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, 2020, 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
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
April 30, 2020.
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, 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
29
Table of Contents
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 small UAS product contracts with both the U.S. government and
foreign governments are recognized at the point in time when the transfer of
control passes to the customer, which is generally when title and risk of loss
transfer. Revenue for TMS contracts is recognized over time as costs are
incurred. Revenue for Customer-Funded R&D contracts is recognized over time as
costs are incurred.
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 nine months ended January 30, 2021 and January 25, 2020,
changes in accounting estimates on contracts recognized over time are presented
below.
For the three months ended January 30, 2021 and January 25, 2020, favorable and
unfavorable cumulative catch-up adjustments included in revenue were as follows
(in thousands):
Three Months Ended
January 30, January 25,
2021 2020
Gross favorable adjustments $ 428 $ 1,369
Gross unfavorable adjustments (228) (217)
Net favorable adjustments $ 200 $ 1,152
For the three months ended January 30, 2021, favorable cumulative catch-up
adjustments of $0.4 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 $0.2 million were primarily
related to higher than expected costs on 12 contracts, which individually were
not material.
For the three months ended January 25, 2020, favorable cumulative catch-up
adjustments of $1.4 million were primarily due to final cost adjustments on
seven 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 13 contracts, which individually were
not material.
Nine Months Ended
January 30, January 25,
2021 2020
Gross favorable adjustments $ 1,898 $ 1,878
Gross unfavorable adjustments (1,103) (709)
Net favorable adjustments $ 795 $ 1,169For the nine months ended January 30, 2021, favorable cumulative catch-up
adjustments of $1.9 million were primarily due to final cost adjustments on 15
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 23 contracts, which individually were
not material.
30
Table of Contents
For the nine months ended January 25, 2020, favorable cumulative catch-up
adjustments of $1.9 million were primarily due to final cost adjustments on 17
contracts. The Company revised its estimates of the total expected costs to
complete a contract associated with a design and development agreement, which
had a favorable impact of $1.0 million. For the same period, unfavorable
cumulative catch-up adjustments of $0.7 million were primarily related to higher
than expected costs on 16 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 2021 fiscal
year ends on April 30, 2021 and our fiscal quarters end on August 1, 2020,
October 31, 2020 and January 30, 2021, respectively.
Results of Operations
The following tables set forth our results of operations for the periods
indicated (in thousands):
Three Months Ended January 30, 2021 Compared to Three Months Ended January 25,
2020
Three Months Ended
January 30, January 25,
2021 2020
Revenue $ 78,782 $ 61,891
Cost of sales 50,141 38,395
Gross margin 28,641 23,496
Selling, general and administrative 15,652 13,223
Research and development 13,631 11,381
Loss from operations (642) (1,108)
Other income:
Interest income, net 94 1,122
Other (expense) income, net (37) 120
(Loss) income before income taxes (585) 134
Benefit from income taxes (924) (38)
Equity method investment loss, net of tax (81) (1,200)
Net income (loss) $ 258 $ (1,028)Revenue. Revenue for the three months ended January 30, 2021 was $78.8 million,
as compared to $61.9 million for the three months ended January 25, 2020,
representing an increase of $16.9 million, or 27%. The increase in revenue was
due to an increase in product revenue of $21.9 million, partially offset by a
decrease in service revenue of $5.0 million. The increase in product revenue was
primarily due to an increase in small UAS and TMS revenue. Within small UAS,
increases in product deliveries to customers within the U.S. Department of
Defense were partially offset by decreases in product deliveries to
international allied customers. The decrease in service revenue was primarily
due to a decrease in customer-funded R&D revenue.
Cost of Sales. Cost of sales for the three months ended January 30, 2021 was
$50.1 million, as compared to $38.4 million for the three months ended January
25, 2020, representing an increase of $11.7 million, or 31%. The increase in
cost of sales was a result of an increase in product cost of sales of $14.7
million, partially offset by a decrease in service costs of sales of $3.0
million. The increase in product cost of sales was primarily due to an increase
in product sales and an unfavorable mix. The decrease in service costs of sales
was primarily due to the decrease in service revenue. As a percentage of
revenue, cost of sales increased from 62% to 64%, primarily due to an
unfavorable product mix, partially offset by an increase in the proportion of
product sales to total revenue.
31
Table of Contents
Gross Margin. Gross margin for the three months ended January 30, 2021 was $28.6
million, as compared to $23.5 million for the three months ended January 25,
2020, representing an increase of $5.1 million, or 22%. The increase in gross
margin was due to an increase in product margin of $7.2 million, partially
offset by a decrease in service margin of $2.1 million. The increase in product
margin was primarily due to the increase in product sales, partially offset by
an unfavorable product mix. The decrease in service margin was primarily due to
the decrease in service revenue. As a percentage of revenue, gross margin
decreased from 38% to 36%, primarily due to an unfavorable product mix,
partially offset by an increase in the proportion of product sales to total
revenue.
