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Item 2. Management’s Discussion and Analysis

2020-12-09 compared with 2020-09-10 · 111 added, 54 removed, 108 unchanged (60% of the section changed)

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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.

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.

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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”).

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.

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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 unmanned aircraft systems (“UAS”) product contracts with both the U.S.

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 Tactical Missile Systems (“TMS”) contracts is recognized over time as costs are incurred.

Revenue for Customer-Funded Research and Development (“R&D”) contracts is recognized over time as costs are incurred.

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.

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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 months ended August 1, 2020 and July 27, 2019, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended August 1, 2020 and July 27, 2019, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

During the three and six months ended October 31, 2020 and October 26, 2019, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended October 31, 2020 and October 26, 2019, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Three Months Ended

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Net favorable adjustments

For the three months ended August 1, 2020, favorable cumulative catch-up adjustments of $0.8 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 $0.4 million were primarily related to higher than expected costs on eight contracts, which individually were not material.

For the three months ended July 27, 2019, favorable cumulative catch-up adjustments of $0.3 million were primarily due to final cost adjustments on 19 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $0.3 million were primarily related to higher than expected costs on nine contracts, which individually were not material.

For the three months ended October 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 three months ended October 26, 2019, favorable cumulative catch-up adjustments of $2.0 million were primarily due to final cost adjustments on 14 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 $1.1 million.

For the same period, unfavorable cumulative catch-up adjustments of $1.6 million were primarily related to higher than expected costs on 11 contracts, which individually were not material.

Six Months Ended

Gross favorable adjustments

Gross unfavorable adjustments

Net favorable adjustments

For the six months ended October 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.

For the six months ended October 26, 2019, favorable cumulative catch-up adjustments of $2.1 million were primarily due to final cost adjustments on 20 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 $1.7 million were primarily related to higher than expected costs on 14 contracts, which individually were not material.

Fiscal Periods

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The following tables set forth our results of operations for the period indicated (in thousands):

Three Months Ended August 1, 2020 Compared to Three Months Ended July 27, 2019

Three Months Ended October 31, 2020 Compared to Three Months Ended October 26, 2019

Three Months Ended

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Net income from continuing operations

Revenue for the three months ended August 1, 2020 was $87.5 million, as compared to $86.9 million for the three months ended July 27, 2019, representing an increase of approximately $0.5 million, or 1%.

The increase in revenue was primarily due to an increase in service revenue of $8.0 million, partially offset by a decrease in product revenue of $7.5 million.

The increase in service revenue was primarily due to an increase in customer-funded R&D revenue primarily associated with the design and development agreement with HAPSMobile.

The decrease in product revenue was primarily due to a decrease in product deliveries of small UAS, partially offset by an increase in TMS revenue.

Revenue for the three months ended October 31, 2020 was $92.7 million, as compared to $83.3 million for the three months ended October 26, 2019, representing an increase of approximately $9.4 million, or 11%.

The increase in revenue was primarily due to an increase in product revenue of $8.1 million and an increase in service revenue of $1.3 million.

The increase in product revenue was primarily due to an increase in TMS revenue.

Within small UAS, decreases in product deliveries to customers within the U.S.

Department of Defense were largely offset by increases in product deliveries to international allied customers.

The increase in service revenue was primarily due to an increase in customer-funded R&D revenue.

Cost of Sales.

Cost of sales for the three months ended August 1, 2020 was $52.0 million, as compared to $45.6 million for the three months ended July 27, 2019, representing an increase of $6.4 million, or 14%.

The increase in cost of sales was a result of an increase in service cost of sales of $4.7 million and an increase in product costs of sales of $1.7 million.

Cost of sales for the three months ended October 31, 2020 was $51.8 million, as compared to $48.1 million for the three months ended October 26, 2019, representing an increase of $3.7 million, or 8%.

The increase in cost of sales was a result of an increase in product cost of sales of $3.4 million and an increase in service costs of sales of $0.3 million.

The increase in product cost of sales was primarily due to an increase in product sales, partially offset by a favorable mix.

The increase in service costs of sales was primarily due to the increase in service revenue.

The increase in product cost of sales was primarily due to an unfavorable product mix, partially offset by the decrease in product sales.

As a percentage of revenue, cost of sales increased from 53% to 60%, primarily due to a decrease in the proportion of product sales to total revenue and an unfavorable product mix.

As a percentage of revenue, cost of sales decreased from 58% to 56%, primarily due to an increase in the proportion of product sales to total revenue and a favorable mix.

Gross Margin.

Gross margin for the three months ended August 1, 2020 was $35.4 million, as compared to $41.3 million for the three months ended July 27, 2019, representing a decrease of $5.9 million, or 14%.

The decrease in gross margin was primarily due to a decrease in product margin of $9.2 million, partially offset by an increase in service margin of $3.3 million.

The decrease in product margin was primarily due to the decrease in product sales and an unfavorable product mix.

