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 October 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.)

 

 

 

900 Innovators Way

 

 

Simi Valley, California

 

93065

(Address of principal executive offices)

 

(Zip Code)

 

(805)  520-8350

(Registrant’s telephone number, including area code)

 

800 Royal Oaks Drive, Suite 210

Monrovia, California 91016

(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, every Interactive Data File required to be submitted 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 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 ☐

 

 

 

 

 

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 November 21, 2018, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,928,373.

 

 

 

 


 

Table of Contents

AeroVironment, Inc.

 

Table of Contents

 

Item 1. 

Financial Statements :

    

 

 

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

 

3

 

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

 

4

 

Consolidated Statements of Comprehensive Income for the three and six months ended October 27, 2018 (Unaudited) and October 28, 2017 (Unaudited)

 

5

 

Consolidated Statements of Cash Flows for the six months ended October 27, 2018 (Unaudited) and October 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

 

27

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4. 

Controls and Procedures

 

34

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

35

Item 1A. 

Risk Factors

 

35

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3. 

Defaults Upon Senior Securities

 

36

Item 4. 

Mine Safety Disclosures

 

36

Item 5. 

Other Information

 

36

Item 6. 

Exhibits

 

37

Signatures 

 

38

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

October 27,

    

April 30,

 

 

 

2018

 

2018

 

 

    

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

151,255

 

$

143,517

 

Short-term investments

 

 

138,536

 

 

113,649

 

Accounts receivable, net of allowance for doubtful accounts of $1,054 at October 27, 2018 and $1,080 at April 30, 2018

 

 

34,639

 

 

56,813

 

Unbilled receivables and retentions (inclusive of related party unbilled receivables of $7,764 at October 27, 2018 and $3,145 at April 30, 2018)

 

 

45,654

 

 

16,872

 

Inventories, net

 

 

46,096

 

 

37,425

 

Prepaid expenses and other current assets

 

 

5,732

 

 

5,103

 

Current assets of discontinued operations

 

 

 —

 

 

25,668

 

Total current assets

 

 

421,912

 

 

399,047

 

Long-term investments

 

 

30,459

 

 

40,656

 

Property and equipment, net

 

 

20,460

 

 

19,219

 

Deferred income taxes

 

 

12,108

 

 

11,494

 

Other assets

 

 

1,628

 

 

3,002

 

Total assets

 

$

486,567

 

$

473,418

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

14,149

 

$

21,340

 

Wages and related accruals

 

 

11,071

 

 

16,851

 

Income taxes payable

 

 

4,851

 

 

4,085

 

Customer advances

 

 

2,449

 

 

3,564

 

Other current liabilities

 

 

6,971

 

 

6,954

 

Current liabilities of discontinued operations

 

 

 —

 

 

9,294

 

Total current liabilities

 

 

39,491

 

 

62,088

 

Deferred rent

 

 

1,478

 

 

1,536

 

Other non-current liabilities

 

 

1,306

 

 

622

 

Deferred tax liability

 

 

67

 

 

67

 

Liability for uncertain tax positions

 

 

49

 

 

49

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

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

 

 

 

 

 —

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—100,000,000

 

 

 

 

 

 

 

Issued and outstanding shares—23,928,373 shares at October 27, 2018 and 23,908,736 at April 30, 2018

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

171,867

 

 

170,139

 

Accumulated other comprehensive income (loss)

 

 

 5

 

 

(21)

 

Retained earnings

 

 

272,300

 

 

238,913

 

Total AeroVironment stockholders’ equity

 

 

444,174

 

 

409,033

 

Noncontrolling interest

 

 

 2

 

 

23

 

Total equity

 

 

444,176

 

 

409,056

 

Total liabilities and stockholders’ equity

 

$

486,567

 

$

473,418

 

 

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

 

Six Months Ended

 

 

 

October 27,

 

October 28,

 

October 27,

 

October 28,

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

47,056

 

$

48,420

 

$

102,369

 

$

67,200

 

Contract services (inclusive of related party revenue of $12,832 and $7,071 for the three months ended October 27, 2018 and October 28, 2017, respectively; and inclusive of related party revenue of $24,395 and $9,622 for the six months ended October 27, 2018 and October 28, 2017, respectively)

 

 

25,923

 

 

17,381

 

 

48,653

 

 

32,962

 

 

 

 

72,979

 

 

65,801

 

 

151,022

 

 

100,162

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

26,567

 

 

25,196

 

 

56,378

 

 

41,168

 

Contract services

 

 

18,013

 

 

10,462

 

 

33,656

 

 

20,153

 

 

 

 

44,580

 

 

35,658

 

 

90,034

 

 

61,321

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

20,489

 

 

23,224

 

 

45,991

 

 

26,032

 

Contract services

 

 

7,910

 

