avav_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended October  28, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           

 

Commission File Number: 001-33261

 


 

AEROVIRONMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2705790

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

800 Royal Oaks Drive, Suite 210

 

 

Monrovia, California

 

91016

(Address of principal executive offices)

 

(Zip Code)

 

(626) 357-9983

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if 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 ☐  No ☒

 

As of November  28, 2017, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,870,182.

 

 

 

 


 

Table of Contents

AeroVironment, Inc.

 

Table of Contents

 

 

 

 

 

Item 1. 

Financial Statements :

 

 

 

Consolidated Balance Sheets as of October 28, 2017 (Unaudited) and April 30, 2017

 

3

 

Consolidated Statements of Operations for the three and six months ended October 28, 2017 (Unaudited) and October 29, 2016 (Unaudited)

 

4

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended October 28, 2017 (Unaudited) and October 29, 2016 (Unaudited)

 

5

 

Consolidated Statements of Cash Flows for the six months ended October 28, 2017 (Unaudited) and October 29, 2016 (Unaudited)

 

6

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4. 

Controls and Procedures

 

27

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

28

Item 1A. 

Risk Factors

 

28

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

Item 3. 

Defaults Upon Senior Securities

 

28

Item 4. 

Mine Safety Disclosures

 

28

Item 5. 

Other Information

 

28

Item 6. 

Exhibits

 

29

Signatures 

 

30

Exhibit Index

 

 

 

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

October 28,

    

April 30,

 

 

 

2017

 

2017

 

 

    

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,109

 

$

79,904

 

Short-term investments

 

 

110,751

 

 

119,971

 

Accounts receivable, net of allowance for doubtful accounts of $1,201 at October 28, 2017 and $291 at April 30, 2017

 

 

35,106

 

 

74,361

 

Unbilled receivables and retentions

 

 

13,494

 

 

14,120

 

Inventories, net

 

 

76,039

 

 

60,076

 

Prepaid expenses and other current assets

 

 

5,175

 

 

5,653

 

Total current assets

 

 

357,674

 

 

354,085

 

Long-term investments

 

 

33,024

 

 

42,096

 

Property and equipment, net

 

 

21,614

 

 

19,220

 

Deferred income taxes

 

 

16,113

 

 

15,089

 

Other assets

 

 

838

 

 

2,010

 

Total assets

 

$

429,263

 

$

432,500

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

15,724

 

$

20,283

 

Wages and related accruals

 

 

10,415

 

 

12,966

 

Income taxes payable

 

 

350

 

 

1,418

 

Customer advances

 

 

3,921

 

 

3,317

 

Other current liabilities

 

 

7,441

 

 

10,079

 

Total current liabilities

 

 

37,851

 

 

48,063

 

Deferred rent

 

 

1,637

 

 

1,719

 

Capital lease obligations - net of current portion

 

 

50

 

 

161

 

Other non-current liabilities

 

 

184

 

 

184

 

Deferred tax liability

 

 

67

 

 

116

 

Liability for uncertain tax positions

 

 

64

 

 

64

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—10,000,000; none issued or outstanding at October 28, 2017 and April 30, 2017

 

 

 —

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—100,000,000

 

 

 

 

 

 

 

Issued and outstanding shares—23,865,335 shares at October 28, 2017 and 23,630,419 at April 30, 2017

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

166,993

 

 

162,150

 

Accumulated other comprehensive loss

 

 

(98)

 

 

(127)

 

Retained earnings

 

 

222,504

 

 

219,929

 

Total AeroVironment stockholders' equity

 

 

389,401

 

 

381,954

 

Noncontrolling interest

 

 

 9

 

 

239

 

Total equity

 

 

389,410

 

 

382,193

 

Total liabilities and stockholders’ equity

 

$

429,263

 

$

432,500

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

52,933

 

$

29,350

 

$

84,024

 

$

45,087

 

Contract services

 

 

20,894

 

 

20,766

 

 

33,567

 

 

41,247

 

 

 

 

73,827

 

 

50,116

 

 

117,591

 

 

86,334

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

30,014

 

 

19,197

 

 

54,231

 

 

34,419

 

Contract services

 

 

12,813

 

 

13,502

 

 

20,730

 

 

27,815

 

 

 

 

42,827

 

 

32,699

 

 

74,961

 

 

62,234

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

22,919

 

 

10,153

 

 

29,793

 

 

10,668

 

Contract services

 

 

8,081

 

 

7,264

 

 

12,837

 

 

13,432

 

 

 

 

31,000

 

 

17,417

 

 

42,630

 

 

24,100

 

Selling, general and administrative

 

 

14,464

 

 

13,387

 

 

27,795

 

 

27,050

 

Research and development

 

 

7,272

 

 

8,517

 

 

13,733

 

 

17,117

 

Income (loss) from operations

 

 

9,264

 

 

(4,487)

 

 

1,102

 

 

(20,067)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

432

 

 

397

 

 

944

 

 

772

 

Other expense, net

 

 

(55)

 

 

(130)

 

 

(51)

 

 

(430)

 

Income (loss) before income taxes

 

 

9,641

 

 

(4,220)

 

 

1,995

 

 

(19,725)

 

Provision (benefit) for income taxes

 

 

2,829

 

 

(48)

 

 

(351)

 

 

(3,911)

 

Net income (loss)

 

 

6,812

 

$

(4,172)

 

 

2,346

 

 

(15,814)

 

Net loss attributable to noncontrolling interest

 

 

206

 

 

 —

 

 

229

 

 

 —

 

Net income (loss) attributable to AeroVironment

 

$

7,018

 

$

(4,172)

 

$

2,575

 

$

(15,814)

 

Net income (loss) per share attributable to AeroVironment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

(0.18)

 

$

0.11

 

$

(0.69)

 

Diluted

 

$

0.29

 

$

(0.18)

 

$

0.11

 

$

(0.69)

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,477,914

 

 

23,049,056

 

 

23,407,500

 

 

23,002,832

 

Diluted

 

 

23,832,959

 

 

23,049,056

 

 

23,715,997

 

 

23,002,832

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income (loss)

 

$

6,812

 

$

(4,172)

 

$

2,346

 

$

(15,814)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $17 and $17 for the three months ended October 28, 2017 and October 29, 2016, respectively; and net of deferred tax expense of $19 and $29 for the six months ended October 28, 2017 and October 29, 2016, respectively

