AEROVIRONMENT, INC. 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 endedApril 30, 2021 , as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended ("the Exchange Act"). 36 Table of Contents 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
The following should be read in conjunction with the critical accounting
estimates presented in our Annual Report on Form 10-K for the fiscal year ended
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 inthe 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, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, 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. We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods
or services. Revenue for 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, including ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors' costs, other direct costs, and indirect costs applicable on government and commercial contracts. For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts, respectively. 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.
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 estimate of completion 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 endedOctober 30, 2021 andOctober 31, 2020 , changes in accounting estimates on contracts recognized over time are presented below. 37 Table of Contents
For the three months endedOctober 30, 2021 andOctober 31, 2020 , favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands): Three Months Ended October 30, October 31, 2021 2020 Gross favorable adjustments$ 289 $ 1,140 Gross unfavorable adjustments (1,137) (891)
Net (unfavorable) favorable adjustments
For the three months endedOctober 30, 2021 , favorable cumulative catch-up adjustments of$0.3 million were primarily due to final cost adjustments on six contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of$1.1 million were primarily related to higher than expected costs on 18 contracts, which individually were not material.
For the three months endedOctober 31, 2020 , favorable cumulative catch-up adjustments of$1.1 million were primarily due to final cost adjustments on nine contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of$0.9 million were primarily related to higher than expected costs on 30 contracts, which individually were not material. For the six months endedOctober 30, 2021 andOctober 31, 2020 , favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands): Six Months Ended October 30, October 31, 2021 2020 Gross favorable adjustments $ 872$ 1,505 Gross unfavorable adjustments (1,851) (1,015)
Net (unfavorable) favorable adjustments
For the six months endedOctober 30, 2021 , favorable cumulative catch-up adjustments of$0.9 million were primarily due to final cost adjustments on 18 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of$1.9 million were primarily related to higher than expected costs on 17 contracts, which individually were not material. For the six months endedOctober 31, 2020 , favorable cumulative catch-up adjustments of$1.5 million were primarily due to final cost adjustments on 13 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of$1.0 million were primarily related to higher than expected costs on 21 contracts, which individually were not material. Fiscal Periods Due to our fixed year end date ofApril 30 , our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday. Our 2022 fiscal year ends onApril 30, 2022 and our fiscal quarters end onJuly 31, 2021 ,October 30, 2021 andJanuary 29, 2022 , respectively. 38 Table of Contents Results of Operations
The following tables set forth our results of operations for the periods indicated (in thousands):
Three Months EndedOctober 30, 2021 Compared to Three Months Ended October 31, 2020 Three Months Ended October 30, October 31, 2021 2020 Revenue$ 122,008 $ 92,665 Cost of sales 79,553 51,814 Gross margin 42,455 40,851
Selling, general and administrative 24,819 14,977 Research and development 14,297 11,976 Income from operations 3,339 13,898 Other (loss) income: Interest (expense) income, net (1,379) 115 Other (expense) income, net (10,048) 72 Income before income taxes (8,088) 14,085 (Benefit from) provision for income taxes (9,511) 2,491 Equity method investment loss, net of tax 1,133 (9,522)
Net income$ 2,556 $ 2,072 We operate the business as three reportable segments, Small Unmanned Aircraft Systems ("Small UAS"), Tactical Missile Systems ("TMS") and Medium Unmanned Aircraft Systems ("MUAS"). The Small UAS segment consists of our existing small UAS product lines. The TMS segment consists of our existing tactical missile systems product lines. The MUAS segment consists of our recently acquired Arcturus business. All other includes HAPS, MacCready Works, which includes the recently acquired ISG and Telerob businesses. The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses. Three Months Ended October 30, 2021 Small UAS TMS MUAS All other Total Revenue$ 54,714 $ 18,418 $ 26,525 $ 22,351 $ 122,008 Gross margin 27,754 6,222 2,223 6,256 42,455
Income (loss) from operations 13,377 47 (7,000) (3,085) 3,339 Acquisition-related expenses 297 163 108 280 848 Amortization of acquired intangible assets and other purchase accounting adjustments 707 - 6,358
3,257 10,322
Adjusted income (loss) from
operations $ 14,381 $ 210 $ (534) $ 452 $ 14,509
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Three Months Ended October 31, 2020
