AeroVironment, Inc.
AeroVironment Inc (Form: 10-Q, Received: 12/07/2016 06:04:45)

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 29, 2016

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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)

 

 

 

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 29, 2016, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,388,110.

 

 

 

 


 

Table of Contents

AeroVironment, Inc.

 

Table of Contents

 

PART I. FINANCIAL INFORMATION  

    

 

 

 

 

 

Item 1.  

 

 

 

Consolidated Balance Sheets as of October 29, 2016 (Unaudited) and April 30, 2016

 

 

Consolidated Statements of Operations for the three and six months ended October 29, 2016 (Unaudited) and October 31, 2015 (Unaudited)

 

 

Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended October 29, 2016 (Unaudited) and October 31, 2015 (Unaudited)

 

 

Consolidated Statements of Cash Flows for the six months ended October 29, 2016 (Unaudited) and October 31, 2015 (Unaudited)

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

Item 2.  

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

 

18 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

26 

Item 4.  

Controls and Procedures

 

26 

 

 

 

 

PART II. OTHER INFORMATION  

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

27 

Item 1A.  

Risk Factors

 

27 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

27 

Item 3.  

Defaults Upon Senior Securities

 

27 

Item 4.  

Mine Safety Disclosures

 

27 

Item 5.  

Other Information

 

27 

Item 6.  

Exhibits

 

27 

Signatures  

 

29 

Exhibit Index

 

 

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AeroVironment, Inc.

Consolidated Balance Sheet s

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

October 29,

    

April 30,

 

 

 

2016

 

2016

 

 

    

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,876

 

$

124,287

 

Short-term investments

 

 

118,208

 

 

103,404

 

Accounts receivable, net of allowance for doubtful accounts of $380 at October 29, 2016 and $262 at April 30, 2016

 

 

26,102

 

 

56,045

 

Unbilled receivables and retentions

 

 

16,870

 

 

18,899

 

Inventories, net

 

 

55,168

 

 

37,486

 

Income tax receivable

 

 

3,957

 

 

 —

 

Prepaid expenses and other current assets

 

 

4,706

 

 

4,150

 

Total current assets

 

 

313,887

 

 

344,271

 

Long-term investments

 

 

42,559

 

 

33,859

 

Property and equipment, net

 

 

17,445

 

 

16,762

 

Deferred income taxes

 

 

15,409

 

 

15,016

 

Other assets

 

 

598

 

 

750

 

Total assets

 

$

389,898

 

$

410,658

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

18,662

 

$

17,712

 

Wages and related accruals

 

 

10,021

 

 

13,973

 

Income taxes payable

 

 

 —

 

 

943

 

Customer advances

 

 

3,720

 

 

2,544

 

Other current liabilities

 

 

6,997

 

 

11,173

 

Total current liabilities

 

 

39,400

 

 

46,345

 

Deferred rent

 

 

1,820

 

 

1,714

 

Capital lease obligations - net of current portion

 

 

276

 

 

449

 

Other non-current liabilities

 

 

193

 

 

184

 

Liability for uncertain tax positions

 

 

62

 

 

441

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—10,000,000; none issued or outstanding

 

 

 —

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—100,000,000

 

 

 

 

 

 

 

Issued and outstanding shares—23,371,943 shares at October 29, 2016 and 23,359,925 at April 30, 2016

 

 

2

 

 

2

 

Additional paid-in capital

 

 

156,667

 

 

154,274

 

Accumulated other comprehensive loss

 

 

(158)

 

 

(201)

 

Retained earnings

 

 

191,636

 

 

207,450

 

Total stockholders’ equity

 

 

348,147

 

 

361,525

 

Total liabilities and stockholders’ equity

 

$

389,898

 

$

410,658

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Operation s (Unaudited)

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 29,

 

October 31,

 

October 29,

 

October 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

29,350

 

$

49,492

 

$

45,087

 

$

76,131

 

Contract services

 

 

20,766

 

 

15,239

 

 

41,247

 

 

35,650

 

 

 

