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 July 28, 2018
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 |
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95-2705790 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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800 Royal Oaks Drive, Suite 210 |
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Monrovia, California |
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91016 |
(Address of principal executive offices) |
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(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 ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
(Do not check if smaller reporting company) |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 29, 2018, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,930,623.
AeroVironment, Inc.
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Consolidated Balance Sheets as of July 28, 2018 (Unaudited) and April 30, 2018 |
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3 | ||||
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4 | |||||
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5 | |||||
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6 | |||||
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7 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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26 | |||||
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31 | ||||||
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31 | ||||||
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33 | ||||||
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33 | ||||||
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33 | ||||||
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33 | ||||||
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33 | ||||||
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33 | ||||||
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34 | ||||||
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35 | ||||||
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2
AeroVironment, Inc.
(In thousands except share and per share data)
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July 28, |
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April 30, |
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2018 |
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2018 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
170,788 |
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$ |
143,517 |
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Short-term investments |
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118,303 |
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113,649 |
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Accounts receivable, net of allowance for doubtful accounts of $1,033 at July 28, 2018 and $1,080 at April 30, 2018 |
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13,802 |
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56,813 |
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Unbilled receivables and retentions (inclusive of related party unbilled receivables of $9,504 at July 28, 2018 and $3,145 at April 30, 2018) |
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59,870 |
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16,872 |
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Inventories, net |
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42,244 |
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37,425 |
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Prepaid expenses and other current assets |
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5,196 |
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5,103 |
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Current assets of discontinued operations |
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— |
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25,668 |
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Total current assets |
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410,203 |
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399,047 |
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Long-term investments |
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36,712 |
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40,656 |
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Property and equipment, net |
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19,347 |
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19,219 |
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Deferred income taxes |
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11,800 |
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11,494 |
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Other assets |
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2,299 |
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3,002 |
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Total assets |
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$ |
480,361 |
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$ |
473,418 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
12,939 |
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$ |
21,340 |
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Wages and related accruals |
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10,624 |
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16,851 |
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Income taxes payable |
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8,898 |
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4,085 |
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Customer advances |
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1,627 |
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3,564 |
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Other current liabilities |
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6,664 |
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6,954 |
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Current liabilities of discontinued operations |
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— |
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9,294 |
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Total current liabilities |
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40,752 |
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62,088 |
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Deferred rent |
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1,476 |
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1,536 |
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Other non-current liabilities |
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958 |
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622 |
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Deferred tax liability |
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67 |
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67 |
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Liability for uncertain tax positions |
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49 |
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49 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $0.0001 par value: |
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Authorized shares—10,000,000; none issued or outstanding at July 28, 2018 and April 30, 2018 |
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— |
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— |
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Common stock, $0.0001 par value: |
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Authorized shares—100,000,000 |
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Issued and outstanding shares—23,923,342 shares at July 28, 2018 and 23,908,736 at April 30, 2018 |
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2 |
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2 |
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Additional paid-in capital |
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170,789 |
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170,139 |
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Accumulated other comprehensive income (loss) |
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16 |
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(21) |
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Retained earnings |
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266,243 |
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238,913 |
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Total AeroVironment stockholders’ equity |
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437,050 |
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409,033 |
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Noncontrolling interest |
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9 |
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23 |
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Total equity |
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437,059 |
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409,056 |
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Total liabilities and stockholders’ equity |
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$ |
480,361 |
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$ |
473,418 |
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See accompanying notes to consolidated financial statements (unaudited).