Gross margin for the three months ended October 31, 2020 was $40.9 million, as compared to $35.2 million for the three months ended October 26, 2019, representing an increase of $5.7 million, or 16%.

The increase in gross margin was primarily due to an increase in product margin of $4.7 million and an increase in service margin of $1.0 million.

The increase in product margin was primarily due to the increase in product sales and a favorable mix.

The increase in service margin was primarily due to the increase in service revenue.

As a percentage of revenue, gross margin decreased from 47% to 40%, primarily due to a decrease in the proportion of product sales to total revenue and an unfavorable product mix.

As a percentage of revenue, gross margin increased from 42% to 44%, primarily due to an increase in the proportion of product sales to total revenue and a favorable mix.

Selling, General and Administrative .

Selling, general and administrative (“SG&A”) expense for the three months ended August 1, 2020 was $12.0 million, or 14% of revenue, compared to SG&A expense of $13.7 million, or 16% of revenue, for the three months ended July 27, 2019.

SG&A expense for the three months ended October 31, 2020 was $15.0 million, or 16% of revenue, as compared to SG&A expense of $16.3 million, or 20% of revenue, for the three months ended October 26, 2019.

Research and Development.

R&D expense for the three months ended August 1, 2020 was $11.1 million, or 13% of revenue, compared to R&D expense of $8.7 million, or 10% of revenue, for the three months ended July 27, 2019.

R&D expense increased by $2.4 million, or 27%, for the three months ended August 1, 2020, primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines.

R&D expense for the three months ended October 31, 2020 was $12.0 million, or 13% of revenue, as compared to R&D expense of $10.9 million, or 13% of revenue, for the three months ended October 26,

R&D expense increased by $1.1 million, or 10%, for the three months ended October 31, 2020, 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 August 1, 2020 was $0.2 million compared to interest income, net of $1.3 million for the three months ended July 27, 2019.

The decrease in interest income was primarily due to a decrease in the average interest rates earned on our investment portfolio.

Interest income, net for the three months ended October 31, 2020 was $0.1 million compared to interest income, net of $1.3 million for the three months ended October 26, 2019.

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 three months ended August 1, 2020 was $33,000 compared to other income, net of $0.4 million for the three months ended July 27, 2019.

Other income, net, for the three months ended October 31, 2020 was $0.1 million compared to other income, net of $0.2 million for the three months ended October 26, 2019.

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 9.6% for the three months ended August 1, 2020, as compared to 10.4% for the three months ended July 27, 2019.

The decrease in the effective income tax rate was primarily due to higher discrete excess tax benefits from stock based compensation during the three months ended August 1, 2020 versus three months ended July 27, 2019.

Our effective income tax rate was 17.7% for the three months ended October 31, 2020, as compared to 11.7% for the three months ended October 26, 2019.

The increase in the effective income tax rate was primarily due to higher 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 August 1, 2020 was $1.3 million compared to $1.3 million for the three months ended July 27, 2019.

The decrease was primarily due to the equity method loss associated with our investment in the HAPSMobile joint venture formed in December 2017.

Equity method investment loss, net of tax for the three months ended October 31, 2020 was $9.5 million compared to $0.9 million for the three months ended October 26, 2019.

The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC.

Six Months Ended October 31, 2020 Compared to Six Months Ended October 26, 2019

Six Months Ended

Cost of sales:

Selling, general and administrative

Research and development

Income from operations

Other income:

Interest income, net

Other income, net

Income from continuing operations before income taxes

Provision for income taxes

Equity method investment loss, net of tax

Net income from continuing operations

Revenue for the six months ended October 31, 2020 was $180.1 million, as compared to $170.2 million for the six months ended October 26, 2019, representing an increase of $9.9 million, or 6%.

The increase in revenue was due an increase in service revenue of $9.3 million and an increase in product deliveries of $0.7 million.

The increase in service revenue was primarily due to an increase in customer-funded R&D revenue.

The increase in product deliveries was primarily due to an increase in TMS revenue, partially offset by a decrease in product deliveries of small UAS.

Cost of Sales.

Cost of sales for the six months ended October 31, 2020 was $103.9 million, as compared to $93.7 million for the six months ended October 26, 2019, representing an increase of $10.1 million, or 11%.

The increase in cost of sales was a result of an increase in product cost of sales of $5.1 million and an increase in service costs of sales of $5.0 million.

The increase in product costs was primarily due to the increase in product deliveries.

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 55% to 58%, primarily due to an unfavorable product mix.

Gross Margin.

Gross margin for the six months ended October 31, 2020 was $76.3 million, as compared to $76.4 million for the six months ended October 26, 2019.

The decrease in gross margin was primarily due to a decrease in product margin of $4.4 million, partially offset by an increase in service margin of $4.2 million.

The decrease in product margin was primarily due to 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 45% to 42%, primarily due to a decrease in the proportion of product revenue to total revenue and an unfavorable product mix.