 

50,116

 

 

64,731

 

 

86,334

 

 

111,781

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

19,197

 

 

24,802

 

 

34,419

 

 

41,567

 

Contract services

 

 

13,502

 

 

8,396

 

 

27,815

 

 

22,658

 

 

 

 

32,699

 

 

33,198

 

 

62,234

 

 

64,225

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

10,153

 

 

24,690

 

 

10,668

 

 

34,564

 

Contract services

 

 

7,264

 

 

6,843

 

 

13,432

 

 

12,992

 

 

 

 

17,417

 

 

31,533

 

 

24,100

 

 

47,556

 

Selling, general and administrative

 

 

13,387

 

 

14,733

 

 

27,050

 

 

29,989

 

Research and development

 

 

8,517

 

 

9,897

 

 

17,117

 

 

19,728

 

(Loss) income from operations

 

 

(4,487)

 

 

6,903

 

 

(20,067)

 

 

(2,161)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

397

 

 

268

 

 

772

 

 

492

 

Other expense, net

 

 

(130)

 

 

(192)

 

 

(430)

 

 

(2,581)

 

(Loss) income before income taxes

 

 

(4,220)

 

 

6,979

 

 

(19,725)

 

 

(4,250)

 

(Benefit) provision for income taxes

 

 

(48)

 

 

2,560

 

 

(3,911)

 

 

(1,688)

 

Net (loss) income

 

$

(4,172)

 

$

4,419

 

$

(15,814)

 

$

(2,562)

 

(Loss) earnings per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.18)

 

$

0.19

 

$

(0.69)

 

$

(0.11)

 

Diluted

 

$

(0.18)

 

$

0.19

 

$

(0.69)

 

$

(0.11)

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,049,056

 

 

22,985,956

 

 

23,002,832

 

 

22,966,513

 

Diluted

 

 

23,049,056

 

 

23,148,456

 

 

23,002,832

 

 

22,966,513

 

 

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

 

Six Months Ended

 

 

 

October 29,

 

October 31,

 

October 29,

 

October 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Net (loss) income

 

$

(4,172)

 

$

4,419

 

$

(15,814)

 

$

(2,562)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $17 and $17 for the three months ended October 29, 2016 and October 31, 2015, respectively; and net of deferred tax expense of $29 and $18 for the six months ended October 29, 2016 and October 31, 2015, respectively

 

 

25

 

 

25

 

 

43

 

 

27

 

Total comprehensive (loss) income

 

$

(4,147)

 

$

4,444

 

$

(15,771)

 

$

(2,535)

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Cash Flow s (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 29,

    

October 31,

 

 

 

2016

 

2015

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(15,814)

 

$

(2,562)

 

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,401

 

 

2,765

 

Loss from equity method investments

 

 

111

 

 

122

 

Impairment of available-for-sale securities

 

 

 —

 

 

2,186

 

Provision for doubtful accounts

 

 

119

 

 

(231)

 

Losses on foreign currency transactions

 

 

269

 

 

63

 

Loss on sale of equity securities

 

 

 —

 

 

219

 

Deferred income taxes

 

 

(329)

 

 

215

 

Stock-based compensation

 

 

1,813

 

 

2,082

 

Tax benefit from exercise of stock options

 

 

22

 

 

196

 

Gain on disposition of property and equipment

 

 

(7)

 

 

 —

 

Amortization of held-to-maturity investments

 

 

1,259

 

 

2,146

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

29,562

 

 

(8,908)

 

Unbilled receivables and retentions

 

 

2,029

 

 

5,558

 

Inventories

 

 

(17,682)

 

 

(8,922)

 

Income tax receivable

 

 

(3,957)

 

 

(2,887)

 

Prepaid expenses and other assets

 

 

(555)

 

 

119

 

Accounts payable

 

 

1,413

 

 

(7,653)

 

Other liabilities

 

 

(7,933)

 

 

(7,417)

 

Net cash used in operating activities

 

 

(6,279)

 

 

(22,909)

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(4,514)