 

6,919

 

 

14,997

 

 

12,809

 

 

 

 

28,399

 

 

30,143

 

 

60,988

 

 

38,841

 

Selling, general and administrative

 

 

13,646

 

 

12,768

 

 

25,602

 

 

24,055

 

Research and development

 

 

8,109

 

 

6,844

 

 

14,544

 

 

12,386

 

Income from continuing operations

 

 

6,644

 

 

10,531

 

 

20,842

 

 

2,400

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,068

 

 

432

 

 

1,974

 

 

944

 

Other income (expense), net

 

 

1,291

 

 

(55)

 

 

9,679

 

 

(51)

 

Income from continuing operations before income taxes

 

 

9,003

 

 

10,908

 

 

32,495

 

 

3,293

 

Provision for income taxes

 

 

1,211

 

 

3,358

 

 

3,778

 

 

137

 

Equity method investment activity, net of tax

 

 

(752)

 

 

 —

 

 

(1,354)

 

 

 —

 

Net income from continuing operations

 

 

7,040

 

 

7,550

 

 

27,363

 

 

3,156

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on sale of business, net of tax (benefit) expense of $(114) and $2,463 for the three and six months ended October 27, 2018, respectively

 

 

(391)

 

 

 —

 

 

8,452

 

 

 —

 

Loss from discontinued operations, net of tax

 

 

(599)

 

 

(33)

 

 

(2,449)

 

 

(1,521)

 

Net (loss) income from discontinued operations

 

 

(990)

 

 

(33)

 

 

6,003

 

 

(1,521)

 

Net income

 

 

6,050

 

 

7,517

 

 

33,366

 

 

1,635

 

Net loss attributable to noncontrolling interest

 

 

 7

 

 

206

 

 

21

 

 

229

 

Net income attributable to AeroVironment

 

$

6,057

 

$

7,723

 

$

33,387

 

$

1,864

 

Net income (loss) per share attributable to AeroVironment—Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.30

 

$

0.33

 

$

1.16

 

$

0.14

 

Discontinued operations

 

 

(0.04)

 

 

 —

 

 

0.25

 

 

(0.06)

 

Net income per share attributable to AeroVironment—Basic

 

$

0.26

 

$

0.33

 

$

1.41

 

$

0.08

 

Net income (loss) per share attributable to AeroVironment—Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.29

 

$

0.32

 

$

1.14

 

$

0.14

 

Discontinued operations

 

 

(0.04)

 

 

 —

 

 

0.25

 

 

(0.06)

 

Net income per share attributable to AeroVironment—Diluted

 

$

0.25

 

$

0.32

 

$

1.39

 

$

0.08

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,667,400

 

 

23,477,914

 

 

23,621,720

 

 

23,407,500

 

Diluted

 

 

24,098,833

 

 

23,832,959

 

 

24,059,394

 

 

23,715,997

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 27,

 

October 28,

 

October 27,

 

October 28,

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

 

$

6,050

 

$

7,517

 

$

33,366

 

$

1,635

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

 

 

(11)

 

 

 —

 

 

(31)

 

 

 —

 

Unrealized gain on investments, net of deferred tax expense of $0 and $17 for the three months ended October 27, 2018 and October 28, 2017, respectively; and net of deferred tax expense of $51 and $19 for the six months ended October 27, 2018 and October 28, 2017, respectively

 

 

 —

 

 

26

 

 

57

 

 

29

 

Total comprehensive income

 

 

6,039

 

$

7,543

 

 

33,392

 

 

1,664

 

Net loss attributable to noncontrolling interest

 

 

 7

 

 

206

 

 

21

 

 

229

 

Comprehensive income attributable to AeroVironment

 

$

6,046

 

$

7,749

 

$

33,413

 

$

1,893

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 27,

    

October 28,

 

 

 

2018

 

2017

 

Operating activities

 

 

 

 

 

 

Net income

 

$

33,366

 

$

1,635

 

Gain on sale of business, net of tax

 

 

(8,452)

 

 

 —

 

Loss from discontinued operations, net of tax

 

 

2,449

 

 

1,521

 

Net income from continuing operations

 

 

27,363

 

 

3,156

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,584

 

 

2,784

 

Loss from equity method investment

 

 

1,354

 

 

 —

 

Impairment of long-lived assets

 

 

 —

 

 

255

 

Provision for doubtful accounts

 

 

(27)

 

 

935

 

Impairment of intangible assets and goodwill

 

 

 —

 

 

1,021

 

Gains on foreign currency transactions

 

 

(13)

 

 

(108)

 

Deferred income taxes

 

 

(614)

 

 

(1,094)

 

Stock-based compensation

 

 

2,517

 

 

2,535

 

Loss on disposition of property and equipment

 

 

 —

 

 

15

 

