What changed in this filing

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Item 1. Financial Statements

2021-09-09 compared with 2021-03-10 · 405 added, 325 removed, 422 unchanged (63% of the section changed)

6 unchanged sentences

Short-term investments

Accounts receivable, net of allowance for doubtful accounts of $ 565 at January 30, 2021 and $ 1,190 at April 30, 2020

Unbilled receivables and retentions (inclusive of related party unbilled receivables of $ 6,834 at January 30, 2021 and $ 15,779 at April 30, 2020)

Accounts receivable, net of allowance for doubtful accounts of $ 579 at July 31, 2021 and $ 595 at April 30, 2021

Unbilled receivables and retentions (inclusive of related party unbilled receivables of $ 5,568 at July 31, 2021 and $ 544 at April 30, 2021)

Income taxes receivable

Prepaid expenses and other current assets

10 unchanged sentences

Customer advances

Current portion of long-term debt

Current operating lease liabilities

2 unchanged sentences

Total current liabilities

Long-term debt, net of current portion

Non-current operating lease liabilities

1 unchanged sentence

Liability for uncertain tax positions

Deferred income taxes

Commitments and contingencies

2 unchanged sentences

Authorized shares— 10,000,000 ;

none issued or outstanding at January 30, 2021 and April 30, 2020

none issued or outstanding at July 31, 2021 and April 30, 2021

Common stock, $ 0.0001 par value:

Authorized shares— 100,000,000

Issued and outstanding shares— 24,102,691 shares at January 30, 2021 and 24,063,639 shares at April 30, 2020

Issued and outstanding shares— 24,811,802 shares at July 31, 2021 and 24,777,295 shares at April 30, 2021

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

Retained earnings

8 unchanged sentences

Three Months Ended

Nine Months Ended

Product sales

Contract services (inclusive of related party revenue of $ 7,480 and $ 11,762 for the three months ended January 30, 2021 and January 30, 2020, respectively;

and $ 35,318 and $ 37,491 for the nine months ended January 30, 2021 and January 25, 2020, respectively)

Contract services (inclusive of related party revenue of $ 10,352 and $ 16,386 for the three months ended July 31, 2021 and August 1, 2020, respectively)

Cost of sales:

7 unchanged sentences

(Loss) income from operations

Other income:

Interest income, net

Other (loss) income:

Interest (expense) income, net

Other (expense) income, net

2 unchanged sentences

Equity method investment loss, net of tax

Net income (loss)

Net (loss) income

Net (income) loss attributable to noncontrolling interest

Net income (loss) attributable to AeroVironment, Inc.

Net income (loss) per share attributable to AeroVironment, Inc.

Net (loss) income attributable to AeroVironment, Inc.

Net (loss) income per share attributable to AeroVironment, Inc.

Weighted-average shares outstanding:

1 unchanged sentence

AeroVironment, Inc.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(In thousands)

Three Months Ended

Nine Months Ended

Net income (loss)

Other comprehensive income (loss):

Net (loss) income

Other comprehensive (loss) income:

Unrealized loss on available-for-sale investments, net of deferred tax benefit of $ 0 and $ 4 for the three months ended July 31, 2021 and August 1, 2020, respectively

Change in foreign currency translation adjustments

Unrealized gain (loss) on available-for-sale investments, net of deferred tax benefit of $ 2 for the three and nine months ended January 30, 2021

Total comprehensive income (loss)

Net loss (income) attributable to noncontrolling interest

Comprehensive income (loss) attributable to AeroVironment, Inc.

Total comprehensive (loss) income

Net (income) loss attributable to noncontrolling interest

Comprehensive (loss) income attributable to AeroVironment, Inc.

See accompanying notes to consolidated financial statements (unaudited).

1 unchanged sentence

Consolidated Statements of Stockholders’ Equity

For the nine months ended January 30, 2021 and January 25, 2020 (Unaudited)

For the three months ended July 31, 2021 and August 1, 2020 (Unaudited)

(In thousands except share data)

1 unchanged sentence

AeroVironment, Inc.

Income (Loss)

Balance at April 30, 2021

Net income (loss)

Unrealized loss on investments

5 unchanged sentences

Stock based compensation

Balance at January 30, 2021

Balance at July 31, 2021

Comprehensive

AeroVironment, Inc.

Income (Loss)

Balance at April 30, 2020

Adoption of ASU 2018-09

Net income (loss)

Foreign currency translation

Stock options exercised

Restricted stock awards

Restricted stock awards forfeited

Tax withholding payment related to net share settlement of equity awards

Stock based compensation

Balance at January 25, 2020

See accompanying notes to consolidated financial statements (unaudited).

AeroVironment, Inc.

Consolidated Statements of Stockholders’ Equity

For the three months ended January 30, 2021 and January 25, 2020 (Unaudited)

(In thousands except share data)

Comprehensive

AeroVironment, Inc.

Balance at October 31, 2020

Unrealized loss on investments

Restricted stock awards

Restricted stock awards forfeited

Tax withholding payment related to net share settlement of equity awards

Stock based compensation

Balance at January 30, 2021

Comprehensive

AeroVironment, Inc.

Balance at October 26, 2019

Foreign currency translation

Stock options exercised

Restricted stock awards

2 unchanged sentences

Stock based compensation

Balance at January 25, 2020

Balance at August 1, 2020

See accompanying notes to consolidated financial statements (unaudited).

2 unchanged sentences

(In thousands)

Nine Months Ended

Three Months Ended

Operating activities

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

Net (loss) income

Adjustments to reconcile net (loss) income to cash provided by operating activities:

Depreciation and amortization

Losses from equity method investments

Losses from equity method investments, net

Amortization of debt issuance costs

Realized gain from sale of available-for-sale investments

Provision for doubtful accounts

Other non-cash income

Other non-cash expense

Non-cash lease expense

Loss on foreign currency transactions

(Gain) loss on foreign currency transactions

Deferred income taxes

Stock-based compensation

Loss (gain) on sale of property and equipment

Loss on sale of property and equipment

Amortization of debt securities

2 unchanged sentences

Unbilled receivables and retentions

Income tax receivable

Income taxes receivable

Prepaid expenses and other assets

1 unchanged sentence

Other liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Investing activities

1 unchanged sentence

Equity method investments

Business acquisition, net of cash acquired

Proceeds from sale of property and equipment

Redemptions of held-to-maturity investments

Purchases of held-to-maturity investments

Business acquisitions, net of cash acquired

Redemptions of available-for-sale investments

2 unchanged sentences

Financing activities

Tax withholding payment related to net settlement of equity awards

Principal payment of loan

Holdback and retention payments for business acquisition

Tax withholding payment related to net settlement of equity awards

Exercise of stock options

Net cash used in financing activities

Net increase (decrease) in cash, cash equivalents, and restricted cash

Effects of currency translation on cash and cash equivalents

Net decrease in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

3 unchanged sentences

Non-cash activities

Unrealized loss on available-for-sale investments, net of deferred tax benefit of $2

Unrealized loss on available-for-sale investments, net of deferred tax benefit of $ 0 and $ 4 for the three months ended July 31, 2021 and August 1, 2020, respectively

Change in foreign currency translation adjustments

Issuances of inventory to property and equipment, ISR in-service assets

Acquisitions of property and equipment included in accounts payable

3 unchanged sentences

Organization and Significant Accounting Policies

AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, support and operation of unmanned aircraft systems (“UAS”) for various industries and governmental agencies.

AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, delivery and support of a technologically advanced portfolio of intelligent, multi-domain robotic systems and related services for government agencies and businesses.

AeroVironment, Inc.

supplies unmanned aircraft systems (“UAS”), tactical missile systems (“TMS”), unmanned ground vehicles (“UGV”) and related services primarily to organizations within the U.S.

Department of Defense (“DoD”) and to international allied governments.

Basis of Presentation

4 unchanged sentences

In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included.

The results of operations for the three and nine months ended January 30, 2021 are not necessarily indicative of the results for the full year ending April 30, 2021.

The results of operations for the three months ended July 31, 2021 are not necessarily indicative of the results for the full year ending April 30, 2022.

For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2021, included in the Company’s Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes.

GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the unaudited consolidated financial statements and accompanying notes.

Actual results could differ from those estimates.

The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries.

The Company’s unaudited consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries.

All intercompany accounts and transactions have been eliminated.

In December 2017, the Company and SoftBank Corp.

(“SoftBank”) formed a joint venture, HAPSMobile Inc.

(“HAPSMobile”).

As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment has been accounted for as an equity method investment.

The Company has presented its proportion of HAPSMobile’s net loss in equity method investment loss, net of tax in the consolidated statements of operations.

During the nine months ended January 25, 2021, the Company recorded its proportion of a loss for HAPSMobile’s impairment of its investment in Loon LLC in the amount of $ 8,363,000 .

