Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer to Part I, “Forward-Looking Statements” on page 2 and Part 1A, “Risk Factors” beginning on page 25, for a discussion of the uncertainties, risks and assumptions associated with these statements.
On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations. Therefore, the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.
Overview
We design, develop, produce, deliver and support a technologically-advanced portfolio of intelligent, multi-domain robotic systems and related services for government agencies and businesses. We supply UAS, TMS, UGV and related services primarily to organizations within the U.S. DoD and to international allied governments. We derive the majority of our revenue from these business areas and we believe that the markets for these solutions offer the potential for significant long-term growth. Additionally, we believe that some of the innovative potential products, services and technologies in our research and development pipeline will emerge as new growth platforms in the future, creating additional market opportunities.
The success of our current products and services stems from our investment in research and development and our ability to invent and deliver advanced solutions, utilizing our proprietary technologies, to help our government and commercial customers operate more effectively and efficiently. We develop these highly innovative solutions by working closely with our key customers and solving their most important challenges related to our areas of expertise. Our core technological capabilities, developed through nearly 50 years of innovation, include robotics and robotics systems autonomy; sensor design, development, miniaturization and integration; embedded software and firmware; miniature, low power wireless digital communications; lightweight aerostructures; high-altitude systems design, integration and operations; machine vision, machine learning and autonomy; low SWaP (Size, Weight and Power) system design and integration; manned-unmanned teaming, unmanned-unmanned teaming; power electronics and electric propulsion systems; efficient electric power conversion, storage systems and high density energy packaging; controls and systems integration; vertical takeoff and landing flight, fixed wing flight and hybrid aircraft flight; image stabilization and target tracking; advanced flight control systems; fluid dynamics; human-machine interface development; and integrated mission solutions for austere environments.
Our business focuses primarily on the design, development, production, marketing, support and operation of innovative UAS and TMS and the delivery of UAS-related services that provide situational awareness, remote sensing, multi-band communications, force protection and other information and mission effects to increase the safety and effectiveness of our customers’ operations.
Revenue
We generate our revenue primarily from the sale, support, design and operation of our UAS, TMS, HAPS and UGV as well as ISR services by our MUAS. Support for our small UAS and TMS customers includes training, spare
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parts, product repair, product replacement, and the customer-contracted operation of our small UAS by our personnel. Under ISR services contracts we deliver the information our MUAS produce to our customers, who use that information to support their missions. We refer to these support activities, in conjunction with customer-funded research and development (“R&D”), as our services operation. We derive most of our small UAS, MUAS, HAPS and TMS revenue from fixed-price and cost-plus-fee contracts with the U.S. government and allied foreign governments.
Cost of Sales
Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor, materials, travel, subcontracts and other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses, fringe benefits, depreciation of in-service ISR assets, amortization of acquired intangible assets and other costs that are not directly charged to a specific contract.
Gross Margin
Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to help us understand trends in our direct costs and allocated indirect costs when compared to the revenue we generate.
Selling, General and Administrative
Our selling, general and administrative expenses (“SG&A”), include salaries, fringe benefits, and other expenses related to selling, marketing and proposal activities, and other administrative costs and amortization of acquired intangible assets. Some SG&A expenses relate to marketing and business development activities that support both ongoing business areas as well as new and emerging market areas. These activities can be directly associated with developing requirements for and applications of capabilities created in our research and development (“R&D”) activities. SG&A is an important financial metric that we analyze to help us evaluate the contribution of our selling, marketing and proposal activities to revenue generation.
Research and Development Expense
R&D is an integral part of our business model. We normally conduct significant internally funded R&D. Our R&D activities focus specifically on creating capabilities that support our existing product portfolio as well as new solutions.
Other Income and Expenses
Other income and expenses includes the gain on the sale of our equity interest in HAPSMobile, legal accruals related to our former EES Business, a one-time gain from a litigation settlement, income from transition services performed on behalf of the buyer of the discontinued EES Business, interest income, interest expense, and amortization of capital lease payments.
Income Tax Expense (Benefit)
Our effective tax rates are higher than the statutory rates primarily due to R&D tax credits and excess tax benefit of equity awards.
Equity Method Investment Loss, Net of Tax
Equity method investment loss, net of tax, includes equity method income or loss related to the HAPSMobile joint venture we formed in December 2017 with SoftBank and our investment in a limited partnership fund for which we have concluded we have influence for holding more than a minor interest. In March 2022, we sold our equity interest in HAPSMobile and will no longer record equity method income (loss) of HAPSMobile.
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Loss from Discontinued Operations, Net of Tax
On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations. Therefore, the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests includes the 50% interest in the income or losses of our Turkish joint venture, Altoy, as of September 15, 2021 and 15% interest for all prior periods presented.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 1 to our consolidated financial statements entitled “Organization and Significant Accounting Policies,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.
