AeroVironment, Inc.
AeroVironment Inc (Form: 10-Q, Received: 08/30/2017 06:06:39)

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 July 29, 2017

 

OR

 

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

 

For the transition period from           to           

 

Commission File Number: 001-33261

 


 

AEROVIRONMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2705790

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

800 Royal Oaks Drive, Suite 210

 

 

Monrovia, California

 

91016

(Address of principal executive offices)

 

(Zip Code)

 

(626) 357-9983

(Registrant’s telephone number, including area code)

 

N/A

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

 


 

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

 

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

 

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

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

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

 

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

 

As of August  22, 2017, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,840,300.

 

 

 

 


 

Table of Contents

AeroVironment, Inc.

 

Table of Contents

 

 

 

 

 

Item 1.  

 

 

 

Consolidated Balance Sheets as of July 29, 2017 (Unaudited) and April 30, 2017

 

3

 

Consolidated Statements of Operations for the three months ended July 29, 2017 (Unaudited) and July 30, 2016 (Unaudited)

 

4

 

Consolidated Statements of Comprehensive Loss for the three months ended July 29, 2017 (Unaudited) and July 30, 2016 (Unaudited)

 

5

 

Consolidated Statements of Cash Flows for the three months ended July 29, 2017 (Unaudited) and July 30, 2016 (Unaudited)

 

6

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

Item 2.  

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

 

19

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4.  

Controls and Procedures

 

24

 

 

 

 

PART II. OTHER INFORMATION  

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

26

Item 1A.  

Risk Factors

 

26

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

Item 3.  

Defaults Upon Senior Securities

 

26

Item 4.  

Mine Safety Disclosures

 

26

Item 5.  

Other Information

 

26

Item 6.  

Exhibits

 

26

Signatures  

 

28

Exhibit Index

 

 

 

 

 

 

 

 

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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)

 

 

 

 

 

 

 

 

 

 

July 29,

    

April 30,

 

 

 

2017

 

2017

 

 

    

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,473

 

$

79,904

 

Short-term investments

 

 

107,831

 

 

119,971

 

Accounts receivable, net of allowance for doubtful accounts of $469 at July 29, 2017 and $291 at April 30, 2017

 

 

30,685

 

 

74,361

 

Unbilled receivables and retentions

 

 

10,753

 

 

14,120

 

Inventories, net

 

 

72,017

 

 

60,076

 

Income tax receivable

 

 

2,969

 

 

 —

 

Prepaid expenses and other current assets

 

 

5,266

 

 

5,653

 

Total current assets

 

 

346,994

 

 

354,085

 

Long-term investments

 

 

35,844

 

 

42,096

 

Property and equipment, net

 

 

20,317

 

 

19,220

 

Deferred income taxes

 

 

15,646

 

 

15,089

 

Other assets

 

 

1,938

 

 

2,010

 

Total assets

 

$

420,739

 

$

432,500

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

13,966

 

$

20,283

 

Wages and related accruals

 

 

10,608

 

 

12,966

 

Income taxes payable

 

 

 —

 

 

1,418

 

Customer advances

 

 

4,593

 

 

3,317

 

Other current liabilities

 

 

8,530

 

 

10,079

 

Total current liabilities

 

 

37,697

 

 

48,063

 

Deferred rent

 

 

1,673

 

 

1,719

 

Capital lease obligations - net of current portion

 

 

104

 

 

161

 

Other non-current liabilities

 

 

184

 

 

184

 

Deferred tax liability

 

 

79

 

 

116

 

Liability for uncertain tax positions

 

 

64

 

 

64

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—10,000,000; none issued or outstanding at July 29, 2017 and April 30, 2017

 

 

 —

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized shares—100,000,000

 

 

 

 

 

 

 

Issued and outstanding shares— 23,840,300 shares at July 29, 2017 and 23,630,419 at April 30, 2017

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

165,359

 

 

162,150

 

Accumulated other comprehensive loss

 

 

(125)

 

 

(127)

 

Retained earnings

 

 

215,486

 

 

219,929

 

Total AeroVironment stockholders' equity

 

 

380,722

 

 

381,954

 

Noncontrolling interest

 

 

216

 

 

239

 

Total equity

 

 

380,938

 

 

382,193

 

Total liabilities and stockholders’ equity

 

$

420,739

 

$

432,500

 

 

See accompanying notes to consolidated financial statements (unaudited).

