Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, are to be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under the ASU, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits are also classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and are to be applied prospectively or retrospectively to all periods presented. The Company adopted the pronouncement beginning May 1, 2016. In connection with adopting the pronouncement beginning May 1, 2016, the Company recorded a cumulative increase of $265,000 in retained earnings with a corresponding increase in deferred tax assets in the consolidated balance sheet as of April 30, 2016 related to the prior years' unrecognized excess tax benefits. Excess tax benefits related to exercised options and vested restricted stock awards during the three months ended July 30, 2016 have been recognized in the current period’s income statement. The Company also excluded the excess tax benefits from the calculation of diluted earnings per share for the three months ended July 30, 2016. The Company applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation related to the adoption of new accounting pronouncements during the six months ended October 29, 2016 impacting the classification of deferred income taxes in the consolidated balance sheets.
Segments
The Company’s products are sold and divided among two reportable segments to reflect the Company’s strategic goals. Operating segments are defined as components of an enterprise from which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of these segments in order to make resource allocation decisions, including the focus of research and development (“R&D”) activities and performance assessment. The Company’s reportable segments are business units that offer different products and services and are managed separately.
Investments
The Company’s investments are accounted for as held-to-maturity and available-for-sale and reported at amortized cost and fair value, respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost due to the short period of time to maturity.
Government Contracts
Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.
For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to
disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.
The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured.
The Defense Contract Management Agency, or DCMA, disallowed a portion of the Company’s executive compensation and/or other costs included in the Company’s fiscal 2006, 2007 and 2008 incurred cost claims and sought interest for all three years and penalties for Fiscal 2006, based on the disallowed costs. The Company appealed these cost disallowances to the Armed Services Board of Contract Appeals. For Fiscal 2006, as a result of partial settlements and a decision of the Armed Services Board of Contract Appeals in March 2016, the government’s remaining claims were dismissed with prejudice. All of the government’s claims related to the Company’s 2007 and 2008 incurred cost claims were settled as of October 2015 by payment to the government of $50,000 and the government’s claims related to the Company’s 2009 and 2010 incurred cost claims were settled as of October 2015 and April 2016, respectively, without the payment of any consideration.
As a result of the settlement agreements and the Armed Services Board of Contract Appeals ruling, the Company reversed reserves of $3,607,000 related to those fiscal years as a credit to cost of sales, allocated as $3,203,000 to the UAS segment and $404,000 to the EES segment during the fiscal year ended April 30, 2016. At October 29, 2016 and April 30, 2016, the Company did not have any remaining reserves for incurred cost claim audits.
(Loss) Earnings Per Share
Basic (loss) earnings per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.
The reconciliation of basic to diluted shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, excluding unvested restricted stock
|
|
23,049,056
|
|
22,985,956
|
|
23,002,832
|
|
22,966,513
|
|
Dilutive effect of employee stock options and unvested restricted stock
|
|
—
|
|
162,500
|
|
—
|
|
—
|
|
Denominator for diluted (loss) earnings per share
|
|
23,049,056
|
|
23,148,456
|
|
23,002,832
|
|
22,966,513
|
|
Due to the net loss for the three and six months ended October 29, 2016 and the six months ended October 31, 2015, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. Potentially dilutive shares not included in the computation of diluted weighted average common shares because their effect would have been antidilutive were 199,428
and
256,366 for the three and six months ended October 29, 2016, respectively, and 208,102 for the six months ended October 31, 2015. During the three months ended October 31, 2015, approximately 21,000 shares reserved for issuance upon exercise of stock options and shares of unvested restricted stock were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
Recently Issued Accounting Standards
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
(Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Municipal securities
|
|
$
|
42,179
|
|
$
|
5
|
|
$
|
(7)
|
|
$
|
42,177
|
|
U.S. government securities
|
|
|
28,702
|
|
|
23
|
|
|
—
|
|
|
28,725
|
|
Corporate bonds
|
|
|
63,602
|
|
|
54
|
|
|
(32)
|
|
|
63,624
|
|
Certificates of deposit
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total held-to-maturity investments
|
|
$
|
134,483
|
|
$
|
82
|
|
$
|
(39)
|
|
$
|
134,526
|
|
The amortized cost and fair value of the held-to-maturity securities by contractual maturity at October 29, 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Due within one year
|
|
$
|
118,208
|
|
$
|
118,224
|
|
Due after one year through five years
|
|
|
40,107
|
|
|
40,039
|
|
Total
|
|
$
|
158,315
|
|
$
|
158,263
|
|
Available-For-Sale Securities
Auction Rate Securities
As of October 29, 2016 and April 30, 2016, the entire balance of available-for-sale, auction rate securities, consisted of two investment grade auction rate municipal bonds, with maturities of approximately 3 and 18 years, respectively. These investments have characteristics similar to short-term investments, because at pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.