Revenue Recognition
Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business or market conditions. Management judgments and estimates have been applied consistently and have been reliable historically. We believe that there are two key factors which impact the reliability of management’s estimates. The first of those key factors is that the terms of our contracts are typically less than six months. The short-term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis of market conditions or other factors. The second key factor is that we have hundreds of contracts in any given accounting period, which reduces the risk that any one change in an accounting estimate on one or several contracts would have a material impact on our consolidated financial statements.
The substantial majority of our revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to customer specifications. These contracts may be fixed price, cost-reimbursable, or time and materials. We account for all revenue contracts in accordance with ASC 606. A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. For contracts with multiple performance obligations, we allocate the contract’s
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transaction price to each performance obligation using observable standalone selling prices for similar products and services. When the standalone selling price is not directly observable, we use our best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus reasonable margin approach.
Our performance obligations are satisfied over time or at a point in time. Revenue for TMS product deliveries, customization of UGV transport vehicles and Customer-Funded R&D contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, including ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.
We review cost performance and estimates to complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in the estimated costs to complete for contracts using the over time method are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the fiscal years ended April 30, 2022, 2021 and 2020, changes in accounting estimates on contracts recognized using the over time method are presented below. Amounts representing contract change orders or claims are included in revenue if the order or claim meets the criteria of a contract or contract modification in accordance with ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.
For the years ended April 30, 2022, 2021 and 2020, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):
Year Ended April 30,
Gross unfavorable adjustments (2,857) (2,205) (2,019)
For the year ended April 30, 2022, favorable cumulative catch up adjustments of $1.3 million were primarily due to final cost adjustments on 19 contracts, which individually were not material. For the same period, unfavorable cumulative catch up adjustments of $2.9 million were primarily related to higher than expected costs on 10 contracts. During the year ended April 30, 2022, we revised our estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.1 million.
For the year ended April 30, 2021, favorable cumulative catch up adjustments of $2.0 million were primarily due to final cost adjustments on 12 contracts, which individually were not material. For the same period, unfavorable
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cumulative catch up adjustments of $2.2 million were primarily related to higher than expected costs on nine contracts. During the year ended April 30, 2021, we revised our estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.0 million.
For the year ended April 30, 2020, favorable cumulative catch-up adjustments of $2.2 million were primarily due to final cost adjustments on 13 contracts. During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a design and development agreement. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.1 million. For the same period, unfavorable cumulative catch-up adjustments of $2.0 million were primarily related to higher than expected costs on seven contracts. During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a TMS contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.4 million.
Inventories Reserves for Excess and Obsolescence
Our policy for valuation of inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, an estimate of future demand for products within specific time horizons, valuation of existing inventory, as well as product lifecycle and product development plans. Inventory reserves are also provided to cover risks arising from slow-moving items. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions and record to cost of sales. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
Intangible Assets – Acquired in Business Combinations
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: technology, backlog, in-process research and development, customer relationships, licenses, trademarks and tradenames, and non-compete agreements. We use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits of such assets are consumed.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.
Our evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, we may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill
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impairment loss to be recognized (if any). For the quantitative impairment test we estimate the fair value by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.
Income Taxes
Our income tax provision and related income tax assets and liabilities are based on actual and expected future income, U.S. and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which it operates. We believe that the accounting estimates related to income taxes are "critical accounting estimates" because significant judgment is required in interpreting tax regulations in the United States and in foreign jurisdictions, evaluating our worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect our consolidated financial statements.
We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes. We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assets principally depends on our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors, which may result in recording a valuation allowance against those deferred tax assets. We record a valuation allowance to reduce our deferred tax assets if, based on the weight of available evidence, we believe expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. We evaluate the level of our valuation allowances during the interim and annually.
We record unrecognized tax benefits for U.S. federal, state, local, and foreign tax positions related primarily to tax credits claimed and tax nexus. For each reporting period, we apply a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Our measurement of our unrecognized tax benefits is based on our assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments. We recognize unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more likely than not (a greater than 50% likelihood) be realized.
We have various foreign subsidiaries to conduct or support our business outside the United States. We do not provide for U.S. income taxes on undistributed earnings for our foreign subsidiaries as we expect the foreign earnings will be indefinitely reinvested in such foreign jurisdictions.
Fiscal Periods
Our fiscal year ends on April 30. Due to our fixed year end date of April 30, our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday.
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Results of Operations
The following table sets forth certain historical consolidated income statement data expressed in dollars (in thousands) and as a percentage of revenue for the periods indicated. Certain amounts may not sum due to rounding.