Amortization of held-to-maturity investments

 

 

(459)

 

 

897

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

22,261

 

 

39,861

 

Unbilled receivables and retentions

 

 

(28,782)

 

 

600

 

Inventories

 

 

(8,671)

 

 

(13,772)

 

Income tax receivable

 

 

 —

 

 

(307)

 

Prepaid expenses and other assets

 

 

(831)

 

 

413

 

Accounts payable

 

 

(8,841)

 

 

(2,972)

 

Other liabilities

 

 

(6,184)

 

 

(4,225)

 

Net cash provided by operating activities of continuing operations

 

 

2,657

 

 

29,994

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(4,135)

 

 

(5,455)

 

Proceeds from sale of business

 

 

31,994

 

 

 —

 

Redemptions of held-to-maturity investments

 

 

153,029

 

 

105,758

 

Purchases of held-to-maturity investments

 

 

(169,402)

 

 

(88,763)

 

Redemptions of available-for-sale investments

 

 

2,250

 

 

450

 

Net cash provided by investing activities from continuing operations

 

 

13,736

 

 

11,990

 

Financing activities

 

 

 

 

 

 

 

Principal payments of capital lease obligations

 

 

(111)

 

 

(173)

 

Tax withholding payment related to net settlement of equity awards

 

 

(975)

 

 

(313)

 

Exercise of stock options

 

 

71

 

 

2,164

 

Net cash (used in) provided by financing activities from continuing operations

 

 

(1,015)

 

 

1,678

 

Discontinued operations

 

 

 

 

 

 

 

Operating activities of discontinued operations

 

 

(7,188)

 

 

(5,875)

 

Investing activities of discontinued operations

 

 

(452)

 

 

(582)

 

Financing activities of discontinued operations

 

 

 —

 

 

 —

 

Net cash used in discontinued operations

 

 

(7,640)

 

 

(6,457)

 

Net increase in cash and cash equivalents

 

 

7,738

 

 

37,205

 

Cash and cash equivalents at beginning of period

 

 

143,517

 

 

79,904

 

Cash and cash equivalents at end of period

 

$

151,255

 

$

117,109

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid, net during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

5,270

 

$

1,803

 

Non-cash activities

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $51 and $19, respectively

 

$

57

 

$

29

 

Reclassification from share-based liability compensation to equity

 

$

 —

 

$

384

 

Change in foreign currency translation adjustments

 

$

(31)

 

$

 —

 

Acquisitions of property and equipment included in accounts payable

 

$

753

 

$

888

 

 

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”) 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 six months ended October 27, 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.

 

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

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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 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

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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 October 27, 2018, the Company had approximately $163,852,000 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 77% of the remaining performance obligations as revenue in fiscal 2019, an additional 17% 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 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

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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 or six month periods ended October 27, 2018 and October 28, 2017. No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three and six month periods ended October 27, 2018 and October 28, 2017.

 

Revenue by Category

 

Revenue from products and services during the six months ended October 27, 2018 consisted of revenue derived from over 230 active contracts. The following tables present the Company’s revenue disaggregated by major product line, contract type, customer category and geographic location (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 27,

 

October 28,

 

October 27,

 

October 28,

 

Revenue by major product line/program

 

2018

    

2017

    

2018

    

2017

 

Small UAS

 

$

42,199

 

$

47,021

 

$

83,415

 

$

67,082

 

TMS

 

 

15,019

 

 

9,366

 

 

37,785

 

 

18,931

 

HAPS

 

 

12,832

 

 

7,071

 

 

24,395

 

 

9,622

 

Other

 

 

2,929

 

 

2,343

 

 

5,427

 

 

4,527

 

Total revenue

 

$

72,979

 

$

65,801

 

$

151,022

 

$

100,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 27,

 

October 28,

    

October 27,

 

October 28,

 

Revenue by contract type

 

2018

    

2017

 

2018

    

2017

 

FFP

 

$

50,054

 

$

56,761

 

$

108,057

 

$

82,615

 

CPFF

 

 

22,870

 

 

8,948

 

 

42,853

 

 

17,321

 

T&M

 

 

55

 

 

92

 

 

112

 

 

226

 

Total revenue

 

$

72,979

 

$

65,801

 

$

151,022

 

$

100,162

 

 

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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

 

Six Months Ended

 

 

    

October 27,

 

October 28,

    

October 27,

 

October 28,

 

Revenue by customer category

 

2018

    

2017

 

2018

    

2017

 

U.S. government:

 

$

46,941

 

$

40,578

 

$

82,849

 

$

63,471

 

Non-U.S. government

 

 

26,038

 

 

25,223

 

 

68,173

 

 

36,691

 

Total revenue

 

$

72,979

 

$

65,801

 

$

151,022

 

$

100,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 27,

 