3
AeroVironment, Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)
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Three Months Ended |
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July 28, |
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July 29, |
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2018 |
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2017 |
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Revenue: |
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Product sales |
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$ |
55,313 |
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$ |
18,780 |
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Contract services (inclusive of related party revenue of $11,563 and $2,551 for the three months ended July 28, 2018 and July 29, 2017, respectively) |
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22,730 |
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15,581 |
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78,043 |
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34,361 |
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Cost of sales: |
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Product sales |
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29,811 |
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15,972 |
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Contract services |
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15,643 |
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9,691 |
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45,454 |
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25,663 |
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Gross margin: |
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Product sales |
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25,502 |
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2,808 |
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Contract services |
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7,087 |
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5,890 |
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32,589 |
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8,698 |
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Selling, general and administrative |
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11,956 |
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11,287 |
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Research and development |
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6,435 |
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5,542 |
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Income (loss) from continuing operations |
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14,198 |
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(8,131) |
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Other income: |
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Interest income, net |
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906 |
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512 |
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Other income, net |
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8,388 |
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4 |
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Income (loss) from continuing operations before income taxes |
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23,492 |
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(7,615) |
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Provision (benefit) for income taxes |
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2,567 |
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(3,221) |
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Equity method investment activity, net of tax |
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(602) |
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— |
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Net income (loss) from continuing operations |
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20,323 |
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(4,394) |
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Discontinued operations: |
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Gain on sale of business, net of tax expense of $2,577 |
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8,843 |
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— |
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Loss from discontinued operations, net of tax |
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(1,850) |
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(1,488) |
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Net income (loss) from discontinued operations |
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6,993 |
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(1,488) |
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Net income (loss) |
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27,316 |
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(5,882) |
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Net loss attributable to noncontrolling interest |
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14 |
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23 |
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Net income (loss) attributable to AeroVironment |
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$ |
27,330 |
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$ |
(5,859) |
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Net income (loss) per share attributable to AeroVironment—Basic |
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Continuing operations |
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$ |
0.86 |
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$ |
(0.19) |
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Discontinued operations |
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0.30 |
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(0.06) |
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Net income (loss) per share attributable to AeroVironment—Basic |
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$ |
1.16 |
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$ |
(0.25) |
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Net income (loss) per share attributable to AeroVironment—Diluted |
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Continuing operations |
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$ |
0.85 |
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$ |
(0.19) |
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Discontinued operations |
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0.29 |
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(0.06) |
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Net income (loss) per share attributable to AeroVironment—Diluted |
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$ |
1.14 |
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$ |
(0.25) |
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Weighted-average shares outstanding: |
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Basic |
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23,574,595 |
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23,336,305 |
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Diluted |
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24,010,303 |
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23,336,305 |
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See accompanying notes to consolidated financial statements (unaudited).
4
AeroVironment, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
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Three Months Ended |
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July 28, |
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July 29, |
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2018 |
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2017 |
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Net income (loss) |
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$ |
27,316 |
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$ |
(5,882) |
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Other comprehensive income: |
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Change in foreign currency translation adjustments |
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(20) |
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— |
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Unrealized gain on investments, net of deferred tax expense of $51 and $4, respectively |
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57 |
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2 |
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Total comprehensive income (loss) |
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27,353 |
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(5,880) |
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Net loss attributable to noncontrolling interest |
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14 |
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23 |
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Comprehensive income (loss) attributable to AeroVironment |
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$ |
27,367 |
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$ |
(5,857) |
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See accompanying notes to consolidated financial statements (unaudited).
