avav_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended January 27, 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

 

95-2705790

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

800 Royal Oaks Drive, Suite 210

 

 

Monrovia, California

 

91016

(Address of principal executive offices)

 

(Zip Code)

 

(626) 357-9983

(Registrant’s telephone number, including area code)

 

N/A

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

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

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

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of February 27, 2018, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,905,986.

 

 

 

 


 

Table of Contents

AeroVironment, Inc.

 

Table of Contents

 

 

 

 

 

Item 1. 

Financial Statements :

 

 

 

Consolidated Balance Sheets as of January 27, 2018 (Unaudited) and April 30, 2017

 

3

 

Consolidated Statements of Operations for the three and nine months ended January 27, 2018 (Unaudited) and January  28, 2017 (Unaudited)

 

4

 

Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended January 27, 2018 (Unaudited) and January 28, 2017 (Unaudited)

 

5

 

Consolidated Statements of Cash Flows for the nine months ended January 27, 2018 (Unaudited) and January 28, 2017 (Unaudited)

 

6

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

Item 2. 

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

 

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4. 

Controls and Procedures

 

29

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

30

Item 1A. 

Risk Factors

 

30

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

Item 3. 

Defaults Upon Senior Securities

 

30

Item 4. 

Mine Safety Disclosures

 

30

Item 5. 

Other Information

 

30

Item 6. 

Exhibits

 

32

Signatures 

 

33

 

 

 

 

 

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

January 27,

    

April 30,

 

 

 

2018

 

2017

 

 

    

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,304

 

$

79,904

 

Short-term investments

 

 

109,543

 

 

119,971

 

Accounts receivable, net of allowance for doubtful accounts of $1,360 at January 27, 2018 and $291 at April 30, 2017

 

 

25,690

 

 

74,361

 

Unbilled receivables and retentions

 

 

24,961

 

 

14,120

 

Inventories, net

 

 

77,327

 

 

60,076

 

Income taxes receivable

 

 

292

 

 

 —

 

Prepaid expenses and other current assets

 

 

5,138

 

 

5,653

 

Total current assets

 

 

355,255

 

 

354,085

 

Long-term investments

 

 

38,822

 

 

42,096

 

Property and equipment, net

 

 

21,626

 

 

19,220

 

Deferred income taxes

 

 

14,837

 

 

15,089

 

Other assets

 

 

2,305

 

 

2,010

 

Total assets

 

$

432,845

 

$

432,500

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

13,249

 

$

20,283

 

Wages and related accruals

 

 

15,090

 

 

12,966

 

Income taxes payable

 

 

 —

 

 

1,418

 

Customer advances

 

 

3,555

 

 

3,317

 

Other current liabilities

 

 

8,651

 

 

10,079

 

Total current liabilities

 

 

40,545

 

 

48,063

 

Deferred rent

 

 

1,589

 

 

1,719

 

Capital lease obligations - net of current portion

 

 

 7

 

 

161

 

Other non-current liabilities

 

 

184

 

 

184

 

Deferred tax liability

 

 

67

 

 

116

 

Liability for uncertain tax positions

 

 

64

 

 

64

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—10,000,000; none issued or outstanding at January 27, 2018 and April 30, 2017

 

 

 —

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—100,000,000

 

 

 

 

 

 

 

Issued and outstanding shares—23,906,043 shares at January 27, 2018 and 23,630,419 at April 30, 2017

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

168,735

 

 

162,150

 

Accumulated other comprehensive loss

 

 

(25)

 

 

(127)

 

Retained earnings

 

 

221,676

 

 

219,929

 

Total AeroVironment stockholders' equity

 

 

390,388

 

 

381,954

 

Noncontrolling interest

 

 

 1

 

 

239

 

Total equity

 

 

390,389

 

 

382,193

 

Total liabilities and stockholders’ equity

 

$

432,845

 

$

432,500

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 27,

 

January 28,

 

January 27,

 

January 28,

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

49,204

 

$

36,746

 

$

133,228

 

$

81,833

 

Contract services

 

 

14,731

 

 

16,417

 

 

48,298

 

 

57,664

 

 

 

 

63,935

 

 

53,163

 

 

181,526

 

 

139,497

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

31,911

 

 

23,641

 

 

86,142

 

 

58,060

 

Contract services

 

 

11,438

 

 

10,171

 

 

32,168

 

 

37,986

 

 

 

 

43,349

 