Fiscal Year Ended April 30,
Interest (expense) income, net (5,440) (1) % (618) — % 4,828 1 %
Other (expense) income, net (10,313) (2) % (8,330) (2) % 707 — %
Loss on sale of business, net of tax — — % — — % (265) — %
The Company operates its business as four reportable segments, small UAS, TMS, MUAS and HAPS. The small UAS segment consists of our existing small UAS product lines. The TMS segment consists of our existing tactical missile systems product lines. The MUAS segment consists of our recently acquired Arcturus business. The HAPS segment consists of our existing development of High Altitude Pseudo-Satellite systems in conjunction with SoftBank. The segment below entitled “All other” includes MacCready Works, which includes the recently acquired ISG and Telerob businesses. The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.
Small UAS TMS MUAS HAPS All other Total
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Small UAS TMS MUAS HAPS All other Total
Small UAS TMS MUAS HAPS All other Total
The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying consolidated statements of operations:
Year Ended
April 30, April 30, April 30,
Cost of sales:
Selling, general and administrative 18,075 3,007 183
Fiscal Year Ended April 30, 2022 Compared to Fiscal Year Ended April 30, 2021
Revenue. Revenue for the fiscal year ended April 30, 2022 was $445.7 million, as compared to $394.9 million for the fiscal year ended April 30, 2021, representing an increase of $50.8 million, or 13%. The increase in revenue was due to an increase in service revenue of $89.0 million, partially offset by a decrease in product revenue of $38.2 million. The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and an increase in customer-funded R&D largely resulting from our acquisition of ISG. The decrease in product revenue was primarily due to decreases in small UAS and TMS product revenue, partially offset by increases in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 2022 was $304.5 million, as compared to $230.4 million for the fiscal year ended April 30, 2021, representing an increase of $74.1 million, or 32%. The increase in cost of sales was a result of an increase in service cost of sales of $83.3 million, partially offset by a decrease in product costs of sales of $9.1 million. The increase in service cost of sales was primarily due to the increase in service revenues
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resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments. The decrease in product costs of sales was primarily due to the decrease in product revenue, unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments. Cost of sales for the fiscal year ended April 30, 2022 included $18.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $4.5 million for the fiscal year ended April 30, 2021. As a percentage of revenue, cost of sales increased from 58% to 68%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.
Gross Margin. Gross margin for the fiscal year ended April 30, 2022 was $141.2 million, as compared to $164.6 million for the fiscal year ended April 30, 2021, representing a decrease of $23.3 million, or 14%. The decrease in gross margin was due to a decrease in product margin of $29.1 million, partially offset by an increase in service margin of $5.8 million. The decrease in product margin was primarily due to the decrease in product revenue, unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments. The increase in service margin was primarily due to the increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments. As a percentage of revenue, gross margin decreased from 42% to 32%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally has lower gross margins than our product revenue, in future quarters as compared to our historical trends. Additionally, we expect inflationary and supply chain constraint trends to continue throughout our fiscal year 2023, which will negatively impact our gross margin.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2022 was $96.4 million, or 22% of revenue, compared to SG&A expense of $67.5 million, or 17% of revenue, for the fiscal year ended April 30, 2021. The increase in SG&A expense was primarily due to an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions and an increase in intangible amortization and acquisition related expenses. SG&A included $22.9 million and $11.0 million of intangible amortization expenses and acquisition-related expenses for the fiscal year ended April 30, 2022 and April 30, 2021, respectively.
Research and Development. R&D expense for the fiscal year ended April 30, 2022 was $54.7 million, or 12% of revenue, compared to R&D expense of $53.8 million, or 14% of revenue, for the fiscal year ended April 30, 2021. R&D expense increased by $0.9 million, or 2%, for the fiscal year ended April 30, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.
Interest Expense, net. Interest expense, net for the fiscal year ended April 30, 2022 was $5.4 million, compared to interest expense, net of $0.6 million for the fiscal year ended April 30, 2021. The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other Expense, net. Other expense, net for the fiscal year ended April 30, 2022 was $10.3 million, as compared to other expense, net of $8.3 million for the fiscal year ended April 30, 2021. Other expense, net for the fiscal year ended April 30, 2022 included $10 million of expense related to the Webasto legal settlement. Other expense, net for the fiscal year ended April 30, 2021 included $9.3 million of expense related to the Webasto legal accrual.
Sale of ownership in HAPSMobile Inc. joint venture. Sale of ownership in HAPSMobile Inc. joint venture for the fiscal year ended April 30, 2022 was $6.5 million gain related to the sale of our equity interest in HAPSMobile.
