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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 27, 2019

OR

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

For the transition period from           to           

Commission File Number: 001-33261

AEROVIRONMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware

95-2705790

(State or other jurisdiction of incorporation or organization)

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

900 Innovators Way

Simi Valley, California

93065

(Address of principal executive offices)

(Zip Code)

(805) 520-8350

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AVAV

The NASDAQ Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of August 28, 2019, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,980,491.

Table of Contents

AeroVironment, Inc.

Table of Contents

Item 1.

Financial Statements :

    

Consolidated Balance Sheets as of July 27, 2019 (Unaudited) and April 30, 2019

3

Consolidated Statements of Operations for the three months ended July 27, 2019 (Unaudited) and July 28, 2018 (Unaudited)

4

Consolidated Statements of Comprehensive Income for the three months ended July 27, 2019 (Unaudited) and July 28, 2018 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity for the three months ended July 27, 2019 (Unaudited) and July 28, 2018 (Unaudited)

6

Consolidated Statements of Cash Flows for the three months ended July 27, 2019 (Unaudited) and July 28, 2018 (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

37

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

July 27,

    

April 30,

2019

2019

    

(Unaudited)

 

Assets

Current assets:

Cash and cash equivalents

$

137,094

$

172,708

Short-term investments

 

163,634

 

150,487

Accounts receivable, net of allowance for doubtful accounts of $1,053 at July 27, 2019 and $1,041 at April 30, 2019

 

42,724

 

31,051

Unbilled receivables and retentions (inclusive of related party unbilled receivables of $12,649 at July 27, 2019 and $9,028 at April 30, 2019)

 

47,935

 

53,047

Inventories

 

56,336

 

54,056

Prepaid expenses and other current assets

 

7,606

 

7,418

Income taxes receivable

821

Total current assets

 

455,329

 

469,588

Long-term investments

 

4,887

 

9,386

Property and equipment, net

 

17,747

 

16,905

Operating lease right-of-use assets

9,917

Deferred income taxes

 

7,699

 

6,685

Intangibles, net

16,727

459

Goodwill

8,080

Other assets

 

14,196

 

5,821

Total assets

$

534,582

$

508,844

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

11,450

$

15,972

Wages and related accruals

 

12,085

 

18,507

Customer advances

 

3,268

 

2,962

Current operating lease liabilities

2,771

Income taxes payable

1,367

Other current liabilities

 

12,167

 

7,425

Total current liabilities

 

43,108

 

44,866

Deferred rent

 

 

1,173

Non-current operating lease liabilities

7,597

Other non-current liabilities

2,298

150

Deferred tax liability

29

29

Liability for uncertain tax positions

 

51

 

51

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.0001 par value:

Authorized shares—10,000,000; none issued or outstanding at July 27, 2019 and April 30, 2019

 

 

Common stock, $0.0001 par value:

Authorized shares—100,000,000

Issued and outstanding shares—23,990,459 shares at July 27, 2019 and 23,946,293 shares at April 30, 2019

 

2

 

2

Additional paid-in capital

 

177,207

 

176,216

Accumulated other comprehensive loss

 

171

 

2

Retained earnings

 

304,126

 

286,351

Total AeroVironment stockholders’ equity

 

481,506

 

462,571

Noncontrolling interest

(7)

4

Total equity

481,499

462,575

Total liabilities and stockholders’ equity

$

534,582

$

508,844

See accompanying notes to consolidated financial statements (unaudited).

3

Table of Contents

AeroVironment, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)

Three Months Ended

July 27,

July 28,

    

2019

    

2018

 

Revenue:

Product sales

$

65,839

$

55,313

Contract services (inclusive of related party revenue of $12,335 and $11,563 for the three months ended July 27, 2019 and July 28, 2018, respectively)

 

21,072

 

22,730

 

86,911

 

78,043

Cost of sales:

Product sales

 

30,408

 

29,811

Contract services

 

15,231

 

15,643

 

45,639

 

45,454

Gross margin:

 

Product sales

35,431

25,502

Contract services

5,841

7,087

 

41,272

 

32,589

Selling, general and administrative

 

13,668

 

11,956

Research and development

 

8,709

 

6,435

Income from continuing operations

 