The Company’s investment has been written down to zero.

Refer to Note 6—Equity Method Investments for further details.

On June 10, 2019, the Company purchased 100 % of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unit Purchase Agreement (the “Pulse Purchase Agreement”).

The assets, liabilities and operating results of Pulse have been included in the Company’s consolidated financial statements.

On February 12, 2021, the Company dissolved its wholly-owned subsidiary, Pulse Aerospace, LLC, the results of which were not material to the consolidated financial statements as the Company has integrated the assets and operations.

On February 19, 2021, the Company closed its acquisition of Arcturus UAV, Inc.

(“Arcturus”), a California corporation, pursuant to a Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus and each of the shareholders and other equity interest holders of Arcturus (collectively, the “Arcturus Sellers”), to purchase 100 % of the issued and outstanding equity interests of Arcturus (the “Arcturus Acquisition”).

The assets, liabilities and operating results of Arcturus have been included in the Company’s unaudited consolidated financial statements.

Refer to Note 18—Business Acquisitions for further details.

During the nine months ended January 25, 2020, the Company dissolved its wholly-owned subsidiary, Skytower, Inc., the results of which were not material to the consolidated financial statements.

On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation, a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date, by and among the Company, ISG Seller and the sole shareholder of ISG Seller (the “Beneficial Owner,” and such acquisition of ISG, the “ISG Acquisition”).

The assets, liabilities and operating results of ISG have been included in the Company’s unaudited consolidated financial statements.

Refer to Note 18—Business Acquisitions for further details.

On May 3, 2021, the Company closed its acquisition of Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company based in Ostfildern (near Stuttgart), Germany (“Telerob GmbH”), including Telerob GmbH’s wholly-owned subsidiary, Telerob USA, Inc.

(“Telerob USA,” and collectively with Telerob GmbH, “Telerob”) pursuant to its previously announced Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems

Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Seller (collectively, the “Telerob Shareholders”), to purchase 100% of the issued and outstanding shares of Telerob Seller’s wholly-owned subsidiary Telerob GmbH (the “Telerob Acquisition”).

The assets, liabilities and operating results of Telerob GmbH have been included in the Company’s unaudited consolidated financial statements.

Refer to Note 18—Business Acquisitions for further details.

Recently Adopted Accounting Standards

Effective May 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , along with several additional clarification ASU’s issued during 2018 and 2019, collectively “CECL”.

CECL requires the reporting entity to estimate

expected credit losses over the life of a financial asset.

CECL requires the credit loss to be recognized upon initial recognition of the financial asset.

ASU 2016-13 requires the entity to adopt CECL using the modified retrospective transition approach through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

As part of the assessment of the adequacy of the Company’s allowances for credit losses, the Company considered a number of factors including, but not limited to, customer credit ratings, age of receivables, and expected loss rates.

However, the adoption of CECL did not have a material impact to retained earnings for the Company.

Effective May 1, 2020, the Company adopted ASU 2018-15, “ Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ” (“ASU 2018-15”).

ASU 2018-15 provides guidance on the treatment of accounting for fees paid by a customer in a cloud computing arrangement.

This guidance includes the requirements for capitalizing implementation costs incurred in a hosting arrangement.

The Company adopted ASU 2018-15 using the prospective method, applying the new guidance to all implementation costs incurred after adoption.

The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated financial statements.

The Company did not adopt any accounting standards during the three months ended July 31, 2021.

Revenue Recognition

14 unchanged sentences

The contractual right to payment is generally supported by termination for convenience clauses that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process.

Revenue for tactical missile systems (“TMS”) product deliveries and Customer-Funded Research and Development contracts is recognized over time as costs are incurred.

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.

1 unchanged sentence

Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress.

Contract services revenue, including revenue from intelligence, surveillance, and reconnaissance (“ISR”) services, is recognized over time as services are rendered.

In accordance with ASC Topic 606, the Company 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.

4 unchanged sentences

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.

The Company’s small UAS product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS systems and spare parts.

The Company’s small UAS, medium 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.

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.

Performance obligations satisfied over time accounted for 39 % of revenue during the three and nine months ended January 30, 2021.

Performance obligations satisfied at a point in time accounted for 61 % of revenue during the three and nine months ended January 30, 2021.

On January 30, 2021, the Company had approximately $ 103,869,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog.

The Company currently expects to recognize approximately 73 % of the remaining performance obligations as revenue in fiscal 2021 , an additional 26 % in fiscal 2022, and the balance thereafter.

Performance obligations satisfied over time accounted for 61 % and 38 % of revenue during the three months ended July 31, 2021 and August 1, 2020, respectively.

Performance obligations satisfied at a point in time accounted for 39 % and 62 % of revenue during the three months ended July 31, 2021 and August 1, 2020, respectively.

On July 31, 2021, the Company had approximately $ 257,685,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog.

The Company currently expects to recognize approximately 84 % of the remaining performance obligations as revenue in fiscal 2022 and an additional 16 % in fiscal 2023 .

The Company collects sales, value added, and other taxes concurrent with revenue producing activities, which are excluded from revenue when they are both imposed on a specific transaction and collected from a customer.

16 unchanged sentences

The impact of adjustments in contract estimates on the Company’s operating earnings can be reflected in either operating costs and expenses, or revenue.

The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was not significant for the three or nine month

periods ended January 30, 2021.

No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three or nine month periods ended January 30, 2021.

The aggregate net favorable impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was approximately $ 1,152,000 and $ 1,169,000 for the three and nine month periods ended January 25, 2020, respectively.

No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three month period ended January 25, 2020.

During the nine month period ended January 25, 2020, the Company revised its estimates of the total expected costs to complete a contract associated with a design and development agreement.

The impact of the revised estimate on this contract on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase of approximately $ 1,036,000 .

ended July 31, 2021 or the three month period ended August 1, 2020.

No adjustment on any one contract was material to the Company’s unaudited consolidated financial statements for the three month period ended July 31, 2021 or the three month period ended August 1, 2020.

Revenue by Category

1 unchanged sentence

Three Months Ended

Nine Months Ended

Revenue by major product line/program

1 unchanged sentence

Three Months Ended

Nine Months Ended

Revenue by contract type

7 unchanged sentences

Three Months Ended

Nine Months Ended

Revenue by customer category

1 unchanged sentence

Three Months Ended

Nine Months Ended

Revenue by geographic location

6 unchanged sentences

However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities recorded in customer advances on the consolidated balance sheet.

Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.

liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.

These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

For the Company’s product revenue, the Company generally receives cash payments subsequent to satisfying the performance obligation via delivery of the product, resulting in billed accounts receivable.

Changes in the contract asset and liability balances during the nine month period ended January 30, 2021 were not materially impacted by any other factors.

Changes in the contract asset and liability balances during the three month period ended July 31, 2021 were not materially impacted by any other factors.

For the Company’s contracts, there are no significant gaps between the receipt of payment and the transfer of the associated goods and services to the customer for material amounts of consideration.

Revenue recognized for the three and nine month periods ended January 30, 2021 that was included in contract liability balances at the beginning of April 30, 2020 was $ 0 and $ 5,423,000 , respectively;

and revenue recognized for the three and nine month periods ended January 25, 2020 that was included in contract liability balances at the beginning of April 30, 2019 was $ 12,000 and $ 1,670,000 , respectively.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of research and development (“R&D”), on a consolidated basis for the Company’s continuing operations.

Accordingly, the Company operates its business as a single reportable segment.

Revenue recognized for the three month periods ended July 31, 2021 that was included in contract liability balances at the beginning of April 30, 2021 was $ 309,000 ;

and revenue recognized for the three month periods ended August 1, 2020 that was included in contract liability balances at the beginning of April 30, 2020 was $ 1,973,000 .

The Company’s CODM, collectively the Chief Executive Officer and Chief Operations Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the allocation of research and development (“R&D”).

Accordingly, the Company identifies three reportable segments.

Refer to Note 20—Segments for further details.

The Company’s investments are accounted for as available-for-sale and are reported at fair value.

2 unchanged sentences

Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Investments are considered to be impaired if the fair value of the investment is less than its amortized cost basis.

On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments.

If the cost of an investment exceeds its fair value, the Company evaluates if the decline in fair value resulted from a credit loss or other factors.

The Company considers factors such as general market conditions and potential adverse conditions related to the financial health of the issuer based on rating agency actions.

Impairments relating to credit losses are recorded in earnings through an allowance for credit losses.

The allowance is limited by the amount that the fair value is less than the amortized cost basis.

Impairments not related to credit losses are recorded through other comprehensive income, net of applicable taxes.

Fair Values of Financial Instruments

8 unchanged sentences

The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured.