During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments that failed to settle at auction, at the maximum contractual rate until the next auction occurs. In the event the Company needs to access funds invested in these auction rate securities, the Company may not be able to liquidate these securities at the fair value recorded on October 29, 2016, until a future auction of these securities is successful or a buyer is found outside of the auction process.
As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of October 29, 2016. The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction. Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate that the current lack of liquidity of these investments will affect its ability to operate its business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment if a further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity and as of October 29, 2016, the Company did not consider these investments to be other-than-temporarily impaired.
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of October 29, 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Auction rate securities
|
|
$
|
2,700
|
|
$
|
—
|
|
$
|
(248)
|
|
$
|
2,452
|
|
Total available-for-sale investments
|
|
$
|
2,700
|
|
$
|
—
|
|
$
|
(248)
|
|
$
|
2,452
|
|
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of April 30, 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Auction rate securities
|
|
$
|
3,100
|
|
$
|
—
|
|
$
|
(320)
|
|
$
|
2,780
|
|
Total available-for-sale investments
|
|
$
|
3,100
|
|
$
|
—
|
|
$
|
(320)
|
|
$
|
2,780
|
|
The amortized cost and fair value of the auction rate securities by contractual maturity at October 29, 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Due after one through five years
|
|
$
|
700
|
|
$
|
679
|
|
Due after 10 years
|
|
|
2,000
|
|
|
1,773
|
|
Total
|
|
$
|
2,700
|
|
$
|
2,452
|
|
Equity Securities
At April 30, 2015, the entire balance of available-for-sale equity securities consisted of 618,042 CybAero AB (“CybAero”) common shares. The shares were classified as available-for-sale. These shares were initially acquired on August 11, 2014, when the Company converted a convertible bond into CybAero common shares. The convertible bond was in the amount of 10 million SEK and was converted into 1,062,699 common shares of CybAero at the conversion price of 9.41 SEK per share. When the Company converted the bond on August 11, 2014, the fair value per share was 37.50 SEK which became the new cost basis going forward, with all subsequent changes in fair value being recorded to other comprehensive income.
At August 1, 2015, the Company reviewed these shares for impairment based on criteria that included the extent to which the investment’s carrying value exceeds its related market value, the duration of the market decline, uncertainty as to the recovery period due to sustained losses of the investee and the Company’s intent to hold its investment until recovery. In the three months ended August 1, 2015, the Company determined it was in its best interests to liquidate the remaining shares held. As a result, during the three months ended August 1, 2015, the Company recorded an other‑than‑temporary-impairment loss of $2,186,000 related to the Company’s investment in the CybAero shares which was recorded to Other expense in the consolidated statement of operations. As a result of recording the impairment charge, the investment’s fair value became its new cost basis.
In August 2015, the Company sold its remaining shares in CybAero in a private sale at the price of 12.00 SEK per share, resulting in proceeds of approximately $777,000 resulting in realized gains of $207,000, based on the difference between the original conversion price of 9.41 SEK per share and the sales price at the time of sale, inclusive of the final sale of all shares. At April 30, 2016, the Company did not hold any CybAero shares.
3. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended, (“the Exchange Act”).
Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventories and reserves for excess and obsolescence, warranty liabilities, self-insured liabilities, accounting for stock-based awards, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.
We review cost performance and estimates-to-complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in profit estimates for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the three and six months ended October 29, 2016 and October 31, 2015, changes in accounting estimates on fixed-price contracts recognized using the percentage of completion method of accounting are presented below.
For the three months ended October 29, 2016 and October 31, 2015, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
October 29,
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Gross favorable adjustments
|
|
$
|
2,211
|
|
$
|
499
|
|
Gross unfavorable adjustments
|
|
|
(32)
|
|
|
(125)
|
|
Net favorable adjustments
|
|
$
|
2,179
|
|
$
|
374
|
|
For the three months ended October 29, 2016, favorable cumulative catch-up adjustments of $2.2 million were primarily due to final cost adjustments on 53 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments were not material.
For the three months ended October 31, 2015, favorable cumulative catch-up adjustments of $0.5 million were primarily due to final cost adjustments on 154 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.1 million were primarily related to higher than expected costs on 96 contracts, which individually were not material.
For the six months ended October 29, 2016 and October 31, 2015, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 29,
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Gross favorable adjustments
|
|
$
|
2,257
|
|
$
|
437
|
|
Gross unfavorable adjustments
|
|
|
(209)
|
|
|
(207)
|
|
Net favorable adjustments
|
|
$
|
2,048
|
|
$
|
230
|
|
For the six months ended October 29, 2016, favorable cumulative catch-up adjustments of $2.3 million were primarily due to final cost adjustments on 49 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 9 contracts, which individually were not material.
For the six months ended October 31, 2015, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on 136 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 88 contracts, which individually were not material.
Fiscal Periods
Due to our fixed year end date of April 30, our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday. Our 2017 fiscal year ends on April 30, 2017 and our fiscal quarters end on July 30, 2016, October 29, 2016 and January 28, 2017, respectively.
Results of Operations
Our operating segments are Unmanned Aircraft Systems, or UAS, and Efficient Energy Systems, or EES. Our accounting policies for each of these segments are the same. In addition, a significant portion of our research and development, or R&D, selling, general and administrative, or SG&A, and general overhead resources are shared across our segments.
The following table sets forth our revenue and gross margin generated by each operating segment for the periods indicated (in thousands):
Three Months Ended October 29, 2016 Compared to Three Months Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
October 29,
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
UAS
|
|
$
|
40,829
|
|
$
|
56,589
|
|
EES
|
|
|
9,287
|
|
|
8,142
|
|
Total
|
|
|
50,116
|
|
|
64,731
|
|
Cost of sales:
|
|
|
|
|
|
|
|
UAS
|
|
|
25,936
|
|
|
28,314
|
|
EES
|
|
|
6,763
|
|
|
4,884
|
|
Total
|
|
|
32,699
|
|
|
33,198
|
|
Gross margin:
|
|
|
|
|
|
|
|
UAS
|
|
|
14,893
|
|
|
28,275
|
|
EES
|
|
|
2,524
|
|
|
3,258
|
|
Total
|
|
|
17,417
|
|
|
31,533
|
|
Selling, general and administrative
|
|
|
13,387
|
|
|
14,733
|
|
Research and development
|
|
|
8,517
|
|
|
9,897
|
|
(Loss) income from operations
|
|
|
(4,487)
|
|
|
6,903
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
397
|
|
|
268
|
|
Other expense, net
|
|
|
(130)
|
|
|
(192)
|
|
(Loss) income before income taxes
|
|
$
|
(4,220)
|
|
$
|
6,979
|
|
Revenue.