 

33,812

 

 

118,310

 

 

96,046

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

17,293

 

 

13,105

 

 

47,086

 

 

23,773

 

Contract services

 

 

3,293

 

 

6,246

 

 

16,130

 

 

19,678

 

 

 

 

20,586

 

 

19,351

 

 

63,216

 

 

43,451

 

Selling, general and administrative

 

 

13,500

 

 

12,788

 

 

41,295

 

 

39,838

 

Research and development

 

 

7,314

 

 

7,988

 

 

21,047

 

 

25,105

 

(Loss) income from operations

 

 

(228)

 

 

(1,425)

 

 

874

 

 

(21,492)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

545

 

 

390

 

 

1,489

 

 

1,162

 

Other expense, net

 

 

(108)

 

 

(38)

 

 

(159)

 

 

(357)

 

Income (loss) before income taxes

 

 

209

 

 

(1,073)

 

 

2,204

 

 

(20,687)

 

Provision (benefit) for income taxes

 

 

628

 

 

1,102

 

 

277

 

 

(2,809)

 

Equity method investment activity, net of tax

 

 

(418)

 

 

(8)

 

 

(418)

 

 

(119)

 

Net (loss) income

 

 

(837)

 

$

(2,183)

 

 

1,509

 

 

(17,997)

 

Net loss attributable to noncontrolling interest

 

 

9

 

 

 —

 

 

238

 

 

 —

 

Net (loss) income attributable to AeroVironment

 

$

(828)

 

$

(2,183)

 

$

1,747

 

$

(17,997)

 

Net (loss) income per share attributable to AeroVironment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04)

 

$

(0.09)

 

$

0.07

 

$

(0.78)

 

Diluted

 

$

(0.04)

 

$

(0.09)

 

$

0.07

 

$

(0.78)

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,515,622

 

 

23,082,974

 

 

23,443,673

 

 

23,029,546

 

Diluted

 

 

23,515,622

 

 

23,082,974

 

 

23,774,946

 

 

23,029,546

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 27,

 

January 28,

 

January 27,

 

January 28,

 

 

    

2018

    

2017

    

2018

    

2017

 

Net (loss) income

 

$

(837)

 

$

(2,183)

 

$

1,509

 

$

(17,997)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

 

 

62

 

 

 —

 

 

62

 

 

 —

 

Unrealized gain (loss) on investments, net of deferred tax expense (benefit) of $10 and $(23) for the three months ended January 27, 2018 and January 28, 2017, respectively; and net of deferred tax expense of $29 and $6 for the nine months ended January 27, 2018 and January 28, 2017, respectively

 

 

13

 

 

(11)

 

 

42

 

 

32

 

Total comprehensive (loss) income

 

 

(762)

 

$

(2,194)

 

 

1,613

 

 

(17,965)

 

Net loss attributable to noncontrolling interest

 

 

 9

 

 

 —

 

 

238

 

 

 —

 

Comprehensive (loss) income attributable to AeroVironment

 

$

(753)

 

$

(2,194)

 

$

1,851

 

$

(17,965)

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

January 27,

    

January 28,

 

 

 

2018

 

2017

 

Operating activities

 

 

 

 

 

 

Net income (loss)

 

$

1,509

 

$

(17,997)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,605

 

 

5,188

 

Loss from equity method investments

 

 

418

 

 

119

 

Impairment of long-lived assets

 

 

255

 

 

 —

 

Provision for doubtful accounts

 

 

1,102

 

 

115

 

Impairment of intangible assets and goodwill

 

 

1,021

 

 

 —

 

(Gains) losses on foreign currency transactions

 

 

(36)

 

 

272

 

Deferred income taxes

 

 

175

 

 

(698)

 

Stock-based compensation

 

 

3,899

 

 

2,736

 

Tax benefit from exercise of stock options

 

 

 —

 

 

22

 

Loss on disposition of property and equipment

 

 

15

 

 

37

 

Amortization of held-to-maturity investments

 

 

1,250

 

 

1,827

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

47,652

 

 

32,553

 

Unbilled receivables and retentions

 

 

(10,841)

 

 

4,079

 

Inventories

 

 

(17,251)

 

 

(31,320)

 

Income tax receivable

 

 

(292)

 

 

(2,487)

 

Prepaid expenses and other assets

 

 

472

 

 

(1,190)

 

Accounts payable

 

 

(6,684)

 

 

(3,170)