Income Taxes. Our effective income tax rate was 54.2% for the fiscal year ended April 30, 2022, as compared to 1.6% for the fiscal year ended April 30, 2021. The increase in our effective tax rate was primarily due to the decrease in income before income taxes and an increase in certain federal income tax credits.
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Equity method investment income (loss), net of tax. Equity method investment income, net of tax for the fiscal year ended April 30, 2022 was $4.6 million, as compared to equity method investment loss, net of $(10.5) million for the fiscal year ended April 30, 2021. The increase in equity method investment income, net of tax was primarily due to our proportionate share of the income from our limited partnership investment fund for the fiscal year ended April 30, 2022 and a loss of $8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC in the fiscal year ended April 30, 2021. With the sale of our equity interest in HAPSMobile during the fiscal year ended April 30, 2022, no future joint venture equity income or losses for HAPSMobile will be recorded.
Fiscal Year Ended April 30, 2021 Compared to Fiscal Year Ended April 30, 2020
Revenue. Revenue for the fiscal year ended April 30, 2021 was $394.9 million, as compared to $367.3 million for the fiscal year ended April 30, 2020, representing an increase of $27.6 million, or 8%. The increase in revenue was due to an increase in product revenue of $22.1 million and an increase in service revenue of $5.5 million. The increase in product revenue was primarily due to an increase in product deliveries of TMS and small UAS. The decrease in service revenue was primarily due to a decrease in customer-funded R&D primarily associated with a design and development agreement, partially offset by an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and customer-funded R&D primarily associated with TMS.
Cost of Sales. Cost of sales for the fiscal year ended April 30, 2021 was $230.4 million, as compared to $214.2 million for the fiscal year ended April 30, 2020, representing an increase of $16.2 million, or 8%. The increase in cost of sales was a result of an increase in product cost of sales of $10.6 million and an increase in service costs of sales of $5.6 million. The increase in product costs of sales was primarily due to an increase in product sales. The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus in February 2021, partially offset by a decrease in service revenues for the HAPS segment. Cost of sales for fiscal 2021 included $1.7 million and $2.8 million of intangible amortization expense and other related non-cash purchase accounting expense as compared to $2.4 million for the fiscal year ended April 30, 2020. As a percentage of revenue, cost of sales remained consistent at 58%.
Gross Margin. Gross margin for the fiscal year ended April 30, 2021 was $164.6 million, as compared to $153.1 million for the fiscal year ended April 30, 2020, representing an increase of $11.5 million, or 7%. The increase in gross margin was primarily due to an increase in product margin of $11.5 million. The increase in product gross margin was primarily due to an increase in product sales, partially offset by a decrease in service revenues and a favorable mix. As a percentage of revenue, gross margin remained consistent at 42%.
Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2021 was $67.5 million, or 17% of revenue, compared to SG&A expense of $59.5 million, or 16% of revenue, for the fiscal year ended April 30, 2020. The increase in SG&A expense was primarily due to an increase in acquisition related expenses of $6.5 million primarily related to the acquisition of Arcturus, ISG and Telerob and an increase in intangible amortization expense of $2.8 million.
Research and Development. R&D expense for the fiscal year ended April 30, 2021 was $53.8 million, or 14% of revenue, compared to R&D expense of $46.5 million, or 13% of revenue, for the fiscal year ended April 30, 2020. R&D expense increased primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines.
Interest (Expense) Income, net. Interest expense, net for the fiscal year ended April 30, 2021 was $0.6 million, compared to interest income net of $4.8 million for the fiscal year ended April 30, 2020. The increase in interest expense is primarily due to a combination of a decrease in the average interest rates earned on our investments portfolio and a decrease in the average investment balances and an increase in interest expense of $0.9 million resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other (Expense) Income, net. Other expense, net for the fiscal year ended April 30, 2021 was $8.3 million, as compared to other income, net of $0.7 million for the fiscal year ended April 30, 2020. The increase in other expense, net was primarily due to a legal accrual related to our former EES Business.
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Income Taxes. Our effective income tax rate was 1.6% for the fiscal year ended April 30, 2021, as compared to 11.1% for the fiscal year ended April 30, 2020. The decrease in our effective tax rate was primarily due to the decrease in income before income taxes and an increase in certain federal income tax credits.
Equity method investment loss, net of tax. Equity method investment loss, net of tax for the fiscal year ended April 30, 2021 was $10.5 million, as compared to equity method investment loss, net of $5.5 million for the fiscal year ended April 30, 2020. The increase was primarily due to a loss of $8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC.
Loss on sale of business, net of tax. Loss on sale of business, net of tax for the fiscal year ended April 30, 2021 was $0, as compared to $0.3 million for the fiscal year ended April 30, 2020. The loss on sale of business, net of tax related to the sale of our former EES Business during the fiscal year ended April 30, 2019. We recorded an adjustment related to a settled working capital dispute during the fiscal year ended April 30, 2020.
