What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-03-04 compared with 2021-12-08 · 112 added, 108 removed, 181 unchanged (55% of the section changed)

32 unchanged sentences

The impact of revisions in estimate of completion for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made.

During the three and six months ended October 30, 2021 and October 31, 2020, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended October 30, 2021 and October 31, 2020, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

During the three and nine months ended January 29, 2022 and January 30, 2021, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Three Months Ended

2 unchanged sentences

Net (unfavorable) favorable adjustments

For the three months ended October 30, 2021, favorable cumulative catch-up adjustments of $0.3 million were primarily due to final cost adjustments on six contracts, which individually were not material.

For the three months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.1 million were primarily due to final cost adjustments on six contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $1.7 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.

For the three months ended October 31, 2020, favorable cumulative catch-up adjustments of $1.1 million were primarily due to final cost adjustments on nine contracts, which individually were not material.

For the three months ended January 30, 2021, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on nine contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 12 contracts, which individually were not material.

For the six months ended October 30, 2021 and October 31, 2020, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Six Months Ended

For the nine months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Nine Months Ended

Gross favorable adjustments

1 unchanged sentence

Net (unfavorable) favorable adjustments

For the six months ended October 30, 2021, favorable cumulative catch-up adjustments of $0.9 million were primarily due to final cost adjustments on 18 contracts, which individually were not material.

For the nine months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.2 million were primarily due to final cost adjustments on 18 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $2.2 million were primarily related to higher than expected costs on 15 contracts, which individually were not material.

For the six months ended October 31, 2020, favorable cumulative catch-up adjustments of $1.5 million were primarily due to final cost adjustments on 13 contracts, which individually were not material.

For the nine months ended January 30, 2021, favorable cumulative catch-up adjustments of $1.9 million were primarily due to final cost adjustments on 15 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on 23 contracts, which individually were not material.

6 unchanged sentences

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

Three Months Ended October 30, 2021 Compared to Three Months Ended October 31, 2020

Three Months Ended January 29, 2022 Compared to Three Months Ended January 30, 2021

Three Months Ended

2 unchanged sentences

Research and development

Income from operations

Loss from operations

Other (loss) income:

Interest (expense) income, net

Other (expense) income, net

Income before income taxes

(Benefit from) provision for income taxes

Equity method investment loss, net of tax

Other income (expense), net

Loss before income taxes

Benefit from income taxes

Equity method investment income (loss), net of tax

Net (loss) income

We operate the business as three reportable segments, Small Unmanned Aircraft Systems (“Small UAS”), Tactical Missile Systems (“TMS”) and Medium Unmanned Aircraft Systems (“MUAS”).

5 unchanged sentences

Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.

Three Months Ended October 30, 2021

Three Months Ended January 29, 2022

Income (loss) from operations

2 unchanged sentences

Adjusted income (loss) from operations

Three Months Ended October 31, 2020

Three Months Ended January 30, 2021

Income (loss) from operations

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of sales:

2 unchanged sentences

Selling, general and administrative

Revenue for the three months ended October 30, 2021 was $122.0 million, as compared to $92.7 million for the three months ended October 31, 2020, representing an increase of $29.3 million, or 32%.

The increase in revenue was due to an increase in service revenue of $23.9 million and an increase in product revenue of $5.5 million.

The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, partially offset by a decrease in TMS service revenue.

The increase in product revenue was primarily due to an increases in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus, respectively, partially offset by a decrease in small UAS product revenue.

Revenue for the three months ended January 29, 2022 was $90.1 million, as compared to $78.8 million for the three months ended January 30, 2021, representing an increase of $11.3 million, or 14%.

The increase in revenue was due to an increase in service revenue of $27.1 million, partially offset by a decrease in product revenue of $15.7 million.

The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021 and increases in revenue from customer-funded research and development efforts, partially offset by a decrease in TMS service revenue.

The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset by an increases in UGV product revenue, resulting from our acquisitions of Telerob.

Cost of Sales.

Cost of sales for the three months ended October 30, 2021 was $79.6 million, as compared to $51.8 million for the three months ended October 31, 2020, representing an increase of $27.7 million, or 54%.

The increase in cost of sales was a result of an increase in service cost of sales of $23.0 million and an increase in product costs of sales of $4.7 million.

Cost of sales for the three months ended January 29, 2022 was $68.7 million, as compared to $50.1 million for the three months ended January 30, 2021, representing an increase of $18.5 million, or 37%.

The increase in cost of sales was a result of an increase in service cost of sales of $25.0 million, partially offset by a decrease in product costs of sales of $6.5 million.

The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments.

The increase in product costs of sales was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments, an increase in product revenue and an unfavorable product mix.