18,895

 

14,198

Other income:

Interest income, net

 

1,329

 

906

Other income, net

 

355

 

8,388

Income from continuing operations before income taxes

 

20,579

 

23,492

Provision for income taxes

 

2,133

 

2,567

Equity method investment loss, net of tax

 

(1,347)

 

(602)

Net income from continuing operations

17,099

20,323

Discontinued operations:

Gain on sale of business, net of tax expense of $2,577

8,843

Loss from discontinued operations, net of tax

(1,850)

Net income from discontinued operations

 

 

6,993

Net income

17,099

27,316

Net loss attributable to noncontrolling interest

11

14

Net income attributable to AeroVironment

$

17,110

$

27,330

Net income per share attributable to AeroVironment—Basic

Continuing operations

$

0.72

$

0.86

Discontinued operations

0.30

Net income per share attributable to AeroVironment—Basic

$

0.72

$

1.16

Net income per share attributable to AeroVironment—Diluted

Continuing operations

$

0.71

$

0.85

Discontinued operations

0.29

Net income per share attributable to AeroVironment—Diluted

$

0.71

$

1.14

Weighted-average shares outstanding:

Basic

 

23,745,199

 

23,574,595

Diluted

 

24,069,933

 

24,010,303

See accompanying notes to consolidated financial statements (unaudited).

4

Table of Contents

AeroVironment, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

Three Months Ended

July 27,

July 28,

    

2019

    

2018

 

Net income

$

17,099

$

27,316

Other comprehensive income:

Change in foreign currency translation adjustments

169

(20)

Unrealized gain on investments, net of deferred tax expense of $51 for the three months ended July 28, 2018

 

 

57

Total comprehensive income

17,268

27,353

Net loss attributable to noncontrolling interest

11

14

Comprehensive income attributable to AeroVironment

$

17,279

$

27,367

See accompanying notes to consolidated financial statements (unaudited).

5

Table of Contents

AeroVironment, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

(In thousands)

Accumulated

 

Additional

Other

Total

Non-

 

Common Stock

Paid-In

Retained

Comprehensive

AeroVironment

Controlling

 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

Equity

Interest

    

Total

 

Balance at April 30, 2019

 

23,946,293

2

176,216

286,351

2

462,571

4

462,575

Adoption of ASU 2018-09

 

 

 

665

 

665

 

665

Net income (loss)

 

 

 

 

17,110

 

17,110

(11)

 

17,099

Unrealized gain on investments

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

169

169

 

169

Stock options exercised

 

3,000

 

 

93

 

93

 

93

Restricted stock awards

 

57,861

 

 

 

 

Restricted stock awards forfeited

 

(4,720)

 

 

 

 

Tax withholding payment related to net share settlement of equity awards

 

(11,975)

 

 

(668)

 

(668)

 

(668)

Stock based compensation

 

 

 

1,566

 

1,566

 

1,566

Balance at July 27, 2019

 

23,990,459

$

2

$

177,207

$

304,126

$

171

$

481,506

$

(7)

$

481,499

Accumulated

Additional

Other

Total

Non-

Common Stock

Paid-In

Retained

Comprehensive

AeroVironment

Controlling

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

Equity

Interest

    

Total

Balance at April 30, 2018

 

23,908,736

2

170,139

238,913

(21)

409,033

23

409,056

Net income (loss)

 

 

 

 

27,330

 

27,330

(14)

 

27,316

Unrealized gain on investments

 

 

 

 

 

57

57

 

57

Foreign currency translation

 

 

 

 

(20)

(20)

 

(20)

Stock options exercised

 

6,000

 

 

67

 

67

 

67

Restricted stock awards

 

33,412

 

 

 

 

Restricted stock awards forfeited

 

(13,453)

 

 

 

 

Tax withholding payment related to net share settlement of equity awards

 

(11,353)

 

 

(819)

 

(819)

 

(819)

Stock-based compensation

 

 

1,402

 

1,402

 

1,402

Balance at July 28, 2018

 

23,923,342

$

2

$

170,789

$

266,243

$

16

$

437,050

$

9

$

437,059

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

Three Months Ended

    

July 27,

    

July 28,

 