Liquidity and Capital Resources
On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement (as amended February 4, 2022, the “Credit Agreement”) for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and (ii) a five-year amortized $200 million term A loan (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $4.2 million as of April 30, 2022. As of April 30, 2022, approximately $95.8 million was available under the Revolving Facility. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 12—Debt to our financial statements for further details.
We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities including those provided by our recent acquisitions of Arcturus, ISG and Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Agreement. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
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Our working capital requirements vary by contract type. On cost-plus-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 expenses incurred during the lead time from contract award until contract deliveries begin.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In consideration of the impact of the ongoing COVID-19 pandemic, we continue to hold a significant portion of our investments in U.S. government and U.S. government agency securities.
During the fiscal year ended April 30, 2022, we made certain commitments outside of the ordinary course of business, including capital contribution commitments to a second limited partnership fund. Under the terms of the new limited partnership agreement, we have committed to make capital contributions to such fund totaling $20.0 million, inclusive of the expected reinvestment of distributions from our existing limited partnership fund, of which $20.0 million was remaining at April 30, 2022. The contributions are anticipated to be paid over the next five fiscal years. The remaining $15 million obligation under the legal settlement with Webasto will be paid during the fiscal year ending April 30, 2023.
Cash Flows
The following table provides our cash flow data from continuing operations for the periods ended:
Fiscal Year Ended April 30,
(In thousands)
Cash (Used in) Provided by Operating Activities. Net cash used in operating activities for the fiscal year ended April 30, 2022 increased by $96.2 million to $9.6 million, compared to net cash provided by operating activities of $86.5 million for the fiscal year ended April 30, 2021. This increase in net cash used in operating activities was primarily due to an increase in the cash used as a result of changes in operating assets and liabilities of $98.5 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, increases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and increases in accounts payable due to year over year timing differences, and an increase in net loss of $27.5 million, partially offset by an increase in non-cash expenses of $29.9 million primarily due to an increase in depreciation and amortization, partially offset by gains from equity method investments.
Net cash provided by operating activities for the fiscal year ended April 30, 2021 increased by $61.4 million to $86.5 million, compared to net cash provided by operating activities of $25.1 million for the fiscal year ended April 30, 2020. This increase in net cash provided by operating activities was primarily due to an increase in the cash provided as a result of changes in operating assets and liabilities of $66.9 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, partially offset by decreases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and decreases in prepaid expenses and other assets due to year over year timing differences, and an increase in non-cash expenses of $12.5 million primarily due to an increase in depreciation and amortization and loss from equity method investments.
Cash (Used in) Provided by Investing Activities. Net cash used in investing activities decreased by $326.5 million to $52.3 million for the fiscal year ended April 30, 2022, compared to net cash used in investing activities of $378.8 million for the fiscal year ended April 30, 2021. The decrease in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021,
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partially offset by the acquisition of Telerob, net of cash for $46.2 million, and a decrease in purchases of available-for-sale investments of $101.8 million, partially offset by a decrease in redemptions of available-for-sale investments of $110.6 million and an increase in the acquisition of property and equipment of $11.0 million to support our existing and newly acquired businesses. During the fiscal years ended April 30, 2022 and 2021, we used cash to purchase property and equipment totaling $22.3 million and $11.3 million, respectively.
Net cash used in investing activities increased by $437.9 million to $378.7 million for the fiscal year ended April 30, 2021, compared to net cash provided by investing activities of $59.2 million for the fiscal year ended April 30, 2020. The increase in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021 and a decrease in redemptions of available-for-sale investments net of purchases. During the fiscal years ended April 30, 2021 and 2020, we used cash to purchase property and equipment totaling $11.3 million and $11.2 million, respectively.
Cash (Used in) Provided by Financing Activities. Net cash used in financing activities increased by $210.8 million to $16.6 million for the fiscal year ended April 30, 2022, compared to net cash provided by financing activities of $194.2 million for the fiscal year ended April 30, 2021. The increase in net cash provided by financing activities was primarily due to the proceeds of long-term debt of $200.0 million in the fiscal year ended April 30, 2021 and the principal payment of the loan in the fiscal year ended April 30, 2022 of $10.0 million.
Net cash provided by financing activities increased by $196.0 million to $194.2 million for the fiscal year ended April 30, 2021, compared to net cash used in financing activities of $1.8 million for the fiscal year ended April 30, 2020. The increase in net cash provided by financing activities was primarily due to the proceeds of long-term debt of $200.0 million, partially offset by payment of debt issuance costs of $3.9 million.