Revenue for the three months ended October 29, 2016 was $50.1 million, as compared to $64.7 million for the three months ended October 31, 2015, representing a decrease of $14.6 million, or 23%. The decrease in revenue was due to a decrease in product deliveries of $20.1 million, partially offset by an increase in service revenue of $5.5 million. UAS revenue decreased $15.8 million, or 28%, to $40.8 million for the three months ended October 29, 2016, primarily due to a decrease in product deliveries of $21.5 million, partially offset by an increase in customer-funded R&D work of $4.3 million and an increase in service revenue of $1.4 million. The decrease in product deliveries was primarily due to a decrease in product deliveries of small UAS, partially offset by an increase in product deliveries of tactical missile systems. The increase in customer-funded R&D was primarily due to an increase in tactical missile system variant programs. The increase in service revenue was primarily due to an increase in tactical missile systems and an increase in sustainment activities in small UAS. EES revenue increased $1.1 million, or 14%, to $9.3 million for the three months ended October 29, 2016, primarily due to an increase in product deliveries of passenger and fleet electric vehicle charging systems.
Cost of Sales.
Cost of sales for the three months ended October 29, 2016 was $32.7 million, as compared to $33.2 million for the three months ended October 31, 2015, representing a decrease of $0.5 million, or 2%. As a percentage of revenue, cost of sales increased from 51% to 65%. The decrease in cost of sales was primarily due to a decrease in product costs of $5.6 million, partially offset by an increase in cost of services of $5.1 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016. The decrease in product costs was primarily due to the decrease in product deliveries, partially offset by the prior year reserve reversal for the settlement of prior year government incurred cost audits, the decrease in product sales volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost and an increase in engineering and technical analyses costs (“sustaining engineering activities”) in support of our existing products of $1.3 million. The increase in cost of services was primarily due to the increase in service revenue. UAS cost of sales decreased $2.4 million, or 8%, to $25.9 million for the three months ended October 29, 2016, primarily due to a decrease in product deliveries, partially offset by the prior year reserve reversal of $3.1 million for the settlement of prior year government incurred cost audits, the decrease in product sales
volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost and an increase in sustaining engineering activities in support of our existing products. As a percentage of revenue, cost of sales for UAS increased from 50% to 64%, primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits, the decrease in product sales volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost and the increase in sustaining engineering activities in support of our existing products. EES cost of sales increased $1.9 million, or 38%, to $6.8 million for the three months ended October 29, 2016, primarily due to the increased sales volume, partially offset by the prior year reserve reversal of $0.4 million for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products. As a percentage of revenue, cost of sales for EES increased from 60% to 73% primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products.
Gross Margin.
Gross margin for the three months ended October 29, 2016 was $17.4 million, as compared to $31.5 million for the three months ended October 31, 2015, representing a decrease of $14.1 million, or 45%. The decrease in gross margin was primarily due to a decrease in product margins of $14.5 million, partially offset by an increase in service margins of $0.4 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016. As a percentage of revenue, gross margin decreased from 49% to 35%, primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits, the decrease in product sales volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost and an increase in sustaining engineering activities in support of our existing products of $1.3 million. UAS gross margin decreased to $14.9 million for the three months ended October 29, 2016 from $28.3 million. As a percentage of revenue, gross margin for UAS decreased from 50% to 36%, primarily due to the prior year reserve reversal of $3.1 million for the settlement of prior year government incurred cost audits, the decrease in product sales volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost and the increase in sustaining engineering activities in support of our existing products. EES gross margin decreased $0.7 million, or 23%, to $2.5 million for the three months ended October 29, 2016 primarily due to the prior year reserve reversal of $0.4 million for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products, partially offset by the increased sales volume. As a percentage of revenue, EES gross margin decreased from 40% to 27%, primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products.
Selling, General and Administrative
.
SG&A expense for the three months ended October 29, 2016 was $13.4 million, or 27% of revenue, compared to SG&A expense of $14.7 million, or 23% of revenue, for the three months ended October 31, 2015. SG&A expense decreased by $1.3 million, or 9%, for the three months ended October 29, 2016, primarily due to a decrease in bid and proposal costs.