 

 

26

 

 

25

 

 

29

 

 

43

 

Total comprehensive income (loss)

 

 

6,838

 

$

(4,147)

 

 

2,375

 

 

(15,771)

 

Net loss attributable to noncontrolling interest

 

 

206

 

 

 —

 

 

229

 

 

 —

 

Comprehensive income (loss) attributable to AeroVironment

 

$

7,044

 

$

(4,147)

 

$

2,604

 

$

(15,771)

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

Operating activities

 

 

 

 

 

 

Net income (loss)

 

$

2,346

 

$

(15,814)

 

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,692

 

 

3,401

 

Loss from equity method investments

 

 

 —

 

 

111

 

Impairment of long-lived assets

 

 

255

 

 

 —

 

Provision for doubtful accounts

 

 

943

 

 

119

 

Impairment of intangible assets and goodwill

 

 

1,021

 

 

 —

 

(Gains) losses on foreign currency transactions

 

 

(108)

 

 

269

 

Deferred income taxes

 

 

(1,093)

 

 

(329)

 

Stock-based compensation

 

 

2,608

 

 

1,813

 

Tax benefit from exercise of stock options

 

 

 —

 

 

22

 

Loss (Gain) on disposition of property and equipment

 

 

15

 

 

(7)

 

Amortization of held-to-maturity investments

 

 

897

 

 

1,259

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

38,440

 

 

29,562

 

Unbilled receivables and retentions

 

 

626

 

 

2,029

 

Inventories

 

 

(15,963)

 

 

(17,682)

 

Income tax receivable

 

 

 —

 

 

(3,957)

 

Prepaid expenses and other assets

 

 

468

 

 

(555)

 

Accounts payable

 

 

(4,739)

 

 

1,413

 

Other liabilities

 

 

(5,289)

 

 

(7,933)

 

Net cash provided by (used in) operating activities

 

 

24,119

 

 

(6,279)

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(6,037)

 

 

(4,514)

 

Redemptions of held-to-maturity investments

 

 

105,758

 

 

53,961

 

Purchases of held-to-maturity investments

 

 

(88,763)

 

 

(79,052)

 

Proceeds from the sale of property and equipment

 

 

 —

 

 

 7

 

Sales and redemptions of available-for-sale investments

 

 

450

 

 

400

 

Net cash provided by (used in) investing activities

 

 

11,408

 

 

(29,198)

 

Financing activities

 

 

 

 

 

 

 

Principal payments of capital lease obligations

 

 

(173)

 

 

(192)

 

Tax withholding payment related to net settlement of equity awards

 

 

(313)

 

 

 —

 

Exercise of stock options

 

 

2,164

 

 

258

 

Net cash provided by financing activities

 

 

1,678

 

 

66

 

Net increase (decrease) in cash and cash equivalents

 

 

37,205

 

 

(35,411)

 

Cash and cash equivalents at beginning of period

 

 

79,904

 

 

124,287

 

Cash and cash equivalents at end of period

 

$

117,109

 

$

88,876

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

1,803

 

$

1,786

 

Non-cash activities

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $19 and $29, respectively

 

$

29

 

$

43

 

Reclassification from share-based liability compensation to equity

 

$

384

 

$

307

 

Acquisitions of property and equipment included in accounts payable

 

$

888

 

$

704

 

 

See accompanying notes to consolidated financial statements (unaudited).

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Table of Contents

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, support and operation of unmanned aircraft systems (“UAS”) and efficient energy systems (“EES”) for various industries and governmental agencies.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and six months ended October  28, 2017 are not necessarily indicative of the results for the full year ending April 30, 2018. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2017, included in the Company’s Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

The accompanying consolidated financial statements include the balance sheet and results of operations of Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”), in which the Company increased its ownership to a controlling interest of 85% during the fourth quarter of the fiscal year ended April 30, 2017. Prior to the increase in ownership, the Company's investment in Altoy was accounted for under the equity method.

 

In July 2016, the Company dissolved Charger Bicycles, LLC, the results of which were not material to the consolidated financial statements.  During the three months ended October 29, 2016, the Company dissolved Skytower, LLC and Regenerative Fuel Cell Systems, LLC, the results of which were not material to the consolidated financial statements.

 

Recently Adopted Accounting Standards

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.  This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method.  The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.  This ASU eliminates from U.S. GAAP the requirement to measure inventory at the lower of cost or market.  Market under the previous requirement could be replacement cost, net realizable value, or net realizable value less a normal profit margin.  Entities within the scope of this update will now be required to measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The Company’s adoption of ASU No. 2015-11 effective May 1, 2017 did not have a material impact on its consolidated financial statements.

 

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In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. If goodwill impairment is realized, the amount recognized will be the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied on a prospective basis and will become effective for public entities in the first quarter of the year ending September 30, 2021, with early adoption available. The Company elected to early adopt the standard during the three months ended October 28, 2017. The Company’s adoption of ASU 2017-04 did not have a material impact on its consolidated financial statements.

 

 

Segments

 

The Company’s products are sold and divided among two reportable segments to reflect the Company’s strategic goals. Operating segments are defined as components of an enterprise from which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of these segments in order to make resource allocation decisions, including the focus of research and development (“R&D”) activities and performance assessment. The Company’s reportable segments are business units that offer different products and services and are managed separately.

 

Investments

 

The Company’s investments are accounted for as held-to-maturity and available-for-sale and reported at amortized cost and fair value, respectively.

 

Fair Values of Financial Instruments

 

Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost due to the short period of time to maturity.

 

Government Contracts

 

Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.

 

For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

 

The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured. During the fiscal year ended April 30, 2017, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 without payment of any consideration. At October  28, 2017 and April 30, 2017, the Company did not have any remaining reserves for incurred cost claim audits.

 

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Earnings Per Share

 

Basic earnings per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.