Cost of sales for the three months ended October 30, 2021 included $5.5 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $0.7 million for the three months ended October 31, 2020.

As a percentage of revenue, cost of sales increased from 56% to 65%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

The decrease in product costs of sales was primarily due to a decrease in product revenue and an unfavorable product mix, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the three months ended January 29, 2022 included $5.1 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $0.6 million for the three months ended January 30, 2021.

As a percentage of revenue, cost of sales increased from 64% to 76%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Gross Margin.

Gross margin for the three months ended October 30, 2021 was $42.5 million, as compared to $40.9 million for the three months ended October 31, 2020, representing an increase of $1.6 million, or 4%.

The increase in gross margin was due to an increase in service margin of $0.9 million and an increase in product margin of $0.7 million.

The increase in product margin was primarily due to the increase in product sales, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix.

Gross margin for the three months ended January 29, 2022 was $21.4 million, as compared to $28.6 million for the three months ended January 30, 2021, representing a decrease of $7.2 million, or 25%.

The decrease in gross margin was due to a decrease in product margin of $9.3 million, partially offset by an increase in service margin of $2.1 million.

The decrease in product margin was primarily due to the decrease in product sales, an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix.

The increase in service margin was primarily due to an increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

As a percentage of revenue, gross margin decreased from 44% to 35%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting

adjustments, and an unfavorable product mix.

With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally have lower gross margins than our product sales, in future quarters as compared to our historical trends in future quarters.

As a percentage of revenue, gross margin decreased

from 36% to 24%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally has lower gross margins than our product sales, in future quarters as compared to our historical trends.

Selling, General and Administrative .

SG&A expense for the three months ended October 30, 2021 was $24.8 million, or 20% of revenue, as compared to SG&A expense of $15.0 million, or 16% of revenue, for the three months ended October 31, 2020.

The increase in SG&A expense was primarily due to an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions and an increase in intangible amortization and acquisition related expenses, partially offset by a decrease in bonus and equity based compensation expense.

SG&A included $5.7 million and $0.4 million of acquisition-related expenses and intangible amortization expenses for the three months ended October 30, 2021 and October 31, 2020, respectively.

SG&A expense for the three months ended January 29, 2022 was $22.5 million, or 25% of revenue, as compared to SG&A expense of $15.7 million, or 20% of revenue, for the three months ended January 30, 2021.

The increase in SG&A expense was primarily due to an increase in intangible amortization and acquisition related expenses and an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions, partially offset by a decrease in bonus and equity based compensation expense.

SG&A included $4.8 million and $3.5 million of acquisition-related expenses and intangible amortization expenses for the three months ended January 29, 2022 and January 30, 2021, respectively.

Research and Development.

R&D expense for the three months ended October 30, 2021 was $14.3 million, or 12% of revenue, as compared to R&D expense of $12.0 million, or 13% of revenue, for the three months ended October 31, 2020.

R&D expense increased by $2.3 million, or 19%, for the three months ended October 30, 2021, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

R&D expense for the three months ended January 29, 2022 was $13.0 million, or 14% of revenue, as compared to R&D expense of $13.6 million, or 17% of revenue, for the three months ended January 30, 2021.

R&D expense decreased by $0.6 million, or 5%, for the three months ended January 29, 2022, primarily due to a decrease in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

Interest (Expense) Income, net.

Interest expense, net for the three months ended October 30, 2021 was $1.4 million compared to interest income, net of $0.1 million for the three months ended October 31, 2020.

Interest expense, net for the three months ended January 29, 2022 was $1.5 million compared to interest income, net of $0.1 million for the three months ended January 30, 2021.

The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.

Other (Expense) Income, net.

Other expense, net, for the three months ended October 30, 2021 was $10.0 million compared to other income, net of $0.1 million for the three months ended October 31, 2020.

The increase was due to an additional legal accrual of $10.0 million for the expected settlement of all claims made by the buyers of our former EES business.

(Benefit from) Provision for Income Taxes.

Our effective income tax rate was 117.6% for the three months ended October 30, 2021, as compared to 17.7% for the three months ended October 31, 2020.

The increase in the effective income tax rate was primarily due to a change in estimate during the current quarter to reduce projected annual income (loss) before income taxes, combined with the year over year decrease in projected annual income (loss) before income taxes.

Other Income (Expense), net.

Other income, net, for the three months ended January 29, 2022 was $34 thousand compared to other expense, net of $37 thousand for the three months ended January 30, 2021.

Benefit from Income Taxes.

Our effective income tax rate was 98.7% for the three months ended January 29, 2022, as compared to 157.9% for the three months ended January 30, 2021.

The decrease in the effective income tax rate was primarily due to a change in estimate during the current quarter to reduce projected annual income (loss) before income taxes, combined with the year over year decrease in projected annual income (loss) before income taxes.