During the fiscal year ended April 30, 2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal year 2015 for an amount that was not significant.

At January 30, 2021 and April 30, 2020, the Company had no reserve for incurred cost claim audits.

Earnings (Loss) Per Share

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

At July 31, 2021 and April 30, 2021, the Company had no reserve for incurred cost claim audits.

(Loss) Earnings Per Share

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

The reconciliation of basic to diluted shares is as follows:

Three Months Ended

Nine Months Ended

January 30, 2021

January 25, 2020

January 30, 2021

January 25, 2020

July 31, 2021

August 1, 2020

Net income attributable to AeroVironment, Inc.

Denominator for basic earnings (loss) per share:

2 unchanged sentences

Denominator for diluted earnings (loss) per share

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 0 and 24 for the three and nine months ended January 30, 2021.

Due to the net loss for the three months ended January 25, 2020, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive.

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 287,408 and 3,076 for the three and nine months ended January 25, 2020, respectively.

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 3,871 and 844 for the three months ended July 31, 2021 and August 1, 2020,

respectively.

Due to the net loss for the three months ended July 31, 2021, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive.

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 276,107 for the three months ended July 31, 2021.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) .

This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted.

The adoption method is dependent on the specific amendment included in this update as certain amendments require retrospective adoption, modified retrospective adoption, an option of retrospective or modified retrospective, and prospective adoption.

The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic

815 (Topic 321, Topic 323, and Topic 815) .

This ASU clarifies accounting certain topics impacted by Topic 321 Investments—Equity Securities.

These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise.

The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted.

The amendments should be adopted prospectively.

The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

Accounting pronouncements issued but not effective until after July 31, 2021 are not expected to be applicable to the Company.

Discontinued Operations

1 unchanged sentence

(“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company.

In accordance with the terms of the Purchase Agreement, as amended by a side letter agreement executed at the closing, the Company received cash consideration of $ 31,994,000 upon closing, which resulted in a gain of $ 11,420,000 and has been recorded in gain on sale of business, net of tax in the consolidated statements of income.

During the year ended April 30, 2019, the Company recorded a reduction to the gain resulting from a working capital adjustment of $ 486,000 .

During the year ended April 30, 2020, the Company and Webasto engaged an independent accounting firm to resolve a working capital dispute with a maximum exposure of $ 922,000 pursuant to the terms of the Purchase Agreement.

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

The Company is entitled to receive additional cash consideration of $ 6,500,000 (the “Holdback”) upon tendering consents to assignment of two remaining customer contracts to Webasto.

The Holdback was not recorded in the Company’s consolidated financial statements as the amount was not realized or realizable as of January 30, 2021.

The Holdback was not recorded in the Company’s unaudited consolidated financial statements as the amount was not realized or realizable as of July 31, 2021.

The Company’s satisfaction of the requirements for the payment of the Holdback is currently in dispute.

On February 22, 2019, Webasto filed a lawsuit alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures, failure to provide certain consents to contract assignments and related to a previously announced product recall.

Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $ 6,500,000 in addition to attorneys’ fees, costs, and punitive damages.

On February 22, 2019, Webasto filed a lawsuit, which was amended in April 2019, alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures and failure to provide certain consents to contract assignments, and related to a previously announced product recall.

Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $ 6,500,000 in

addition to attorneys’ fees, costs, and punitive damages.

On August 16, 2019, the Company filed a counterclaim against Webasto seeking payment of the Holdback and declaratory relief regarding Webasto’s cancellation of an assigned contract.

The Company believes that the allegations are generally meritless and is mounting a vigorous defense.

Webasto again amended the complaint in May 2021 to include additional claims.

On June 2, 2021, the Company filed an answer to Webasto’s second amended complaint filed in May 2021.

The Company’s evaluation remains that many of the allegations in the Webasto lawsuit are meritless, but as the discovery phase of litigation continues the Company lacks sufficient information to fully analyze other allegations at this time.

The Company continues to mount a vigorous defense.

In order to avoid the future cost, expense, and distraction of continued litigation, the Company engaged in settlement negotiations with Webasto;

however, the negotiations did not result in a settlement of any of the Company’s or Webasto’s claims.

As a result of the settlement negotiations, the Company established a litigation reserve, which reserve reflects the scope of a rejected offer intended to communicate the Company’s serious and good faith intention to attempt to reach a settlement for the stated purposes.

The offer did not reflect the Company’s view of the merits of the claims made, and the Company continues to vigorously defend all claims.

However, as a result of the preparation of the good faith offer and the Company’s willingness to pursue settlement for that amount, the Company recorded litigation reserve expenses in the amount of $ 9,300,000 during the year ended April 30, 2021 recorded in other expense on the consolidated statements of operations and in other non-current liabilities on the consolidated balance sheet.

During the three months ended October 27, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration that named certain of the Company’s EES products as subject to the recall.

9 unchanged sentences

Concurrent with the execution of the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) to provide certain general and administrative services to Webasto for a defined period.

Income from performing services under the TSA was $ 0 and $ 38,000 and has been recorded in other income, net in the consolidated statements of operations for the three and nine months ended January 30, 2021, respectively, and $ 57,000 and $ 545,000 and has been

recorded in other income, net in the consolidated statements of operations for the three and nine months ended January 25, 2020, respectively.

Income from performing services under the TSA was $ 0 and $ 38,000 and has been recorded in other (expense) income, net in the unaudited consolidated statements of operations for the three months ended July 31, 2021 and August 1, 2020, respectively.

Investments consist of the following (in thousands):

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government securities

Total available-for-sale investments

Total long-term available-for-sale investments

Equity method investments

3 unchanged sentences

Available-For-Sale Securities

As of January 30, 2021 and April 30, 2020, the balance of available-for-sale securities consisted of state and local government municipal securities, U.S.

As of July 31, 2021 and April 30, 2021, the balance of available-for-sale securities consisted of state and local government municipal securities, U.S.

government securities, U.S.

1 unchanged sentence

Interest earned from these investments is recorded in interest income.

Realized gains on sales of these investments on the basis of specific identification is recorded in interest income.

The following table is a summary of the activity related to the available-for-sale investments recorded in short-term and long-term investments as of January 30, 2021 and April 30, 2020, respectively (in thousands):

January 30, 2021

Realized gains on sales of these investments on the basis of specific identification are recorded in (expense) interest income.

The following table is a summary of the activity related to the available-for-sale investments recorded in short-term and long-term investments as of July 31, 2021 and April 30, 2021, respectively (in thousands):

July 31, 2021

Municipal securities

government securities

Corporate bonds

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Total available-for-sale investments

The amortized cost and fair value of the available-for-sale debt securities by contractual maturity at January 30, 2021 were as follows (in thousands):

The amortized cost and fair value of the available-for-sale debt securities by contractual maturity at July 31, 2021 were as follows (in thousands):

Due within one year

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

The Company’s financial assets measured at fair value on a recurring basis at January 30, 2021, were as follows (in thousands):

The Company’s financial assets measured at fair value on a recurring basis at July 31, 2021, were as follows (in thousands):

Fair Value Measurement Using

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Available-for-sale securities

Contingent consideration

The Company’s financial assets measured at fair value on a recurring basis at April 30, 2021, were as follows (in thousands):

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Available-for-sale securities

Contingent consideration

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value

on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):

Measurements Using

Unobservable Inputs

Balance at May 1, 2021

Business acquisition

Transfers to Level 3

Total losses (realized or unrealized)

Included in selling, general and administrative

Balance at July 31, 2021

The amount of total (gains) or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at July 31, 2021

Pursuant to the ISG Purchase Agreement, the sellers may receive up to a maximum of $ 6,000,000 in additional cash consideration (“contingent consideration”), if certain revenue targets are achieved during the 3 years following closing.

The contingent consideration was valued using a Black-Scholes option-pricing model.

The analysis considered, among other items, contractual terms of the ISG Purchase Agreement, the Company’s discount rate, the timing of expected future cash flows and the probability that the revenue targets required for payment of the contingent consideration will be achieved.

Pursuant to the Telerob Purchase Agreement, the Telerob Seller may receive up to a maximum of € 6,000,000 (approximately $ 7,272,000 ) in additional cash consideration if specific revenue and contract award targets for Telerob are achieved during the 36 month period after closing.

The contingent consideration was valued using a Black-Scholes option-pricing model.

The analysis considered, among other items, contractual terms of the Telerob Purchase Agreement, the Company’s discount rate, the timing of expected future cash flows and the probability that the revenue and contract award targets required for payment of the contingent consideration will be achieved.

Refer to Note 18—Business Acquisitions.

Inventories, net

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Equity Method Investments

In December of 2017, the Company and SoftBank formed a joint venture, HAPSMobile, which is a Japanese corporation.