 

The reconciliation of basic to diluted shares is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 28, 2017

    

October 29, 2016

    

October 28, 2017

    

October 29, 2016

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

23,477,914

 

23,049,056

 

23,407,500

 

23,002,832

 

Dilutive effect of employee stock options and unvested restricted stock

 

355,045

 

 —

 

308,497

 

 —

 

Denominator for diluted earnings per share

 

23,832,959

 

23,049,056

 

23,715,997

 

23,002,832

 

 

Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been antidilutive were 0 and 14,820 for the three and six months ended October 28, 2017, respectively.  Due to the net loss for the three and six months ended October 29, 2016, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been anti-dilutive were 199,428 and 256,366 for the three and six months ended October 29, 2016, respectively.

 

Recently Issued Accounting Standards

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that fiscal year, with early adoption permitted. The amendments are to be applied prospectively to business combinations that occur after the effective date.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements. The Company currently does not hold a large number of leases that are classified as operating leases under the existing lease standard, with the only significant leases being the Company’s various property leases.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date. This update approved a one-year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. Since the issuance of ASU 2014-09, the FASB has issued several amendments to provide additional supplemental guidance on certain aspects of the original pronouncement. The core principle of ASU 2014-09 is to recognize revenue

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upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received.  In adopting the guidance, companies are permitted to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures.

 

The Company currently expects to adopt ASU 2014-09 on May 1, 2018 using the full retrospective transition method. The Company is continuing to assess the potential impact of this guidance, including the impact on those areas currently subject to industry-specific guidance such as government contract accounting. As part of its assessment, the Company is reviewing representative samples of customer contracts to determine the impact on revenue recognition under the new guidance. The Company’s contracts with the U.S. government contain provisions that, among other things, allow the government to unilaterally terminate the contract for convenience (in whole or in part), pay the Company for costs incurred plus a reasonable profit and take control of any work in process. The Company is continuing to evaluate its contracts with the U.S. government to determine whether: (i) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (ii) the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. Revenues for contracts meeting either of these criteria will be recognized over the performance period using an acceptable measure of progress under the new standard, which the Company anticipates to be as costs are incurred.

 

The Company’s contracts with international governments for the purchase of small UAS and related services generally contain provisions that, among other things, allow the government to unilaterally terminate the contract for convenience (in whole or in part), pay the Company for costs incurred plus a reasonable profit and take control of any work in process. The Company is continuing to evaluate its contracts with its international UAS customers to determine whether the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. Revenues for contracts meeting this criteria will be recognized over the performance period using an acceptable measure of progress under the new standard, which the Company anticipates to be as costs are incurred.

 

 

2. Investments

 

Investments consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

October 28,

 

April 30,

 

 

    

2017

    

2017

 

Short-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

43,901

 

$

47,437

 

U.S. government securities

 

 

22,609

 

 

14,515

 

Corporate bonds

 

 

44,241

 

 

55,519

 

Certificates of deposit

 

 

 —

 

 

2,500

 

Total held-to-maturity and short-term investments

 

$

110,751

 

$

119,971

 

Long-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

3,898

 

$

8,942

 

U.S. government securities

 

 

25,021

 

 

22,540

 

Corporate bonds

 

 

2,009

 

 

8,117

 

Total held-to-maturity investments

 

 

30,928

 

 

39,599

 

Available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

 

2,096

 

 

2,497

 

Total available-for-sale investments

 

 

2,096

 

 

2,497

 

Total long-term investments

 

$

33,024

 

$

42,096

 

 

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Held-To-Maturity Securities

 

As of October  28, 2017 and April 30, 2017, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities, U.S. government-guaranteed agency securities, U.S. government-sponsored agency debt securities, certificates of deposit and highly rated corporate bonds. Interest earned from these investments is recorded in interest income.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of October  28, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 28, 2017

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

47,799

 

$

13

 

$

(16)

 

$

47,796

 

U.S. government securities

 

 

47,630

 

 

 —

 

 

(115)

 

 

47,515

 

Corporate bonds

 

 

46,250

 

 

 1

 

 

(43)

 

 

46,208

 

Certificates of deposit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total held-to-maturity investments

 

$

141,679

 

$

14

 

$

(174)

 

$

141,519

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

56,379

 

$

30

 

$

(21)

 

$

56,388

 

U.S. government securities

 

 

37,055

 

 

 2

 

 

(41)

 

 

37,016

 

Corporate bonds

 

 

63,636

 

 

 9

 

 

(85)

 

 

63,560

 

Certificates of deposit

 

 

2,500

 

 

 1

 

 

 —

 

 

2,501

 

Total held-to-maturity investments

 

$

159,570

 

$

42

 

$

(147)

 

$

159,465

 

 

The amortized cost and fair value of the held-to-maturity securities by contractual maturity at October  28, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due within one year

 

$

110,751

 

$

110,660

 

Due after one year through five years

 

 

30,928

 

 

30,859

 

Total

 

$

141,679

 

$

141,519

 

 

Available-For-Sale Securities

 

Auction Rate Securities

 

As of October  28, 2017 and April 30, 2017, the entire balance of available-for-sale auction rate securities, consisted of two investment grade auction rate municipal bonds, with maturities of approximately 2 and 17 years, respectively. These investments have characteristics similar to short-term investments, because at pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.

 

During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments

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that failed to settle at auction, at the maximum contractual rate until the next auction occurs. In the event the Company needs to access funds invested in these auction rate securities, the Company may not be able to liquidate these securities at the fair value recorded on October  28, 2017, until a future auction of these securities is successful or a buyer is found outside of the auction process.

 

As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of October  28, 2017. The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction. Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate that the current lack of liquidity of these investments will affect its ability to operate its business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment if a further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity. As of October  28, 2017, the Company did not consider these investments to be other-than-temporarily impaired.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of October  28, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,250

 

$

 

$

(154)

 

$

2,096

 

Total available-for-sale investments

 

$

2,250

 

$

 —

 

$

(154)

 

$

2,096

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of April 30, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,700

 

$

 

$

(203)

 

$

2,497

 

Total available-for-sale investments

 

$

2,700

 

$

 —

 

$

(203)

 

$

2,497

 

 

The amortized cost and fair value of the auction rate securities by contractual maturity at October  28, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due after one through five years

 

$

250

 

$

250

 

Due after 10 years

 

 

2,000

 

 

1,846

 

Total

 

$

2,250

 

$

2,096

 

 

 

 

 

 

3. Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:

 

·

Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

 

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·

Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

 

·

Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.