2019

2018

Operating activities

Net income

$

17,099

$

27,316

Gain on sale of business, net of tax

(8,843)

Loss from discontinued operations, net of tax

1,850

Net income from continuing operations

17,099

20,323

Adjustments to reconcile net income from continuing operations to cash provided by operating activities from continuing operations:

Depreciation and amortization

 

2,079

 

1,746

Loss from equity method investment

1,347

602

Provision for doubtful accounts

 

11

 

(48)

Other non-cash expense

32

Non-cash lease expense

(251)

Losses (gains) on foreign currency transactions

 

1

 

(2)

Deferred income taxes

 

(349)

 

(306)

Stock-based compensation

 

1,566

 

1,287

Gain on sale of property and equipment

(75)

Amortization of held-to-maturity investments

(527)

(115)

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

 

(11,557)

 

43,189

Unbilled receivables and retentions

 

5,112

 

(42,998)

Inventories

 

(1,946)

 

(4,819)

Income tax receivable

821

Prepaid expenses and other assets

 

(616)

 

(133)

Accounts payable

 

(5,110)

 

(9,893)

Other liabilities

(4,524)

(3,797)

Net cash provided by operating activities of continuing operations

 

3,113

 

5,036

Investing activities

Acquisition of property and equipment

 

(1,902)

 

(1,423)

Equity method investments

(4,569)

Business acquisition, net of cash acquired

(18,641)

Proceeds from sale of business

31,994

Proceeds from sale of property and equipment

81

Redemptions of held-to-maturity investments

 

65,035

 

78,909

Purchases of held-to-maturity investments

(70,463)

(81,646)

Redemptions of available-for-sale investments

 

 

2,250

Purchases of available-for-sale investments

(2,693)

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

 

(33,152)

 

30,084

Financing activities

Principal payments of capital lease obligations

(57)

Tax withholding payment related to net settlement of equity awards

(668)

(819)

Exercise of stock options

 

93

 

67

Net cash used in financing activities from continuing operations

 

(575)

 

(809)

Discontinued operations

Operating activities of discontinued operations

(6,609)

Investing activities of discontinued operations

(431)

Financing activities of discontinued operations

Net cash used in discontinued operations

(7,040)

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

(30,614)

 

27,271

Cash, cash equivalents, and restricted cash at beginning of period

 

172,708

 

143,517

Cash, cash equivalents, and restricted cash at end of period

$

142,094

$

170,788

Supplemental disclosures of cash flow information

Cash paid, net during the period for:

Income taxes

$

294

$

(7)

Non-cash activities

Unrealized gain on investments, net of deferred tax expense of $51 for the three months ended July 28, 2018

$

$

57

Change in foreign currency translation adjustments

$

169

$

(20)

Acquisitions of property and equipment included in accounts payable

$

1,253

$

595

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Organization and Significant Accounting Policies

Organization

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three months ended July 27, 2019 are not necessarily indicative of the results for the full year ending April 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2019, 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 December 2017, the Company and SoftBank Corp. (“SoftBank”) formed a joint venture, HAPSMobile, Inc. (“HAPSMobile”). As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment has been accounted for as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in equity method investment activity, net of tax in the consolidated statements of operations. The carrying value of the investment in HAPSMobile was recorded in other assets. Refer to Note 6—Equity Method Investments for further details.

On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its efficient energy systems business segment (the “EES Business”) to Webasto Charging Systems, Inc. (“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company. The Company determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represents a strategic shift in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. Refer to Note 2—Discontinued Operations for further details.

On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unit Purchase Agreement (the “Pulse Purchase Agreement”). The assets, liabilities and operating results of Pulse have been included in the Company’s consolidated financial statements. Refer to Note 18—Business Acquisitions for further details.