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Table of Contents

AeroVironment, Inc.

Consolidated Statements of Operation s (Unaudited)

(In thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

July 29,

 

July 30,

 

 

    

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

Product sales

 

$

31,091

 

$

15,737

 

Contract services

 

 

12,673

 

 

20,481

 

 

 

 

43,764

 

 

36,218

 

Cost of sales:

 

 

 

 

 

 

 

Product sales

 

 

24,217

 

 

15,222

 

Contract services

 

 

7,917

 

 

14,313

 

 

 

 

32,134

 

 

29,535

 

Gross margin:

 

 

 

 

 

 

 

Product sales

 

 

6,874

 

 

515

 

Contract services

 

 

4,756

 

 

6,168

 

 

 

 

11,630

 

 

6,683

 

Selling, general and administrative

 

 

13,331

 

 

13,663

 

Research and development

 

 

6,461

 

 

8,600

 

Loss from operations

 

 

(8,162)

 

 

(15,580)

 

Other income (expense):

 

 

 

 

 

 

 

Interest income, net

 

 

512

 

 

375

 

Other income (expense), net

 

 

 4

 

 

(300)

 

Loss before income taxes

 

 

(7,646)

 

 

(15,505)

 

Benefit for income taxes

 

 

(3,180)

 

 

(3,863)

 

Net loss

 

 

(4,466)

 

 

(11,642)

 

Net loss attributable to noncontrolling interest

 

 

23

 

 

 —

 

Net loss attributable to AeroVironment

 

$

(4,443)

 

$

(11,642)

 

Loss per share attributable to AeroVironment:

 

 

 

 

 

 

 

Basic

 

$

(0.19)

 

$

(0.51)

 

Diluted

 

$

(0.19)

 

$

(0.51)

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

23,336,305

 

 

22,956,607

 

Diluted

 

 

23,336,305

 

 

22,956,607

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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AeroVironment, Inc.

Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

July 29,

 

July 30,

 

 

    

2017

    

2016

 

Net loss

 

$

(4,466)

 

$

(11,642)

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $4 and $12, respectively

 

 

 2

 

 

18

 

Total comprehensive loss

 

 

(4,464)

 

 

(11,624)

 

Net loss attributable to noncontrolling interest

 

 

23

 

 

 —

 

Comprehensive loss attributable to AeroVironment

 

$

(4,441)

 

$

(11,624)

 

 

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Cash Flow s (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

July 29,

    

July 30,

 

 

 

2017

 

2016

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(4,466)

 

$

(11,642)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,862

 

 

1,653

 

Loss from equity method investments

 

 

 —

 

 

72

 

Impairment of long-lived assets

 

 

 9

 

 

 —

 

Provision for doubtful accounts

 

 

211

 

 

171

 

(Gains) losses on foreign currency transactions

 

 

(106)

 

 

226

 

Deferred income taxes

 

 

(596)

 

 

 —

 

Stock-based compensation

 

 

1,397

 

 

992

 

Tax benefit from exercise of stock options

 

 

 —

 

 

22

 

Gain on disposition of property and equipment

 

 

 —

 

 

(7)

 

Amortization of held-to-maturity investments

 

 

474

 

 

661

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

43,577

 

 

23,019

 

Unbilled receivables and retentions

 

 

3,367

 

 

4,406

 

Inventories

 

 

(11,941)

 

 

(6,619)

 

Income tax receivable

 

 

(2,969)

 

 

(4,250)

 

Prepaid expenses and other assets

 

 

377

 

 

(17)

 

Accounts payable

 

 

(6,238)

 