 

The Company’s financial assets measured at fair value on a recurring basis at October  28, 2017, 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

 

Auction rate securities

 

$

 

$

 

$

2,096

 

$

2,096

 

Total

 

$

 —

 

$

 —

 

$

2,096

 

$

2,096

 

 

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):

 

 

 

 

 

 

 

    

Fair Value

 

 

 

Measurements Using

 

 

 

Significant

 

 

 

Unobservable Inputs

 

Description

 

(Level 3)

 

Balance at May 1, 2017

 

$

2,497

 

Transfers to Level 3

 

 

 —

 

Total gains (realized or unrealized)

 

 

 

 

Included in earnings

 

 

 —

 

Included in other comprehensive income

 

 

49

 

Purchases, issuances and settlements, net

 

 

(450)

 

Balance at October 28, 2017

 

$

2,096

 

The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at October 28, 2017

 

$

 —

 

 

The auction rate securities are valued using a discounted cash flow model.  The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows and the estimated date upon which the security is expected to have a successful auction.  As of October  28, 2017, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 1.58% and 1.59%, estimated redemption periods of 2 and 17 years and discount rates of 2.55% and 10.13%. The discount rates were based on market rates for municipal bond securities, as adjusted for a risk premium to reflect the lack of liquidity of these investments.

 

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4. Inventories, net

 

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

October 28,

 

April 30,

 

 

    

2017

    

2017

 

 

 

 

 

Raw materials

 

$

21,423

 

$

18,365

 

Work in process

 

 

22,921

 

 

16,168

 

Finished goods

 

 

37,164

 

 

30,793

 

Inventories, gross

 

 

81,508

 

 

65,326

 

Reserve for inventory excess and obsolescence

 

 

(5,469)

 

 

(5,250)

 

Inventories, net

 

$

76,039

 

$

60,076

 

 

 

5. Warranty Reserves

 

The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The warranty reserve is included in other current liabilities. The related expense is included in cost of sales. Warranty reserve activity is summarized as follows for the three and six months ended October  28, 2017 and October 29, 2016, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

    

 

 

 

2017

    

 

2016

    

 

2017

    

 

2016

 

Beginning balance

 

$

2,885

 

$

5,223

 

$

3,231

 

$

4,134

 

Warranty expense

 

 

719

 

 

144

 

 

1,166

 

 

336

 

Changes in estimates related to pre-existing warranties

 

 

 —

 

 

(179)

 

 

 —

 

 

1,228

 

Warranty costs settled

 

 

(520)

 

 

(1,500)

 

 

(1,313)

 

 

(2,010)

 

Ending balance

 

$

3,084

 

$

3,688

 

$

3,084

 

$

3,688

 

 

During the six months ended October 29, 2016, the Company revised its estimates based on the results of additional engineering studies and recorded incremental warranty reserve charges totaling $1,407,000 related to the estimated costs to repair a component of certain small UAS that were delivered in prior periods. At October  28, 2017, there were no remaining estimated warranty costs related to the repair of the impacted UAS. As of October  28, 2017, a total of $2,198,000 of costs related to this warranty have been incurred.

 

 

6. Intangibles

 

Intangibles are included in other assets on the balance sheet. The components of intangibles are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30,

 

Impairment

 

October 28,

 

 

    

2017

 

Charges

    

2017

 

 

 

(In thousands)

 

Licenses

 

$

818

 

$

 -

 

$

818

 

Customer relationships

 

 

1,600

 

 

(867)

 

 

733

 

Trademarks and tradenames

 

 

60

 

 

(32)

 

 

28

 

Other

 

 

 3

 

 

 -

 

 

 3

 

Intangibles, gross

 

 

2,481

 

$

(899)

 

 

1,582

 

Less accumulated amortization

 

 

(658)

 

 

 

 

 

(816)

 

Intangibles, net

 

$

1,823

 

 

 

 

$

766

 

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The customer relationships, trademarks and tradenames, and other intangible assets were recognized in conjunction with the Company’s acquisition of a controlling interest in Altoy on February 1, 2017.

 

The Company tests identifiable intangible assets and goodwill for impairment in the fourth quarter of each fiscal year unless there are interim indicators that suggest that it is more likely than not that either the identifiable intangible assets or goodwill may be impaired. Due to the current political situation within Turkey and the increased uncertainty in the relations between the U.S. and Turkey, the Company significantly lowered its cash flow expectations for its Altoy operations. As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairment of Altoy’s long-lived assets, excluding goodwill during the three months ended October 28, 2017. Based on the analysis, the Company determined that the fair value of Altoy had declined below its carrying value, excluding goodwill. As a result, the Company performed additional analysis to determine the amount of the impairment loss and recorded an impairment loss totaling $899,000 during the three and six months ended October 28, 2017, which is included in selling, general and administrative expense on the consolidated statements of operations. The fair value of the Altoy asset group was determined based on a discounted cash flow model reflective of the revised cash flow estimates.

 

7. Goodwill

 

The following table presents the changes in the Company’s goodwill balance (in thousands):

 

 

 

 

 

Balance at April 30, 2017

    

$

122

Additions to goodwill

 

 

 -

Impairment of goodwill

 

 

(122)

Balance at October 28, 2017

 

$

 -

 

Goodwill is attributable to the acquisition of a controlling interest in Altoy on February 1, 2017.

 

The Company tests goodwill for impairment in the fourth quarter of each fiscal year unless there are interim indicators that suggest that it is more likely than not that goodwill may be impaired. Due to the factors described in Note 6 above, the Company significantly lowered its cash flow expectations for its Altoy operations. As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairment of Altoy’s goodwill during the three months ended October 28, 2017. Based on the analysis, it was determined that Altoy’s fair value had declined significantly below its carrying value, including goodwill. As a result, the Company performed additional analysis to determine the amount of the impairment and recorded an impairment loss totaling $122,000 during the three and six months ended October 28, 2017, which is included in selling, general and administrative expense on the consolidated statements of operations.

