18. Commitments and Contingencies

Commitments

The Company’s operations are conducted in leased facilities. The Company finances the purchase of certain IT equipment and perpetual software licenses under capital lease arrangements. Following is a summary of non‑cancelable operating and capital lease commitments:


	April 30, 2017
	(In thousands)

		Operating leases		Capital leases
2018	$	3,492	$	304
2019		3,046		168
2020		2,888		—
2021		2,042		—
2022		1,648		—
Thereafter		2,631		—
	$	15,747		472
Less: amounts representing interest				(23)
Present value of capital lease obligations				449
Less: Current portion				(288)
Long-term portion of capital lease obligations			$	161

Rental expense under operating leases was approximately $4,612,000, $4,820,000 and $4,350,000 for the years ended April 30, 2017, 2016 and 2015, respectively.

Not included in the table above are future rental payments associated with a lease amendment executed by the Company on June 13, 2017 to amend and extend its existing lease for one of its administrative properties. The amendment extends the term of the lease until June 30, 2022 and provides a tenant improvement allowance of up to $420,332. Beginning July 1, 2017, base monthly rent under the Second Amendment will be $65,200, which amount shall increase by 2.5%, compounded annually, commencing July 1, 2018. In addition, the Company has two 5-year options to extend the term of lease at the end of the then-current term.

Contingencies

The Company is subject to legal proceedings and claims which arise out of the ordinary course of its business. Although adverse decisions or settlements may occur, the Company, in consultation with legal counsel, believes that the final disposition of such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

At April 30, 2017 and 2016, the Company had outstanding letters of credit totaling $2,070,000 and $1,080,000, respectively.

Contract Cost Audits

Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency, or 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 (“FAR”), 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.

The Defense Contract Management Agency (“DCMA”) disallowed a portion of the Company’s executive compensation and/or other costs included in the Company’s fiscal 2006, 2007 and 2008 incurred cost claims and sought interest for all three years and penalties for fiscal 2006, based on the disallowed costs. The Company appealed these cost disallowances to the Armed Services Board of Contract Appeals. For fiscal 2006, as a result of partial settlements and a decision of the Armed Services Board of Contract Appeals in March 2016, the government’s remaining claims were dismissed with prejudice. All of the government’s claims related to the Company’s 2007 and 2008 incurred cost claims were settled as of October 2015 by payment to the government of $50,000 and the government’s claims related to the Company’s 2009 and 2010 incurred cost claims were settled as of October 2015 and April 2016, respectfully, without the payment of any consideration. During the fiscal year ended April 30, 2017, the Company settled rates for its incurred cost claims for fiscal years 2011 through 2014 without payment of any consideration.

As a result of the settlement agreements and the Armed Services Board of Contract Appeals ruling, the Company reversed reserves of $3,607,000 related to those fiscal years as a credit to cost of sales, allocated as $3,203,000 to the UAS segment and $404,000 to the EES segment during the fiscal year ended April 30, 2016. At April 30, 2017 and 2016, the Company did not have any remaining reserves for incurred cost claim audits.