 

Other liabilities

 

 

(153)

 

 

(4,510)

 

Net cash provided by (used in) operating activities

 

 

28,116

 

 

(14,424)

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(8,450)

 

 

(7,586)

 

Equity method investments

 

 

(1,860)

 

 

 —

 

Redemptions of held-to-maturity investments

 

 

163,813

 

 

93,208

 

Purchases of held-to-maturity investments

 

 

(151,740)

 

 

(122,978)

 

Proceeds from the sale of property and equipment

 

 

 —

 

 

 7

 

Redemptions of available-for-sale investments

 

 

450

 

 

400

 

Net cash provided by (used in) investing activities

 

 

2,213

 

 

(36,949)

 

Financing activities

 

 

 

 

 

 

 

Principal payments of capital lease obligations

 

 

(231)

 

 

(291)

 

Tax withholding payment related to net settlement of equity awards

 

 

(389)

 

 

 —

 

Exercise of stock options

 

 

2,691

 

 

655

 

Net cash provided by financing activities

 

 

2,071

 

 

364

 

Net increase (decrease) in cash and cash equivalents

 

 

32,400

 

 

(51,009)

 

Cash and cash equivalents at beginning of period

 

 

79,904

 

 

124,287

 

Cash and cash equivalents at end of period

 

$

112,304

 

$

73,278

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid, net during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

1,812

 

$

1,786

 

Non-cash activities

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $29 and $6, respectively

 

$

42

 

$

32

 

Reclassification from share-based liability compensation to equity

 

$

384

 

$

307

 

Change in foreign currency translation adjustments

 

$

62

 

$

 —

 

Acquisitions of property and equipment included in accounts payable

 

$

332

 

$

408

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

1. Organization and Significant Accounting Policies

 

Organization

 

AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, support and operation of unmanned aircraft systems (“UAS”) and efficient energy systems (“EES”) for various industries and governmental agencies.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and nine months ended January  27, 2018 are not necessarily indicative of the results for the full year ending April 30, 2018. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2017, included in the Company’s Annual Report on Form 10-K.

 

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

 

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

 

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

 

In July 2016, the Company dissolved Charger Bicycles, LLC, the results of which were not material to the consolidated financial statements.  During the three months ended January 28, 2017, the Company dissolved Skytower, LLC and Regenerative Fuel Cell Systems, LLC, the results of which were not material to the consolidated financial statements.

 

In December of 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 will be accounted 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 statement of operations.  The carrying value of the investment in HAPSMobile was recorded in “Other assets, long-term.” Refer to Note 5 – Equity Method Investments for further details.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation. Equity method losses associated with the Company’s investment in Altoy for the three and nine months ended Janaury 28, 2017 have been reclassified from other expense, net to equity method investment activity, net of tax on the consolidated statement of operations. 

 

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Recently Adopted Accounting Standards

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.  This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method.  The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.  This ASU eliminates from U.S. GAAP the requirement to measure inventory at the lower of cost or market.  Market under the previous requirement could be replacement cost, net realizable value, or net realizable value less a normal profit margin.  Entities within the scope of this update will now be required to measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The Company’s adoption of ASU 2015-11 effective May 1, 2017 did not have a material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. If goodwill impairment is realized, the amount recognized will be the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied on a prospective basis and will become effective for public entities in the first quarter of the year ending July 31, 2020, with early adoption available. The Company elected to early adopt the standard during the three months ended October 28, 2017. The Company’s adoption of ASU 2017-04 did not have a material impact on its consolidated financial statements.

 

Segments

 

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

 

Investments

 

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

 

Fair Values of Financial Instruments

 

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

 

Government Contracts

 

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

 

For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government

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audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

 

The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured. During the fiscal year ended April 30, 2017, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 without payment of any consideration. At January 27, 2018, the Company had $77,000 reserved for incurred cost claim audits.  At April 30, 2017, the Company had no reserves for incurred cost claim audits.

 

(Loss) Earnings Per Share

 

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

 

The reconciliation of basic to diluted shares is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

January 27, 2018

    

January 28, 2017

    

January 27, 2018

    

January 28, 2017

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, excluding unvested restricted stock

 

23,515,622

 

23,082,974

 

23,443,673

 

23,029,546

 

Dilutive effect of employee stock options and unvested restricted stock

 

 —

 

 —

 

331,273

 

 —

 

Denominator for diluted (loss) earnings per share

 

23,515,622

 

23,082,974

 

23,774,946

 

23,029,546

 

 

Due to the net loss for the three months ended January 27, 2018, 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 379,749 for the three months ended January 27, 2018. Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 27,139 for the nine months ended January 27, 2018.  Due to the net loss for the three and nine months ended January 28, 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  222,071 and 246,093 for the three and nine months ended January 28, 2017, respectively.