Research and Development.
R&D expense for the three months ended October 29, 2016 was $8.5 million, or 17% of revenue, compared to R&D expense of $9.9 million, or 15% of revenue, for the three months ended October 31, 2015. R&D expense decreased by $1.4 million, or 14%, for the three months ended October 29, 2016, primarily due to a decrease in development activities for certain strategic initiatives.
Interest Income, net.
Interest income, net for the three months ended October 29, 2016 was $0.4 million compared to interest income, net of $0.3 million for the three months ended October 31, 2015.
Other Expense, net.
Other expense, net for the three months ended October 29, 2016 was $0.1 million compared to other expense, net of $0.2 million for the three months ended October 31, 2015.
(Benefit) Provision for Income Taxes.
Our effective income tax rate was 1.1% for the three months ended October 29, 2016, as compared to 36.7% for the three months ended October 31, 2015. The variance from statutory rates for the three months ended October 29, 2016, was primarily due to federal legislation permanently reinstating the federal research and development tax credit during the three months ended January 30, 2016 and the reversal of a reserve for uncertain tax positions due to the settlement of prior fiscal year audits.
Six Months Ended October 29, 2016 Compared to Six Months Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
Six Months Ended
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|
|
|
October 29,
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|
October 31,
|
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|
|
2016
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
UAS
|
|
$
|
71,326
|
|
$
|
96,756
|
|
EES
|
|
|
15,008
|
|
|
15,025
|
|
Total
|
|
|
86,334
|
|
|
111,781
|
|
Cost of sales:
|
|
|
|
|
|
|
|
UAS
|
|
|
51,019
|
|
|
54,780
|
|
EES
|
|
|
11,215
|
|
|
9,445
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|
Total
|
|
|
62,234
|
|
|
64,225
|
|
Gross margin:
|
|
|
|
|
|
|
|
UAS
|
|
|
20,307
|
|
|
41,976
|
|
EES
|
|
|
3,793
|
|
|
5,580
|
|
Total
|
|
|
24,100
|
|
|
47,556
|
|
Selling, general and administrative
|
|
|
27,050
|
|
|
29,989
|
|
Research and development
|
|
|
17,117
|
|
|
19,728
|
|
Loss from operations
|
|
|
(20,067)
|
|
|
(2,161)
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|
Other income (expense):
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|
|
|
|
|
|
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Interest income, net
|
|
|
772
|
|
|
492
|
|
Other (expense), net
|
|
|
(430)
|
|
|
(2,581)
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|
Loss before income taxes
|
|
$
|
(19,725)
|
|
$
|
(4,250)
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|
Revenue.
Revenue for the six months ended October 29, 2016 was $86.3 million, as compared to $111.8 million for the six months ended October 31, 2015, representing a decrease of $25.4 million, or 23%. The decrease in revenue was due to a decrease in product deliveries of $31.0 million, partially offset by an increase in service revenue of $5.6 million. UAS revenue decreased $25.4 million, or 26%, to $71.3 million for the six months ended October 29, 2016, primarily due to a decrease in product deliveries of $31.3 million, partially offset by an increase in service revenue of $3.4 million and an increase in customer-funded R&D work of $2.5 million. The decrease in product deliveries was primarily due to a decrease in product deliveries of small UAS, partially offset by an increase in product deliveries of tactical missile systems. The increase in service revenue was primarily due to an increase in tactical missile systems and an increase in sustainment activities in small UAS. The increase in customer-funded R&D was primarily due to an increase in tactical missile system variant programs. EES revenue was $15.0 million for the six months ended October 29, 2016 and October 31, 2015.
Cost of Sales.