Selling, General and Administrative .

SG&A expense for the six months ended October 31, 2020 was $27.0 million, or 15% of revenue, as compared to SG&A expense of $29.9 million, or 18% of revenue, for the six months ended October 26, 2019.

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.

Research and Development.

R&D expense for the six months ended October 31, 2020 was $23.1 million, or 13% of revenue, as compared to R&D expense of $19.6 million, or 11% of revenue, for the six months ended October 26, 2019.

R&D expense increased by $3.5 million, or 18%, for the six months ended October 26, 2019, primarily due to an increase in development activities for certain strategic initiatives.

Interest Income, net.

Interest income, net for the six months ended October 31, 2020 was $0.3 million compared to interest income, net of $2.6 million for the six months ended October 26, 2019.

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 six months ended October 31, 2020 was $0.1 million compared to other income, net of $0.5 million for the six months ended October 26, 2019.

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 13.9% for the six months ended October 31, 2020, as compared to 10.8% for the six months ended October 26, 2019.

The increase in effective income tax rate was primarily due to higher projected annual effective tax rate in the current fiscal year over last fiscal year.

Equity Method Investment Activity, net of tax.

Equity method investment activity, net of tax for the six months ended October 31, 2020 was a loss of $10.8 million compared to equity method investment activity, net of tax of $2.2 million for the six months ended October 26, 2019.

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.

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 August 1, 2020, our funded backlog was approximately $154.4 million.

In addition to our funded backlog, we also had unfunded backlog of $118.0 million as of August 1, 2020.

As of October 31, 2020, our funded backlog was approximately $130.6 million.

In addition to our funded backlog, we also had unfunded backlog of $116.8 million as of October 31, 2020.

Unfunded backlog does not meet the definition of a performance obligation under ASC Topic 606.

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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.

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.

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government agency securities.

Although not material in value alone or in aggregate, during the three months ended August 1, 2020, we made certain commitments outside of the ordinary course of business, including a capital contribution of $1.2 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 $3.9 million was remaining at August 1, 2020.

The following table provides our cash flow data for the three months ended August 1, 2020 and July 27, 2019 (in thousands):

Three Months Ended

Although not material in value alone or in aggregate, during the six months ended October 31, 2020, we made certain commitments outside of the ordinary course of business, including a capital contribution of $1.2 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 $3.9 million was remaining at October 31, 2020.

The following table provides our cash flow data for the six months ended October 31, 2020 and October 26, 2019 (in thousands):

Six Months Ended

Net cash provided by operating activities

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Cash Provided by Operating Activities.

Net cash provided by operating activities for the three months ended August 1, 2020 increased by $23.7 million to $26.8 million, compared to net cash provided by operating activities of $3.1 million for the three months ended July 27, 2019.

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 $28.3 million, largely related to collections of receivables, partially offset by a decrease in net income $7.1 million.

Net cash provided by operating activities for the six months ended October 31, 2020 increased by $50.7 million to $58.6 million, as compared to net cash provided by operating activities of $7.9 million for the six months ended October 26, 2019.

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 $52.3 million, largely related to collections of receivables, and losses from equity method investments of $8.6 million, partially offset by a decrease in net income $12.5 million.

Cash Used in Investing Activities.

Net cash used in investing activities increased by $0.3 million to $33.5 million for the three months ended August 1, 2020, compared to net cash used by investing activities of $33.2 million for the three months ended July 27, 2019.

The increase in net cash used in investing activities was primarily due an increase in purchases net of redemptions of available-for-sale investments of $25.5 million;

partially offset by a decrease in cash used in business acquisition of $18.6 million and a decrease in purchases net of redemptions of held-to-maturity investments of $5.4 million.

Net cash used in investing activities decreased by $12.3 million to $31.9 million for the six months ended October 31, 2020, as compared to net cash used by investing activities of $44.2 million for the six months ended October 26, 2019.

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 held-to-maturity investments of $9.3 million, partially offset by an increase in purchases net of redemptions of available-for-sale investments of $19.8 million.

Cash Used in Financing Activities.

Net cash used in financing activities increased by $1.1 million to $1.7 million for the three months ended August 1, 2020, compared to net cash used by financing activities of $0.6 million for the three months ended July 27, 2019.

Net cash used in financing activities increased by $1.0 million to $1.7 million for the six months ended October 31, 2020, as compared to net cash used by financing activities of $0.7 million for the six months ended October 26, 2019.

The increase in net cash used by financing activities was primarily due to an increase in tax withholding payments related to net settlement of equity awards of $1.0 million.

Contractual Obligations

During the three months ended August 1, 2020, 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.

During the three months ended October 31, 2020, 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 August 1, 2020, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

As of October 31, 2020, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

Our operations have not been, and we do not expect them to be, materially affected by inflation.

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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 three months ended August 1, 2020.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis