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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 August 1, 2020

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 each 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 September 2, 2020, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 24,104,319.

Table of Contents

AeroVironment, Inc.

Table of Contents

Item 1.

Financial Statements :

    

Consolidated Balance Sheets as of August 1, 2020 (Unaudited) and April 30, 2020

3

Consolidated Statements of Operations for the three months ended August 1, 2020 (Unaudited) and July 27, 2019 (Unaudited)

4

Consolidated Statements of Comprehensive Income for the three months ended August 1, 2020 (Unaudited) and July 27, 2019 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity for the three months ended August 1, 2020 (Unaudited) and July 27, 2019 (Unaudited)

6

Consolidated Statements of Cash Flows for the three months ended August 1, 2020 (Unaudited) and July 27, 2019 (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signatures

34

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)

August 1,

    

April 30,

2020

2020

    

(Unaudited)

 

Assets

Current assets:

Cash and cash equivalents

$

246,839

$

255,142

Short-term investments

71,334

47,507

Accounts receivable, net of allowance for doubtful accounts of $1,054 at August 1, 2020 and $1,190 at April 30, 2020

 

43,357

 

73,660

Unbilled receivables and retentions (inclusive of related party unbilled receivables of $28,143 at August 1, 2020 and $15,779 at April 30, 2020)

 

73,791

 

75,837

Inventories

 

45,530

 

45,535

Prepaid expenses and other current assets

 

5,941

 

6,246

Total current assets

 

486,792

 

503,927

Long-term investments

20,338

15,030

Property and equipment, net

 

22,907

 

21,694

Operating lease right-of-use assets

13,612

8,793

Deferred income taxes

 

5,262

 

4,928

Intangibles, net

12,928

13,637

Goodwill

6,340

6,340

Other assets

 

9,640

 

10,605

Total assets

$

577,819

$

584,954

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

11,740

$

19,859

Wages and related accruals

 

13,025

 

23,972

Customer advances

 

5,725

 

7,899

Current operating lease liabilities

4,478

3,380

Income taxes payable

2,620

1,065

Other current liabilities

 

8,735

 

10,778

Total current liabilities

 

46,323

 

66,953

Non-current operating lease liabilities

10,344

6,833

Other non-current liabilities

243

250

Liability for uncertain tax positions

 

1,017

 

1,017

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.0001 par value:

Authorized shares—10,000,000; none issued or outstanding at August 1, 2020 and April 30, 2020

 

 

Common stock, $0.0001 par value:

Authorized shares—100,000,000

Issued and outstanding shares—24,104,564 shares at August 1, 2020 and 24,063,639 shares at April 30, 2020

 

2

 

2

Additional paid-in capital

 

181,406

 

181,481

Accumulated other comprehensive income

 

351

 

328

Retained earnings

 

338,170

 

328,090

Total AeroVironment, Inc. stockholders’ equity

 

519,929

 

509,901

Noncontrolling interest

(37)

Total equity

519,892

509,901

Total liabilities and stockholders’ equity

$

577,819

$

584,954

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

August 1,

July 27,

    

2020

    

2019

 

Revenue:

Product sales

$

58,357

$

65,839

Contract services (inclusive of related party revenue of $16,386 and $12,335 for the three months ended August 1, 2020 and July 27, 2019, respectively)

 

29,093

 

21,072

 

87,450

 

86,911

Cost of sales:

Product sales

 

32,084

 

30,408

Contract services

 

19,955

 

15,231

 

52,039

 

45,639

Gross margin:

 

Product sales

26,273

35,431

Contract services

9,138

5,841

 

35,411

 

41,272

Selling, general and administrative

 

12,011

 

13,668

Research and development

 

11,103

 

8,709

Income from operations

 

12,297

 

18,895

Other income:

Interest income, net

 

208

 

1,329

Other income, net

 

33

 

355

Income before income taxes

 

12,538

 

20,579

Provision for income taxes

 

1,207

 

2,133

Equity method investment loss, net of tax

 

(1,288)

 

(1,347)

Net income

10,043

17,099

Net loss attributable to noncontrolling interest

37

11

Net income attributable to AeroVironment, Inc.

$

10,080

$

17,110

Net income per share attributable to AeroVironment, Inc.

