Business Acquisitions

6 Months Ended

Oct. 26, 2019

Business Acquisitions

Business Acquisitions

18. Business Acquisitions

On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse pursuant to the terms of the Pulse Purchase Agreement. The Company’s acquisition of Pulse’s helicopter UAS product family strengthens AeroVironment’s leading family of fixed-wing small unmanned aircraft systems and increases the mission capabilities of AeroVironment’s family of systems.

Pursuant to the Pulse Purchase Agreement, at closing, the Company paid $20,650,000 in cash, less closing indebtedness and transaction costs as defined in the Pulse Purchase Agreement, less a $250,000 retention to cover any post-closing indemnification claims, and less a $1,250,000 holdback amount, with the retention and holdback to be released to the member unit holders of Pulse, less any amounts paid or reserved, 18 months after the closing of the transactions in accordance with the terms of the Pulse Purchase Agreement. The closing cash consideration included the payoff of the outstanding indebtedness of Pulse as of the closing date. The Company financed the acquisition entirely from available cash on hand.

In addition to the consideration paid at closing, the acquisition of Pulse includes contingent consideration arrangements that require additional consideration to be paid by the Company to the sellers of Pulse if two specified research and development milestones are achieved by December 10, 2021. Amounts are payable upon the achievement of the milestones. The range of the undiscounted amounts the Company could pay under each of the contingent consideration agreements is zero or $2,500,000 ($5,000,000 in total if both milestones are achieved). The fair value of the contingent consideration recognized on the acquisition date of $4,263,000 was estimated by applying the income approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions include (1) a discount rate of 4.5% and (2) the probability that each of the milestones will be achieved.

As of October 26, 2019, there were no changes in the key assumptions for the contingent consideration recognized as a result of the acquisition of Pulse. As of October 26, 2019, the fair value of the contingent consideration was $4,344,000 recorded in other current liabilities and other non-current liabilities on the consolidated balance sheet. The increase in fair value is attributable to the accretion of the liability discount.

The following table summarizes the provisional allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the acquisition of Pulse (in thousands):

	June 10,
	2019
Technology	$	14,950
Goodwill		8,080
In-process R&D		1,370
Inventory		334
Non-compete agreements		320
Other assets, net of liabilities assumed		(614)
Total net identified assets acquired	$	24,440
Fair value of consideration:
Cash	$	18,677
Holdback		1,250
Retention		250
Contingent consideration		4,263
Total	$	24,440

Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Pulse and expected future customers in the helicopter UAS market. For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.

Supplemental Pro Forma Information (unaudited)

Pulse did not contribute significant revenues to the three or six months ended October 26, 2019 since acquisition on June 10, 2019. Other than intangible asset amortization expense of $731,000 and $1,220,000 for the three and six months ended October 26, 2019 since acquisition on June 10, 2019, the Pulse financial results were not significant. The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2018 (in thousands):

	Three Months Ended				Six Months Ended
	October 26,		October 27,		October 26,		October 27,
	2019		2018		2019		2018
Revenue	$	83,271	$	73,297	$	170,409	$	152,610
Net income attributable to AeroVironment	$	7,526	$	5,396	$	23,721	$	31,781

The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.

These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 28, 2018, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2018 with the consequential tax effects, and including the results of Pulse prior to acquisition.

The Company incurred approximately $18,000 and $359,000 of acquisition-related costs for the three and six months ended October 26, 2019. These expenses are included in selling, general and administrative expense on the Company’s consolidated income statement.

The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2018, nor are they indicative of results of operations that may occur in the future.