Contractual Obligations
The following table describes our commitments to settle contractual obligations as of April 30, 2022:
Payments Due By Period (2)
Less Than More Than
Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years
(In thousands)
Webasto legal settlement 15,000 15,000 — — —
Recently Adopted Accounting Standards
Effective May 1, 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU 2019-12”). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, including removing the requirement to limit income tax expense (benefit) in an interim period to the full year projected amounts. We adopted ASU 2019-12 using the prospective method, applying the new guidance accounting for income taxes after adoption. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.
New Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 requires an acquirer to
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apply the guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 is adopted prospectively and could impact future acquisitions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into the Credit Facilities. As of April 30, 2022, the current outstanding balance of the Credit Facilities is $190 million and bears a variable interest rate. If market interest rates increase significantly, interest due on the Credit Facilities would increase. An increase or decrease in the variable interest rate of 100 basis points would result in an increase or decrease to our interest expense for the fiscal year ending April 30, 2023 of approximately $1.9 million.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date. We currently do not engage in forward contracts or other derivatives in foreign currencies to limit our exposure on non-U.S. dollar transactions. With the acquisition of Telerob, who does conduct sales denominated in Euros, we are exposed to future foreign exchange gains or losses, and we will consider methods to limit our exposure on non-U.S. dollar transactions in the future.
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Item 8. Financial Statements and Supplementary Data.
AeroVironment, Inc.
Audited Consolidated Financial Statements
Index to Consolidated Financial Statements and Supplementary Data
Page
Report of Independent Registered Public Accounting Firm (PCAOB 34) 74
Consolidated Balance Sheets at April 30, 2022 and 2021 77
Notes to Consolidated Financial Statements 82
Supplementary Data
All other schedules are omitted because they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of AeroVironment, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AeroVironment, Inc. and subsidiaries (the "Company") as of April 30, 2022 and 2021, the related consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity, and cash flows, for each of the three years in the period ended April 30, 2022, and the related notes and the schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 28, 2022, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Acquisitions – Refer to Note 1 and 21 to the financial statements
Critical Audit Matter Description
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to the terms of the Telerob Purchase Agreement for total consideration of approximately $47.0 million, net of cash acquired, which includes the Company’s estimate of contingent consideration of $.9 million based on the achievement of certain revenue targets, awards and/or orders from the U.S. military prior to the end of a 36-month post-closing period. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets
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acquired and liabilities assumed based on their respective fair values, resulting in technology of $11.5 million, customer relationships of $5.0 million, backlog of $2.4 million and goodwill of $20.8 million. Management estimated the fair value of the intangible assets using discounted cash flow analyses, which were based on the Company’s best estimate of future revenues, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Determining the fair value of the intangible assets acquired required management to make significant estimates and assumptions related to future revenue projections.
We identified the assumptions related to estimating the amount and timing of expected future revenues to be a critical audit matter given the inherent judgment involved in estimating these amounts. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the expected amount and timing of future revenue used to estimate the fair value of the intangible assets acquired included the following, among others:
Goodwill— Refer to Note 1 and Note 7 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company estimates the fair value by weighting the results from the income approach and the market approach. The income approach incorporates the use of cash flow projections and a discount rate that are developed using market participant-based assumptions. The cash-flow projections are based on seven-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth. The selected discount rate considers the risk and nature of the respective reporting unit’s cash flows and the rates of return market participants would require to invest their capital in its reporting units. The market approach utilizes the guideline public company and guideline transaction methods. The goodwill balance was $334.3 million as of April 30, 2022, of which $290.2 million relates to the MUAS Reporting Unit (“MUAS”) as a result of the acquisition of Arcturus, $20.8 million relates to the UGV Reporting Unit (“UGV”) as a result of the acquisition of Telerob, and $23.3 million relates to other historical acquisitions. The fair values of all reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized. Determining the fair values of the reporting units required management to make significant estimates and assumptions related to future revenue projections.
We identified the assumptions related to estimating the amount and timing of expected future revenue used in determining the fair values of the MUAS and UGV reporting units as a critical audit matter because of the significant judgments involved in estimating these amounts. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the expected amount and timing of future revenue used to estimate the fair values of the MUAS and UGV reporting units included the following, among others:
/s/ Deloitte & Touche LLP
Los Angeles, California
June 28, 2022
We have served as the Company’s auditor since fiscal 2020.