 

8. Accumulated Other Comprehensive Loss and Reclassifications Adjustments

 

The components of accumulated other comprehensive loss and adjustments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

Accumulated Other

 

 

    

Securities

 

Comprehensive Loss

 

Balance, net of $76 of taxes, as of April 30, 2017

 

$

(127)

 

$

(127)

 

Reclassifications out of accumulated other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

Unrealized gains, net of $19 of taxes

 

 

29

 

 

29

 

Balance, net of $57 of taxes, as of October 28, 2017

 

$

(98)

 

$

(98)

 

 

 

 

 

 

 

 

 

 

 

9. Customer-Funded Research & Development

 

Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue is recognized, which is generally as the R&D services are performed. Revenue from customer-

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funded R&D was approximately $13,873,000 and $20,108,000 for the three and six months ended October 28, 2017, respectively. Revenue from customer-funded R&D was approximately $14,541,000 and $29,278,000 for the three and six months ended October 29, 2016, respectively.

 

10. Long-Term Incentive Awards

 

During the three months ended July 29, 2017, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2018 LTIP”).  Awards under the Fiscal 2018 LTIP  consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2018, July 2019 and July 2020, and (ii) performance-based restricted stock units (“PRSUs”) which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2020. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs  at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs  will be made in fully-vested shares of common stock. As of October  28, 2017, no compensation cost has been recognized for the performance-based portion of the Fiscal 2018 LTIP, as the Company concluded that it was not probable that the performance conditions will be achieved. At October  28, 2017, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2018 LTIP is $2,850,000.

 

During the three months ended July 29, 2017, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2017 LTIP”). Awards under the Fiscal 2017 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2017, July 2018 and July 2019, and (ii) PRSUs which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2019. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs  at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs  will be made in fully-vested shares of common stock. As of October  28, 2017, no compensation cost has been recognized for the performance-based portion of the Fiscal 2017 LTIP, as the Company concluded that it was not probable that the performance conditions will be achieved. At October  28, 2017, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2017 LTIP is $2,630,000.

 

During the year ended April 30, 2016, the Company granted a three-year performance award under the Restated 2006 Plan to key employees (“Fiscal 2016 LTIP”). The performance period for each three-year award is the three-year period ending April 30, 2018. A target payout was established at the award date. The actual payout at the end of the performance period will be calculated based upon the Company’s achievement of revenue and gross margin for the performance period. Payouts will be made in cash and restricted stock units. Upon vesting of the restricted stock units, the Company has the discretion to settle the restricted stock units in cash or stock. As of October  28, 2017, no compensation cost has been recognized for this award as the Company has concluded that it was not probable that the performance conditions will be achieved.  At October  28, 2017, the maximum compensation expense that may be recorded for the Fiscal 2016 LTIP is $2,690,000.

 

At each reporting period, the Company reassesses the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised.

 

 

11. Income Taxes

 

For the three and six months ended October  28, 2017, the Company recorded a provision (benefit) for income taxes of  

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$2,829,000 and $(351,000),  respectively, yielding an effective tax rate of  29.3% and (17.6)%, respectively. For the three and six months ended October 29, 2016, the Company recorded a (benefit) for income taxes of $(48,000) and $(3,911,000), yielding an effective tax rate of 1.1% and 19.8%, respectively. The variance from statutory rates for the three and six months ended October 28, 2017 was primarily due to federal R&D credits and the recording of discrete excess tax benefits of $376,000 and $1,401,000, respectively, resulting from the vesting of restricted stock awards and exercises of stock options. The variance from statutory rates for the three and six months ended October 29, 2016, was primarily due to federal legislation reinstating the federal research and development tax credit during the third quarter of fiscal 2016 and the reversal of a $968,000 reserve, including the related interest, for uncertain tax positions due to the settlement of prior fiscal year audits recorded during the first quarter of fiscal 2017.

 

 

12. Share Repurchase

 

In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $25,000,000 of the Company’s common stock with no specified termination date for the program. No shares were repurchased under the program during the three and six months ended October  28, 2017. As of October  28, 2017 and April 30, 2017, approximately $21.2 million remained authorized for future repurchases under this program.

 

13. Segment Data

 

The Company’s product segments are as follows:

 

·

Unmanned Aircraft Systems — The UAS segment focuses primarily on the design, development, production, support and operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects to increase the security and effectiveness of the operations of the Company’s customers.

 

·

Efficient Energy Systems — The EES segment focuses primarily on the design, development, production, marketing, support and operation of innovative efficient electric energy systems that address the growing demand for electric transportation solutions.

 

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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. Depreciation and amortization related to the manufacturing of goods is included in gross margin for the segments. The Company does not discretely allocate assets to its operating segments, nor does the CODM evaluate operating segments using discrete asset information. Consequently, the Company operates its financial systems as a single segment for accounting and control purposes, maintains a single indirect rate structure across all segments, has no inter-segment sales or corporate elimination transactions, and maintains limited financial statement information by segment. The segment results are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

 

    

 

2017

    

2016

    

 

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

UAS

 

$

63,988

 

$

40,829

 

$

100,238

 

$

71,326

 

EES

 

 

9,839

 

 

9,287

 

 

17,353

 

 

15,008

 

Total

 

 

73,827

 

 

50,116

 

 

117,591

 

 

86,334

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

UAS

 

 

35,817

 

 

25,936

 

 

62,225

 

 

51,019

 

EES

 

 

7,010

 

 

6,763

 

 

12,736

 

 

11,215

 

Total

 

 

42,827

 

 

32,699

 

 

74,961

 

 

62,234

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

UAS

 

 

28,171

 

 

14,893

 

 

38,013

 

 

20,307

 

EES

 

 

2,829

 

 

2,524

 

 

4,617

 

 

3,793

 

Total

 

 

31,000

 

 

17,417

 

 

42,630

 

 

24,100

 

Selling, general and administrative

 

 

14,464

 

 

13,387

 

 

27,795

 

 

27,050

 

Research and development

 

 

7,272

 

 

8,517

 

 

13,733

 

 

17,117

 

Income (loss) from operations

 

 

9,264

 

 

(4,487)

 

 

1,102

 

 

(20,067)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

432

 

 

397

 

 

944

 

 

772

 

Other expense, net

 

 

(55)

 

 

(130)

 

 

(51)

 

 

(430)

 

Income (loss) before income taxes

 

$

9,641

 

$

(4,220)

 

$

1,995

 

$

(19,725)

 

 

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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, 2017, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”).

 

Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventories and reserves for excess and obsolescence, warranty liabilities, self-insured liabilities, accounting for stock-based awards, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.