Cost of sales for the six months ended October 29, 2016 was $62.2 million, as compared to $64.2 million for the six months ended October 31, 2015, representing a decrease of $2.0 million, or 3%. As a percentage of revenue, cost of sales increased from 57% to 72%. The decrease in cost of sales was primarily due to a decrease in product costs of $7.1 million, partially offset by an increase in service costs of $5.2 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016. The decrease in product costs was primarily due to the decrease in product deliveries, partially offset by the prior year reserve reversal for the settlement of prior year government incurred cost audits, an increase in sustaining engineering activities in support of our existing products of $2.7 million and an increase in warranty related costs of $1.7 million related to certain small UAS delivered in prior periods. The increase in cost of services was primarily due to the increase in service revenue. UAS cost of sales decreased $3.8 million, or 7%, to $51.0 million for the six months ended October 29, 2016 primarily due to the decrease in product deliveries, partially offset by the prior year reserve reversal of $3.1 million for the settlement of prior year government incurred cost audits, an increase in sustaining engineering activities in support of our existing products and an increase in warranty related costs of $1.7 million related to certain small UAS delivered in prior periods. As a percentage of revenue, cost of sales for UAS increased from 57% to 72%, primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits, an increase in sustaining engineering activities in support of our existing products and the increase in small UAS warranty related costs. EES cost of sales increased $1.8 million, or 19%, to $11.2 million for the six
months ended October 29, 2016, primarily due to the prior year reserve reversal of $0.4 million for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products. As a percentage of revenue, cost of sales for EES increased from 63% to 75% primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products.
Gross Margin.
Gross margin for the six months ended October 29, 2016 was $24.1 million, as compared to $47.6 million for the six months ended October 31, 2015, representing a decrease of $23.5 million, or 49%. The decrease in gross margin was primarily due to a decrease in product margins of $23.9 million, partially offset by an increase in service margins of $0.4 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016. As a percentage of revenue, gross margin decreased from 43% to 28%, primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits, an increase in sustaining engineering activities in support of our existing products of $2.7 million and an increase in warranty related costs of $1.7 million related to certain small UAS delivered in prior periods. UAS gross margin decreased to $20.3 million for the six months ended October 29, 2016 from $42.0 million. As a percentage of revenue, gross margin for UAS decreased from 43% to 28%, primarily due to the prior year reserve reversal of $3.1 million for the settlement of prior year government incurred cost audits, an increase in sustaining engineering activities in support of our existing products and the increase in small UAS warranty related costs. EES gross margin decreased $1.8 million, or 32%, to $3.8 million for the six months ended October 29, 2016 primarily due to the prior year reserve reversal of $0.4 million for the settlement of prior year government incurred cost audits and an increase in sustaining engineering activities in support of our existing products. As a percentage of revenue, EES gross margin decreased from 37% to 25% primarily due to the prior year reserve reversal for the settlement of prior year government incurred cost audits and the increase in sustaining engineering activities in support of our existing products.
Selling, General and Administrative
.
SG&A expense for the six months ended October 29, 2016 was $27.1 million, or 31% of revenue, compared to SG&A expense of $30.0 million, or 27% of revenue, for the six months ended October 31, 2015. SG&A expense decreased by $2.9 million, or 10%, for the six months ended October 29, 2016, primarily due to a decrease in bid and proposal costs and a decrease in professional services.
Research and Development.
R&D expense for the six months ended October 29, 2016 was $17.1 million, or 20% of revenue, compared to R&D expense of $19.7 million, or 18% of revenue, for the six months ended October 31, 2015. R&D expense decreased by $2.6 million, or 13%, for the six months ended October 29, 2016, primarily due to a decrease in development activities for certain strategic initiatives.
Interest Income, net.
Interest income, net for the six months ended October 29, 2016 was $0.8 million compared to interest income, net of $0.5 million for the six months ended October 31, 2015.
Other Expense, net.