5
AeroVironment, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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Three Months Ended |
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July 28, |
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July 29, |
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2018 |
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2017 |
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Operating activities |
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Net income (loss) |
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$ |
27,316 |
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$ |
(5,882) |
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Gain on sale of business, net of tax |
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(8,843) |
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— |
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Loss from discontinued operations, net of tax |
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1,850 |
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1,488 |
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Net income (loss) from continuing operations |
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20,323 |
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(4,394) |
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Adjustments to reconcile net income (loss) to cash provided by operating activities: |
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Depreciation and amortization |
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1,746 |
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1,406 |
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Loss from equity method investments |
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602 |
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— |
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Impairment of long-lived assets |
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— |
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9 |
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Provision for doubtful accounts |
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(48) |
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209 |
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Gains on foreign currency transactions |
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(2) |
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(106) |
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Deferred income taxes |
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(306) |
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(597) |
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Stock-based compensation |
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1,287 |
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1,326 |
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Amortization of held-to-maturity investments |
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(115) |
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474 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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43,189 |
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43,819 |
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Unbilled receivables and retentions |
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(42,998) |
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6,234 |
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Inventories |
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(4,819) |
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(10,224) |
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Income tax receivable |
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— |
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(3,385) |
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Prepaid expenses and other assets |
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(133) |
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358 |
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Accounts payable |
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(9,893) |
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(5,504) |
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Other liabilities |
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(3,797) |
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(4,306) |
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Net cash provided by operating activities of continuing operations |
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5,036 |
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25,319 |
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Investing activities |
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Acquisition of property and equipment |
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(1,423) |
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(2,705) |
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Proceeds from sale of business |
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31,994 |
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— |
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Redemptions of held-to-maturity investments |
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78,909 |
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59,280 |
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Purchases of held-to-maturity investments |
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(81,646) |
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(41,806) |
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Redemptions of available-for-sale investments |
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2,250 |
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450 |
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Net cash provided by investing activities from continuing operations |
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30,084 |
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15,219 |
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Financing activities |
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Principal payments of capital lease obligations |
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(57) |
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(92) |
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Tax withholding payment related to net settlement of equity awards |
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(819) |
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(212) |
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Exercise of stock options |
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67 |
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1,640 |
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Net cash (used in) provided by financing activities from continuing operations |
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(809) |
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1,336 |
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Discontinued operations |
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Operating activities of discontinued operations |
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(6,609) |
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(4,037) |
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Investing activities of discontinued operations |
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(431) |
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(268) |
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Financing activities of discontinued operations |
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— |
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— |
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Net cash used in discontinued operations |
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(7,040) |
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(4,305) |
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Net increase in cash and cash equivalents |
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27,271 |
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37,569 |
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Cash and cash equivalents at beginning of period |
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143,517 |
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|
79,904 |
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Cash and cash equivalents at end of period |
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$ |
170,788 |
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$ |
117,473 |
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Supplemental disclosures of cash flow information |
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Cash (refunds) paid, net during the period for: |
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Income taxes |
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$ |
(7) |
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$ |
1,803 |
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Non-cash activities |
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|
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Unrealized gain on investments, net of deferred tax expense of $51 and $4, respectively |
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$ |
57 |
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$ |
2 |
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Reclassification from share-based liability compensation to equity |
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$ |
— |
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$ |
384 |
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Change in foreign currency translation adjustments |
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$ |
(20) |
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$ |
— |
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Acquisitions of property and equipment included in accounts payable |
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$ |
595 |
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$ |
644 |
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See accompanying notes to consolidated financial statements (unaudited).
6
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”) 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 months ended July 28, 2018 are not necessarily indicative of the results for the full year ending April 30, 2019. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2018, included in the Company’s Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements include the balance sheet and results of operations of Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”), in which the Company increased its ownership to a controlling interest of 85% during the fourth quarter of the fiscal year ended April 30, 2017. Prior to the increase in ownership, the Company's investment in Altoy was accounted for under the equity method.
In December 2017, the Company and SoftBank Corp. (“SoftBank”) formed a joint venture, HAPSMobile, Inc. (“HAPSMobile”). As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment has been accounted for as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in “Equity method investment activity, net of tax” in the consolidated statements of operations. The carrying value of the investment in HAPSMobile was recorded in “Other assets.” Refer to Note 6—Equity Method Investments for further details.
On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its efficient energy systems business segment (“the EES Business”) to Webasto Charging Systems, Inc. (“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company. The Company determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represents a strategic shift in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. Refer to Note 2—Discontinued Operations for further details.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
7
Recently Adopted Accounting Standards
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
In the first quarter of its fiscal 2019, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective method. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services.
Revenue for small UAS product contracts with both the U.S. government and foreign governments under the new standard will be recognized at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. Revenue for Tactical Missile Systems (“TMS”) contracts will now be recognized under the new standard over time as costs are incurred. Under previous U.S. GAAP, revenue was generally recognized when deliveries of the related TMS products were made. The new standard accelerates the timing of when the revenue is recognized; however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for the Company’s Customer-Funded Research and Development (“R&D”) contracts. The Company continues to recognize revenue for these contracts over time as costs are incurred. The adoption of Topic 606 resulted in a cumulative adjustment to decrease retained earnings by $1,084,000 at May 1, 2018 relating to both the Company’s continuing and discontinued operations. For the Company’s continuing operations, the adoption of Topic 606 resulted in a cumulative adjustment to increase retained earnings by $1,063,000 at May 1, 2018.