October 28,

 

October 27,

 

October 28,

 

Revenue by geographic location

 

2018

    

2017

 

2018

    

2017

 

Domestic

 

$

46,726

 

$

39,170

 

$

82,078

 

$

60,740

 

International

 

 

26,253

 

 

26,631

 

 

68,944

 

 

39,422

 

Total revenue

 

$

72,979

 

$

65,801

 

$

151,022

 

$

100,162

 

 

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 six-month period ended October 27, 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 October 27, 2018 and October 28, 2017 that was included in contract liability balances at the beginning of each year were $6,000 and $0, respectively; and revenue recognized for the six month periods ended October 27, 2018 and October 28, 2017 that was included in contract liability balances at the beginning of each year were $1,554,000 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 reported at amortized cost and fair value,

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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 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 October 27, 2018 and April 30, 2018, the Company had $179,000 and $77,000 reserved for incurred cost claim audits, respectively.

 

Earnings Per Share

 

Basic 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 (in thousands except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

Income (loss) from

    

October 27, 2018

    

October 28, 2017

    

October 27, 2018

    

October 28, 2017

 

Continuing operations attributable to AeroVironment

 

$

7,047

 

$

7,756

 

$

27,384

 

$

3,385

 

Discontinued operations, net of tax

 

 

(990)

 

 

(33)

 

 

6,003

 

 

(1,521)

 

Net income attributable to AeroVironment

 

$

6,057

 

$

7,723

 

$

33,387

 

$

1,864

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

23,667,400

 

 

23,477,914

 

 

23,621,720

 

 

23,407,500

 

Dilutive effect of employee stock options, restricted stock and restricted stock units

 

 

431,433

 

 

355,045

 

 

437,674

 

 

308,497

 

Denominator for diluted earnings per share

 

 

24,098,833

 

 

23,832,959

 

 

24,059,394

 

 

23,715,997

 

 

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 598 and 7,130 for the three and six months ended October 27, 2018, respectively. There were no potentially dilutive shares for the three months ended October 27, 2018. Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been antidilutive were 14,820 for the six months ended October 28, 2017, respectively.

 

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Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize the 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 plans to adopt Topic 842 using the required modified retrospective approach with the election to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. 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. During the three-months ended October 27, 2018, the Company recorded a reduction to the gain resulting from a working capital adjustment of $504,000. In addition, the Company is in the process of submitting a Webasto working capital dispute in the amount of $1,085,000 to an independent accounting firm for resolution pursuant to the terms of the Purchase Agreement.  No amounts have been recorded in the consolidated financial statements related to the additional working capital dispute as Company has assessed the likelihood of a loss to be less than probable.

 

The Company is entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of two 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 October 27, 2018. The Company’s satisfaction of the requirements for the payment of the Holdback is currently in dispute.

 

During the three months ended October 27, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration that named certain of the Company’s EES products as subject to the recall. The Company is continuing to assess the facts giving rise to the recall. Under the terms of the Purchase Agreement, the Company may be responsible for certain costs of such recall of named products the Company manufactured, sold or serviced prior to the closing of the sale of the EES Business.

 

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 income of $1,221,000 and $1,620,000 has been recorded in “Other income, net” in the consolidated statements of operations for three and six months ended October 27, 2018, respectively.

 

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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 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 27, 2018

    

October 28, 2017

    

October 27, 2018

    

October 28, 2017

 

Net sales

 

$

 —

 

$

9,965

 

$

4,256

 

$

17,575

 

Cost of sales

 

 

748

 

 

8,293

 

 

5,026

 

 

14,803

 

Gross margin

 

 

(748)

 

 

1,672

 

 

(770)

 

 

2,772

 

Selling, general and administrative

 

 

50

 

 

1,696

 

 

1,503

 

 

3,740

 

Research and development

 

 

(25)

 

 

429

 

 

1,040

 

 

1,348

 

Other income, net

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

Loss from discontinued operations before income taxes

 

 

(773)

 

 

(453)

 

 

(3,312)

 

 

(2,316)

 

Benefit for income taxes

 

 

(174)

 

 

(420)

 

 

(863)

 

 

(795)

 

Net loss from discontinued operations

 

$

(599)

 

$

(33)

 

$

(2,449)

 

$

(1,521)

 

(Loss) gain on sale of business, net of tax (benefit) expense of $(114) and $2,463 for the three and six months ended October 27, 2018, respectively

 

 

(391)

 

 

 —

 

 

8,452

 

 

 —

 

Net income (loss) from discontinued operations

 

$

(990)

 

$

(33)

 

$

6,003

 

$

(1,521)

 

 

The major classes of assets and liabilities included in discontinued operations related to the EES Business are presented in the table below (in thousands).

 

 

 

 

 

 

 

 

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