Equity Method Investment Income (Loss), net of Tax.

Equity method investment income, net of tax for the three months ended October 30, 2021 was $1.1 million compared to equity method investment loss, net of tax of $9.5 million for the three months ended October 31, 2020.

The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC during the three months ended October 31, 2020.

The equity method investment income during the current quarter was due to an increase in our limited partnership investment.

Six Months Ended October 30, 2021 Compared to Six Months Ended October 31, 2020

Six Months Ended

Equity method investment income, net of tax for the three months ended January 29, 2022 was $0.2 million compared to a loss of $(0.1) million for the three months ended January 30, 2021.

The equity method investment income during the current quarter was due to an increase in income from our limited partnership investment.

Nine Months Ended January 29, 2022 Compared to Nine Months Ended January 30, 2021

Nine Months Ended

Cost of sales

7 unchanged sentences

(Benefit from) provision for income taxes

Equity method investment loss, net of tax

Equity method investment income (loss), net of tax

Net (loss) income

1 unchanged sentence

Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.

Six Months Ended October 30, 2021

Nine Months Ended January 29, 2022

Income (loss) from operations

2 unchanged sentences

Adjusted income (loss) from operations

Six Months Ended October 31, 2020

Nine Months Ended January 30, 2021

Income (loss) from operations

2 unchanged sentences

Adjusted income (loss) from operations

Revenue for the six months ended October 30, 2021 was $223.0 million, as compared to $180.1 million for the six months ended October 31, 2020, representing an increase of $42.9 million, or 24%.

The increase in revenue was due to an increase in service revenue of $42.7 million and an increase in product revenue of $0.2 million.

The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and small UAS service revenue, partially offset by a decrease in HAPS service revenue.

The increase in product revenue was primarily due to an increase in TMS revenue, an increase in UGV and MUAS product revenue,

resulting from our acquisitions of Telerob and Arcturus, respectively, partially offset by a decrease in small UAS product revenue.

Revenue for the nine months ended January 29, 2022 was $313.1 million, as compared to $258.9 million for the nine months ended January 30, 2021, representing an increase of $54.2 million, or 21%.

The increase in revenue was due to an increase in service revenue of $69.7 million, partially offset by a decrease in product revenue of $15.5 million.

The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset

by an increase in TMS revenue, an increase in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus, respectively.

Cost of Sales.

Cost of sales for the six months ended October 30, 2021 was $151.8 million, as compared to $103.9 million for the six months ended October 31, 2020, representing an increase of $48.0 million, or 46%.

The increase in cost of sales was a result of an increase in service cost of sales of $42.8 million and an increase in product costs of sales of $5.2 million.

Cost of sales for the nine months ended January 29, 2022 was $220.5 million, as compared to $154.0 million for the nine months ended January 30, 2021, representing an increase of $66.5 million, or 43%.

The increase in cost of sales was a result of an increase in service cost of sales of $67.7 million, partially offset by a decrease in product costs of sales of $1.2 million.

The increase in product costs of sales was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix.

Cost of sales for the six months ended October 30, 2021 included $9.5 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $1.3 million for the six months ended October 31, 2020.

The decrease in product costs of sales was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the nine months ended January 29, 2022 included $14.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $1.9 million for the nine months ended January 30, 2021.

As a percentage of revenue, cost of sales increased from 59% to 70%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Gross Margin.

Gross margin for the six months ended October 30, 2021 was $71.2 million, as compared to $76.3 million for the six months ended October 31, 2020, representing a decrease of $5.1 million, or 7%.

The decrease in gross margin was due to a decrease in product margin of $5.0 million and a decrease in service margin of $0.1 million.

The decrease in product margin was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix.

The decrease in service margin was primarily due to an increase in intangible amortization expense and other purchase accounting adjustments, partially offset by the increase in service revenue.

Gross margin for the nine months ended January 29, 2022 was $92.6 million, as compared to $104.9 million for the nine months ended January 30, 2021, representing a decrease of $12.3 million, or 12%.

The decrease in gross margin was due to a decrease in product margin of $14.3 million, partially offset by an increase in service margin of $2.0 million.

The decrease in product margin was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

The increase in service margin was primarily due to the increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

As a percentage of revenue, gross margin decreased from 41% to 30%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Selling, General and Administrative .

SG&A expense for the six months ended October 30, 2021 was $51.9 million, or 23% of revenue, as compared to SG&A expense of $27.0 million, or 15% of revenue, for the six months ended October 31, 2020.

SG&A expense for the nine months ended January 29, 2022 was $74.5 million, or 24% of revenue, as compared to SG&A expense of $42.6 million, or 16% of revenue, for the nine months ended January 30, 2021.