 

(6,336)

 

Other liabilities

 

 

(3,676)

 

 

(3,594)

 

Net cash provided by (used in) operating activities

 

 

21,282

 

 

(1,243)

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(2,973)

 

 

(2,634)

 

Redemptions of held-to-maturity investments

 

 

59,280

 

 

28,820

 

Purchases of held-to-maturity investments

 

 

(41,806)

 

 

(27,487)

 

Proceeds from the sale of property and equipment

 

 

 —

 

 

 7

 

Sales and redemptions of available-for-sale investments

 

 

450

 

 

400

 

Net cash provided by (used in) investing activities

 

 

14,951

 

 

(894)

 

Financing activities

 

 

 

 

 

 

 

Principal payments of capital lease obligations

 

 

(92)

 

 

(95)

 

Tax withholding payment related to net settlement of equity awards

 

 

(212)

 

 

 —

 

Exercise of stock options

 

 

1,640

 

 

258

 

Net cash provided by financing activities

 

 

1,336

 

 

163

 

Net increase (decrease) in cash and cash equivalents

 

 

37,569

 

 

(1,974)

 

Cash and cash equivalents at beginning of period

 

 

79,904

 

 

124,287

 

Cash and cash equivalents at end of period

 

$

117,473

 

$

122,313

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

1,803

 

$

1,786

 

Non-cash activities

 

 

 

 

 

 

 

Unrealized gain on investments, net of deferred tax expense of $4 and $12, respectively

 

$

 2

 

$

18

 

Reclassification from share-based liability compensation to equity

 

$

384

 

$

307

 

Acquisitions of property and equipment included in accounts payable

 

$

644

 

$

321

 

 

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 months ended July 29, 2017 are not necessarily indicative of the results for the full year ending April 30, 2018. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2017, included in the Company’s Annual Report on Form 10-K.

 

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

 

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

 

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

 

In July 2016, the Company dissolved Charger Bicycles, LLC, the results of which were not material to the consolidated financial statements.  During the three months ended 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.

 

Recently Adopted Accounting Standards

 

In July 2015, the Financial Accounting Standards Board (“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 Company’s adoption of ASU No. 2015-11 effective May 1, 2017 did not have a material impact on its consolidated financial statements.

 

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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 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. During the fiscal year ended April 30, 2017, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 without payment of any consideration. At July 29, 2017 and April 30, 2017, the Company did not have any remaining reserves for incurred cost claim audits.

 

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Loss Per Share

 

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

 

The reconciliation of basic to diluted shares is as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

July 29, 2017

    

July 30, 2016

 

 

 

 

 

 

 

Denominator for basic loss per share:

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

23,336,305

 

22,956,607

 

Dilutive effect of employee stock options and unvested restricted stock

 

 —

 

 —

 

Denominator for diluted loss per share

 

23,336,305

 

22,956,607

 

 

Due to the net loss for the three months ended July 29, 2017 and July 30, 2016, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been anti-dilutive were 256,011 and  302,332 for the three months ended July 29, 2017 and July 30, 2016, respectively.

 

Recently Issued Accounting Standards

 

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

 

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

 

In February 2016, the FASB issued ASU 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. 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.

 

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 606)-Deferral of the Effective Date. This update approved a one-year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. Since the issuance of ASU 2014-09, the FASB has issued several amendments to provide additional supplemental guidance on certain aspects of the original pronouncement. The core principle of ASU 2014-09 is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received.  In adopting the guidance, companies are permitted to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional

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footnote disclosures.