Selling, General and Administrative. SG&A expense for the three months ended
January 30, 2021 was $15.7 million, or 20% of revenue, as compared to SG&A
expense of $13.2 million, or 21% of revenue, for the three months ended January
25, 2020. The increase in SG&A expense was primarily due to an increase in
acquisition related expenses of $3.1 million related to the Arcturus
Acquisition, ISG Acquisition and the pending acquisition of Telerob.
Research and Development. R&D expense for the three months ended January 30,
2021 was $13.6 million, or 17% of revenue, as compared to R&D expense of
$11.4 million, or 18% of revenue, for the three months ended January 25, 2020.
R&D expense increased by $2.3 million, or 20%, for the three months ended
January 30, 2021, primarily due to an increase in development activities
regarding enhanced capabilities for our products and development of new product
lines.
Interest Income, net. Interest income, net for the three months ended January
30, 2021 was $0.1 million compared to interest income, net of $1.1 million for
the three months ended January 25, 2020. The decrease in interest income was
primarily due to a decrease in the average interest rate earned on our
investment portfolio.
Other (Expense) Income, net. Other expense, net, for the three months ended
January 30, 2021 was $37 thousand compared to other income, net of $0.1 million
for the three months ended January 25, 2020.
Benefit from Income Taxes. Our effective income tax rate was 157.9% for the
three months ended January 30, 2021, as compared to (28.4)% for the three months
ended January 25, 2020. The decrease in the effective income tax rate was
primarily due to lower projected annual effective tax rate in the current fiscal
year over last fiscal year.
Equity Method Investment Loss, net of Tax. Equity method investment loss, net of
tax for the three months ended January 30, 2021 was $0.1 million compared to
$1.2 million for the three months ended January 25, 2020.
Nine Months Ended January 30, 2021 Compared to Nine Months Ended January 25,
2020
Nine Months Ended
January 30, January 25,
2021 2020
Revenue $ 258,897 $ 232,073
Cost of sales: 153,994 132,139
Gross margin 104,903 99,934
Selling, general and administrative 42,640 43,146
Research and development 36,710 30,948
Income from operations 25,553 25,840
Other income:
Interest income, net 417 3,717
Other income, net 68 632
Income before income taxes 26,038 30,189
Provision for income taxes 2,774 3,203
Equity method investment loss, net of tax (10,891) (3,410)
Net income $ 12,373 $ 23,576
32
Table of Contents
Revenue. Revenue for the nine months ended January 30, 2021 was $258.9 million,
as compared to $232.1 million for the nine months ended January 25, 2020,
representing an increase of $26.8 million, or 12%. The increase in revenue was
due an increase in product revenue of $22.6 million and an increase in service
revenue of $4.2 million. The increase in product deliveries was primarily due to
an increase in TMS revenue and an increase in product deliveries of small UAS.
Within small UAS, increases in product deliveries to customers within the U.S.
Department of Defense were partially offset by decreases in product deliveries
to international allied customers. The increase in service revenue was primarily
due to an increase in customer-funded R&D revenue, partially offset by a
decrease in engineering services revenue.
Cost of Sales. Cost of sales for the nine months ended January 30, 2021 was
$154.0 million, as compared to $132.1 million for the nine months ended January
25, 2020, representing an increase of $21.9 million, or 17%. The increase in
cost of sales was a result of an increase in product cost of sales of $19.8
million and an increase in service costs of sales of $2.1 million. The increase
in product costs was primarily due to the increase in product deliveries and an
unfavorable product mix. The increase in service costs of sales was primarily
due to the increase in service revenue. As a percentage of revenue, cost of
sales increased from 57% to 59%, primarily due to an unfavorable product mix.
Gross Margin. Gross margin for the nine months ended January 30, 2021 was $104.9
million, as compared to $99.9 million for the nine months ended January 25,
2020. The increase in gross margin was primarily due to an increase in product
margin of $2.8 million and an increase in service margin of $2.2 million. The
increase in product margin was primarily due to an increase in product sales,
partially offset by an unfavorable product mix. The increase in service margin
was primarily due to an increase in service revenue. As a percentage of revenue,
gross margin decreased from 43% to 41%, primarily due to an unfavorable product
mix.