 

 

(2,804)

 

Equity method investment

 

 

 —

 

 

(186)

 

Redemptions of held-to-maturity investments

 

 

53,961

 

 

55,847

 

Purchases of held-to-maturity investments

 

 

(79,052)

 

 

(43,072)

 

Proceeds from the sale of property and equipment

 

 

7

 

 

 —

 

Sales and redemptions of available-for-sale investments

 

 

400

 

 

987

 

Net cash (used in) provided by investing activities

 

 

(29,198)

 

 

10,772

 

Financing activities

 

 

 

 

 

 

 

Purchase and retirement of common stock

 

 

 —

 

 

(3,756)

 

Principal payments of capital lease obligations

 

 

(192)

 

 

 —

 

Tax withholding payment related to net settlement of equity awards

 

 

 —

 

 

(29)

 

Exercise of stock options

 

 

258

 

 

544

 

Net cash provided by (used in) financing activities

 

 

66

 

 

(3,241)

 

Net decrease in cash and cash equivalents

 

 

(35,411)

 

 

(15,378)

 

Cash and cash equivalents at beginning of period

 

 

124,287

 

 

143,410

 

Cash and cash equivalents at end of period

 

$

88,876

 

$

128,032

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

1,786

 

$

1,519

 

Non-cash activities

 

 

 

 

 

 

 

Unrealized change in fair value of long-term investments recorded in accumulated other comprehensive loss, net of deferred tax expense of $29 and $18, respectively

 

$

43

 

$

27

 

Reclassification from share-based liability compensation to equity

 

$

307

 

$

228

 

Acquisitions of property and equipment included in accounts payable

 

$

704

 

$

 —

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Notes to Consolidated Financia l 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 six months ended October 29, 2016, are not necessarily indicative of the results for the full year ending April 30, 2017. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2016, 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.

 

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 October 29, 2016, the Company dissolved Skytower, LLC and Regenerative Fuel Cell Systems, LLC, the results of which were not material to the consolidated financial statements.

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes , which requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. This guidance simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and non-current in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted.  The ASU may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company adopted this pronouncement beginning May 1, 2016 and applied this pronouncement retrospectively. In connection with adopting the pronouncement beginning May 1, 2016, the Company reclassified $5,432,000 from current deferred income tax assets in the consolidated balance sheet as of April 30, 2016 to non-current deferred income tax liabilities.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting . The new standard simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the related classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis.

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Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, are to be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under the ASU, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits are also classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and are to be applied prospectively or retrospectively to all periods presented. The Company adopted the pronouncement beginning May 1, 2016. In connection with adopting the pronouncement beginning May 1, 2016, the Company recorded a cumulative increase of $265,000 in retained earnings with a corresponding increase in deferred tax assets in the consolidated balance sheet as of April 30, 2016 related to the prior years' unrecognized excess tax benefits. Excess tax benefits related to exercised options and vested restricted stock awards during the three months ended July 30, 2016 have been recognized in the current period’s income statement. The Company also excluded the excess tax benefits from the calculation of diluted earnings per share for the three months ended July 30, 2016. The Company applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted.

 

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation related to the adoption of new accounting pronouncements during the six months ended October 29, 2016 impacting the classification of deferred income taxes in the consolidated balance sheets.

 

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, 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

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disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

 

The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured.

 

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

 

As a result of the settlement agreements and the Armed Services Board of Contract Appeals ruling, the Company reversed reserves of $3,607,000 related to those fiscal years as a credit to cost of sales, allocated as $3,203,000 to the UAS segment and $404,000 to the EES segment during the fiscal year ended April 30, 2016. At October 29, 2016 and April 30, 2016, the Company did not have any remaining 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

 

Six Months Ended

 

 

    

October 29, 2016

    

October 31, 2015

    

October 29, 2016

    

October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

23,049,056

 

22,985,956

 

23,002,832

 

22,966,513

 

Dilutive effect of employee stock options and unvested restricted stock

 

 —

 

162,500

 