 

Recently Issued Accounting Standards

 

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

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the

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assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements. The Company currently does not hold a large number of leases that are classified as operating leases under the existing lease standard, with the only significant leases being the Company’s various property leases. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date. This update approved a one-year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. Since the issuance of ASU 2014-09, the FASB has issued several amendments to provide additional supplemental guidance on certain aspects of the original pronouncement. The core principle of ASU 2014-09 is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received.  In adopting the guidance, companies are permitted to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures.

 

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

 

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

 

The Company’s contracts with its EES customers are generally product purchase order, bill and ship arrangments.  The Company is continuing to evaluate its contracts with these customers to determine the impact on revenue recognition under the new guidance. 

 

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2. Investments

 

Investments consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

January 27,

 

April 30,

 

 

    

2018

    

2017

 

Short-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

53,728

 

$

47,437

 

U.S. government securities

 

 

28,607

 

 

14,515

 

Corporate bonds

 

 

27,208

 

 

55,519

 

Certificates of deposit

 

 

 —

 

 

2,500

 

Total held-to-maturity and short-term investments

 

$

109,543

 

$

119,971

 

Long-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

1,258

 

$

8,942

 

U.S. government securities

 

 

29,467

 

 

22,540

 

Corporate bonds

 

 

5,979

 

 

8,117

 

Total held-to-maturity investments

 

 

36,704

 

 

39,599

 

Available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

 

2,118

 

 

2,497

 

Total available-for-sale investments

 

 

2,118

 

 

2,497

 

Total long-term investments

 

$

38,822

 

$

42,096

 

 

Held-To-Maturity Securities

 

As of January  27, 2018 and April 30, 2017, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities, U.S. government-guaranteed agency securities, U.S. government-sponsored agency debt securities, highly rated corporate bonds, and certificates of deposit. Interest earned from these investments is recorded in interest income.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of January 27, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 27, 2018

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

54,986

 

$

 3

 

$

(26)

 

$

54,963

 

U.S. government securities

 

 

58,074

 

 

 —

 

 

(285)

 

 

57,789

 

Corporate bonds

 

 

33,187

 

 

 —

 

 

(53)

 

 

33,134

 

Total held-to-maturity investments

 

$

146,247

 

$

 3

 

$

(364)

 

$

145,886

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

56,379

 

$

30

 

$

(21)

 

$

56,388

 

U.S. government securities

 

 

37,055

 

 

 2

 

 

(41)

 

 

37,016

 

Corporate bonds

 

 

63,636

 

 

 9

 

 

(85)

 

 

63,560

 

Certificates of deposit

 

 

2,500

 

 

 1

 

 

 —

 

 

2,501

 

Total held-to-maturity investments

 

$

159,570

 

$

42

 

$

(147)

 

$

159,465

 

 

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The amortized cost and fair value of the held-to-maturity securities by contractual maturity at January 27, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due within one year

 

$

109,543

 

$

109,399

 

Due after one year through five years

 

 

36,704

 

 

36,487

 

Total

 

$

146,247

 

$

145,886

 

 

Available-For-Sale Securities

 

Auction Rate Securities

 

As of January 27, 2018 and April 30, 2017, the entire balance of available-for-sale auction rate securities, consisted of two investment grade auction rate municipal bonds, with maturities of approximately 1 and 16 years, respectively. These investments have characteristics similar to short-term investments, because at pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities, and the underlying issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.