Other expense, net for the six months ended October 29, 2016 was $0.4 million compared to other expense, net of $2.6 million for the six months ended October 31, 2015. The decrease was primarily due to the recording of an other-than-temporary impairment loss of $2.2 million on our CybAero equity securities during the six months ended October 31, 2015. The CybAero equity securities were sold during the second quarter of fiscal 2016.
Benefit for Income Taxes.
Our effective income tax benefit rate was 19.8% for the six months ended October 29, 2016, as compared to an effective income tax benefit rate of 39.7% for the six months ended October 31, 2015. The variance from statutory rates for the six months ended October 29, 2016, was primarily due to federal legislation permanently reinstating the federal research and development tax credit during the three months ended January 30, 2016 and the reversal of a reserve for uncertain tax positions due to the settlement of prior fiscal year audits.
Backlog
We define funded backlog as unfilled firm orders for products and services for which funding currently is appropriated to us under the contract by the customer. As of October 29, 2016 and April 30, 2016, our funded backlog was approximately $119.6 million and $65.8 million, respectively.
In addition to our funded backlog, we also had unfunded backlog of $24.2 million and $16.7 million as of October 29, 2016 and April 30, 2016, respectively. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery, indefinite quantity, or IDIQ contracts. Unfunded backlog does not obligate the U.S. government to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfunded backlog does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because the contract was awarded to five companies in 2012, including AeroVironment, and we cannot be certain that we will receive task orders issued against the contract.
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing contracts expire, or are renewed, or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.
Liquidity and Capital Resources
We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing R&D costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. In addition, we believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital and capital expenditure requirements during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or obtain financing. We anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.
Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products, enhancing existing products and marketing to stimulate acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense, commercial and electric vehicle industries and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. To the extent that existing cash, cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and other expenses incurred during the lead time from contract award until contract deliveries begin.
Cash Flows
The following table provides our cash flow data for the six months ended October 29, 2016 and October 31, 2015 (in thousands):
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|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 29,
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Unaudited)
|
|
Net cash used in operating activities
|
|
$
|
(6,279)
|
|
$
|
(22,909)
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(29,198)
|
|
$
|
10,772
|
|
Net cash provided by (used in) financing activities
|
|
$
|
66
|
|
$
|
(3,241)
|
|
Cash Used in Operating Activities.
Net cash used in operating activities for the six months ended October 29, 2016, decreased by $16.6 million to $6.3 million, compared to net cash used in operating activities of $22.9 million for the six months ended October 31, 2015. The decrease in net cash used in operating activities was primarily due to a decrease in the use of cash as a result of changes in operating assets and liabilities of $33.0 million, largely resulting from decreases in accounts receivable due to the year over year timing of revenue, partially offset by an increase in net loss of $13.3 million and a decrease in non-cash charges primarily due to the other than temporary impairment charge on the CybAero available-for-sale equity securities of $2.2 million during the six months ended October 31, 2015.
Cash (Used in) Provided by Investing Activities.
Net cash used in investing activities increased by $40.0 million to $29.2 million for the six months ended October 29, 2016, compared to net cash provided by investing activities of $10.8 million for the six months ended October 31, 2015. The increase in net cash used in investing activities was primarily due to a decrease in net redemptions and purchases of investments of $38.5 million and an increase in cash paid for acquisitions of property and equipment of $1.7 million.
Cash Provided by (Used in) Financing Activities.
Net cash provided by financing activities increased by $3.3 million to $0.1 million for the six months ended October 29, 2016, compared to net cash used in financing activities of $3.2 million for the six months ended October 31, 2015. The decrease in cash provided by financing activities was primarily due a decrease in the purchase and retirement of common stock of $3.8 million, partially offset by a decrease in cash proceeds from the exercise of stock options.
Contractual Obligations
During the six months ended October 29, 2016, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.
Off-Balance Sheet Arrangements
As of October 29, 2016, we had no off
‑
balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S
‑
K.
Inflation
Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.
New Accounting Standards
Please refer to Note 1 “Organization and Significant Accounting Policies” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the six months ended October 29, 2016.