 —

 

 —

 

Denominator for diluted (loss) earnings per share

 

23,049,056

 

23,148,456

 

23,002,832

 

22,966,513

 

 

Due to the net loss for the three and six months ended October 29, 2016 and the six months ended October 31, 2015, 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 antidilutive were 199,428  and  256,366 for the three and six months ended October 29, 2016, respectively, and 208,102 for the six months ended October 31, 2015. During the three months ended October 31, 2015, approximately 21,000 shares reserved for issuance upon exercise of stock options and shares of unvested restricted stock were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

Recently Issued Accounting Standards

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The 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

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adoption on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 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 is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 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 amendments in this update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted.  The Company is evaluating the potential impact of this adoption on its consolidated financial statements. 

 

In May 2014, the FASB issued ASU No. 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 No. 2015-14, Revenue from Contracts with Customers (Topic 640)-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. The Company is currently evaluating when to adopt the new standard and the potential impact of adoption on its consolidated financial statements.

 

 

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2. Investments

 

Investments consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

October 29,

 

April 30,

 

 

    

2016

    

2016

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

49,695

 

$

42,179

 

U.S. government securities

 

 

23,664

 

 

21,184

 

Corporate bonds

 

 

40,349

 

 

40,041

 

Certificates of deposit

 

 

4,500

 

 

 —

 

Total held-to-maturity investments

 

$

118,208

 

$

103,404

 

 

 

 

 

 

 

 

 

Total short-term investments

 

$

118,208

 

$

103,404

 

Long-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

9,836

 

$

 —

 

U.S. government securities

 

 

4,018

 

 

7,518

 

Corporate bonds

 

 

26,253

 

 

23,561

 

Total held-to-maturity investments

 

 

40,107

 

 

31,079

 

Available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

 

2,452

 

 

2,780

 

Total available-for-sale investments

 

 

2,452

 

 

2,780

 

Total long-term investments

 

$

42,559

 

$

33,859

 

 

Held-To-Maturity Securities

 

As of October 29, 2016 and April 30, 2016, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury and agency securities, certificates of deposit and corporate bonds. 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 October 29, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

59,531

 

$

7

 

$

(28)

 

$

59,510

 

U.S. government securities

 

 

27,682

 

 

18

 

 

(1)

 

 

27,699

 

Corporate bonds

 

 

66,602

 

 

23

 

 

(70)

 

 

66,555

 

Certificates of deposit

 

 

4,500

 

 

 —

 

 

(1)

 

 

4,499

 

Total held-to-maturity investments

 

$

158,315

 

$

48

 

$

(100)

 

$

158,263

 

 

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The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

42,179

 

$

5

 

$

(7)

 

$

42,177

 

U.S. government securities

 

 

28,702

 

 

23

 

 

 —

 

 

28,725

 

Corporate bonds

 

 

63,602

 

 

54

 

 

(32)

 

 

63,624

 

Certificates of deposit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total held-to-maturity investments

 

$

134,483

 

$

82

 

$

(39)

 

$

134,526

 

 

The amortized cost and fair value of the held-to-maturity securities by contractual maturity at October 29, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due within one year

 

$

118,208

 

$

118,224

 

Due after one year through five years

 

 

40,107

 

 

40,039

 

Total

 

$

158,315

 

$

158,263

 

 

Available-For-Sale Securities

 

Auction Rate Securities

 

As of October 29, 2016 and April 30, 2016, the entire balance of available-for-sale, auction rate securities, consisted of two investment grade auction rate municipal bonds, with maturities of approximately 3 and 18 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 October 29, 2016, 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 October 29, 2016. 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 and as of October 29, 2016, the Company did not consider these investments to be other-than-temporarily impaired.