Small UAS TMS MUAS All other Total
Revenue $ 58,265 $ 18,961 $ - $ 15,439 $ 92,665
Gross margin 29,695 5,943 - 5,213 40,851
Income (loss) from operations 15,386 (995) - (493) 13,898
Acquisition-related expenses 171 94 58 91 414
Amortization of acquired
intangible assets and otherpurchase accounting adjustments 715 - -
- 715
Adjusted income (loss) from
operations $ 16,272 $ (901) $ 58 $ (402) $ 15,027 The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying unaudited consolidated statements of operations:
Three Months Ended Six Months Ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Cost of sales:
Product sales $ 2,320 $ 677 $ 3,987 $ 1,300
Contract services 3,141 - 5,503 -Selling, general and administrative 4,861 38
9,956 76
Total $ 10,322 $ 715 $ 19,446 $ 1,376
Revenue. Revenue for the three months ended October 30, 2021 was $122.0 million ,
as compared to $92.7 million for the three months ended October 31, 2020 ,
representing an increase of $29.3 million , or 32%. The increase in revenue was
due to an increase in service revenue of $23.9 million and an increase in
product revenue of $5.5 million . The increase in service revenue was primarily
due to an increase in MUAS service revenue, resulting from our acquisition of
Arcturus in February 2021 , partially offset by a decrease in TMS service
revenue. The increase in product revenue was primarily due to an increases in
UGV and MUAS product revenue, resulting from our acquisitions of Telerob and
Arcturus, respectively, partially offset by a decrease in small UAS product
revenue.
Cost of Sales. Cost of sales for the three months ended October 30, 2021 was
$79.6 million , as compared to $51.8 million for the three months ended October
31, 2020 , representing an increase of $27.7 million , or 54%. The increase in
cost of sales was a result of an increase in service cost of sales of $23.0
million and an increase in product costs of sales of $4.7 million . The increase
in service cost of sales was primarily due to the increase in service revenues
resulting from the acquisitions of Arcturus and ISG, and an increase in
intangible amortization expense and other purchase accounting adjustments. The
increase in product costs of sales was primarily due to an increase in
intangible amortization expense and other purchase accounting adjustments, an
increase in product revenue and an unfavorable product mix. Cost of sales for
the three months ended October 30, 2021 included $5.5 million of intangible
amortization and other related non-cash purchase accounting expenses as compared
to $0.7 million for the three months ended October 31, 2020 . As a percentage of
revenue, cost of sales increased from 56% to 65%, primarily due to an increase
in the proportion of service revenue to total revenues resulting from the
acquisitions of Arcturus and ISG, an increase in intangible amortization expense
and other purchase accounting adjustments, and an unfavorable product mix.
Gross Margin. Gross margin for the three months ended October 30, 2021 was $42.5
million , as compared to $40.9 million for the three months ended October 31,
2020 , representing an increase of $1.6 million , or 4%. The increase in gross
margin was due to an increase in service margin of $0.9 million and an increase
in product margin of $0.7 million . The increase in product margin was primarily
due to the increase in product sales, partially offset by an increase in
intangible amortization expense and other purchase accounting adjustments and an
unfavorable product mix. The increase in service margin was primarily due to an
increase in service revenue, partially offset by an increase in intangible
amortization expense and other purchase accounting adjustments. As a percentage
of revenue, gross margin decreased from 44% to 35%, primarily due to an increase
in the proportion of service revenue to total revenues resulting from the
acquisitions of Arcturus and ISG, an increase in intangible amortization expense
and other purchase accounting
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adjustments, and an unfavorable product mix. With the acquisitions of Arcturus
and ISG we expect that we will continue to experience a higher proportion of
service revenue, which generally have lower gross margins than our product
sales, in future quarters as compared to our historical trends in future
quarters.
Selling, General and Administrative. SG&A expense for the three months ended
October 30, 2021 was $24.8 million , or 20% of revenue, as compared to SG&A
expense of $15.0 million , or 16% of revenue, for the three months ended October
31, 2020 . The increase in SG&A expense was primarily due to an increase in
headcount and related costs associated with our Arcturus, ISG and Telerob
acquisitions and an increase in intangible amortization and acquisition related
expenses, partially offset by a decrease in bonus and equity based compensation
expense. SG&A included $5.7 million and $0.4 million of acquisition-related
expenses and intangible amortization expenses for the three months ended October
30, 2021 and October 31, 2020 , respectively.
Research and Development. R&D expense for the three months ended October 30,
2021 was $14.3 million , or 12% of revenue, as compared to R&D expense of
$12.0 million , or 13% of revenue, for the three months ended October 31, 2020 .