As of January 30, 2021, the Company’s ownership stake in HAPSMobile was approximately 7 %, with the remaining 93 % held by SoftBank.

In December 2017, the Company and SoftBank Corp.

(“Softbank”) formed a joint venture, HAPSMobile Inc.

(“HAPSMobile”), which is a Japanese corporation.

Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile.

As of July 31, 2021, the Company’s ownership stake in HAPSMobile was approximately 7 %, with the remaining 93 % held by SoftBank.

In connection with the formation of the joint venture on December 27, 2017, the Company initially purchased shares of HAPSMobile representing a 5 % ownership interest in exchange for an investment of 210,000,000 yen ($ 1,860,000 ).

The Company subsequently purchased additional shares of HAPSMobile in order to maintain a 5 % ownership stake in the joint venture.

subsequently purchased additional shares of HAPSMobile in order to maintain a 5 % ownership stake in the joint venture.

The first such purchase occurred on April 17, 2018, at which time the Company invested 150,000,000 yen ($ 1,407,000 ) for the purchase of additional shares of HAPSMobile.

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On December 4, 2019, the Company purchased 540,050,000 yen ($ 4,982,000 ) of additional shares of HAPSMobile to increase its ownership stake to approximately 7 %.

On May 29, 2021, the Company entered into an amendment to the DDA with HAPSMobile.

The parties agreed to the amendment in anticipation of the Company and SoftBank entering into a Master Design and Development Agreement (“MDDA”) with each other to continue the design and development of the Solar High Altitude Pseudo-Satellite (“Solar HAPS”) aircraft developed under the DDA.

On May 29, 2021, the Company and SoftBank entered into a MDDA to continue the development of Solar HAPS.

Pursuant to the MDDA, which has a five-year term, SoftBank will issue orders to the Company for the Company to perform design and development services and produce deliverables as specified in the applicable order(s).

Upon the execution of the MDDA, SoftBank issued to the Company, and the Company accepted, the first order under the MDDA which has a maximum value of approximately $ 51,200,000 .

Concurrent with the execution of the MDDA, each of SoftBank and the Company agreed to lend HAPSMobile loans which are convertible into shares of HAPSMobile under certain conditions, and to cooperate with each other to explore restructuring and financing options for HAPSMobile to continue the development of Solar HAPS.

The Company committed to lend 500,000,000 yen ($ 4,600,000 ).

On June 7, 2021 the Company funded 130,000,000 yen ($ 1,195,000 ) of the loan agreement.

On August 13, 2021, the Company made the second payment of the loan agreement in the amount of 180,000,000 yen ($ 1,638,000 ).

As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile pursuant to the applicable Joint Venture Agreement and related organizational documents, the Company’s investment is accounted for as an equity method investment.

During the nine months ended January 25, 2021, the Company recorded its proportion of a loss for HAPSMobile’s impairment of its investment in Loon LLC in the amount of $ 8,363,000 .

For the three and nine months ended January 30, 2021, the Company recorded its ownership percentage of the net loss of HAPSMobile, or $ 0 and $ 10,810,000 , respectively, in equity method investment loss, net of tax in the unaudited consolidated statement of income.

HAPSMobile initially made its investment in Loon LLC in April 2019.

For the three and nine months ended January 25, 2020, the Company recorded its ownership percentage of the net loss of HAPSMobile, or $ 1,200,000 and $ 3,410,000 , respectively, in equity method investment loss, net of tax in the unaudited consolidated statement of operations.

At January 30, 2021 and April 30, 2020, the carrying value of the investment in HAPSMobile of $ 0 and $ 10,455,000 , respectively, was recorded in other assets.

As the Company’s investment has been written down to zero, no future losses of HAPSMobile will be recorded in equity method investment loss, net of tax in subsequent periods.

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded its proportionate net loss of HAPSMobile, or $ 1,655,000 and $ 1,008,000 , respectively, in equity method investment loss, net of tax in the unaudited consolidated statement of operations.

At July 31, 2021 and April 30, 2021, the carrying value of the investment in HAPSMobile was a liability of $ 415,000 and an asset of $ 10,455,000 , respectively, was recorded in other current liabilities and other assets, respectively.

The equity method losses recognized during the three months ended July 31, 2021 exceeded the Company’s loan contributions to date resulting in the recording of an accrued liability in the amount of $ 415,000 recorded in other current liabilities on the unaudited consolidated balance sheet as of July 31, 2021.

Investment in Limited Partnership Fund

In July 2019, the Company made its initial capital contribution to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets.

On July 15, 2020 and January 4, 2021, the Company made additional contributions of $ 1,173,000 and $ 977,000 , respectively.

During the three months ended July 31, 2021 and August 1, 2021, the Company made additional contributions of $ 1,497,000 and $ 1,173,000 , respectively.

Under the terms of the limited partnership agreement, the Company has committed to make additional capital contributions of $ 880,000 to the fund.

The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest.

For the three and nine months ended January 30, 2021, the Company recorded its ownership percentage of the net loss of the limited partnership, or $ 81,000 and $ 361,000 , respectively, in equity method investment loss in the consolidated statements of income.

For the three and nine months

ended January 25, 2020, the Company recorded no net loss of the limited partnership.

At January 30, 2021 and April 30, 2020, the carrying value of the investment in the limited partnership of $ 6,230,000 and $ 4,442,000 , respectively, was recorded in long-term investments.

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded its ownership percentage of the net gain (loss) of the limited partnership, or $ 514,000 and $( 280,000 ), respectively, in equity method investment loss in the unaudited consolidated statements of operations.

At July 31, 2021 and April 30, 2021, the carrying value of the investment in the limited partnership of $ 9,178,000 and $ 7,168,000 , respectively, was recorded in long-term investments.

Warranty Reserves

1 unchanged sentence

The warranty reserve is included in other current liabilities.

The related expense is included in cost of sales.

Warranty reserve activity is summarized as follows for the three and nine months ended January 30, 2021 and January 25, 2020, respectively (in thousands):

The related expense is

included in cost of sales.

Warranty reserve activity is summarized as follows for the three months ended July 31, 2021 and August 1, 2020, respectively (in thousands):

Three Months Ended

Nine Months Ended

Beginning balance

Balance acquired from acquisition

Warranty expense

Changes in estimates related to pre-existing warranties

Warranty costs settled

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Intangibles, net

The weighted average amortization period at January 30, 2021 and April 30, 2020 was four years .

Amortization expense for the three and nine months ended January 30, 2021 was $ 662,000 and $ 2,086,000 , respectively.

Amortization expense for the three and nine months ended January 25, 2020 was $ 775,000 and $ 2,102,000 , respectively.

Technology, in-process research and development, customer relationships, trademarks and tradenames, and non-compete agreements were recognized in conjunction with the Company’s acquisition of Pulse on June 10, 2019.

The weighted average amortization period at July 31, 2021 and April 30, 2021 was five years , respectively.

Amortization expense for the three months ended July 31, 2021 and August 1, 2020 was $ 6,973,000 and $ 709,000 , respectively.

Technology, backlog and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of Telerob on May 3, 2021.

Technology and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of Arcturus on February 19, 2021.

Technology and customer relationship intangible assets were recognized in conjunction with the Company’s acquisition of ISG on February 23, 2021.

Refer to Note 18—Business Acquisitions for further details.

4 unchanged sentences

Impairment of goodwill

Balance at January 30, 2021

The goodwill balance at April 30, 2020 is attributable to the acquisition of Pulse.

Balance at July 31, 2021

The goodwill balance at April 30, 2021 is attributable to the acquisitions of Pulse, ISG, and Arcturus acquisitions.

The All other goodwill addition is attributable to the Telerob acquisition.

Refer to Note 18—Business Acquisitions for further details.

In connection with the consummation of the Arcturus Acquisition on February 19, 2021, the Company, as borrower, and Arcturus, as guarantor, entered into a Credit Agreement with certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S.

Bank National Association, as joint lead arrangers and joint bookrunners (the “Credit Agreement”).

The Credit Agreement and its associated Security and Pledge Agreement set forth the terms and conditions 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 (the “Revolving Facility”), and (ii) a five-year amortized $ 200 million term A loan (the “Term Loan Facility”, and together with the Revolving Facility, the “Credit Facilities”).

Certain existing letters of credit issued by JPMorgan Chase Bank were reserved for under the Revolving Facility at closing and remain outstanding under the terms thereof.

Upon execution of the Credit Agreement, the Company drew the full principal of the Term Loan Facility for use in the acquisition of Arcturus.

The Term Loan Facility requires payment of 5 % of the outstanding obligations in each of the first four loan years, with the remaining 80 % 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.