 

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 profit estimates 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 six months ended October  28, 2017 and October 29, 2016, changes in accounting estimates on fixed-price contracts recognized using the percentage of completion method of accounting are presented below.

 

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For the three months ended October 28, 2017 and October 29, 2016, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Gross favorable adjustments

 

$

592

 

$

2,211

 

Gross unfavorable adjustments

 

 

(215)

 

 

(32)

 

Net favorable adjustments

 

$

377

 

$

2,179

 

 

For the three months ended October 28, 2017, favorable cumulative catch-up adjustments of $0.6 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 $0.2 million were primarily related to higher than expected costs on 8 contracts, which individually were not material.

 

For the three months ended October 29, 2016, favorable cumulative catch-up adjustments of $2.2 million were primarily due to final cost adjustments on 53 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments were not material.

 

For the six months ended October 28, 2017 and October 29, 2016, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Gross favorable adjustments

 

$

1,011

 

$

2,257

 

Gross unfavorable adjustments

 

 

(458)

 

 

(209)

 

Net favorable adjustments

 

$

553

 

$

2,048

 

 

For the six months ended October 28, 2017, favorable cumulative catch-up adjustments of $1.0 million were primarily due to final cost adjustments on 12 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.5 million were primarily related to higher than expected costs on 7 contracts, which individually were not material.

 

For the six months ended October 29, 2016, favorable cumulative catch-up adjustments of $2.3 million were primarily due to final cost adjustments on 49 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 9 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 2018 fiscal year ends on April 30, 2018 and our fiscal quarters end on July 29, 2017, October 28, 2017 and January 27, 2018, respectively.

 

Results of Operations

 

Our operating segments are Unmanned Aircraft Systems, or UAS, and Efficient Energy Systems, or EES. Our accounting policies for each of these segments are the same. In addition, a significant portion of our research and development, or R&D, selling, general and administrative, or SG&A, and general overhead resources are shared across our segments.

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The following table sets forth our revenue and gross margin generated by each operating segment for the periods indicated (in thousands):

 

Three Months Ended October  28, 2017 Compared to Three Months Ended October 29, 2016

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

Revenue:

 

 

 

 

 

 

 

UAS

 

$

63,988

 

$

40,829

 

EES

 

 

9,839

 

 

9,287

 

Total

 

 

73,827

 

 

50,116

 

Cost of sales:

 

 

 

 

 

 

 

UAS

 

 

35,817

 

 

25,936

 

EES

 

 

7,010

 

 

6,763

 

Total

 

 

42,827

 

 

32,699

 

Gross margin:

 

 

 

 

 

 

 

UAS

 

 

28,171

 

 

14,893

 

EES

 

 

2,829

 

 

2,524

 

Total

 

 

31,000

 

 

17,417

 

Selling, general and administrative

 

 

14,464

 

 

13,387

 

Research and development

 

 

7,272

 

 

8,517

 

Income (loss) from operations

 

 

9,264

 

 

(4,487)

 

Other income (expense):

 

 

 

 

 

 

 

Interest income, net

 

 

432

 

 

397

 

Other expense, net

 

 

(55)

 

 

(130)

 

Income (loss) before income taxes

 

$

9,641

 

$

(4,220)

 

 

Revenue. Revenue for the three months ended October 28, 2017 was $73.8 million, as compared to $50.1 million for the three months ended October 29, 2016, representing an increase of $23.7 million, or 47%. The increase in revenue was due to an increase in product deliveries of $23.6 million and  an increase in service revenue of $0.1 million. UAS revenue increased $23.2 million, or 57%, to $64.0 million for the three months ended October  28, 2017, due to an increase in product deliveries of $23.1 million and an increase in service revenue of $0.8 million, partially offset by a decrease in customer-funded R&D work of $0.7 million. The increase in product deliveries was primarily due to an increase in product deliveries of small UAS. During the three months ended October 28, 2017, we continued to experience expansion in small UAS product deliveries and related services to international customers. The increase in service revenue was primarily due to an increase in sustainment activities in support of small UAS for our international customers. The decrease in customer-funded R&D was primarily associated with tactical missile systems and tactical missile system variant programs.  EES revenue increased $0.6 million, or 6%, to $9.8 million for the three months ended October 28, 2017, primarily due to an increase in product deliveries of our PosiCharge industrial electric vehicle charging systems.

 

Cost of Sales. Cost of sales for the three months ended October  28, 2017 was $42.8 million, as compared to $32.7 million for the three months ended October 29, 2016, representing an increase of $10.1 million, or 31%. As a percentage of revenue, cost of sales decreased from 65% to 58%. The increase in cost of sales was primarily due to an increase in product costs of $10.8 million, partially offset by a decrease in cost of services of $0.7 million. The increase in product costs was primarily due to the increase in product deliveries. The decrease in cost of services was primarily due to mix. UAS cost of sales increased $9.9 million, or 38%, to $35.8 million for the three months ended October 28, 2017, primarily due to an increase in product deliveries. As a percentage of revenue, cost of sales for UAS decreased from 64% to 56%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue.  EES cost of sales increased $0.2 million, or 4%, to $7.0 million for the three months ended October 28, 2017, primarily due to the increased sales volume. As a percentage of revenue, cost of sales for EES decreased from 73% to 71%.

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Gross Margin. Gross margin for the three months ended October  28, 2017 was $31.0 million, as compared to $17.4 million for the three months ended October 29, 2016, representing an increase of $13.6 million, or 78%. The increase in gross margin was primarily due to an increase in product margins of $12.8 million and an increase in service margins of $0.8 million. As a percentage of revenue, gross margin increased from 35% to 42%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue.  UAS gross margin increased $13.3 million, or 89%, to $28.2 million for the three months ended October 28, 2017, primarily due to the increase in product sales volume. As a percentage of revenue, gross margin for UAS increased from 36% to 44%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue. EES gross margin increased $0.3 million, or 12%, to $2.8 million for the three months ended October 28, 2017, primarily due to the increased sales volume. As a percentage of revenue, EES gross margin increased from 27% to 29%.

 

Selling, General and Administrative.  SG&A expense for the three months ended October  28, 2017 was $14.5 million, or 20% of revenue, compared to SG&A expense of $13.4 million, or 27% of revenue, for the three months ended October 29, 2016. The increase in SG&A expense was primarily due to the recording of impairment charges totaling $1.0 million related to the identifiable intangible assets and goodwill of Altoy, our Turkish majority-owned subsidiary, during the three months ended October 28, 2017.