R&D expense increased by $2.3 million , or 19%, for the three months ended
October 30, 2021 , primarily due to an increase in development activities
regarding enhanced capabilities for our products, development of new product
lines and to support our recently acquired businesses.
Interest (Expense) Income, net. Interest expense, net for the three months ended
October 30, 2021 was $1.4 million compared to interest income, net of $0.1
million for the three months ended October 31, 2020 . The increase in interest
expense was primarily due to an increase in interest expense resulting from the
term debt issued concurrent with the acquisition of Arcturus.
Other (Expense) Income, net. Other expense, net, for the three months ended
October 30, 2021 was $10.0 million compared to other income, net of $0.1 million
for the three months ended October 31, 2020 . The increase was due to an
additional legal accrual of $10.0 million for the expected settlement of all
claims made by the buyers of our former EES business.
(Benefit from) Provision for Income Taxes. Our effective income tax rate was
117.6% for the three months ended October 30, 2021 , as compared to 17.7% for the
three months ended October 31, 2020 . The increase in the effective income tax
rate was primarily due to a change in estimate during the current quarter to
reduce projected annual income (loss) before income taxes, combined with the
year over year decrease in projected annual income (loss) before income taxes.
Equity Method Investment Income (Loss), net of Tax. Equity method investment
income, net of tax for the three months ended October 30, 2021 was $1.1 million
compared to equity method investment loss, net of tax of $9.5 million for the
three months ended October 31, 2020 . The increase was primarily due to a loss of
$8.4 million for our proportion of HAPSMobile impairment of its investment in
Loon LLC during the three months ended October 31, 2020 . The equity method
investment income during the current quarter was due to an increase in our
limited partnership investment.
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Six Months Ended October 30, 2021 Compared to Six Months Ended October 31, 2020
Six Months Ended
October 30, October 31,
2021 2020
Revenue $ 223,017 $ 180,115
Cost of sales 151,839 103,853
Gross margin 71,178 76,262Selling, general and administrative 51,947 26,988 Research and development 28,005 23,079 (Loss) income from operations (8,774) 26,195 Other (loss) income: Interest (expense) income, net (2,654) 323 Other (expense) income, net (10,394) 105 (Loss) income before income taxes (21,822) 26,623 (Benefit from) provision for income taxes (10,468) 3,698 Equity method investment loss, net of tax (8) (10,810)
Net (loss) income$ (11,362) $ 12,115
The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated. Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.
Six Months Ended October 30, 2021
Small UAS TMS MUAS All other Total
Revenue $ 94,638 $ 37,594 $ 48,904 $ 41,881 $ 223,017
Gross margin 44,674 12,211 5,404 8,889 71,178
Income (loss) from operations 15,335 (416) (13,381) (10,312) (8,774)
Acquisition-related expenses 721 414 1,492 1,475 4,102
Amortization of acquired
intangible assets and otherpurchase accounting adjustments 1,414 - 11,549
6,483 19,446
Adjusted income (loss) from
operations $ 17,470 $ (2) $ (340) $ (2,354) $ 14,774
Six Months Ended October 31, 2020
Small UAS TMS MUAS All other Total
Revenue $ 114,467 $ 28,495 $ - $ 37,153 $ 180,115
Gross margin 57,178 7,863 - 11,221 76,262
Income (loss) from operations 30,583 (5,140) - 752 26,195
Acquisition-related expenses 171 94 58 91 414
Amortization of acquired
intangible assets and otherpurchase accounting adjustments 1,376 - -
- 1,376
Adjusted income (loss) from
operations $ 32,130 $ (5,046) $ 58 $ 843 $ 27,985
Revenue. Revenue for the six months ended October 30, 2021 was $223.0 million ,
as compared to $180.1 million for the six months ended October 31, 2020 ,
representing an increase of $42.9 million , or 24%. The increase in revenue was
due to an increase in service revenue of $42.7 million and an increase in
product revenue of $0.2 million . The increase in service revenue was primarily
due to an increase in MUAS service revenue, resulting from our acquisition of
Arcturus in February 2021 , and small UAS service revenue, partially offset by a
decrease in HAPS service revenue. The increase in product revenue was primarily
due to an increase in TMS revenue, an increase in UGV and MUAS product revenue,
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resulting from our acquisitions of Telerob and Arcturus, respectively, partially offset by a decrease in small UAS product revenue.