The Credit Facilities provide the Company with a choice of interest rates between (a) LIBOR (with a 0% floor) plus the Applicable Margin;

or (b) Base Rate (defined as the highest of (a) the Federal Funds Rate plus one-half percent ( 0.50 %), (b) the Bank of America prime rate, and (c) the one (1) month LIBOR plus one percent ( 1.00 %) plus the Applicable Margin.

The Applicable Margin is based upon the Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether the Company elects LIBOR (ranging from 1.50 - 2.25 %) or Base Rate (ranging from 0.50 - 1.25 %).

The Company is also responsible for certain commitment fees from 0.20 - 0.35 % depending on the Consolidated Leverage Ratio, and administrative agent expenses incurred in relation to the Credit Facilities.

In the event of a default, an additional 2 % default interest rate in addition to the applicable rate if specified or the Base Rate plus Applicable Margin if an applicable rate is not specified.

Any borrowing under the Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid under the Revolving Facility may be reborrowed.

Mandatory prepayments are required under the revolving loans when borrowings and letter of credit usage exceed the aggregate revolving commitments of all lenders.

Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested and unpermitted debt transactions.

In support of its obligations pursuant to the Credit Facilities, the Company has granted security interests in substantially all of the personal property of the Company and its domestic subsidiaries, including a pledge of the equity interests in its subsidiaries (limited to 65 % of outstanding equity interests in the case of foreign subsidiaries), and the proceeds thereof, with customary exclusions and exceptions.

The Company’s existing and future domestic subsidiaries, including Arcturus, are guarantors for the Credit Facilities.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including certain restrictions on the ability of the Company and its subsidiaries (as defined in the Credit Agreement) to incur any additional indebtedness or guarantee indebtedness of others, to create liens on properties or assets, or to enter into certain asset and stock-based transactions.

In addition, the Credit Agreement includes certain financial maintenance covenants, requiring that (x) the Consolidated Leverage Ratio (as defined in the Credit Agreement) shall not be more than 3.00 to 1.00 as of the end of any fiscal quarter and (y) the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) shall not be less than 1.25 to 1.00 as of the end of any fiscal quarter.

As of July 31, 2021, the Company is in compliance with all covenants.

The Credit Agreement contains certain customary events of default, which include failure to make payments when due thereunder, the material inaccuracy of representations or warranties, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, certain judgments, certain ERISA-related events, invalidity of loan documents, or a Change of Control (as defined in the Credit Agreement).

Upon the occurrence and continuation of an event of default, the Lenders may cease making future loans under the Credit Agreement and may declare all amounts owing under the Credit Agreement to be immediately due and payable.

Long-term debt and the current period interest rates were as follows:

Three Months Ended

(In thousands)

Revolving credit facility

Less current portion

Total long-term debt, less current portion

Less unamortized debt issuance costs - term loans

Total long-term debt, net of unamortized debt issuance costs - term loans

Unamortized debt issuance costs - revolving credit facility

Current period interest rate

Future long-term debt principal payments at July 31, 2021 were as follows:

(In thousands)

The Company leases certain buildings, land and equipment.

5 unchanged sentences

The Company’s leases have remaining lease terms of less than one year to six years , some of which may include options to extend the lease for up to 10 years , and some of which may include options to terminate the lease after two years .

None of the Company’s options to extend or terminate are reasonably certain of being exercised, and are therefore not included in the Company’s determination of lease assets and liabilities.

If the Company determines the option to extend or terminate is reasonably certain, it is included in the determination of lease assets and liabilities.

For operating leases, the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

3 unchanged sentences

For these lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.

The Company does not have any finance leases.

The Company does not have any material restrictions or covenants in its lease agreements, sale-leaseback transactions, land easements or residual value guarantees.

1 unchanged sentence

Additionally, the Company makes judgments around contractual asset substitution rights in determining whether a contract contains a lease.

The components of lease costs recorded in cost of sales for product sales and contract services and selling, general and administrative (“SG&A”) expense were as follows (in thousands):

Nine Months Ended

The components of lease costs recorded in cost of sales and selling, general and administrative (“SG&A”) expense were as follows (in thousands):

Three Months Ended

Operating lease cost

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Supplemental lease information were as follows:

Nine Months Ended

Three Months Ended

(In thousands)

4 unchanged sentences

Weighted average discount rate

Maturities of operating lease liabilities as of January 30, 2021 were as follows (in thousands):

Maturities of operating lease liabilities as of July 31, 2021 were as follows (in thousands):

Total lease payments

1 unchanged sentence

Total present value of operating lease liabilities

Accumulated Other Comprehensive Income and Reclassifications Adjustments

The components of accumulated other comprehensive income and adjustments are as follows (in thousands):

Nine Months Ended

Balance, net of $ 0 deferred taxes, as of April 30, 2020 and April 30, 2019

Changes in foreign currency translation adjustments

Unrealized losses, net of $ 2 of deferred taxes for the nine months ended January 30, 2021

Balance, net of $ 2 and $ 0 deferred taxes, as of January 30, 2021 and January 25, 2020, respectively

Accumulated Other Comprehensive (Loss) Income and Reclassifications Adjustments

The components of accumulated other comprehensive (loss) income and adjustments are as follows (in thousands):

Three Months Ended

Balance, net of $ 1 and $ 0 deferred taxes, as of April 30, 2021 and April 30, 2020, respectively

Unrealized loss on available-for-sale investments, net of deferred tax benefit of $ 0 and $ 4 for the three months ended July 31, 2021 and August 1, 2020, respectively

Change in foreign currency translation adjustments

Balance, net of $ 1 and $ 4 deferred taxes, as of July 31, 2021 and August 1, 2020, respectively

Customer-Funded Research & Development

Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications.

These costs are direct contract costs and are expensed to cost of sales as costs are

These costs are direct contract costs and are expensed to cost of sales as costs are incurred.

Revenue from customer-funded R&D contracts are recognized in accordance with Topic 606 over time as costs are incurred.

Revenue from customer-funded R&D was approximately $ 14,811,000 and $ 58,979,000 for the three and nine months ended January 30, 2021, respectively.

Revenue from customer-funded R&D was approximately $ 17,939,000 and $ 50,565,000 for the three and nine months ended January 25, 2020, respectively.

Revenue from customer-funded R&D was approximately $ 16,911,000 and $ 23,426,000 for the three months ended July 31, 2021 and August 1, 2020, respectively.

Long-Term Incentive Awards

During the three months ended August 1, 2020, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2021 LTIP”).

During the three months ended July 31, 2021, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2022 LTIP”).

Awards under the Fiscal 2022 LTIP consist of:

(i) time-based restricted stock awards, which vest in equal tranches in July 2021, July 2022 and July 2023, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2023.

(i) time-based restricted stock awards and time-based restricted stock units, which vest in equal tranches in July 2022, July 2023 and July 2024, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2024.

At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100 % for each such metric.

2 unchanged sentences

Settlement of the PRSUs will be made in fully-vested shares of common stock.

For the three and nine months ended January 30, 2021, the Company recorded $ 126,000 and $ 564,000 of compensation expense related to the Fiscal 2021 LTIP.

The Company recorded no compensation expense related to the Fiscal 2021 LTIP for the three and nine months ended January 25, 2020.

At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2021 LTIP is $ 7,946,000 .

During the three months ended July 27, 2019, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2020 LTIP”).

For the three months ended July 31, 2021, the Company recorded $ 308,000 of compensation expense related to the Fiscal 2022 LTIP.

The Company recorded no compensation expense related to the Fiscal 2022 LTIP for the three months ended August 1, 2020.

At July 31, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2022 LTIP is $ 13,314,000 .

Awards under the Fiscal 2021 LTIP consist of:

(i) time-based restricted stock awards, which vest in equal tranches in July 2020, July 2021 and July 2022, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2022.

At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100 % for each such metric.

2 unchanged sentences

Settlement of the PRSUs will be made in fully-vested shares of common stock.

For the three months ended January 30, 2021, the Company recorded a reduction of $ 26,000 of compensation expense related to the Fiscal 2020 LTIP, and for the nine months ended January 30, 2021, the Company recorded $ 319,000 of compensation expense related to the Fiscal 2020 LTIP.

For the three and nine months ended January 25, 2020, the Company recorded $215,000 and $512,000 of compensation expense related to the Fiscal 2020 LTIP, respectively.

At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2020 LTIP is $ 4,263,000 .

During the three months ended July 28, 2018, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2019 LTIP”).

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded $ 65,000 and $ 91,000 of compensation expense related to the Fiscal 2021 LTIP, respectively.

At July 31, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2021 LTIP is $ 7,337,000 .

During the three months ended July 27, 2019, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2020 LTIP”).

Awards under the Fiscal 2020 LTIP consist of:

4 unchanged sentences

Settlement of the PRSUs will be made in fully-vested shares of common stock.

