components and while we have sought to keep stock of all our raw materials and other product components with long lead times to assist in the event that our supply chain is disrupted, the prolonged outbreak of COVID-19 and the related global supply chain shortages have depleted our on-hand stock of certain components and continues to deplete our reserves of other components, which if the COVID-19 outbreak continues and results in an additional commercial and/or governmental restrictions, may continue to impact our ability to obtain certain raw materials and certain components used in the manufacture of our products and in our development programs.
A decline in the U.S. and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.
Because we generate a significant portion of our total sales, including our small and medium UAS and TMS sales, from the U.S. government and its agencies, our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well as by delays in the government budget process, program starts, or the award of contracts or orders under existing contracts. As a result, our business may be impacted due to shifts in the political environment and changes in the government and agency leadership positions under the new U.S. administration. We cannot assure you that current levels of congressional funding for our products and services will continue and that our business will not decline. If annual budget appropriations or continuing resolutions are not enacted timely, we could face U.S. government shutdowns, which could adversely impact our programs and contracts with the U.S. government, our ability to receive timely payment from U.S. government entities and our ability to timely obtain export licenses for our products to fulfill contracts with our international customers.
Additionally, there is a possibility that political decisions made by the new U.S. administration, such as changes in prior military commitments, including the withdrawal from Afghanistan, or an impasse on policy issues, could impact future spending and program authorizations, which may not increase or may decrease or shift to programs in areas in which we do not provide products or services or are less likely to be awarded contracts. Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs due to, among other factors, competing demands for federal funds and the number and intensity of military conflicts.
51
Military transformation and changes in overseas operational levels may affect future procurement priorities and existing programs, which could limit demand for our UAS.
With the inception of the global war on terror, operational activity in the US-CENTCOM combatant command area of operations led to broad deployment and increased demand for UAS and TMS products, training and spares. Over the course of the prior six years, the tempo of Department of Defense counterinsurgency operations receded, reducing demand for certain of our small UAS and TMS products, training and spares from prior levels. We cannot predict whether the reduction in overseas operational levels will continue, how future procurement priorities related to defense transformation will be impacted or how changes in the threat environment will impact opportunities and competition for our UAS and TMS products and our ISR services, in terms of existing, additional or replacement programs. If defense transformation or overseas operations slow down further or cease in key operational areas, then our business, financial condition and results of operations could be impacted negatively.
The operations tempo in the U.S. Department of Defense both of training and deployments, both domestically and overseas, has reduced as a result of the COVID-19 pandemic. This has negatively affected demand for spares, repairs, and replacement product ordinarily required for the operation and maintenance of our UAS products. We cannot predict whether this reduction in demand will continue and to the extent it may cause an adverse impact on our results of operations.
We face various risks related to the COVID-19 novel coronavirus pandemic and similar public health crises which may adversely impact our business.
In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China, and has reached multiple other regions and countries, including the United States and, more specifically, Southern California, where our primary operations are located. The coronavirus pandemic is evolving, and to date has led to the implementation of various responses and evolving public health safety measures. Although our operations have mostly continued uninterrupted during the COVID-19 outbreak, adoption of work from home protocols, social distancing measures in the workplace, international travel restrictions, vaccine mandates and other responsive actions have required certain changes to our operations. In particular, additional surges in infection rates and resulting travel disruptions, quarantine requirements or other similar logistics restrictions, may further reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations. Further, the applicability of a vaccine requirement to our workforce has been met with varying levels of support and resistance, creating tensions in an already competitive labor market.
Global health concerns, such as the coronavirus pandemic, could result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate. It is not currently possible to ascertain the overall impact of the COVID-19 outbreak, if any, on our business. The extent to which COVID-19 impacts on our business, financial condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19, new and potentially more contagious variants of the SARS-CoV-2 virus, rates of vaccination, government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which remain highly uncertain.
We cannot presently predict the scope and severity of existing and other potential business disruptions, but if we or any of the third parties with whom we engage, including suppliers and other third parties with whom we conduct business, were to experience prolonged shutdowns or other business disruptions, including a slowdown in the effectiveness of our workforce due to illness or otherwise, our ability to conduct our business in the manner presently planned could be materially and negatively impacted. The COVID-19 outbreak has caused delays in the timing of our customers’ awarding of contracts to us, which has begun to have some negative impact on our business for fiscal year 2022; there can be no assurances that any further delays would not have a material adverse impact on our business and results of operations in the future.