The Company applied the standard’s practical expedient that permits the omission of prior-period information about the Company’s remaining performance obligations, the practical expedient that permits the Company to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset the entity otherwise would have recognized is one year or less, and the practical expedient that permits the Company to not retrospectively restate contracts which were modified prior to the Company’s initial date of adoption, or May 1, 2016. Instead the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price. No other practical expedients were applied.
Revenue Recognition
The Company’s revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to the specifications of the customers. These contracts may be firm fixed price (“FFP”), cost plus fixed fee (“CPFF”), or time and materials (“T&M”). The Company considers all such contracts to be within the scope of ASC Topic 606.
Performance Obligations
A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit
8
of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its observable standalone selling price for products and services. When the standalone selling price is not directly observable, the Company uses its best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus margin approach. This approach estimates the Company’s expected costs of satisfying the performance obligation and then adds an appropriate margin for that distinct good or service.
Contract modifications are routine in the performance of the Company’s contracts. In most instances, contract modifications are for additional goods and/or services that are distinct and, therefore, accounted for as new contracts.
The Company’s performance obligations are satisfied over time or at a point in time. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs, if the customer controls the asset as it is being developed or produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment for the Company’s costs incurred to date plus a reasonable margin. The contractual right to payment is generally supported by termination for convenience clauses that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. Revenue for TMS product deliveries and Customer-Funded R&D contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue is recognized over time as services are rendered. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Training services are recognized over time using an output method based on days of training completed.
For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. The Company’s small UAS product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.
On July 28, 2018, the Company had approximately $157,049,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog. The Company currently expects to recognize approximately 82% of the remaining performance obligations as revenue in fiscal 2019, an additional 13% in fiscal 2020, and the balance thereafter.
The Company collects sales, value add, and other taxes concurrent with revenue producing activities, which are excluded from revenue when they are both imposed on a specific transaction and collected from a customer.
Contract Estimates
Accounting for contracts and programs primarily with a duration of less than six months involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the total expected costs to complete the contract and recognizes revenue based on the percentage of costs incurred at period end. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial
9
contracts.
Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer.
The nature of the Company’s contracts gives rise to several types of variable consideration, including penalty fees and incentive awards generally for late delivery and early delivery, respectively. The Company generally estimates such variable consideration as the most likely amount. In addition, the Company includes the estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. Because of the certainty in estimating these amounts, they are included in the transaction price of the Company’s contracts and the associated remaining performance obligations.
As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company regularly reviews and updates its contract-related estimates. Changes in cumulative revenue estimates, due to changes in the estimated transaction price or cost estimates, are recorded using a cumulative catch-up adjustment in the period identified for contracts with performance obligations recognized over time. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on the Company’s operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was not significant for the three-month periods ended July 28, 2018 and July 29, 2017. No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three-month periods ended July 28, 2018 and July 29, 2017.
Revenue by Category
Revenue from products and services during the three months ended July 28, 2018 consisted of revenue derived from over 160 active contracts. The following tables present the Company’s revenue disaggregated by major product line, contract type, customer category and geographic location:
|
|
Three Months Ended |
|
||||
|
|
July 28, |
|
July 29, |
|
||
Revenue by major product line/program |
|
2018 |
|
2017 |
|
||
Small UAS |
|
$ |
41,216 |
|
$ |
20,061 |
|
TMS |
|
|
22,766 |
|
|
9,565 |
|
HAPS |
|
|
11,563 |
|
|
2,551 |
|
Other |
|
|
2,498 |
|
|
2,184 |
|
Total revenue |
|
$ |
78,043 |
|
$ |
34,361 |
|
|
|
Three Months Ended |
|
||||
|
|
July 28, |
|
July 29, |
|
||
Revenue by contract type |
|
2018 |
|
2017 |
|
||
FFP |
|
$ |
58,003 |
|
$ |
25,854 |
|
CPFF |
|
|
19,983 |
|
|
8,373 |
|
T&M |
|
|
57 |
|
|
134 |
|
Total revenue |
|
$ |
78,043 |
|
$ |
34,361 |
|
10
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with FFP contracts. However, these types of contracts generally offer additional profits when the Company completes the work for less than originally estimated. CPFF contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees on FFP contracts. Under T&M contracts, the Company’s profit may vary if actual labor hour rates vary significantly from the negotiated rates.