Recently Adopted Accounting Standards

Effective May 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), along with several additional clarification ASU’s issued during 2018, collectively the “New Lease Standard”. This New Lease Standard requires the

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lessee to recognize the assets and liabilities for the rights and obligations created by leases. The Company elected to adopt the New Lease Standard using the modified retrospective transition approach through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As such the Company did not recast comparative consolidated financial statements. The Company also elected the package of practical expedients which allows the Company to not reassess existing or expired contracts for existence of a lease, lease classification, or amortization of previously capitalized initial direct leasing cost. Additionally, the Company elected the short-term lease exception to not record right-of-use assets and lease liabilities for leases with a term less than 12 months and the practical expedient to not separate lease and non-lease components. Adoption of the New Lease Standard resulted in the recording of lease assets and lease liabilities on the consolidated balance sheet with no cumulative impact to retained earnings and did not have a material impact on the consolidated statement of cash flows. Refer to Note 10—Leases for additional information required as part of the adoption of the New Lease Standard.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 provides technical corrections, clarifications and other improvements across a variety of accounting topics. Among the clarifications, ASU 2018-09 clarifies that an entity should recognize excess tax benefits in the period in which the amount of the deduction is determined. This includes deductions that are taken on the entity’s return in a different period from when the event that gives rise to the tax deduction occurs and the uncertainty about whether the entity will receive a tax deduction and the amount of the tax deduction is resolved. Certain amendments were applicable immediately while others provide transition guidance and are effective in the Company’s first quarter of fiscal year 2020. The Company adopted ASU 2018-09 on May 1, 2019 using the modified retrospective method. The adoption of ASU 2018-09 resulted in a cumulative adjustment to increase retained earnings by $665,000 at May 1, 2019.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. Specifically, the Company’s existing intangible assets have been reclassified from other assets to intangibles, net on the consolidated balance sheet for all periods presented.

Restricted Cash

The Company classifies cash accounts which are not available for general use as restricted cash. Pursuant to the terms of the Pulse Purchase Agreement, the Company maintains an escrow account to satisfy the payment of contingent consideration due to the sellers if certain objectives are met. The restricted funds in the escrow account are recorded in other assets on the consolidated balance sheet. As of July 27, 2019 restricted cash was $5,000,000. The Company had no restricted cash as of April 30, 2019.

Revenue Recognition

The Company’s revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products and to provide related engineering, technical and other services according to the specifications of the customers. These contracts may be firm fixed price (“FFP”), cost plus fixed fee (“CPFF”), or time and materials (“T&M”). The Company considers all such contracts to be within the scope of ASC Topic 606.

Performance Obligations

A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its observable standalone selling price for products and services. When the standalone selling price is not directly observable, the Company uses its best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus margin approach. This approach estimates the Company’s expected costs of satisfying the performance obligation and then adds an appropriate margin for that distinct good or service.

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Contract modifications are routine in the performance of the Company’s contracts. In most instances, contract modifications are for additional goods and/or services that are distinct and, therefore, accounted for as new contracts.

The Company’s performance obligations are satisfied over time or at a point in time. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs, if the customer controls the asset as it is being developed or produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment for the Company’s costs incurred to date plus a reasonable margin. The contractual right to payment is generally supported by termination for convenience clauses that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. Revenue for tactical missile systems (“TMS”) product deliveries and Customer-Funded Research and Development contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue is recognized over time as services are rendered. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Training services are recognized over time using an output method based on days of training completed.

For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. The Company’s small UAS product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.

On July 27, 2019, the Company had approximately $165,237,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog. The Company currently expects to recognize approximately 91% of the remaining performance obligations as revenue in fiscal 2020, an additional 9% in fiscal 2021, and the balance thereafter.

The Company collects sales, value added, and other taxes concurrent with revenue producing activities, which are excluded from revenue when they are both imposed on a specific transaction and collected from a customer.

Contract Estimates

Accounting for contracts and programs primarily with a duration of less than six months involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the total expected costs to complete the contract and recognizes revenue based on the percentage of costs incurred at period end. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer.

The nature of the Company’s contracts gives rise to several types of variable consideration, including penalty fees and

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incentive awards generally for late delivery and early delivery, respectively. The Company generally estimates such variable consideration as the most likely amount. In addition, the Company includes the estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. Because of the certainty in estimating these amounts, they are included in the transaction price of the Company’s contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company regularly reviews and updates its contract-related estimates. Changes in cumulative revenue estimates, due to changes in the estimated transaction price or cost estimates, are recorded using a cumulative catch-up adjustment in the period identified for contracts with performance obligations recognized over time. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified, and it is recorded in other current liabilities.