52
The COVID-19 pandemic could also cause delays or limits in the ability of our customers to make timely payments to us. Additionally, our government customers may have more limited resources available to purchase our products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic. The future progression of the COVID-19 outbreak and its resulting effects on our business, financial condition and results of operations are uncertain and are continuing to be assessed.
We must recruit and retain highly-skilled employees to succeed in our competitive business.
We depend on our ability to recruit and retain employees who have advanced engineering and technical services skills and who work well with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. The current tight labor market has adversely impacted our ability to recruit qualified personnel, including engineers. If we are unable to recruit and retain a sufficient number of these employees, then our ability to maintain our competitiveness and grow our business could be negatively affected. In addition, because of the highly technical nature of our products, the loss of any significant number of our existing engineering personnel could have a material adverse effect on our business and operating results. Moreover, some of our U.S. government contracts contain provisions requiring us to staff a program with certain personnel the customer considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutes, the customer may terminate the contract. We have experienced shortages of skilled employees that has negatively affected our progress on development programs and our results of operations. We cannot predict the extent to which these shortages will continue or the extent to which they could negatively impact our development programs and results of operations in future periods.
In September 2021, in furtherance of an executive order issued by President Biden, the U.S. Safer Federal Workforce Task Force issued guidance that generally requires that employees of U.S. government contractors receive COVID-19 vaccinations, unless an employee requests and receives a medical or religious accommodation. The mandate is subject to various legal proceedings. While the loss of certain employees due to this vaccine mandate, as well our own vaccine requirements for our employees, has not had a significant impact on our operations to date, our ability to recruit skilled employees in the future may be negatively impacted by vaccine mandates.
Significant inflation could adversely affect our business and financial results.
Although historically our operations have not been materially affected by inflation and we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs, the rate of current inflation and resulting pressures on our costs and pricing could adversely impact our business and financial results. Inflation can adversely affect us by increasing our operating costs, including our materials, freight and labor costs, which are already under pressure due to supply chain constraints and the continuing effects of the COVID-19 pandemic. As interest rates rise to address inflation, such increases will also impact the base rates applicable in our credit arrangements and will result in borrowed funds becoming more expensive to us over time; similar financing pressures from inflation also can have a negative impact on customers’ willingness to purchase our products in the same volumes and at the same rates as previously anticipated. In a highly inflationary environment, we may be unable to raise the sales prices of our products at or above the rate of inflation, which could reduce our profit margins having a material adverse effect on our financial performance.
ITEM 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 $25.0 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 Share Repurchase 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
53
our Board of Directors. No shares were repurchased in the nine months ended January 29, 2022. As of January 29, 2022, approximately $21.2 million remained authorized for future repurchases under the Share Repurchase Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
54
ITEM 6. EXHIBITS
Exhibit |
| Description |
3.1(1) | Amended and Restated Certificate of Incorporation of AeroVironment, Inc. | |
3.2(2) | Third Amended and Restated Bylaws of AeroVironment, Inc., amended as of February 25, 2022 | |
10.1*(3) | ||
10.2*(3) | ||
10.3*(3) | ||
10.4*(3) | ||
10.5*(3) | ||
10.6*(3) | ||
10.7 | ||
31.1 | ||
31.2 | ||
32# | ||
101.INS | XBRL Instance Document – The instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File formatted as Inline XBRL and contained in Exhibit 101 |
| (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 3.1 to the Company’s Current Report on Form 8‑K filed March 3, 2022 (File No. 001‑33261). |
| (3) | Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-8 (File No. 333-260227) |
* Indicates management contract or compensatory plan.
# 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
55
(including this report), unless the Company specifically incorporates the foregoing information into those documents by reference.
SIGNATURES
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.
Date: March 3, 2022 | AEROVIRONMENT, INC. | |
By: | /s/ Wahid Nawabi | |
Wahid Nawabi | ||
Chairman, President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ Kevin P. McDonnell | ||
Kevin P. McDonnell | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
/s/ Brian C. Shackley | ||
Brian C. Shackley | ||
Vice President and Chief Accounting Officer | ||
(Principal Accounting Officer) |
56