 

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

 

 

2. Investments

 

Investments consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

July 29,

 

April 30,

 

 

    

2017

    

2017

 

Short-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

37,164

 

$

47,437

 

U.S. government securities

 

 

16,104

 

 

14,515

 

Corporate bonds

 

 

52,063

 

 

55,519

 

Certificates of deposit

 

 

2,500

 

 

2,500

 

Total held-to-maturity and short-term investments

 

$

107,831

 

$

119,971

 

Long-term investments:

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

Municipal securities

 

$

4,751

 

$

8,942

 

U.S. government securities

 

 

29,040

 

 

22,540

 

Corporate bonds

 

 

 —

 

 

8,117

 

Total held-to-maturity investments

 

 

33,791

 

 

39,599

 

Available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

 

2,053

 

 

2,497

 

Total available-for-sale investments

 

 

2,053

 

 

2,497

 

Total long-term investments

 

$

35,844

 

$

42,096

 

 

Held-To-Maturity Securities

 

As of July 29, 2017 and April 30, 2017, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities, U.S. government-guaranteed agency securities, U.S. government-sponsored agency debt securities, certificates of deposit and highly rated corporate bonds. Interest earned from these investments is recorded in interest income.

 

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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 July 29, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 29, 2017

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

41,915

 

$

32

 

$

(6)

 

$

41,941

 

U.S. government securities

 

 

45,144

 

 

 2

 

 

(48)

 

 

45,098

 

Corporate bonds

 

 

52,063

 

 

 4

 

 

(66)

 

 

52,001

 

Certificates of deposit

 

 

2,500

 

 

 1

 

 

 —

 

 

2,501

 

Total held-to-maturity investments

 

$

141,622

 

$

39

 

$

(120)

 

$

141,541

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Municipal securities

 

$

56,379

 

$

30

 

$

(21)

 

$

56,388

 

U.S. government securities

 

 

37,055

 

 

 2

 

 

(41)

 

 

37,016

 

Corporate bonds

 

 

63,636

 

 

 9

 

 

(85)

 

 

63,560

 

Certificates of deposit

 

 

2,500

 

 

 1

 

 

 —

 

 

2,501

 

Total held-to-maturity investments

 

$

159,570

 

$

42

 

$

(147)

 

$

159,465

 

 

The amortized cost and fair value of the held-to-maturity securities by contractual maturity at July 29, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due within one year

 

$

107,831

 

$

107,768

 

Due after one year through five years

 

 

33,791

 

 

33,773

 

Total

 

$

141,622

 

$

141,541

 

 

Available-For-Sale Securities

 

Auction Rate Securities

 

As of July 29, 2017 and April 30, 2017, the entire balance of available-for-sale auction rate securities, consisted of two investment grade auction rate municipal bonds, with maturities of approximately 2 and 17 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 July 29, 2017, until a future auction of these securities is successful or a buyer is found outside of the auction process.

 

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As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of July 29, 2017. The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction. Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate that the current lack of liquidity of these investments will affect its ability to operate its business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment if a further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity. As of July 29, 2017, the Company did not consider these investments to be other-than-temporarily impaired.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of July 29, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,250

 

$

 

$

(197)

 

$

2,053

 

Total available-for-sale investments

 

$

2,250

 

$

 —

 

$

(197)

 

$

2,053

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of April 30, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

2,700

 

$

 

$

(203)

 

$

2,497

 

Total available-for-sale investments

 

$

2,700

 

$

 —

 

$

(203)

 

$

2,497

 

 

The amortized cost and fair value of the auction rate securities by contractual maturity at July 29, 2017, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Cost

    

Fair Value

 

Due after one through five years

 

$

250

 

$

251

 

Due after 10 years

 

 

2,000

 

 

1,802

 

Total

 

$

2,250

 

$

2,053

 

 

 

 

 

 

3. Fair Value Measurements

 

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

 

·

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

 

·

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

 

·

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

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The Company’s financial assets measured at fair value on a recurring basis at July 29, 2017, 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

 

$

 

$

 

$

2,053

 

$

2,053

 

Total

 

$

 —

 

$

 —

 

$

2,053

 

$

2,053

 

 

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

 

 

 

 

 

 

 

    

Fair Value

 

 

 

Measurements Using

 

 

 

Significant

 

 

 

Unobservable Inputs

 

Description

 

(Level 3)

 

Balance at May 1, 2017

 

$

2,497

 

Transfers to Level 3

 