The impact of adjustments in contract estimates on the Company’s operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was not significant for the three month period ended July 27, 2019 or the three month period ended July 28, 2018. No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three month period ended July 27, 2019 or the three month period ended and July 28, 2018.

Revenue by Category

The following tables present the Company’s revenue disaggregated by major product line, contract type, customer category and geographic location (in thousands):

 

Three Months Ended

 

 

July 27,

July 28,

 

Revenue by major product line/program

    

2019

    

2018

Small UAS

$

66,745

$

41,216

TMS

5,587

22,766

HAPS

12,335

11,563

Other

 

2,244

 

2,498

Total revenue

$

86,911

$

78,043

Three Months Ended

    

July 27,

July 28,

Revenue by contract type

2019

    

2018

FFP

$

67,944

$

58,003

CPFF

18,264

19,983

T&M

 

 

703

 

57

 

Total revenue

$

86,911

$

78,043

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Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with FFP contracts. However, these types of contracts generally offer additional profits when the Company completes the work for less than originally estimated. CPFF contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees on FFP contracts. Under T&M contracts, the Company’s profit may vary if actual labor hour rates vary significantly from the negotiated rates.

Three Months Ended

    

July 27,

July 28,

Revenue by customer category

2019

    

2018

U.S. government:

$

49,134

$

35,908

Non-U.S. government

37,777

42,135

Total revenue

$

86,911

$

78,043

Three Months Ended

July 27,

July 28,

Revenue by geographic location

2019

    

2018

Domestic

$

38,808

$

35,352

International

48,103

42,691

Total revenue

$

86,911

$

78,043

Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits on the consolidated balance sheet. In the Company’s services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, which is generally monthly, or upon the achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets recorded in unbilled receivables and retentions on the consolidated balance sheet. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities recorded in customer advances on the consolidated balance sheet. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. For the Company’s product revenue, the Company generally receives cash payments subsequent to satisfying the performance obligation via delivery of the product, resulting in billed accounts receivable. Changes in the contract asset and liability balances during the three month period ended July 27, 2019 were not materially impacted by any other factors. For the Company’s contracts, there are no significant gaps between the receipt of payment and the transfer of the associated goods and services to the customer for material amounts of consideration.

Revenue recognized for the three month periods ended July 27, 2019 and July 28, 2018 that was included in contract liability balances at the beginning of each year were $830,000 and $1,548,000, respectively.

Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of research and development (“R&D”), on a consolidated basis for the Company’s continuing operations. Accordingly, the Company operates its business as a single reportable segment.

Investments

The Company’s investments are accounted for as held-to-maturity and available-for-sale and reported at amortized cost and cost less impairment, respectively. The Company has elected to measure available-for-sale investments that do not

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have readily determinable fair values at cost minus impairment, if any, adjusted for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Fair Values of Financial Instruments

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

Government Contracts

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

For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

The Company’s revenue recognition policy calls for revenue recognized on all CPFF or T&M government contracts to be recorded at actual rates to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. During the fiscal year ended April 30, 2019, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2016 and 2017 without payment of any consideration. At July 27, 2019 and April 30, 2019, the Company had $345,000 and $93,000 reserved for incurred cost claim audits, respectively.

Intangibles Assets — Acquired in Business Combinations

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. Acquired intangible assets include technology, in-process research and development, customer relationships, trademarks and tradenames, and non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses and the Company’s comparable businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is tested for impairment annually during the fourth quarter of the Company’s fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.

Earnings Per Share

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

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The reconciliation of basic to diluted shares is as follows (in thousands except share data):

Three Months Ended

 

Income from

    

July 27, 2019

    

July 28, 2018

 

Continuing operations attributable to AeroVironment

$

17,110

$

20,337

 

Discontinued operations, net of tax

 

 

6,993

Net income attributable to AeroVironment

$

17,110

$

27,330

Denominator for basic earnings per share:

Weighted average common shares

 

23,745,199

 

23,574,595

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

 

324,734

 