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AEROVIRONMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
April 30,
Assets
Current assets:
Income taxes receivable 442 —
Prepaid expenses and other current assets 11,527 15,001
Property and equipment, net 62,296 58,896
Operating lease right-of-use assets 26,769 22,902
Deferred income taxes 7,290 2,061
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt 10,000 10,000
Current operating lease liabilities 6,819 6,154
Income taxes payable 759 861
Long-term debt, net of current portion 177,840 187,512
Non-current operating lease liabilities 21,915 19,103
Other non-current liabilities 768 10,141
Liability for uncertain tax positions 1,450 3,518
Deferred income taxes 2,626 —
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Common stock, $0.0001 par value:
Accumulated other comprehensive (loss) income (6,514) 343
Total AeroVironment, Inc. stockholders’ equity 607,969 612,093
Noncontrolling interest 241 14
Total liabilities and stockholders’ equity $ 914,200 $ 928,566
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands except share and per share data)
Year Ended April 30,
Revenue:
Cost of sales:
Gross margin:
Other (loss) income:
Interest (expense) income, net (5,440) (618) 4,828
Sale of ownership in HAPSMobile Inc. joint venture 6,497 — —
(Benefit from) provision for income taxes (10,369) 539 5,848
Net (loss) income from continuing operations (4,185) 23,345 41,335
Discontinued operations:
Net loss from discontinued operations — — (265)
Continuing operations $ (0.17) $ 0.97 $ 1.74
Discontinued operations — — (0.01)
Continuing operations $ (0.17) $ 0.96 $ 1.72
Discontinued operations — — (0.01)
Weighted-average shares outstanding:
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Year Ended April 30,
Other comprehensive (loss) income:
Change in foreign currency translation adjustments (6,814) 75 276
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)
Accumulated
Additional Other Total Non-
Shares Amount Capital Earnings (Loss) Income Equity Interest Total
Unrealized gain on investments — — — — 50 50 — 50
Foreign currency translation — — — — 276 276 — 276
Stock options exercised 16,189 — 100 — — 100 — 100
Restricted stock awards 131,991 — — — — — — —
Restricted stock awards forfeited (12,541) — — — — — — —
Stock-based compensation — — 6,227 — — 6,227 — 6,227
Unrealized loss on investments — — — — (60) (60) — (60)
Foreign currency translation — — — — 75 75 — 75
Restricted stock awards 117,468 — — — — — — —
Restricted stock awards forfeited (5,509) — — — — — — —
Stock-based compensation — — 6,932 — — 6,932 — 6,932
Net (loss) income — — — (4,188) — (4,188) 3 (4,185)
Unrealized loss on investments — — — — (43) (43) — (43)
Restricted stock awards 104,402 — — — — — — —
Restricted stock awards forfeited (32,120) — — — — — — —
Stock based compensation — — 5,390 — — 5,390 — 5,390
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended April 30,
Operating activities
Loss on sale of business, net of tax — — 265
Net (loss) income from continuing operations (4,185) 23,345 41,335
Amortization of debt issuance costs 789 145 —
Provision for doubtful accounts (6) (114) 388
Other non-cash expense (income) 649 (449) (703)
Loss on foreign currency transactions 233 1 1
Loss (gain) on disposal of property and equipment 8,277 123 (71)
Amortization of debt securities 242 309 (1,423)
Unbilled receivables and retentions (31,883) 8,381 (22,790)
Income taxes receivable (442) — 821
Prepaid expenses and other assets (4,534) (6,104) 831
Investing activities
Acquisition of property and equipment (22,289) (11,263) (11,220)
Proceeds from loan repayment 4,345 — —
Proceeds from sale of property and equipment — — 81
Redemptions of held-to-maturity investments — — 185,917
Purchases of held-to-maturity investments — — (176,757)
Other 224 — —
Financing activities
Principal payments of term loan (10,000) — —
Payment of contingent consideration — — (868)
Payment of debt issuance costs (293) (3,878) —
Proceeds from long-term debt — 200,000 —
Other (31) — —
Supplemental disclosures of cash flow information
Cash paid, net during the period for:
Interest $ 5,025 $ — $ —
Non-cash activities
Issuance of common stock for business acquisition $ — $ 72,384 $ —
Change in foreign currency translation adjustments $ (6,814) $ 75 $ 276
See accompanying notes to consolidated financial statements.
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AEROVIRONMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
AeroVironment, Inc., a Delaware corporation, is engaged in the design, development, production, delivery and support of a technologically advanced portfolio of intelligent, multi-domain robotic systems and related services for government agencies and businesses. AeroVironment, Inc. supplies unmanned aircraft systems (“UAS”), tactical missile systems (“TMS”), unmanned ground vehicles (“UGV”) and related services primarily to organizations within the U.S. Department of Defense (“DoD”) and to international allied governments.
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AeroVironment, Inc. and its wholly-owned subsidiaries Arcturus UAV, Inc. (“Arcturus”), and Telerob Gesellschaft für Fernhantierungstechnik mbH (“Telerob”), as well as the Company’s Turkish joint venture, Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”) (collectively referred to herein as the “Company”).
On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its efficient energy systems business segment (the “EES Business”) to Webasto Charging Systems, Inc. (“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company. The Company determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in the Company’s operations. Therefore, the results of operations of the EES Business are reported as discontinued operations for all periods presented. Refer to Note 2—Discontinued Operations for further details.
On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unit Purchase Agreement (the “Pulse Purchase Agreement”). The assets, liabilities and operating results of Pulse have been included in the Company’s consolidated financial statements. In February 2021, the Company dissolved its wholly-owned subsidiary, Pulse Aerospace, LLC, the results of which were not material to the consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On February 19, 2021, the Company closed its acquisition of Arcturus, a California corporation pursuant to a Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus and each of the shareholders and other equity interest holders of Arcturus (collectively, the “Arcturus Sellers”), to purchase 100% of the issued and outstanding equity of Arcturus (the “Arcturus Acquisition”). The assets, liabilities and operating results of Arcturus have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation, a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date by and among the Company, ISG Seller and the sole shareholder of ISG Seller (the “Beneficial Owner,” and such acquisition of ISG, the “ISG Acquisition”). The assets, liabilities and operating results of ISG have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
On May 3, 2021, the Company closed its acquisition of Telerob pursuant to its previously announced Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Seller (collectively, the “Telerob Shareholders”), to purchase 100% of the issued and outstanding shares of Telerob
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Seller’s wholly-owned subsidiary Telerob GmbH (the “Telerob Acquisition”). The assets, liabilities and operating results of Telerob GmbH have been included in the Company’s consolidated financial statements. Refer to Note 21—Business Acquisitions for further details.
Investments in Companies Accounted for Using the Equity or Cost Method
Investments in other non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not provided for as the Company is not obligated to provide additional capital. The Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended.
When an investment accounted for using the equity method issues its own shares, the subsequent reduction in the Company’s proportionate interest in the investee is reflected in equity as an adjustment to paid-in-capital. The Company evaluates its investments in companies accounted for by the equity or cost method for impairment when there is evidence or indicators that a decrease in value may be other than temporary.
In December of 2017, the Company and SoftBank Corp. (“SoftBank”) formed a joint venture, HAPSMobile Inc. (“HAPSMobile”). In March 2022, the Company sold its 7% share of HAPSMobile to Softbank. Following the sale, Softbank owns 100% of HAPSMobile. Prior to the sale, as the Company had the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment is accounted as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in equity method investment loss, net of tax in the consolidated statement of operations. The carrying value of the investment in HAPSMobile was recorded in other assets. Refer to Note 9 – Equity Method Investments for further details.
In July 2019, the Company made its initial capital contribution to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets. In March 2022, the Company entered into a second related limited partnership fund also focusing on highly relevant technologies and start-up companies serving defense and industrial markets. The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest. Refer to Note 9 – Equity Method Investments for further details.
Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of research and development (“R&D”). Accordingly, the Company identifies four reportable segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management include, but are not limited to, valuation of: inventory, available-for-sale securities, acquired intangibles, goodwill, deferred tax assets and liabilities, useful lives of property, plant and equipment, medical and dental liabilities, warranty liabilities, long-term incentive plan liabilities and estimates of
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anticipated contract costs and transaction price utilized in the revenue recognition process. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. The Company’s cash equivalents are comprised of money market funds, certificates of deposit of major financial institutions, and U.S. Treasury bills.
Restricted Cash
The Company classifies cash accounts which are not available for general use as restricted cash. Pursuant to the terms of the Arcturus Purchase Agreement, the Company maintained escrow accounts to address final purchase price adjustments post-Arcturus Closing and to address Arcturus UAV’s and/or the Sellers’ indemnification obligations. The restricted funds in the escrow account were recorded in other assets on the consolidated balance sheet. During the fiscal year ended April 30, 2022, the restricted cash was released, and the Company had no restricted cash as of April 30, 2022. As of April 30, 2021 restricted cash was $8,322,000.
Investments
The Company’s investments are accounted for as held-to-maturity reported at amortized cost and available-for-sale reported at fair value.
Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes for available-for-sale investments.
Gains and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Premium and discount on investments are amortized and accreted using the interest method and charged or credited to investment income.
Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and its intent and ability to hold the investment to maturity. The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the investment is established.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost due to the short period of time to maturity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, municipal bonds, U.S. government securities, U.S. government-guaranteed agency securities, U.S. government sponsored agency debt securities, highly rated corporate bonds, and accounts receivable. The Company currently invests the majority of its cash in municipal bonds, U.S. government securities, U.S. government-guaranteed agency securities, U.S. government sponsored agency debt securities and highly rated corporate bonds. The Company’s revenue and accounts receivable are with a limited number of corporations and governmental entities. In the aggregate,