|
|
Three Months Ended |
|
||||
|
|
July 28, |
|
July 29, |
|
||
Revenue by customer category |
|
2018 |
|
2017 |
|
||
U.S. government: |
|
$ |
35,908 |
|
$ |
22,893 |
|
Non-U.S. government |
|
|
42,135 |
|
|
11,468 |
|
Total revenue |
|
|
78,043 |
|
|
34,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
July 28, |
|
July 29, |
|
||
Revenue by geographic location |
|
2018 |
|
2017 |
|
||
Domestic |
|
$ |
35,352 |
|
$ |
21,570 |
|
International |
|
|
42,691 |
|
|
12,791 |
|
Total revenue |
|
$ |
78,043 |
|
$ |
34,361 |
|
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits on the consolidated balance sheet. In the Company’s services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, which is generally monthly, or upon the achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets recorded in “Unbilled receivables and retentions” on the consolidated balance sheet. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities recorded in “Customer advances” on the consolidated balance sheet. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. For the Company’s product revenue, the Company generally receives cash payments subsequent to satisfying the performance obligation via delivery of the product, resulting in billed accounts receivable. Changes in the contract asset and liability balances during the three-month period ended July 28, 2018 were not materially impacted by any other factors. For the Company’s contracts, there are no significant gaps between the receipt of payment and the transfer of the associated goods and services to the customer for material amounts of consideration.
Revenue recognized for the three-month periods ended July 28, 2018 and July 29, 2017 that was included in contract liability balances at the beginning of each year were $1,548,000 and $764,000, respectively.
Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of R&D, on a consolidated basis for the Company’s continuing operations. Accordingly, the Company operates its business as a single reportable segment.
Investments
The Company’s investments are accounted for as held-to-maturity and available-for-sale and reported at amortized cost and fair value, respectively.
11
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables and retentions, and accounts payable approximate cost due to the short period of time to maturity.
Government Contracts
Payments to the Company on government CPFF or T&M contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.
For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.
The Company’s revenue recognition policy calls for revenue recognized on all CPFF or T&M government contracts to be recorded at actual rates 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 July 28, 2018 and April 30, 2018, the Company had $77,000 reserved for incurred cost claim audits.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.
The reconciliation of basic to diluted shares is as follows:
|
|
|
Three Months Ended |
|
|||
Income (loss) from |
|
July 28, 2018 |
|
July 29, 2017 |
|
||
Continuing operations attributable to AeroVironment |
|
$ |
20,337 |
|
$ |
(4,371) |
|
Discontinued operations, net of tax |
|
|
6,993 |
|
|
(1,488) |
|
Net income (loss) attributable to AeroVironment |
|
$ |
27,330 |
|
$ |
(5,859) |
|
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
Weighted average common shares |
|
|
23,574,595 |
|
|
23,336,305 |
|
Dilutive effect of employee stock options, restricted stock and restricted stock units |
|
|
435,708 |
|
|
— |
|
Denominator for diluted earnings per share |
|
|
24,010,303 |
|
|
23,336,305 |
|
Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 25,392 for the three months ended July 28, 2018. Due to the net loss for the three months ended July 29, 2017, 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 256,011 for the three months ended July 29, 2017.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the
12
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 currently does not hold a large number of leases that are classified as operating leases under the existing lease standard, with the only significant leases being the Company’s various property leases. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income. This ASU permits but does not require the Company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within AOCI to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
2. Discontinued Operations
On June 29, 2018, the Company completed the sale of the EES Business to Webasto. In accordance with the terms of the Purchase Agreement, as amended by a Side Letter Agreement executed at the closing, the Company received cash consideration of $31,994,000 upon closing, which resulted in a gain of $11,420,000 which has been recorded in “Gain on sale of business, net of tax” in the consolidated statements of operations. The Company will receive additional cash consideration of $6,500,000 (the “Holdback”) upon the assignment of two of the remaining customer contracts to Webasto. The Holdback was not recorded in the Company’s consolidated financial statements as the amount was not realized or realizable as of July 28, 2018.