435,708

Denominator for diluted earnings per share

24,069,933

24,010,303

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 3,675 and 25,392 for the three months ended July 27, 2019 and July 28, 2018, respectively.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU is intended to replace the incurred loss impairment methodology under GAAP with a methodology that reflects using a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments, and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The guidance is effective for fiscal years beginning after December 15, 2019 and the interim periods therein, with early adoption permitted. Entities are required to apply the amendments in this update using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU removes or modifies current disclosures while adding certain new disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for the removed or modified disclosures. The removed and modified disclosures can be adopted retrospectively, and the added disclosures should be adopted prospectively. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350-40). This ASU allows for capitalization of implementation costs associated with certain cloud computing arrangements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

2. Discontinued Operations

On June 29, 2018, the Company completed the sale of the EES Business to Webasto. In accordance with the terms of the Purchase Agreement, as amended by a side letter agreement executed at the closing, the Company received cash consideration of $31,994,000 upon closing, which resulted in a gain of $11,420,000 which has been recorded in gain on sale of business, net of tax in the consolidated statements of operations for the three months ended July 28, 2018. The Company has disputed $1,085,000 of Webasto’s working capital adjustment claim, which is being submitted to an independent accounting firm for resolution pursuant to the terms of Purchase Agreement. No amounts have been recorded in the consolidated financial statements related to the additional working capital dispute as the Company has assessed the likelihood of a loss to be less than probable.

The Company is entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of two remaining customer contracts to Webasto. The Holdback was not recorded in the

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Company’s consolidated financial statements as the amount was not realized or realizable as of July 27, 2019. The Company’s satisfaction of the requirements for the payment of the Holdback is currently in dispute.

On February 22, 2019, Webasto filed a lawsuit alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures, failure to provide certain consents to contract assignments and related to a previously announced product recall. Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $6,500,000 in addition to attorneys’ fees, costs, and punitive damages. On August 16, 2019, the Company filed a counterclaim against Webasto seeking payment of the Holdback and declaratory relief regarding Webasto’s cancellation of an assigned contract. The Company believes that the allegations are generally meritless and is mounting a vigorous defense.

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

Concurrent with the execution of the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) to provide certain general and administrative services to Webasto for a defined period. Income from performing services under the TSA was $444,000 and $399,000 has been recorded in other income, net in the consolidated statements of operations for three months ended July 27, 2019 and July 28, 2018, respectively.

The Company determined that the EES Business met the criteria for classification as an asset held for sale as of April 30, 2018 and represents a strategic shift in the Company’s operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported as discontinued operations for all periods presented. The table below presents the statements of operations data for the EES Business (in thousands).

 

July 28,

2018

Net sales

    

$

4,256

Cost of sales

 

4,278

Gross margin

 

(22)

Selling, general and administrative

 

1,453

Research and development

 

1,065

Other income, net

1

Loss from discontinued operations before income taxes

 

(2,539)

Benefit for income taxes

(689)

Net loss from discontinued operations

$

(1,850)

Gain on sale of business, net of tax expense of $2,577

8,843

Net income from discontinued operations

$

6,993

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3. Investments

Investments consist of the following (in thousands):

July 27,

April 30,

    

2019

    

2019

 

Short-term investments:

Held-to-maturity securities:

Municipal securities

$

7,873

$

5,332

U.S. government securities

81,689

63,205

Corporate bonds

74,072

81,950

Total held-to-maturity short-term investments

$

163,634

$

150,487

Long-term investments:

Held-to-maturity securities:

U.S. government securities

1,006

7,404

Corporate bonds

1,188

1,982

Total held-to-maturity investments

 

2,194

 

9,386

Available-for-sale securities:

Investment in limited partnership fund

 

2,693

 

Total available-for-sale investments

 

2,693

 

Total long-term investments

$

4,887

$

9,386

Held-To-Maturity Securities

As of July 27, 2019 and April 30, 2019, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. government securities, U.S. government agency securities, and highly rated 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 July 27, 2019 were as follows (in thousands):

July 27, 2019

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Municipal securities

$

7,873

$

2

$

 

$

7,875

U.S. government securities

82,695

129

(11)

 

82,813

Corporate bonds

75,260

43

(6)

 

75,297

Total held-to-maturity investments

$

165,828

$

174

$

(17)

$

165,985

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2019 were as follows (in thousands):