Basic

$

0.42

$

0.72

Diluted

$

0.42

$

0.71

Weighted-average shares outstanding:

Basic

 

23,893,001

 

23,745,199

Diluted

 

24,186,228

 

24,069,933

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

August 1,

July 27,

    

2020

    

2019

 

Net income

$

10,043

$

17,099

Other comprehensive income:

Change in foreign currency translation adjustments

75

169

Unrealized loss on investments, net of deferred tax expense of $4 for the three months ended August 1, 2020

 

(52)

 

Total comprehensive income

10,066

17,268

Net loss attributable to noncontrolling interest

37

11

Comprehensive income attributable to AeroVironment, Inc.

$

10,103

$

17,279

See accompanying notes to consolidated financial statements (unaudited).

5

Table of Contents

AeroVironment, Inc.

Consolidated Statements of Stockholders’ Equity

For the three months ended August 1, 2020 and July 27, 2019 (Unaudited)

(In thousands except share data)

Accumulated

Additional

Other

Total

Non-

Common Stock

Paid-In

Retained

Comprehensive

AeroVironment, Inc.

Controlling

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income

Equity

Interest

    

Total

Balance at April 30, 2020

 

24,063,639

$

2

$

181,481

$

328,090

$

328

$

509,901

$

$

509,901

Net income

 

 

 

 

10,080

 

10,080

(37)

 

10,043

Unrealized loss on investments

 

 

 

 

 

(52)

(52)

 

(52)

Foreign currency translation

 

 

 

 

75

75

 

75

Stock options exercised

 

3,500

 

 

86

 

86

 

86

Restricted stock awards

 

60,592

 

 

 

 

Restricted stock awards forfeited

 

(270)

 

 

 

 

Tax withholding payment related to net share settlement of equity awards

 

(22,897)

 

 

(1,756)

 

(1,756)

 

(1,756)

Stock based compensation

 

 

 

1,595

 

1,595

 

1,595

Balance at August 1, 2020

 

24,104,564

$

2

$

181,406

$

338,170

$

351

$

519,929

$

(37)

$

519,892

Accumulated

Additional

Other

Total

Non-

Common Stock

Paid-In

Retained

Comprehensive

AeroVironment, Inc.

Controlling

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income

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

 

 

 

 

17,110

 

17,110

(11)

 

17,099

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

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

    

August 1,

    

July 27,

 

2020

2019

Operating activities

Net income

$

10,043

$

17,099

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

Depreciation and amortization

 

2,779

 

2,079

Losses from equity method investments

1,288

1,347

Realized gain from sale of available-for-sale investments

(11)

Provision for doubtful accounts

 

(136)

 

11

Other non-cash expense

32

Non-cash lease expense (income)

1,190

(251)

Loss on foreign currency transactions

 

1

 

1

Deferred income taxes

 

(339)

 

(349)

Stock-based compensation

 

1,595

 

1,566

Loss (gain) on sale of property and equipment

2

(75)

Amortization of debt securities

(43)

(527)

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

 

30,439

 

(11,557)

Unbilled receivables and retentions

 

2,046

 

5,112

Inventories

 

5

 

(1,946)

Income tax receivable

821

Prepaid expenses and other assets

 

324

 

(616)

Accounts payable

 

(7,338)

 

(5,110)

Other liabilities

(15,004)

(4,524)

Net cash provided by operating activities

 

26,841

 

3,113

Investing activities

Acquisition of property and equipment

 

(4,067)

 

(1,902)

Equity method investments

(1,173)

(4,569)

Business acquisition, net of cash acquired

(18,641)

Proceeds from sale of property and equipment

81

Redemptions of held-to-maturity investments

 

 

65,035

Purchases of held-to-maturity investments

(70,463)

Redemptions of available-for-sale investments

 

41,727

 

Purchases of available-for-sale investments

(69,961)

(2,693)

Net cash used in investing activities

 

(33,474)

 

(33,152)

Financing activities

Tax withholding payment related to net settlement of equity awards

(1,756)

(668)

Exercise of stock options

 

86

 

93

Net cash used in financing activities

 

(1,670)

 

(575)

Net decrease in cash, cash equivalents, and restricted cash

 

(8,303)

 

(30,614)

Cash, cash equivalents and restricted cash at beginning of period

 

255,142

 

172,708

Cash, cash equivalents and restricted cash at end of period

$

246,839

$

142,094

Supplemental disclosures of cash flow information

Cash refunded (paid), net during the period for:

Income taxes

$

10

$

(294)

Non-cash activities

Unrealized loss on investments, net of deferred tax expense of $4 for the three months ended August 1, 2020

$

52

$

Change in foreign currency translation adjustments

$

75

$

169

Acquisitions of property and equipment included in accounts payable

$

643

$

1,253

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 August 1, 2020 are not necessarily indicative of the results for the full year ending April 30, 2021. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2020, 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 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 17—Business Acquisitions for further details.