 

 —

 

Total gains (realized or unrealized)

 

 

 

 

Included in earnings

 

 

 —

 

Included in other comprehensive income

 

 

 6

 

Purchases, issuances and settlements, net

 

 

(450)

 

Balance at July 29, 2017

 

$

2,053

 

The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at July 29, 2017

 

$

 —

 

 

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 July 29, 2017, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 1.59% and 1.59%, estimated redemption periods of 2 and 17 years and discount rates of 2.15% and 12.36%. 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):

                                                                                                     

 

 

 

 

 

 

 

 

 

 

July 29,

 

April 30,

 

 

    

2017

    

2017

 

 

 

 

 

Raw materials

 

$

19,378

 

$

18,365

 

Work in process

 

 

17,825

 

 

16,168

 

Finished goods

 

 

40,782

 

 

30,793

 

Inventories, gross

 

 

77,985

 

 

65,326

 

Reserve for inventory excess and obsolescence

 

 

(5,968)

 

 

(5,250)

 

Inventories, net

 

$

72,017

 

$

60,076

 

 

 

5. Warranty Reserves

 

The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales

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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 months ended July  29, 2017 and July  30, 2016, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

July 29,

 

 

July 30,

    

 

    

 

2017

    

 

2016

 

Beginning balance

 

$

3,231

 

$

4,134

 

Warranty expense

 

 

447

 

 

192

 

Changes in estimates related to pre-existing warranties

 

 

 —

 

 

1,407

 

Warranty costs settled

 

 

(793)

 

 

(510)

 

Ending balance

 

$

2,885

 

$

5,223

 

 

During the three months ended July 30, 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 July  29, 2017, the total remaining warranty reserve related to the estimated costs to repair the impacted UAS was $5,000. As of July  29, 2017, a total of $2,198,000 of costs related to this warranty have been incurred.

 

 

6. Intangibles

 

Intangibles are included in other assets on the balance sheet. The components of intangibles are as follows:

 

 

 

 

 

 

 

 

 

 

 

July 29,

 

April 30,

 

 

    

2017

    

2017

 

 

 

(In thousands)

 

Licenses

 

$

818

 

$

818

 

Customer relationships

 

 

1,600

 

 

1,600

 

Trademarks and tradenames

 

 

60

 

 

60

 

Other

 

 

 3

 

 

 3

 

Less accumulated amortization

 

 

(737)

 

 

(658)

 

Intangibles, net

 

$

1,744

 

$

1,823

 

 

The customer relationships, trademarks and tradenames, and other intangible assets were recognized in conjunction with the Company’s acquisition of a controlling interest in Altoy on February 1, 2017.

 

7. Goodwill

 

The following table presents the changes in the Company’s goodwill balance (in thousands):

 

 

 

 

 

Balance at April 30, 2017

    

$

122

Changes in goodwill

 

 

 -

Balance at July 29, 2017

 

$

122

 

Goodwill is attributable to the acquisition of a controlling interest in Altoy on February 1, 2017.

 

 

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8. 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 $76 of taxes, as of April 30, 2017

 

$

(127)

 

$

(127)

 

Reclassifications out of accumulated other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

Unrealized gains, net of $4 of taxes

 

 

 2

 

 

 2

 

Balance, net of $72 of taxes, as of July 29, 2017

 

$

(125)

 

$

(125)

 

 

 

 

 

 

 

 

 

 

 

9. 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 $6,235,000 and $14,737,000 for the three months ended July 29, 2017 and July 30, 2016, respectively.

 

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10. Long-Term Incentive Awards

 

During the three months ended July 29, 2017, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2018 LTIP”).  Awards under the Fiscal 2018 LTIP  consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2018, July 2019 and July 2020, and (ii) performance-based restricted stock units (“PRSUs”) which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2020. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievment levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs  at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs  will be made in fully-vested shares of common stock. As of July 29, 2017, no compensation cost has been recognized for the performance-based portion of the Fiscal 2018 LTIP, as the Company concluded that it was not probable that the performance conditions will be achieved. At July 29, 2017, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2018 LTIP is $2,850,000.