Concurrent with the execution of the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) to provide certain general and administrative services to Webasto for a defined period. Income from performing services under the TSA has been recorded in “Other income, net” in the consolidated statements of operations.
The Company determined that the EES Business met the criteria for classification as an asset held for sale as of April 30, 2018 and represents a strategic shift in in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. The table below presents the statements of operations data for the EES Business.
|
|
Three Months Ended |
|
||||
|
|
July 28, 2018 |
|
July 29, 2017 |
|
||
Net sales |
|
$ |
4,256 |
|
$ |
7,610 |
|
Cost of sales |
|
|
4,278 |
|
|
6,510 |
|
Gross margin |
|
|
(22) |
|
|
1,100 |
|
Selling, general and administrative |
|
|
1,453 |
|
|
2,044 |
|
Research and development |
|
|
1,065 |
|
|
919 |
|
Other income, net |
|
|
1 |
|
|
— |
|
Loss from discontinued operations before income taxes |
|
|
(2,539) |
|
|
(1,863) |
|
Benefit for income taxes |
|
|
(689) |
|
|
(375) |
|
Net loss from discontinued operations |
|
$ |
(1,850) |
|
$ |
(1,488) |
|
Gain on sale of business, net of tax expense of $2,577 |
|
|
8,843 |
|
|
— |
|
Net income (loss) from discontinued operations |
|
$ |
6,993 |
|
$ |
(1,488) |
|
13
The major classes of assets and liabilities included in discontinued operations related to the EES Business are presented in the table below.
|
|
April 30, |
|
|
|
|
2018 |
|
|
Carrying amount of assets classified as discontinued operations |
|
|
|
|
Current assets: |
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $139 at April 30, 2018 |
|
$ |
6,889 |
|
Inventories, net |
|
|
15,494 |
|
Prepaid expenses and other current assets |
|
|
185 |
|
Property and equipment, net |
|
|
3,100 |
|
Total current assets classified as discontinued operations |
|
|
25,668 |
|
Total assets classified as discontinued operations |
|
$ |
25,668 |
|
Carrying amount of liabilities classified as discontinued operations |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
|
$ |
5,121 |
|
Wages and related accruals |
|
|
1,946 |
|
Customer advances |
|
|
1,028 |
|
Other current liabilities |
|
|
1,199 |
|
Total current liabilities |
|
|
9,294 |
|
Total liabilities classified as discontinued operations |
|
$ |
9,294 |
|
3. Investments
Investments consist of the following (in thousands):
|
|
July 28, |
|
April 30, |
|
||
|
|
2018 |
|
2018 |
|
||
Short-term investments: |
|
|
|
|
|
|
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
Municipal securities |
|
$ |
14,964 |
|
$ |
35,344 |
|
U.S. government securities |
|
|
33,514 |
|
|
31,620 |
|
Corporate bonds |
|
|
66,825 |
|
|
46,685 |
|
Certificates of deposit |
|
|
3,000 |
|
|
— |
|
Total held-to-maturity and short-term investments |
|
$ |
118,303 |
|
$ |
113,649 |
|
Long-term investments: |
|
|
|
|
|
|
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
Municipal securities |
|
$ |
2,031 |
|
$ |
2,046 |
|
U.S. government securities |
|
|
28,809 |
|
|
27,356 |
|
Corporate bonds |
|
|
5,872 |
|
|
9,112 |
|
Total held-to-maturity investments |
|
|
36,712 |
|
|
38,514 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
Auction rate securities |
|
|
— |
|
|
2,142 |
|
Total available-for-sale investments |
|
|
— |
|
|
2,142 |
|
Total long-term investments |
|
$ |
36,712 |
|
$ |
40,656 |
|
Held-To-Maturity Securities
As of July 28, 2018 and April 30, 2018, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities, U.S. government-guaranteed agency securities, U.S. government-sponsored agency debt securities, highly rated corporate bonds, and certificates of deposit. Interest earned from these investments is recorded in interest income.