For the three and nine months ended January 30, 2021, the Company recorded $ 27,000 and $ 291,000 of compensation expense related to the Fiscal 2019 LTIP, respectively.

For the three and nine months ended January 25, 2020, the Company recorded $ 246,000 and $ 294,000 of compensation expense related to the Fiscal 2019 LTIP, respectively.

At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2019 LTIP is $ 2,478,000 .

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded $(1,000) and $80,000 of compensation expense related to the Fiscal 2020 LTIP, respectively.

At July 31, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2020 LTIP is $ 3,983,000 .

During the three months ended July 28, 2018, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2019 LTIP”).

1 unchanged sentence

(i) time-based restricted stock awards, which vest in equal tranches in July 2019, July 2020 and July 2021, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2021.

During the three months ended August 1, 2020, the Company issued a total of 16,228 fully-vested shares of common stock to settle the PRSUs in the Fiscal 2018 LTIP.

For the three and nine months ended January 30, 2021, the Company recorded no compensation expense.

For the three and nine months ended January 25, 2020, the Company recorded $ 201,000 and $ 162,000 of compensation expense related to the Fiscal 2018 LTIP, respectively.

At January 30, 2021 and April 30, 2020, the Company recorded cumulative stock-based compensation expense from the Fiscal 2021 LTIP, Fiscal 2020 LTIP and Fiscal 2019 LTIP of $ 2,780,000 and $ 1,607,000 , respectively.

During the three months ended July 31, 2021, the Company issued a total of 12,101 fully-vested shares of common stock to settle the PRSUs in the Fiscal 2019 LTIP.

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded $ 0 and $ 75,000 of compensation expense related to the Fiscal 2019 LTIP, respectively.

At each reporting period, the Company reassesses the probability of achieving the performance targets for the PRSUs.

1 unchanged sentence

No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.

For the three and nine months ended January 30, 2021, the Company recorded a (benefit from) and provision for income taxes of $( 924,000 ) and $ 2,774,000 , respectively, yielding effective tax rates of 157.9 % and 10.7 %, respectively.

For the three and nine months ended January 25, 2020, the Company recorded a (benefit from) and provision for income taxes of $( 38,000 ) and $ 3,203,000 , respectively, yielding effective tax rates of ( 28.4 )% and 10.6 %, respectively.

The variance from statutory rates for the three and nine months ended January 30, 2021 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options.

The variance from statutory rates for the three and nine months ended January 25, 2020 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options.

For the three months ended July 31, 2021 and August 1, 2020, the Company recorded a (benefit from) and provision for income taxes of $( 957,000 ) and $ 1,207,000 , respectively, yielding effective tax rates of 7.0 % and 9.6 %, respectively.

The variance from statutory rates for the three months ended July 31, 2021 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options.

The variance from statutory rates for the three months ended August 1, 2020 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options.

Share Repurchase

In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $ 25,000,000 of the Company’s common stock with no specified termination date for the program.

No shares were repurchased under the program during the three and nine months ended January 30, 2021 or January 25, 2020.

As of January 30, 2021 and April 30, 2020, approximately $ 21,200,000 remained authorized for future repurchases under this program.

No shares were repurchased under the program during the three months ended July 31, 2021 or August 1, 2020.

As of July 31, 2021 and April 30, 2021, approximately $ 21,200,000 remained authorized for future repurchases under this program.

Related Party Transactions

2 unchanged sentences

As such, HAPSMobile and SoftBank are considered related parties of the Company.

Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile.

Under the DDA and related efforts, the Company will use its best efforts, up to a maximum net value of $ 181,320,000 , to design and build prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conduct low altitude and high altitude flight tests of the prototype aircraft.

The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $ 7,480,000 and $ 35,318,000 for the three and nine months ended January 30, 2021, respectively.

The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $ 11,762,000 and $ 37,491,000 for the three and nine months ended January 25, 2020, respectively.

At January 30, 2021 and April 30, 2020, the Company had unbilled related party receivables from HAPSMobile of $ 6,834,000 and $ 15,779,000 recorded in unbilled receivables and retentions on the consolidated balance sheets, respectively.

Under the DDA and related efforts with HAPSMobile, the Company will use its best efforts, up to a maximum net value of $ 185,202,000 , to design and build prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conduct low altitude and high altitude flight tests of the prototype aircraft.

The Company will continue the development of Solar HAPS with Softbank under the MDDA.

Upon the execution of the MDDA, SoftBank issued the first order under the MDDA which has a maximum value of approximately $ 51,200,000 .

The Company recorded revenue under both the MDDA and DDA of $ 10,352,000 and $ 16,386,000 for the three months ended July 31, 2021 and August 1, 2020, respectively.

At July 31, 2021 and April 30, 2021, the Company had unbilled related party receivables from HAPSMobile of $ 5,568,000 and $ 544,000 recorded in unbilled receivables and retentions on the consolidated balance sheets, respectively.

Refer to Note 6—Equity Method Investments for further details.

Business Acquisitions

On June 10, 2019, the Company purchased 100 % of the issued and outstanding member units of Pulse pursuant to the terms of the Pulse Purchase Agreement.

The Company’s acquisition of Pulse’s helicopter UAS product family strengthens AeroVironment’s leading family of fixed-wing small unmanned aircraft systems and increases the mission capabilities of AeroVironment’s family of systems.

Pursuant to the Pulse Purchase Agreement, at closing, the Company paid $ 20,650,000 in cash, less closing indebtedness and transaction costs as defined in the Pulse Purchase Agreement, less a $ 250,000 retention to cover any post-closing indemnification claims, and less a $ 1,250,000 holdback amount, with the retention and holdback to be released to the member unit holders of Pulse, less any amounts paid or reserved, 18 months after the closing of the transactions in accordance with the terms of the Pulse Purchase Agreement.

The closing cash consideration included the payoff of the outstanding indebtedness of Pulse as of the closing date.

The Company financed the acquisition entirely from available cash on hand.

During the three months ended January 30, 2021, the Company paid a total of $1,492,000 in holdback and retention payments.

In addition to the consideration paid at closing, the acquisition of Pulse included contingent consideration arrangements that required additional consideration to be paid by the Company to the sellers of Pulse if two specified research and development milestones were achieved by December 10, 2021 and the continued employment of specified employees.

Amounts were payable upon the achievement of the milestones.

The range of the undiscounted amounts the Company could pay under each of the contingent consideration agreements were zero or $ 2,500,000 ($ 5,000,000 in total if both milestones are achieved and specific key employees continued employment).

The fair value of the contingent consideration recognized on the acquisition date of $ 1,703,000 was estimated by applying the income approach.

That measure was based on significant Level 3 inputs not observable in the market.

Key assumptions include (1) a discount rate of 4.5 % and (2) the probability that each of the milestones would be achieved.

During the three months ended January 25, 2020, one of the research and development milestones was achieved, and the requirements for the payout of remaining contingent consideration were concluded to not have been met.

As a result, the Company recorded a gain of $ 832,000 which was recorded in selling, general, and administrative expense in the consolidated statements of income.

On February 26, 2020, $ 2,500,000 of contingent consideration was paid to the sellers for the achieved milestone.

During the fiscal year ended April 30, 2020, the Company finalized its determination of the fair value of the assets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):

In-process R&D

Non-compete agreements

Other assets, net of liabilities assumed

Total net identified assets acquired

Telerob Acquisition

On May 3, 2021, the Company closed its acquisition of Telerob pursuant to the terms of the Telerob Purchase Agreement.

Telerob develops, manufactures, sells, and services remote-controlled unmanned ground robots and transport vehicles for civil and defense applications.

Pursuant to the Telerob Purchase Agreement at closing, the Company paid € 37,455,000 (approximately $ 45,400,000 ) in cash to the Telerob Seller (subject to certain purchase price adjustments as set forth in the Telerob Purchase Agreement), less (a) € 3,000,000 (approximately $ 3,636,000 ) to be held in escrow for breaches of the Telerob Seller’s fundamental warranties or any other of Telerob Seller’s warranties to the extent not covered by a representation and warranty insurance policy (the “RWI Policy”) obtained by the Company in support of certain indemnifications provided by the Telerob Seller;

(b) transaction-related fees and costs incurred by the Telerob Seller, including change in control payments triggered by the transaction;

and (c) 50% of the cost of obtaining the RWI Policy.

In addition, at closing the Company paid off approximately € 7,811,000 (approximately $ 9,468,000 ), of certain indebtedness of Telerob, which amount was paid in combination to the Telerob Seller and the lender under an agreement between Telerob GmbH and the lender providing for a reduced payoff amount.

This indebtedness was offset by cash on hand at Telerob at closing.

The escrow amount is to be released to the Telerob Seller, less any amounts paid or reserved, 30 months following the closing date.