During the three months ended October 27, 2019, the Company dissolved its wholly-owned subsidiary, Skytower, Inc., the results of which were not material to the consolidated financial statements.

Recently Adopted Accounting Standards

Effective May 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with several additional clarification ASU’s issued during 2018 and 2019, collectively “CECL”. CECL requires the reporting entity to estimate expected credit losses over the life of a financial asset. CECL requires the credit loss to be recognized upon initial recognition of the financial asset. ASU 2016-13 requires the entity to adopt CECL using the modified retrospective transition approach through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of the assessment of the adequacy of the Company’s allowances for credit losses, the Company

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considered a number of factors including, but not limited to, customer credit ratings, age of receivables, and expected loss rates. However, the adoption of CECL did not have a material impact to retained earnings for the Company.

Effective May 1, 2020, the Company adopted ASU 2018-15, “Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 provides guidance on the treatment of accounting for fees paid by a customer in a cloud computing arrangement. This guidance includes the requirements for capitalizing implementation costs incurred in a hosting arrangement. The Company adopted ASU 2018-15 using the prospective method, applying the new guidance to all implementation costs incurred after adoption. The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated financial statements.

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.

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, which accounted for 38% and 62% of revenue during the three months ended August 1, 2020, respectively. 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

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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 August 1, 2020, the Company had approximately $154,418,000 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 95% of the remaining performance obligations as revenue in fiscal 2021, an additional 5% in fiscal 2022, 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 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 August 1, 2020 or the three month period ended July 27, 2019. No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three month period ended August 1, 2020 or the three month period ended and July 27, 2019.

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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

 

August 1,

July 27,

Revenue by major product line/program

    

2020

    

2019

Small UAS

$

56,202

$

66,745

TMS

9,534

5,587

HAPS

16,386

12,335

Other

 

5,328

 

2,244

Total revenue

$

87,450

$

86,911

Three Months Ended

    

August 1,

July 27,

Revenue by contract type

2020

    

2019

FFP

$

60,875

$

67,944

CPFF

26,569

18,264

T&M

 

 

6

 

703

Total revenue

$

87,450

$

86,911

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

    

August 1,

July 27,

Revenue by customer category

2020

    

2019

U.S. government

$

53,796

$

49,134

Non-U.S. government

33,654

37,777

Total revenue

$

87,450

$

86,911

Three Months Ended

August 1,

July 27,

Revenue by geographic location

2020

    

2019

Domestic

$

53,430

$

38,808

International

34,020

48,103

Total revenue

$

87,450

$

86,911

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

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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 August 1, 2020 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 August 1, 2020 and July 27, 2019 that was included in contract liability balances at the beginning of each year was $1,973,000 and $830,000, 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 available-for-sale and are reported at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes for available-for-sale investments. Gains and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Investments are considered to be impaired if the fair value of the investment is less than its amortized cost basis. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates if the decline in fair value resulted from a credit loss or other factors. The Company considers factors such as general market conditions and potential adverse conditions related to the financial health of the issuer based on rating agency actions. Impairments relating to credit losses are recorded in earnings through an allowance for credit losses. The allowance is limited by the amount that the fair value is less than the amortized cost basis. Impairments not related to credit losses are recorded through other comprehensive income, net of applicable taxes.

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 CPFF and T&M contracts.

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.

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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, 2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal year 2015 for an amount not significant. At August 1, 2020 and April 30, 2020, the Company had no reserve for incurred cost claim audits.