 

Research and Development. R&D expense for the three months ended October  28, 2017 was $7.3 million, or 10% of revenue, compared to R&D expense of $8.5 million, or 17% of revenue, for the three months ended October 29, 2016.  R&D expense decreased by $1.2 million, or 15%, for the three months ended October  28, 2017, primarily due to a planned decrease in development activities for certain strategic initiatives.

 

Interest Income, net. Interest income, net for the three months ended October  28, 2017 was $0.4 million compared to interest income, net of $0.4 million for the three months ended October 29, 2016.

 

Other Expense, net.  Other expense,  net for the three months ended October  28, 2017 was $0.1 million compared to other expense, net of $0.1 million for the three months ended October 29, 2016.

 

Benefit for Income Taxes. Our effective income tax rate was 29.3% for the three months ended October 28, 2017, as compared to 1.1%  for the three months ended October 29, 2016.  The increase in the effective income tax rate was primarily due to an increase in income before income taxes and an increase in the estimated full year effective income tax rate driven by an increase in full year projected income before income taxes. The effective income tax rate for the three months ended October 28, 2017 included a discrete excess tax benefit of $0.4 million resulting from the vesting of restricted stock awards and exercises of stock options.

 

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Six Months Ended October 28, 2017 Compared to Three Months Ended October 29, 2016

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

Revenue:

 

 

 

 

 

 

 

UAS

 

$

100,238

 

$

71,326

 

EES

 

 

17,353

 

 

15,008

 

Total

 

 

117,591

 

 

86,334

 

Cost of sales:

 

 

 

 

 

 

 

UAS

 

 

62,225

 

 

51,019

 

EES

 

 

12,736

 

 

11,215

 

Total

 

 

74,961

 

 

62,234

 

Gross margin:

 

 

 

 

 

 

 

UAS

 

 

38,013

 

 

20,307

 

EES

 

 

4,617

 

 

3,793

 

Total

 

 

42,630

 

 

24,100

 

Selling, general and administrative

 

 

27,795

 

 

27,050

 

Research and development

 

 

13,733

 

 

17,117

 

Income (loss) from operations

 

 

1,102

 

 

(20,067)

 

Other income (expense):

 

 

 

 

 

 

 

Interest income, net

 

 

944

 

 

772

 

Other expense, net

 

 

(51)

 

 

(430)

 

Income (loss) before income taxes

 

$

1,995

 

$

(19,725)

 

 

Revenue. Revenue for the six months ended October 28, 2017 was $117.6 million, as compared to $86.3 million for the six months ended October 29, 2016, representing an increase of $31.3 million, or 36%. The increase in revenue was due to an increase in product deliveries of $38.9 million, partially offset by a decrease in service revenue of $7.7 million. UAS revenue increased $28.9 million, or 41%, to $100.2 million for the six months ended October  28, 2017, due to an increase in product deliveries of $36.6 million and an increase in service revenue of $1.5 million, partially offset by a decrease in customer-funded R&D work of $9.2 million. The increase in product deliveries was primarily due to an increase in product deliveries of small UAS and an increase in product deliveries of tactical missile systems. During the six months ended October 28, 2017, we continued to experience expansion in small UAS product deliveries and related services to international customers and in tactical missile system product deliveries and related services to customers within the U.S. government. The increase in service revenue was primarily due to an increase in sustainment activities in support of small UAS for our international customers. The decrease in customer-funded R&D was primarily associated with tactical missile systems and tactical missile system variant programs. EES revenue increased $2.3 million, or 16%, to $17.4 million for the six months ended October 28, 2017, primarily due to an increase in product deliveries of passenger electric vehicle charging systems and our PosiCharge industrial electric vehicle charging systems.

 

Cost of Sales. Cost of sales for the six months ended October  28, 2017 was $75.0 million, as compared to $62.2 million for the six months ended October 29, 2016, representing an increase of $12.7 million, or 20%. As a percentage of revenue, cost of sales decreased from 72% to 64%. The increase in cost of sales was primarily due to an increase in product costs of $19.8 million, partially offset by a decrease in cost of services of $7.1 million. The increase in product costs was primarily due to the increase in product deliveries. The decrease in cost of services was primarily due to the decrease in service revenue. UAS cost of sales increased $11.2 million, or 22%, to $62.2 million for the six months ended October  28, 2017, primarily due to an increase in product deliveries. As a percentage of revenue, cost of sales for UAS decreased from 72% to 62%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue.  EES cost of sales increased $1.5 million, or 14%, to $12.7 million for the six months ended October  28, 2017, primarily due to the increased sales volume. As a percentage of revenue, cost of sales for EES decreased from 75% to 73%, primarily due to the increased sales volume.

 

Gross Margin. Gross margin for the six months ended October  28, 2017 was $42.6 million, as compared to $24.1 million for the six months ended October 29, 2016, representing an increase of $18.5 million, or 77%. The

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increase in gross margin was primarily due to an increase in product margins of $19.1  million, partially offset by a decrease in service margins of $0.6 million. As a percentage of revenue, gross margin increased from 28% to 36%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue.  UAS gross margin increased $17.7 million, or 87%, to $38.0 million for the six months ended October  28, 2017, primarily due to the increase in product deliveries. As a percentage of revenue, gross margin for UAS increased from 28% to 38%, primarily due to an increase in sales volume and an increase in the proportion of product sales to total revenue. EES gross margin increased $0.8 million, or 22%, to $4.6 million for the six months ended October  28, 2017, primarily due to the increased sales volume. As a percentage of revenue, EES gross margin increased from 25% to 27%, primarily due to the increased sales volume.

 

Selling, General and Administrative.  SG&A expense for the six months ended October  28, 2017 was $27.8 million, or 24% of revenue, compared to SG&A expense of $27.0 million, or 31% of revenue, for the six months ended October 29, 2016. The increase in SG&A  expense was primarily due to the recording of impairment charges totaling $1.0 million related to the identifiable intangible assets and goodwill of Altoy during the three months ended October 28, 2017.