In addition to the consideration paid at closing, the Telerob Seller may receive € 2,000,000 (approximately $ 2,424,000 ) in additional cash consideration if specific revenue targets for Telerob are achieved during the 12 month period after closing beginning on the first day of the calendar month following the closing (the “First Earnout Year”) and an additional € 2,000,000 (approximately $ 2,424,000 ) in cash consideration if specific revenue targets for Telerob are achieved in the 12 month period following the First Earnout Year.

The Telerob Seller may also receive up to € 2,000,000 (approximately $ 2,424,000 ) in additional cash consideration if specific awards and/or orders from the U.S.

military are achieved prior to the end of a 36-month post-closing period.

The following table summarizes the provisional allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the acquisition of Telerob (in thousands):

Fair value of assets acquired:

Accounts receivable

Unbilled receivable

Inventories, net

Prepaid and other current assets

Property and equipment, net

Operating lease assets

Customer relationships

Other intangible assets

Total assets acquired

Fair value of liabilities assumed:

Accounts payable

Wages and related accruals

Customer advances

Current operating lease liabilities

Other current liabilities

Non-current operating lease liabilities

Other non-current liabilities

Deferred income taxes

Total liabilities assumed

Total identifiable net assets

Fair value of consideration:

Cash consideration, net of cash acquired

Contingent consideration

2 unchanged sentences

Use of different estimates and judgments could yield materially different results.

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Pulse and expected future customers in the helicopter UAS market.

For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years .

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Telerob and expected future customers in the UGV market.

For tax purposes the acquisition was treated as a stock purchase and the goodwill is not deductible.

Supplemental Pro Forma Information (unaudited)

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Three Months Ended

Nine Months Ended

Net income attributable to AeroVironment, Inc.

Net (loss) income attributable to AeroVironment, Inc.

The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.

These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 28, 2018, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2018 with the consequential tax effects, and including the results of Pulse prior to acquisition.

The Company incurred approximately $ 344,000 and $ 1,036,000 of acquisition-related expenses for the three and nine months ended January 25, 2020, respectively.

These expenses are included in selling, general and administrative, research and development, and product cost of sales on the Company’s consolidated statement of operations.

These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended August 1, 2020, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2020 with the consequential tax effects and including the results of Telerob prior to acquisition.

The Company incurred approximately $ 411,000 of acquisition-related expenses for the three months ended July 31, 2021.

These expenses are included in selling, general and administrative on the Company’s unaudited consolidated statement of operations.

The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2020, nor are they indicative of results of operations that may occur in the future.

Subsequent Events

Arcturus Acquisition

On February 19, 2021, the Company closed its acquisition of Arcturus UAV, Inc., a California corporation (“Arcturus UAV”) pursuant to the Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus UAV and each of the shareholders and other equity interest holders of Arcturus UAV (collectively, the “Arcturus Sellers”), to purchase 100 % of the issued and outstanding equity of Arcturus UAV (the “Arcturus Acquisition”).

Arcturus UAV, headquartered in Petaluma, California, designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems.

Arcturus UAV became a wholly-owned subsidiary of the Company as of February 19, 2021.

Pursuant to the Arcturus Purchase Agreement, at the closing of the Arcturus Acquisition, the Company paid approximately $ 431,000,000 (subject to certain customary adjustments and escrow arrangements set forth in the Arcturus Purchase Agreement), financed with a combination of approximately $ 159,000,000 of cash-on-hand, $ 200,000,000 of financing pursuant to the Term Loan Facility, described below, and the issuance of approximately $ 72,000,000 of unregistered, restricted shares of common stock.

On February 19, 2021, the Company closed its acquisition of Arcturus pursuant to the terms of the Arcturus Purchase Agreement.

Arcturus, headquartered in Petaluma, California, designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems.

Pursuant to the Arcturus Purchase Agreement at the closing of the Arcturus Acquisition, the Company paid approximately $ 422,602,000 , net of cash acquired (subject to certain customary adjustments and escrow arrangements set forth in the Arcturus Purchase Agreement), financed with a combination of approximately $ 150,218,000 of cash-on-hand, $ 200,000,000 of financing pursuant to the Term Loan Facility and the issuance of approximately $ 72,384,000 of unregistered, restricted shares of common stock.

As specified in the Arcturus Purchase agreement, the number of shares issued was determined based on a value of $50,000,000 and a calculated average price as of the last business day prior to execution of the Arcturus Purchase Agreement.

The final cash consideration is subject to certain customary adjustments, including for net working capital, cash, debt and unpaid transaction expenses (including change in control related payments triggered by the transaction) of Arcturus UAV at the Arcturus Closing, less $ 6,500,000 to be held in escrow to address final purchase price adjustments post-Arcturus Closing, if any (the “Adjustment Escrow”), and $ 1,822,500 to be held in escrow to address Arcturus UAV’s and/or the Sellers’ indemnification obligations (the “Indemnification Escrow”).

The Adjustment Escrow, less any negative post-Closing adjustment to the cash consideration paid at Closing, is to be released to the Arcturus Sellers upon completion of the post-Arcturus Closing purchase price adjustment process;

the Indemnification Escrow, less any amounts paid or reserved, is to be released to the Arcturus Sellers 12 months following the Arcturus Closing.

To further address potential breaches of Arcturus UAV’s and the Sellers’ representations and warranties beyond the application of the Indemnification Escrow, the Company also obtained representation and warranty insurance policies providing $ 40,000,000 in coverage, subject to customary terms, exclusions and retention amounts.

Due to the timing of the close of the acquisition, the purchase accounting for the business combination is incomplete at the time of this filing.

As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill.

In addition, the Company is unable to provide pro forma revenues and earnings of the combined entity.

All required disclosures will be included in the Company's Annual Report on Form 10-K for the fiscal year quarter ending April 30, 2021.

Credit Facilities

In connection with the consummation of the Arcturus Acquisition on February 19, 2021, the Company, as borrower, and Arcturus UAV, as guarantor, entered into a Credit Agreement with certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S.

Bank National Association, as joint lead arrangers and joint bookrunners (the “Credit Agreement”).

Certain existing letters of credit issued by JPMorgan Chase Bank were reserved for under the Revolving Facility at closing and remain outstanding under the terms thereof.

Upon execution of the Credit Agreement, the Company drew the full principal of the Term Loan Facility for use in the acquisition of Arcturus UAV.

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.

The Credit Facilities provide the Company with a choice of interest rates between (a) LIBOR (with a 0 % floor) plus the Applicable Margin;

In the event of a default, an additional 2 % default interest rate would apply.

Mandatory prepayments are required under the revolving loans when borrowings and letter of credit usage exceed the aggregate revolving commitments of all lenders.

Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested and unpermitted debt transactions.

The Company’s existing and future domestic subsidiaries, including Arcturus UAV (as of the closing of its acquisition by the Company), will be guarantors for the Credit Facilities.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including certain restrictions on the ability of the Company and its Subsidiaries (as defined in the Credit Agreement) to incur any additional indebtedness or guarantee indebtedness of others, to create liens on properties or assets, or to enter into certain asset and stock-based transactions.

Intelligent Systems Group Acquisition

On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation (the “ISG Acquisition”), a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date by and among the Company, Seller and the sole shareholder of Seller (the “Beneficial Owner”).

The final cash consideration is subject to certain customary adjustments, including for net working capital, cash, debt and unpaid transaction expenses (including change in control related payments triggered by the transaction) of Arcturus at the Arcturus closing, less $ 6,500,000 to be held in escrow to address final purchase price adjustments post-Arcturus closing, if any (the “Adjustment Escrow”), and $ 1,822,500 to be held in escrow to address Arcturus’s and/or the Sellers’ indemnification obligations (the “Indemnification Escrow”).

During the three months ended July 31, 2021, the Adjustment Escrow of $ 6,500,000 , less $ 509,000 of post-closing adjustments, was released to the Arcturus Sellers.

To further address potential breaches of Arcturus’s and the Sellers’ representations and warranties beyond the application of the Indemnification Escrow, the Company also obtained representation and warranty insurance policies providing $ 40,000,000 in coverage, subject to customary terms, exclusions and retention amounts.

The following table summarizes the allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the acquisition of Arcturus (in thousands):

Fair value of assets acquired:

Accounts receivable

Unbilled receivable

Inventories, net

Prepaid and other current assets

Property and equipment, net

Operating lease assets

Customer relationships

Total assets acquired

Fair value of liabilities assumed:

Accounts payable

Wages and related accruals

Customer advances

Other current liabilities

Operating lease liabilities

Other non-current liabilities

Deferred income taxes, net

Total liabilities assumed

Total identifiable net assets

Fair value of consideration transferred:

Cash consideration, net of cash acquired

Equity consideration

Total consideration

Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates.