Cost of Sales. Cost of sales for the six months endedOctober 30, 2021 was$151.8 million , as compared to$103.9 million for the six months endedOctober 31, 2020 , representing an increase of$48.0 million , or 46%. The increase in cost of sales was a result of an increase in service cost of sales of$42.8 million and an increase in product costs of sales of$5.2 million . The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments. The increase in product costs of sales was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix. Cost of sales for the six months endedOctober 30, 2021 included$9.5 million of intangible amortization and other related non-cash purchase accounting expenses as compared to$1.3 million for the six months endedOctober 31, 2020 . As a percentage of revenue, cost of sales increased from 58% to 68%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. Gross Margin. Gross margin for the six months endedOctober 30, 2021 was$71.2 million , as compared to$76.3 million for the six months endedOctober 31, 2020 , representing a decrease of$5.1 million , or 7%. The decrease in gross margin was due to a decrease in product margin of$5.0 million and a decrease in service margin of$0.1 million . The decrease in product margin was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix. The decrease in service margin was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments, partially offset by the increase in service revenue. As a percentage of revenue, gross margin decreased from 42% to 32%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally have lower gross margins than our product sales, in future quarters as compared to our historical trends. Selling, General and Administrative. SG&A expense for the six months endedOctober 30, 2021 was$51.9 million , or 23% of revenue, as compared to SG&A expense of$27.0 million , or 15% of revenue, for the six months endedOctober 31, 2020 . The increase in SG&A expense was primarily due to an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions and an increase in intangible amortization and acquisition related expenses. SG&A included$14.0 million and$0.5 million of acquisition-related expenses and intangible amortization expenses for the six months endedOctober 30, 2021 andOctober 31, 2020 , respectively. Research and Development. R&D expense for the six months endedOctober 30, 2021 was$28.0 million , or 13% of revenue, as compared to R&D expense of$23.1 million , or 13% of revenue, for the six months endedOctober 31, 2020 . R&D expense increased by$4.9 million , or 21%, for the six months endedOctober 30, 2021 , primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses. Interest (Expense) Income, net. Interest expense, net for the six months endedOctober 30, 2021 was$2.7 million compared to interest income, net of$0.3 million for the six months endedOctober 31, 2020 . The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus. Other (Expense) Income, net. Other expense, net, for the six months endedOctober 30, 2021 was$10.4 million compared to other income, net of$0.1 million for the six months endedOctober 31, 2020 . The increase was due to an additional legal accrual of$10.0 million for the expected settlement of all claims made by the buyers of our former EES business. (Benefit from) Provision for Income Taxes. Our effective income tax rate was 48.0% for the six months endedOctober 30, 2021 , as compared to a provision for 13.9% for the six months endedOctober 31, 2020 . The increase in the effective 43 Table of Contents
income tax rate was primarily due to lower projected annual income (loss) before income taxes in the current fiscal year as compared to the prior fiscal year.
Equity Method Investment Loss, net of Tax. Equity method investment loss, net of tax for the six months endedOctober 30, 2021 was$8 thousand compared to$10.8 million for the six months endedOctober 31, 2020 . The decrease was primarily due to a loss of$8.4 million for our proportion of HAPSMobile impairment of its investment inLoon LLC during the three months endedOctober 31, 2020 . During the six months endedOctober 30, 2021 equity method losses from HAPSMobile were largely offset by equity method income from our limited partnership investment. Backlog
Consistent with ASC 606, we define funded backlog as remaining performance
obligations under firm orders for which funding is currently appropriated to us
under a customer contract. As of
In addition to our funded backlog, we also had unfunded backlog of$155.1 million as ofOctober 30, 2021 . Unfunded backlog does not meet the definition of a performance obligation under ASC Topic 606. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and indefinite delivery, indefinite quantity ("IDIQ") contracts, or (ii) incremental funding. Unfunded backlog does not obligate the customer 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, with the exception of the remaining potential value of the Flight Control Systems ("FCS") domain, does not include the remaining potential value associated with aU.S. Army IDIQ-type contract for small UAS because values for each of the other domains within the contract have not been disclosed by the customer, and we cannot be certain that we will secure all 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 theU.S. government to purchase any goods or services. Additionally, allU.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of theU.S. government. 44 Table of Contents
Liquidity and Capital Resources