 

During the three months ended July 29, 2017, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2017 LTIP”). Awards under the Fiscal 2017 LTIP consist of: (i) time-based restricted stock awards which vest in equal tranches in July 2017, July 2018 and July 2019, and (ii) PRSUs which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2019. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs  at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs  will be made in fully-vested shares of common stock. As of July 29, 2017, no compensation cost has been recognized for the performance-based portion of the Fiscal 2017 LTIP, as the Company concluded that it was not probable that the performance conditions will be achieved. At July 29, 2017, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2017 LTIP is $2,630,000.

 

During the year ended April 30, 2016, the Company granted a three-year performance award under the Restated 2006 Plan to key employees (“Fiscal 2016 LTIP”). The performance period for each three-year award is the three-year period ending April 30, 2018. A target payout was established at the award date. The actual payout at the end of the performance period will be calculated based upon the Company’s achievement of revenue and gross margin for the performance period. Payouts will be made in cash and restricted stock units. Upon vesting of the restricted stock units, the Company has the discretion to settle the restricted stock units in cash or stock. As of July 29, 2017, no compensation cost has been recognized for this award as the Company has concluded that it was not probable that the performance conditions will be achieved.  At July 29, 2017, the maximum compensation expense that may be recorded for the Fiscal 2016 LTIP is $2,690,000.

 

At each reporting period, the Company reassesses the probability of achieving the performance targets. The estimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised.

 

 

11. Income Taxes

 

For the three months ended July 29, 2017, the Company recorded a (benefit) for income taxes of $(3,180,000), yielding an effective tax rate of 41.6%. For the three months ended July 30, 2016, the Company recorded a (benefit) for income taxes of $(3,863,000), yielding an effective tax rate of 24.9%. The variance from statutory rates for the three months ended July 29, 2017 was primarily due to federal R&D credits and the recording of discrete excess tax benefits of $1,025,000 resulting from the vesting of restricted stock awards and exercises of stock options. The variance from

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statutory rates for the three months ended July 30, 2016 was primarily due to federal R&D credits 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.

 

 

12. 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 three months ended July  29, 2017. As of July  29, 2017 and April 30, 2017, approximately $21.2 million remained authorized for future repurchases under this program.

 

13. 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.

 

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

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thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

July 29,

 

 

July 30,

 

 

    

 

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

UAS

 

$

36,250

 

$

30,497

 

EES

 

 

7,514

 

 

5,721

 

Total

 

 

43,764

 

 

36,218

 

Cost of sales:

 

 

 

 

 

 

 

UAS

 

 

26,408

 

 

25,083

 

EES

 

 

5,726

 

 

4,452

 

Total

 

 

32,134

 

 

29,535

 

Gross margin:

 

 

 

 

 

 

 

UAS

 

 

9,842

 

 

5,414

 

EES

 

 

1,788

 

 

1,269

 

Total

 

 

11,630

 

 

6,683

 

Selling, general and administrative

 

 

13,331

 

 

13,663

 

Research and development

 

 

6,461

 

 

8,600

 

Loss from operations

 

 

(8,162)

 

 

(15,580)

 

Other income (expense):

 

 

 

 

 

 

 

Interest income, net

 

 

512

 

 

375

 

Other income (expense), net

 

 

 4

 

 

(300)

 

Loss before income taxes

 

$

(7,646)

 

$

(15,505)

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”).

 

Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventories and reserves for excess and obsolescence, warranty liabilities, self-insured liabilities, accounting for stock-based awards, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.

 

We review cost performance and estimates-to-complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in profit estimates for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the three months ended July  29, 2017 and July 30, 2016, changes in accounting estimates on fixed-price contracts recognized using the percentage of completion method of accounting are presented below.

 

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For the three months ended July 29, 2017 and July 30, 2016, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

July 29,

    

July 30,

 

 

 

2017

 

2016