Selling, General and Administrative. SG&A expense for the nine months ended
January 30, 2021 was $42.6 million, or 16% of revenue, as compared to SG&A
expense of $43.1 million, or 19% of revenue, for the nine months ended January
25, 2020. The decrease in SG&A expense was primarily due to lower advertising,
business travel and trade show expenses primarily related to COVID-19 related
restrictions, partially offset by an increase in employee related expenses and
acquisition related expenses of $3.1 million related to the Arcturus
Acquisition, ISG Acquisition and the pending acquisition of Telerob.
Research and Development. R&D expense for the nine months ended January 30, 2021
was $36.7 million, or 14% of revenue, as compared to R&D expense of
$30.9 million, or 13% of revenue, for the nine months ended January 25, 2020.
R&D expense increased by $5.8 million, or 19%, for the nine months ended January
30, 2021, primarily due to an increase in development activities regarding
enhanced capabilities for our products and development of new product lines.
Interest Income, net. Interest income, net for the nine months ended January 30,
2021 was $0.4 million compared to interest income, net of $3.7 million for the
nine months ended January 25, 2020. The decrease in interest income was
primarily due to a decrease in the average interest rate earned on our
investment portfolio.
Other Income, net. Other income, net, for the nine months ended January 30, 2021
was $0.1 million compared to other income, net of $0.6 million for the nine
months ended January 25, 2020. The decrease in other income, net was primarily
due to a decrease in transition services performed on behalf of the buyer of the
discontinued EES Business.
Provision for Income Taxes. Our effective income tax rate was 10.7% for the nine
months ended January 30, 2021, as compared to 10.6% for the nine months ended
January 25, 2020.
Equity Method Investment Loss, net of Tax. Equity method investment loss, net of
tax for the nine months ended January 30, 2021 was a loss of $10.9 million
compared to equity method investment loss, net of tax of $3.4 million for the
nine months ended January 25, 2020. The increase was primarily due to a loss of
$8.4 million for our proportion of HAPSMobile's impairment of its investment in
Loon LLC.
33
Table of Contents
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 January 30, 2021, our funded backlog was
approximately $103.9 million.
In addition to our funded backlog, we also had unfunded backlog of $116.1
million as of January 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 FCS domain,
does not include the remaining potential value associated with a U.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 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
On February 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 18-Subsequent Events to our
unaudited consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q for further details.
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 and ISG and our
pending acquisition of 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 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, marketing acceptance and adoption of
our products and services and financing our pending acquisition of Telerob. 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,
34
Table of Contents
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.
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
U.S. government and U.S. government agency securities.
Although not material in value alone or in aggregate, during the nine months
ended January 30, 2021, we made certain commitments outside of the ordinary
course of business, including capital contributions of $2.1 million 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 $2.9 million was remaining at January 30, 2021.
Cash Flows
The following table provides our cash flow data for the nine months ended
January 30, 2021 and January 25, 2020 (in thousands):
Nine Months Ended
January 30, January 25,
2021 2020
(Unaudited)
Net cash provided by operating activities $ 78,962 $ 15,066
Net cash used in investing activities $ (6,200) $ (50,362)
Net cash used in financing activities $ (3,361) $ (916)
Cash Provided by Operating Activities. Net cash provided by operating activities
for the nine months ended January 30, 2021 increased by $63.9 million to $79.0
million, as compared to net cash provided by operating activities of $15.1
million for the nine months ended January 25, 2020. The increase in net cash
provided by operating activities was primarily due to an increase in cash as a
result of changes in operating assets and liabilities of $64.3 million, largely
related to collections of receivables, and losses from equity method investments
of $7.5 million, partially offset by a decrease in net income $11.2 million.
Cash Used in Investing Activities. Net cash used in investing activities
decreased by $44.2 million to $6.2 million for the nine months ended January 30,
2021, as compared to net cash used by investing activities of $50.4 million for
the nine months ended January 25, 2020. The decrease in net cash used in
investing activities was primarily due a decrease in cash used in business
acquisition of $18.6 million and a decrease in purchases net of redemptions of
available-for-sale investments of $22.6 million, partially offset by an increase
in purchases net of redemptions of held-to-maturity investments of $4.4 million.
Cash Used in Financing Activities. Net cash used in financing activities
increased by $2.4 million to $3.4 million for the nine months ended January 30,
2021, as compared to net cash used by financing activities of $0.9 million for
the nine months ended January 25, 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 $1.5 million and an increase
in tax withholding payments related to net settlement of equity awards of $0.9
million.
35
Table of Contents
Contractual Obligations
During the three months ended January 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, 2020.
Off-Balance Sheet Arrangements
As of January 30, 2021, we had no offbalance sheet arrangements as defined in
Item 303(a)(4) of Regulation SK.
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 nine months ended January 30, 2021.
© Edgar Online, source Glimpses
AEROVIRONMENT, INC. 