OnFebruary 19, 2021 , in connection with the consummation of the Arcturus Acquisition, we entered into a Credit Agreement for (i) a five-year$100 million revolving credit facility, which includes a$10 million sublimit for the issuance of standby and commercial letters of credit, and (ii) a five-year amortized$200 million term A loan (together the "Credit Facilities"). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 10-Debt to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. In addition, Telerob has a line of credit of €5.5 million available for issuing letters of credit of which €1.6 million ($1.8 million ) was outstanding as ofOctober 30, 2021 . The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. Based upon our revised projections, there is a substantial risk that we may be required to make a prepayment to reduce the outstanding balance of our Term Loan Facility or to obtain an amendment to the Credit Agreement to remain in compliance with all of the financial covenants in the Credit Agreement during the fiscal quarter endingJanuary 29, 2022 . We currently estimate the range of the potentially required prepayment to be$50 million to$60 million . We are in discussions with the lenders regarding obtaining an amendment to the Credit Agreement to allow us to remain in compliance with the financial covenants; however, if we are not able to obtain such an amendment to the Credit Agreement, we have both the ability and intent to make any required prepayment. We expect to be in compliance with all financial covenants under the terms of our Credit Agreement, including any amendment to such agreement, during the quarter endingApril 30, 2022 regardless of whether a required prepayment is made or loan amendment is obtained. We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities, including those provided by our recent acquisitions of Arcturus UAV, ISG and Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. 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, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities 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 and/or draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, 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 and enhancing existing products, and marketing 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 industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement. In addition, 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 expenses incurred during the lead time from contract award until contract deliveries begin. 45 Table of Contents To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents
and municipal securities. InDecember 2021 , we agreed in principle subject to formal written documentation with Webasto to settle all existing claims related to the sale of our former EES business for$20 million and allowing Webasto to keep the holdback amount. Under the terms of the expected settlement agreement, payment of the settlement amount will occur over a 24 month period after the execution of the settlement agreement. Although not material in value alone or in aggregate, we made certain commitments outside of the ordinary course of business. We made commitments for capital contributions to a limited partnership fund. Under the terms of the limited partnership agreement, we have committed to make capital contributions totaling$10.0 million to the fund of which$0.6 million was remaining atOctober 30, 2021 . We also made commitments to lend HAPSMobile funds to continue the development of Solar HAPS. The Company committed to and lent500 million yen ($4.6 million ) as ofOctober 30, 2021 . As ofOctober 30, 2021 , there are no further lending commitments to HAPSMobile. Under the terms of the agreement the loans are guaranteed and will be repaid when financing is obtained, or by Softbank. We currently anticipate repayment of all amounts loaned to HAPS within the fiscal year endedApril 30, 2022 . Cash Flows
The following table provides our cash flow data for the six months ended
Six Months Ended
October 30 , October 31,
2021 2020
(Unaudited)
Net cash (used in) provided by operating activities
$ 58,593 Net cash used in investing activities$ (34,787) $ (31,944) Net cash used in financing activities$ (12,064)
$ (1,692)
Cash (Used in) Provided by Operating Activities. Net cash used in operating activities for the six months endedOctober 30, 2021 increased by$61.9 million to$3.3 million , as compared to net cash provided by operating activities of$58.6 million for the six months endedOctober 31, 2020 . The increase in net cash used in operating activities was primarily due to a decrease in net income of$23.5 million and a decrease in cash as a result of changes in operating assets and liabilities of$55.2 million , largely related to accounts receivable and unbilled retentions and receivables due to year over year timing differences and income taxes receivable, partially offset by an increase in depreciation and amortization of$24.3 million . Cash Used in Investing Activities. Net cash used in investing activities increased by$2.8 million to$34.8 million for the six months endedOctober 30, 2021 , as compared to net cash used by investing activities of$31.9 million for the six months endedOctober 31, 2020 . The increase in net cash used in investing activities was primarily due an increase in cash used for the acquisition of Telerob of$46.2 million and a decrease in redemptions of available-for-sale investments of$61.7 million , partially offset by a decrease in purchases of available-for-sale investments of$116.9 million . Cash Used in Financing Activities. Net cash used in financing activities increased by$10.4 million to$12.1 million for the six months endedOctober 30, 2021 , as compared to net cash used by financing activities of$1.7 million for the six months endedOctober 31, 2020 . The increase in net cash used by financing activities was primarily due to an increase in holdback and retention payments related to a prior business acquisition of$6.0 million and an increase in payments of loan principal of$5.0 million . 46 Table of Contents Contractual Obligations During the three and six months endedOctober 30, 2021 , 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, 2021.
Off-Balance Sheet Arrangements
As of
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 endedOctober 30, 2021 .
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