14
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of July 28, 2018 were as follows (in thousands):
|
|
July 28, 2018 |
|
||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
Municipal securities |
|
$ |
16,995 |
|
$ |
8 |
|
$ |
(3) |
|
$ |
17,000 |
|
U.S. government securities |
|
|
62,323 |
|
|
— |
|
|
(307) |
|
|
62,016 |
|
Corporate bonds |
|
|
72,697 |
|
|
1 |
|
|
(53) |
|
|
72,645 |
|
Certificates of deposit |
|
|
3,000 |
|
|
— |
|
|
— |
|
|
3,000 |
|
Total held-to-maturity investments |
|
$ |
155,015 |
|
$ |
9 |
|
$ |
(363) |
|
$ |
154,661 |
|
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2018 were as follows (in thousands):
|
|
April 30, 2018 |
|
||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
Municipal securities |
|
$ |
37,390 |
|
$ |
9 |
|
$ |
(36) |
|
$ |
37,363 |
|
U.S. government securities |
|
|
58,976 |
|
|
— |
|
|
(367) |
|
|
58,609 |
|
Corporate bonds |
|
|
55,797 |
|
|
2 |
|
|
(71) |
|
|
55,728 |
|
Certificates of deposit |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total held-to-maturity investments |
|
$ |
152,163 |
|
$ |
11 |
|
$ |
(474) |
|
$ |
151,700 |
|
The amortized cost and fair value of the held-to-maturity securities by contractual maturity at July 28, 2018 were as follows (in thousands):
|
|
Cost |
|
Fair Value |
|
||
Due within one year |
|
$ |
118,303 |
|
$ |
118,120 |
|
Due after one year through five years |
|
|
36,712 |
|
|
36,541 |
|
Total |
|
$ |
155,015 |
|
$ |
154,661 |
|
Available-For-Sale Securities
Auction Rate Securities
As of April 30, 2018, the entire balance of available-for-sale auction rate securities consisted of two investment grade auction rate municipal bonds with maturities ranging from 1 to 16 years. These investments have characteristics similar to short term investments, because at predetermined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses 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 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 April 30, 2018 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
15
as of April 30, 2018. 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 expectation of the next time the security is expected to have a successful auction.
During the three months ended July 28, 2018, the remaining investment grade auction rate municipal bonds were redeemed at par value.
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of April 30, 2018, were as follows (in thousands):
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
|
|
|||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
Auction rate securities |
|
$ |
2,250 |
|
$ |
— |
|
$ |
(108) |
|
$ |
2,142 |
|
Total available-for-sale investments |
|
$ |
2,250 |
|
$ |
— |
|
$ |
(108) |
|
$ |
2,142 |
|
4. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
· |
Level 1—Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date. |
· |
Level 2—Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data. |
· |
Level 3—Inputs to the valuation that are unobservable inputs for the asset or liability. |
The Company did not have any financial assets measured at fair value on a recurring basis at July 28, 2018 as the Company’s remaining auction rate securities were redeemed during the three months ended July 28, 2018 at par value. The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):
|
|
Fair Value |
|
|
|
|
Measurements Using |
|
|
|
|
Significant |
|
|
|
|
Unobservable Inputs |
|
|
Description |
|
(Level 3) |
|
|
Balance at May 1, 2018 |
|
$ |
2,142 |
|
Transfers to Level 3 |
|
|
— |
|
Total gains (realized or unrealized) |
|
|
|
|
Included in earnings |
|
|
— |
|
Included in other comprehensive income |
|
|
108 |
|
Settlements |
|
|
(2,250) |
|
Balance at July 28, 2018 |
|
$ |
— |
|
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 July 28, 2018 |
|
$ |
— |
|
16
The auction rate securities were valued using a discounted cash flow model. The analysis considered, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows and the estimated date upon which the security is expected to have a successful auction.
5. Inventories, net
Inventories consist of the following (in thousands):
|
|
July 28, |
|
April 30, |
|
||
|
|
2018 |