 

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The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of October 29, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,700

 

$

 

$

(248)

 

$

2,452

 

Total available-for-sale investments

 

$

2,700

 

$

 —

 

$

(248)

 

$

2,452

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of April 30, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

3,100

 

$

 

$

(320)

 

$

2,780

 

Total available-for-sale investments

 

$

3,100

 

$

 —

 

$

(320)

 

$

2,780

 

 

The amortized cost and fair value of the auction rate securities by contractual maturity at October 29, 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due after one through five years

 

$

700

 

$

679

 

Due after 10 years

 

 

2,000

 

 

1,773

 

Total

 

$

2,700

 

$

2,452

 

 

Equity Securities

 

At April 30, 2015, the entire balance of available-for-sale equity securities consisted of 618,042 CybAero AB (“CybAero”) common shares. The shares were classified as available-for-sale.  These shares were initially acquired on August 11, 2014, when the Company converted a convertible bond into CybAero common shares. The convertible bond was in the amount of 10 million SEK and was converted into 1,062,699 common shares of CybAero at the conversion price of 9.41 SEK per share. When the Company converted the bond on August 11, 2014, the fair value per share was 37.50 SEK which became the new cost basis going forward, with all subsequent changes in fair value being recorded to other comprehensive income.

 

At August 1, 2015, the Company reviewed these shares for impairment based on criteria that included the extent to which the investment’s carrying value exceeds its related market value, the duration of the market decline, uncertainty as to the recovery period due to sustained losses of the investee and the Company’s intent to hold its investment until recovery. In the three months ended August 1, 2015, the Company determined it was in its best interests to liquidate the remaining shares held. As a result, during the three months ended August 1, 2015, the Company recorded an other‑than‑temporary-impairment loss of $2,186,000 related to the Company’s investment in the CybAero shares which was recorded to Other expense in the consolidated statement of operations. As a result of recording the impairment charge, the investment’s fair value became its new cost basis.

 

In August 2015, the Company sold its remaining shares in CybAero in a private sale at the price of 12.00 SEK per share, resulting in proceeds of approximately $777,000 resulting in realized gains of $207,000, based on the difference between the original conversion price of 9.41 SEK per share and the sales price at the time of sale, inclusive of the final sale of all shares. At April 30, 2016, the Company did not hold any CybAero shares.

 

 

 

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

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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 October 29, 2016, 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

 

$

 

$

 

$

2,452

 

$

2,452

 

Total

 

$

 —

 

$

 —

 

$

2,452

 

$

2,452

 

 

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, 2016

 

$

2,780

 

Transfers to Level 3

 

 

 —

 

Total gains (realized or unrealized)

 

 

 

 

Included in earnings

 

 

 —

 

Included in other comprehensive income

 

 

72

 

Purchases, issuances and settlements, net

 

 

(400)

 

Balance at October 29, 2016

 

$

2,452

 

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 October 29, 2016

 

$

 —

 

 

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 October 29, 2016, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 1.49% and 1.37%, estimated redemption periods of 3 and 18 years and discount rates of 5.28% and 13.47%. 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):

                                                                                                     

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October 29,

 

April 30,

 

 

    

2016

    

2016

 

 

 

 

 

Raw materials

 

$

12,136

 

$

11,609

 

Work in process

 

 

15,993

 

 

4,259

 

Finished goods

 

 

30,961

 

 

26,073

 

Inventories, gross

 

 

59,090

 

 

41,941

 

Reserve for inventory excess and obsolescence

 

 

(3,922)

 

 

(4,455)

 

Inventories, net

 

$

55,168

 

$

37,486

 

 

 

5. 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 six months ended October 29, 2016 and October 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

 

October 29,

 

 

October 31,

 

 

October 29,

 

 

October 31,

    

 

 

 

2016

    

 

2015

    

 

2016

    

 

2015

 

Beginning balance

 

$

5,223

 

$

2,029

 

$

4,134

 

$

2,653

 

Warranty expense

 

 

144

 

 

1,001

 

 

336

 

 

1,708

 

Changes in estimates related to pre-existing warranties

 

 

(179)

 

 

 —

 

 

1,228

 

 

(424)

 

Warranty costs settled

 

 

(1,500)

 

 

(692)

 

 

(2,010)

 

 

(1,599)

 

Ending balance

 

$

3,688

 

$

2,338

 

$

3,688

 

$

2,338

 

 

During the six months ended October 29, 2016, the Company revised its estimates based on the results of additional engineering studies and recorded incremental warranty reserve charges totaling $1,407,000 related to the estimated costs to repair a component of certain small UAS that were delivered in prior periods. At October 29, 2016, the total remaining warranty reserve related to the estimated costs to repair the impacted UAS was $865,000. As of October 29, 2016 a total of $1,114,000 of costs related to this warranty have been incurred.