 

During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments 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 January 27, 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 as of January 27, 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 estimated date upon which the security is expected to have a successful auction. Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate that the current lack of liquidity of these investments will affect its ability to operate its business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment if a further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity. As of January 27, 2018, the Company did not consider these investments to be other-than-temporarily impaired.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of January 27, 2018, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,250

 

$

 

$

(132)

 

$

2,118

 

Total available-for-sale investments

 

$

2,250

 

$

 —

 

$

(132)

 

$

2,118

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities

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as of April 30, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,700

 

$

 

$

(203)

 

$

2,497

 

Total available-for-sale investments

 

$

2,700

 

$

 —

 

$

(203)

 

$

2,497

 

 

The amortized cost and fair value of the auction rate securities by contractual maturity at January 27, 2018, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due after one through five years

 

$

250

 

$

252

 

Due after 10 years

 

 

2,000

 

 

1,866

 

Total

 

$

2,250

 

$

2,118

 

 

 

 

3. Fair Value Measurements

 

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

 

·

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

 

·

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

 

·

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

 

The Company’s financial assets measured at fair value on a recurring basis at January 27, 2018, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

    

 

 

    

Significant

    

 

 

    

 

 

 

 

 

Quoted prices in

 

other

 

Significant

 

 

 

 

 

 

active markets for

 

observable

 

unobservable

 

 

 

 

 

 

identical assets

 

inputs

 

inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Auction rate securities

 

$

 

$

 

$

2,118

 

$

2,118

 

Total

 

$

 —

 

$

 —

 

$

2,118

 

$

2,118

 

 

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

 

 

 

 

 

 

 

    

Fair Value

 

 

 

Measurements Using

 

 

 

Significant

 

 

 

Unobservable Inputs

 

Description

 

(Level 3)

 

Balance at May 1, 2017

 

$

2,497

 

Transfers to Level 3

 

 

 —

 

Total gains (realized or unrealized)

 

 

 

 

Included in earnings

 

 

 —

 

Included in other comprehensive income

 

 

71

 

Purchases, issuances and settlements, net

 

 

(450)

 

Balance at January 27, 2018

 

$

2,118

 

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 January 27, 2018

 

$

 —

 

 

The auction rate securities are valued using a discounted cash flow model.  The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows and the estimated date upon which the security is expected to have a successful auction.  As of January 27, 2018, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 2.33% and 1.88%, estimated redemption periods of 1 and 16 years and discount rates of 2.97% and 9.59%. The discount rates were based on market rates for municipal bond securities, as adjusted for a risk premium to reflect the lack of liquidity of these investments.

 

4. Inventories, net

 

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

January 27,

 

April 30,

 

 

    

2018

    

2017

 

 

 

 

 

Raw materials

 

$

21,381

 

$

18,365

 

Work in process

 

 

29,743

 

 

16,168

 

Finished goods

 

 

31,958

 

 

30,793

 

Inventories, gross

 

 

83,082

 

 

65,326

 

Reserve for inventory excess and obsolescence

 

 

(5,755)

 

 

(5,250)

 

Inventories, net

 

$

77,327

 

$

60,076

 

 

 

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5. Equity Method Investments

 

In December of 2017, the Company and Softbank formed a joint venture, HAPSMobile.  HAPSMobile is a Japanese corporation that is 5% owned by the Company and 95% owned by SoftBank and is governed by a Joint Venture Agreement (the “JVA”).  The Company purchased its 5% stake in HAPSMobile for 210,000,000 yen  ($1,860,000)  effective as of December 27, 2017.  Under the JVA, the Company committed to make additional capital contributions of 150,000,000 yen (approximately $1,400,000)  and 209,500,000 yen (approximately $1,900,000)  in or around April 2018 and January 2019, respectively, to maintain its 5% ownership stake. Additionally under the JVA, the Company may purchase additional shares of HAPSMobile, at the same per share price for the purchase of its original 5% stake, to increase its ownership percentage of HAPSMobile up to 19% prior to the first flight test of the prototype aircraft produced under a design and development agreement between HAPSMobile and the Company.

 

As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment will be accounted as an equity method investment. For the three months ended January 27, 2018, the Company recorded 5% of the net loss of HAPSMobile, or $418,000, in “Equity method investment activity, net of tax” in the consolidated statement of operations.  At January 27, 2018, the carrying value of the investment in HAPSMobile was $1,503,000 and was recorded in “Other assets, long-term.”

 

6. Warranty Reserves

 

The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The warranty reserve is included in other current liabilities. The related expense is included in cost of sales. Warranty reserve activity is summarized as follows for the three and nine months ended January 27, 2018 and January 28, 2017, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

 

January 27,

 

 

January 28,

 

 

January 27,

 

 

January 28,

    

 

 

 

2018

    

 

2017

    

 

2018

    

 

2017

 

Beginning balance

 

$

3,084

 

$

3,688

 

$

3,231

 

$

4,134

 

Warranty expense

 

 

1,347