Earnings Per Share

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

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

Three Months Ended

 

    

August 1, 2020

    

July 27, 2019

 

Denominator for basic earnings per share:

Weighted average common shares

 

23,893,001

 

23,745,199

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

 

293,227

 

324,734

Denominator for diluted earnings per share

24,186,228

24,069,933

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 844 and 3,675 for the three months ended August 1, 2020 and July 27, 2019,

respectively.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted. The adoption method is dependent on the specific amendment included in this update as certain amendments require retrospective adoption, modified retrospective adoption, an option of retrospective or modified retrospective, and prospective adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (Topic 321, Topic 323, and Topic 815). This ASU clarifies accounting certain topics impacted by Topic 321 Investments—Equity Securities. These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted. The amendments should be adopted prospectively. 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 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. 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 and has been recorded in gain on sale of business, net of tax in the consolidated statements of income. During the year ended April 30, 2019, the Company recorded a reduction to the gain resulting from a working capital adjustment of $486,000. During the year ended April 30, 2020, the Company and Webasto engaged an independent accounting firm to resolve a

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working capital dispute with a maximum exposure of $922,000 pursuant to the terms of the Purchase Agreement. In June 2020, the independent accounting firm determined the final adjustment to the working capital dispute to be $341,000 which has been recorded net of tax as discontinued operations in the consolidated statements of income for the year ended April 30, 2020.

The Company is entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of two remaining customer contracts to Webasto. The Holdback was not recorded in the Company’s consolidated financial statements as the amount was not realized or realizable as of August 1, 2020. 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. On August 14, 2019, Benchmark Electronics, Inc. (“Benchmark”), the company that assembled the products subject to the recall, served a demand for arbitration to the Company and Webasto, and a third-party part supplier pursuant to its contracts with the Company and Webasto, respectively. The Company filed a responsive pleading in the Benchmark arbitration on October 29, 2019, consisting of a general denial, affirmative defenses, and a reservation of the right to file counter-claims at a later date. Webasto challenged the validity of the Benchmark arbitration by filing an action in New York Superior Court. In December 2019, Webasto and Benchmark reached a settlement of their disputed claims. Benchmark withdrew its Notice of Arbitration against Webasto and the Company, but reserved its right to pursue indemnity claims against suppliers. The recall remains a significant part of the Webasto lawsuit.

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 $38,000 and $444,000 and has been recorded in other income, net in the consolidated statements of income for three months ended August 1, 2020 and July 27, 2019, respectively.

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3. Investments

Investments consist of the following (in thousands):

August 1,

April 30,

    

2020

    

2020

 

Short-term investments:

Available-for-sale securities:

Municipal securities

1,348

5,244

U.S. government securities

69,986

33,771

Corporate bonds

8,492

Total short-term investments

$

71,334

$

47,507

Long-term investments:

Available-for-sale securities:

Municipal securities

1,592

U.S. government securities

15,004

8,996

Total available-for-sale investments

 

15,004

 

10,588

Equity method investments

Investment in limited partnership fund

 

5,334

 

4,442

Total equity method investments

 

5,334

 

4,442

Total long-term investments

$

20,338

$

15,030

Available-For-Sale Securities

As of August 1, 2020 and April 30, 2020, the balance of available-for-sale securities consisted of state and local government municipal securities, U.S. government securities, U.S. government agency securities, and investment grade corporate bonds. Interest earned from these investments is recorded in interest income. Realized gains on sales of these investments on the basis of specific identification is recorded in interest income.

The following table is a summary of the activity related to the available-for-sale investments recorded in short-term and long-term investments as of August 1, 2020 and April 30, 2020, respectively (in thousands):

August 1, 2020

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Municipal securities

$

1,345

$

3

$

$

1,348

U.S. government securities

84,977

14

(1)

84,990

Corporate bonds

Total available-for-sale investments

$

86,322

$

17

$

(1)

$

86,338

April 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

 

Cost

    

Gains

Losses

    

Value

 

Municipal securities

 

$

6,807

$

29

$

$

6,836

U.S. government securities

 

42,730

41

(4)

42,767

Corporate bonds

 

8,495

(3)

8,492

Total available-for-sale investments

 

$

58,032

 

$

70

$

(7)

 

$

58,095

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The amortized cost and fair value of the available-for-sale debt securities by contractual maturity at August 1, 2020 were as follows (in thousands):

    

Cost

    

Fair Value

 

Due within one year

$

71,322

$

71,334

Due after one year through five years

 

15,000

 

15,004

Total

$

86,322

$

86,338

4. Fair Value Measurements

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

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

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

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

The Company’s financial assets measured at fair value on a recurring basis at August 1, 2020, 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

 

Available-for-sale securities

$

$

86,338

$

$

86,338

Total

$

$

86,338

$

$

86,338