 

 

6. Accumulated Other Comprehensive Loss and Reclassifications Adjustments

 

The components of accumulated other comprehensive loss and adjustments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

Accumulated Other

 

 

    

Securities

    

Comprehensive Loss

 

Balance, net of $134 of taxes, as of April 30, 2016

 

$

(201)

 

$

(201)

 

Reclassifications out of accumulated other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

Unrealized gains, net of $29 of taxes

 

 

43

 

 

43

 

Balance, net of $90 of taxes, as of October 29, 2016

 

$

(158)

 

$

(158)

 

 

 

 

 

 

 

 

 

 

7. Customer-Funded Research & Development

 

Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue is recognized, which is generally as the R&D services are performed. Revenue from customer-funded R&D was approximately $14,541,000 and $29,278,000 for the three and six months ended October 29, 2016, respectively. Revenue from customer-funded R&D was approximately $10,234,000 and $26,761,000 for the three and six months ended October 31, 2015, respectively.

 

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8. Income Taxes

 

For the three and six months ended October 29, 2016, the Company recorded a (benefit) for income taxes of $(48,000) and $(3,911,000), respectively, yielding an effective tax rate of 1.1% and 19.8%, respectively. For the three and six months ended October 31, 2015, the Company recorded a provision (benefit) for income taxes of $2,560,000 and $(1,688,000), respectively, yielding an effective tax rate of 36.7% and 39.7%, respectively.  The variance from statutory rates for the three and six months ended October 29, 2016, was primarily due to federal legislation reinstating the federal research and development tax credit during the third quarter of fiscal 2016 and the reversal of a $968,000 reserve, including the related interest, for uncertain tax positions due to the settlement of prior fiscal year audits recorded during the first quarter of fiscal 2017.

 

9. Share Repurchase

 

In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $25,000,000 of the Company’s common stock with no specified termination date for the program. No shares were repurchased under the program during the six months ended October 29, 2016. As of October 29, 2016 and April 30, 2016, approximately $21.2 million remained authorized for future repurchases under this program.

 

10. Segment Data

 

The Company’s product segments are as follows:

 

·

Unmanned Aircraft Systems — The UAS segment focuses primarily on the design, development, production, support and operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects to increase the security and effectiveness of the operations of the Company’s customers.

 

·

Efficient Energy Systems — The EES segment focuses primarily on the design, development, production, marketing, support and operation of innovative efficient electric energy systems that address the growing demand for electric transportation solutions.

 

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The accounting policies of the segments are the same as those described in Note 1, “Organization and Significant Accounting Policies.” The operating segments do not make sales to each other. Depreciation and amortization related to the manufacturing of goods is included in gross margin for the segments. The Company does not discretely allocate assets to its operating segments, nor does the CODM evaluate operating segments using discrete asset information. Consequently, the Company operates its financial systems as a single segment for accounting and control purposes, maintains a single indirect rate structure across all segments, has no inter-segment sales or corporate elimination transactions, and maintains limited financial statement information by segment. The segment results are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

October 29,

 

 

October 31,

 

 

October 29,

 

 

October 31,

 

 

    

 

2016

    

2015

    

 

2016

    

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

UAS

 

$

40,829

 

$

56,589

 

$

71,326

 

$

96,756

 

EES

 

 

9,287

 

 

8,142

 

 

15,008

 

 

15,025

 

Total

 

 

50,116

 

 

64,731

 

 

86,334

 

 

111,781

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

UAS

 

 

25,936