 

Research and Development. R&D expense for the six months ended October  28, 2017 was $13.7 million, or 12% of revenue, compared to R&D expense of $17.1 million, or 20% of revenue, for the six months ended October 29, 2016.  R&D expense decreased by $3.4 million, or 20%, for the six months ended October  28, 2017, primarily due to a planned decrease in development activities for certain strategic initiatives.

 

Interest Income, net. Interest income, net for the six months ended October  28, 2017 was $0.9 million compared to interest income, net of $0.8 million for the six months ended October 29, 2016.

 

Other Expense, net.  Other expense, net for the six months ended October  28, 2017 was $0.1 million compared to other expense, net of $0.4 million for the six months ended October 29, 2016.

 

Benefit for Income Taxes. Our effective income tax rate was (17.6)% for the six months ended October 28, 2017, as compared to 19.8% for the six months ended October 29, 2016. The year over year change in the effective income tax rate was primarily due to R&D tax credits and discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options, partially offset by an increase in income before income taxes and an increase in the estimated full year effective income tax rate driven by an increase in full year projected income before income taxes. The effective income tax rate for the six months ended October  28, 2017 included a discrete excess tax benefit of $1.4 million resulting from the vesting of restricted stock awards and exercises of stock options. The effective income tax rate for the six months ended October 29, 2016 included a reversal of a reserve for uncertain tax positions of $1.0 million due to the settlement of prior fiscal year audits.

 

Backlog

 

We define funded backlog as unfilled firm orders for products and services for which funding currently is appropriated to us under the contract by the customer. As of October  28, 2017 and April 30, 2017, our funded backlog was approximately $127.1 million and $78.0 million, respectively.

 

In addition to our funded backlog, we also had unfunded backlog of $21.2 million and $24.6 million as of October  28, 2017 and April 30, 2017, respectively.  We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery, indefinite quantity, or IDIQ contracts. Unfunded backlog does not obligate the U.S. government to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfunded backlog does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because the contract was awarded to five companies in 2012, including AeroVironment, and we cannot be certain that we will receive task orders issued against the contract.

 

Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may

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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.

 

Liquidity and Capital Resources

 

We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing R&D costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. In addition, we believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital and capital expenditure requirements during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain financing. We anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.

 

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products, enhancing existing products and marketing to stimulate acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense, commercial and electric vehicle industries and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. To the extent that existing cash, cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.

 

Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and other expenses incurred during the lead time from contract award until contract deliveries begin.

 

Cash Flows

 

The following table provides our cash flow data for the six months ended October  28, 2017 and October 29, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

October 28,

 

October 29,

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

Net cash provided by (used in) operating activities

 

$

24,119

 

$

(6,279)

 

Net cash provided by (used in) investing activities

 

$

11,408

 

$

(29,198)

 

Net cash provided by financing activities

 

$

1,678

 

$

66

 

 

Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities for the six months ended October  28, 2017 increased by $30.4 million to $24.1 million, compared to net cash used in operating activities of $6.3 million for the six months ended October 29, 2016. The increase in net cash provided by operating activities was primarily due to an increase in net income of $18.2 million,  an increase in cash as a result of changes in operating assets and liabilities of $10.7 million, largely resulting from decreases in accounts receivable due to the year over year timing of revenue and related cash collections, and non-cash expenses of $1.6 million, primarily associated with the impairment of the identifiable intangible assets and goodwill of Altoy.

 

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Cash Provided by (Used in) Investing Activities. Net cash provided by investing activities increased by $40.6 million to $11.4 million for the six months ended October  28, 2017, compared to net cash used in investing activities of $29.2 million for the six months ended October 29, 2016. The increase in net cash provided by investing activities was primarily due to an increase in net redemptions and purchases of investments of $42.1 million, partially offset by an increase in cash paid for purchases of property and equipment of $1.5 million.

 

Cash Provided by Financing Activities. Net cash provided by financing activities increased by $1.6 million to $1.7 million for the six months ended October  28, 2017, compared to net cash provided by financing activities of $0.1 million for the six months ended October 29, 2016. The increase in cash provided by financing activities was primarily due an increase in cash provided from the exercise of employee stock options of $1.9 million. 

 

Contractual Obligations

 

During the three and six months ended October  28, 2017, 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, 2017.

 

Off-Balance Sheet Arrangements

 

As of October  28, 2017, we had no offbalance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation SK.

 

Inflation

 

Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.

 

New Accounting Standards

 

Please refer to Note 1 “Organization and Significant Accounting Policies” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the three and six months ended October  28, 2017.

 

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. We do not currently have any significant interest rate exposure.

 

Foreign Currency Exchange Rate Risk

 

Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date, and do not expect to incur significant foreign exchange gains or losses in the future.

 

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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.

 

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 October  28, 2017, 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 October  28, 2017, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended October  28, 2017 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).

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any material legal proceedings. We are, however, 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 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

 

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, 2017.  Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

On September 24, 2015, we announced that on September 23, 2015 our Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which we may repurchase up to $25 million of our common stock from time to time, in amounts and at prices we deem appropriate, subject to market conditions and other considerations.  Share repurchases may be executed through open market transactions or negotiated purchases and may be made under a Rule 10b5-1 plan. There is no expiration date for the program. The Share Repurchase Program does not obligate us to acquire any particular amount of common stock and may be suspended at any time by our Board of Directors. No shares were repurchased in the three and six months ended October  28, 2017. As of October  28, 2017, approximately $21.2 million remained authorized for future repurchases under this program.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

 

 

 

Exhibit
Number

    

Description

3.1(1)

 

Amended and Restated Certificate of Incorporation of AeroVironment, Inc.

3.2(2)

 

Third Amended and Restated Bylaws of AeroVironment, Inc.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32#

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document.

101.SCH

 

XBRL Taxonomy Extension Schema Document.

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1)

Incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10Q filed March 9, 2007 (File No. 00133261).

 

(2)

Incorporated by reference herein to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed July 1, 2015 (File No. 001-33261).

 

#     The information in Exhibit 32 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this report), unless the Company specifically incorporates the foregoing information into those documents by reference.

 

 

 

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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:  December 5, 2017

 

AEROVIRONMENT, INC.

 

 

 

 

By:

/s/ Wahid Nawabi

 

 

Wahid Nawabi

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

/s/ Teresa P. Covington

 

 

Teresa P. Covington

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

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