The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s preliminary estimates of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance.

Use of different estimates and judgments could yield materially different results.

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Arcturus and expected future customers in the MUAS market.

For tax purposes the acquisition was treated as a stock purchase and the goodwill is not deductible.

Supplemental Pro Forma Information (unaudited)

The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):

Three Months Ended

Net income attributable to AeroVironment, Inc.

The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.

These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 27, 2019, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2019 with the consequential tax effects, and including the results of Arcturus prior to acquisition.

The Company incurred approximately $ 1,384,000 and $ 0 acquisition-related expenses for the three months ended July 31, 2021 and August 1, 2020, respectively.

These expenses are included in selling, general and administrative expense on the Company’s unaudited consolidated statement of operations.

The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2019, nor are they indicative of results of operations that may occur in the future.

ISG Acquisition

On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, ISG pursuant to the terms of the ISG Purchase Agreement.

ISG is engaged in development of artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services to United States government customers.

In connection with the ISG Acquisition, the Company (i) paid a base purchase price of $ 30,000,000 in cash at closing and (ii) may pay additional cash consideration of up to $ 6,000,000 based on the achievement of certain revenue targets by ISG during the 3 years following closing, in each case, subject to the terms and conditions of the ISG Purchase Agreement, including certain customary adjustments.

In connection with the ISG Acquisition, the Company (i) paid a base purchase price of $ 29,700,000 in cash at closing and (ii) may pay additional cash consideration of up to $ 6,000,000 , which is held in escrow account not controlled by the Company, based on the achievement of certain revenue targets by ISG during the 3 years following closing, in each case, subject to the terms and conditions of the ISG Purchase Agreement, including certain customary adjustments.

As a condition to closing pursuant to the ISG Purchase Agreement, the Company and the ISG Seller entered into certain ancillary agreements, including a transition services agreement and two subleases pursuant to which the ISG Seller will provide the Company certain services and facilities space to accommodate the transition of ISG to the Company.

1 unchanged sentence

To supplement certain indemnifications provided by the ISG Seller, the Company obtained a representation and warranty insurance policy.

Due to the timing of the close of the acquisition, the purchase accounting for the business combination is incomplete at the time of this filing.

In addition, the Company is unable to provide pro forma revenues and earnings of the combined entity.

All required disclosures will be included in the Company's Annual Report on Form 10-K for the fiscal year quarter ending April 30, 2021.

Telerob Acquisition

On December 3, 2020, the Company entered into a Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Telerob Seller (collectively, the “Shareholders”), to purchase 100% of the issued and outstanding shares of Seller’s wholly-owned subsidiary, Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company based in Ostfildern (near Stuttgart), Germany (“Telerob”), including Telerob’s wholly owned subsidiary, Telerob USA, Inc.

(“Telerob USA,” and collectively with Telerob, the “Telerob Group”).

The Telerob Group develops, manufactures, sells, and services remote-controlled ground robots and transport vehicles for civil and defense applications.

Upon closing of the transactions contemplated by the Telerob Purchase Agreement, which is anticipated in the fourth quarter, Telerob will become a wholly-owned subsidiary of the Company.

Pursuant to the Telerob Purchase Agreement, the Company will pay approximately € 37,455,000 (approximately $ 45.4 million) in cash at the closing to the Telerob Seller, subject to certain purchase price adjustments, less (a) € 3,000,000 (approximately $ 3.6 million) to be held in escrow for breaches of the Telerob Seller’s warranties;

(b) transaction-related fees and costs incurred by the Telerob Seller;

and (d) payments to Shareholders or outside the ordinary course of business if made after September 30, 2020.

In addition, at closing the Company will pay off approximately € 7.8 million (approximately $ 9.4 million) of certain indebtedness of the Telerob Group.

This indebtedness may be offset by any cash on hand at the Telerob Group at closing.

The escrow amount is to be released to the Telerob Seller, less any amounts paid or reserved, 30 months following the closing date.

In addition, the Telerob Seller may receive up to a total of € 6,000,000 (approximately $ 7.3 million) in additional cash consideration over a three year period contingent upon the achievement of three distinct milestones.

The first two milestones are the achievement of specific revenue targets and the third milestone is obtaining certain contract awards from the U.S.

The transactions contemplated by the Telerob Purchase Agreement are subject to certain closing conditions, including:

(i) clearance by the German government;

(ii) the accuracy of each party’s warranties (subject to customary materiality qualifiers);

(iii) each party’s compliance with its covenants and agreements contained in the Telerob Purchase Agreement (subject to customary materiality qualifiers);

and (iv) other customary closing conditions.

The following table summarizes the allocation of the purchase price over the estimated fair value of the assets and liabilities assumed in the ISG Acquisition (in thousands):

Fair value of assets acquired:

Customer relationships

Total identifiable net assets

Fair value of consideration transferred:

Contingent consideration

Total consideration

Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates.

Use of different estimates and judgments could yield materially different results.

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers.

For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.

Supplemental Pro Forma Information (unaudited)

The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2019 (in thousands):

Three Months Ended

Net income attributable to AeroVironment, Inc.

The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.

The Company incurred approximately $ 651,000 and $ 0 acquisition-related expenses for the three months ended July 31, 2021 and August 1, 2020, respectively.

These expenses are included in selling, general and administrative expenses on the Company’s unaudited consolidated statement of operations.

The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2019, nor are they indicative of results of operations that may occur in the future.

As part of the Telerob acquisition, the Company acquired a small foreign-based defined benefit pension plan.

The Rheinmetall-Zusatzversorgung (“RZV”) service plan covers three employees based on individual contracts issued to the employees.

No other employees are eligible to participate.

In January 2011, reinsurance policies were taken out, which were pledged to the employees.

The measurement date for the Company’s pension plan was May 3, 2021 in conjunction with the acquisition.

The table below includes the projected benefit obligation and fair value of plan assets as of May 3, 2021.

The net projected benefit obligation (in thousands) is recorded in other non-current liabilities.

Projected benefit obligation

Fair value of plan assets

Unfunded status of the plan

The projected benefit obligation includes assumptions of a discount rate of 1 % and pension increase for in-payment benefits of 1.5 % for May 3, 2021 and July 31, 2021.

The accumulated benefit obligation is approximately equal to our projected benefit obligation.

The plan assets consist of reinsurance policies for each of the three pension commitments.

The reinsurance policies are fixed-income investments considered a level 2 fair value hierarchy based on observable inputs of the policy.

The Company does not expect to make any contributions to the Plan in the fiscal year ending April 30, 2022.

The Company assumed expected return on plan assets of 2.15% for May 3, 2021 and July 31, 2021.

Expected benefits paid as of May 3, 2021 (in thousands):

Total expected benefit payments

Net benefit income (in thousands) is recorded in interest (expense) income, net.

Three Months Ended

(In thousands)

Expected return on plan assets

Interest cost

Foreign currency exchange rate changes

Net benefit income

The Company’s product segments are as follows:

Small Unmanned Aircraft Systems —The Small UAS segment focuses primarily on products designed to operate reliably at very low altitudes in a wide range of environmental conditions, providing a vantage point from which to collect and deliver valuable information as well as related support services including training, spare parts, product repair, product replacement, and the customer contracted operation.

Tactical Missile Systems – The TMS segment focuses primarily on TMS products, which are tube-launched aircraft that deploy with the push of a button, fly at higher speeds than small UAS products, and perform either effects delivery or reconnaissance missions, and related support services including training, spare parts, product repair, and product replacement.

The TMS segment also includes customer funded research and development programs.

Medium Unmanned Aircraft Systems—The MUAS segment, which originates with the acquisition of Arcturus, focuses on designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems including ISR services.

All other—All other segments include HAPS, MacCready Works and the recently acquired ISG and Telerob businesses.

The accounting policies of the segments are the same as those described in Note 1, “Organization and Significant Accounting Policies.” The operating segments do not make sales to each other.

The following table (in thousands) sets forth segment revenue, gross margin, operating (loss) income and adjusted operating (loss) income from operations for the periods indicated.

Adjusted operating (loss) income is defined as operating (loss) income before intangible amortization, amortization of purchase accounting adjustment related to increasing the carrying value of certain assets to fair value, and acquisition related expenses.

Three Months Ended July 31, 2021

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Three Months Ended August 1, 2020

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Segment assets are summarized in the table below.

Corporate assets primarily consist of cash and cash equivalents, short-term investments, prepaid expenses and other current assets, long-term investments, property and equipment, net, operating lease right-of-use assets, deferred income taxes and other assets managed centrally on behalf of the business segments.

July 31, 2021

Identifiable assets

April 30, 2021

Identifiable assets

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 1. Financial Statements