SG&A included $14.0 million and $0.5 million of acquisition-related expenses and intangible amortization expenses for the six months ended October 30, 2021 and October 31, 2020, respectively.

SG&A included $19.3 million and $3.9 million of acquisition-related expenses and intangible amortization expenses for the nine months ended January 29, 2022 and January 30, 2021, respectively.

Research and Development.

R&D expense for the six months ended October 30, 2021 was $28.0 million, or 13% of revenue, as compared to R&D expense of $23.1 million, or 13% of revenue, for the six months ended October 31, 2020.

R&D expense increased by $4.9 million, or 21%, for the six months ended October 30, 2021, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

R&D expense for the nine months ended January 29, 2022 was $41.0 million, or 13% of revenue, as compared to R&D expense of $36.7 million, or 14% of revenue, for the nine months ended January 30, 2021.

R&D expense increased by $4.3 million, or 12%, for the nine months ended January 29, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

Interest (Expense) Income, net.

Interest expense, net for the six months ended October 30, 2021 was $2.7 million compared to interest income, net of $0.3 million for the six months ended October 31, 2020.

Interest expense, net for the nine months ended January 29, 2022 was $4.2 million compared to interest income, net of $0.4 million for the nine months ended January 30, 2021.

The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.

Other (Expense) Income, net.

Other expense, net, for the six months ended October 30, 2021 was $10.4 million compared to other income, net of $0.1 million for the six months ended October 31, 2020.

The increase was due to an additional legal accrual of $10.0 million for the expected settlement of all claims made by the buyers of our former EES business.

Other expense, net, for the nine months ended January 29, 2022 was $10.4 million compared to other income, net of $0.1 million for the nine months ended January 30, 2021.

The increase was due to an additional legal accrual of $10.0 million associated with the settlement of all claims made by the buyers of our former EES business.

(Benefit from) Provision for Income Taxes.

Our effective income tax rate was 48.0% for the six months ended October 30, 2021, as compared to a provision for 13.9% for the six months ended October 31, 2020.

The increase in the effective

income tax rate was primarily due to lower projected annual income (loss) before income taxes in the current fiscal year as compared to the prior fiscal year.

Equity Method Investment Loss, net of Tax.

Equity method investment loss, net of tax for the six months ended October 30, 2021 was $8 thousand compared to $10.8 million for the six months ended October 31, 2020.

The decrease was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC during the three months ended October 31, 2020.

During the six months ended October 30, 2021 equity method losses from HAPSMobile were largely offset by equity method income from our limited partnership investment.

Our effective income tax rate was 69.1% for the nine months ended January 29, 2022, as compared to a provision for 10.7% for the nine months ended January 30, 2021.

The increase in the

effective income tax rate was primarily due to lower projected annual income (loss) before income taxes in the current fiscal year as compared to the prior fiscal year.

Equity Method Investment Income (Loss), net of Tax.

Equity method investment income, net of tax for the nine months ended January 29, 2022 was $0.2 million compared to equity method investment loss, net of tax of $10.9 million for the nine months ended January 30, 2021.

The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC during the three months ended October 31, 2020.

During the nine months ended January 29, 2022 equity method income from our limited partnership investment were largely offset by equity method losses from HAPSMobile.

Consistent with ASC 606, we define funded backlog as remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract.

As of October 30, 2021, our funded backlog was approximately $252.0 million.

In addition to our funded backlog, we also had unfunded backlog of $155.1 million as of October 30, 2021.

As of January 29, 2022, our funded backlog was approximately $226.3 million.

In addition to our funded backlog, we also had unfunded backlog of $143.4 million as of January 29, 2022.

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

17 unchanged sentences

Refer to Note 10—Debt to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

In addition, Telerob has a line of credit of €5.5 million available for issuing letters of credit of which €1.6 million ($1.8 million) was outstanding as of October 30, 2021.

In addition, Telerob has a line of credit of €5.5 million available for issuing letters of credit of which €1.6 million ($1.8 million) was outstanding as of January 29, 2022.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants.

Based upon our revised projections, there is a substantial risk that we may be required to make a prepayment to reduce the outstanding balance of our Term Loan Facility or to obtain an amendment to the Credit Agreement to remain in compliance with all of the financial covenants in the Credit Agreement during the fiscal quarter ending January 29, 2022.

We currently estimate the range of the potentially required prepayment to be $50 million to $60 million.

We are in discussions with the lenders regarding obtaining an amendment to the Credit Agreement to allow us to remain in compliance with the financial covenants;

however, if we are not able to obtain such an amendment to the Credit Agreement, we have both the ability and intent to make any required prepayment.

We expect to be in compliance with all financial covenants under the terms of our Credit Agreement, including any amendment to such agreement, during the quarter ending April 30, 2022 regardless of whether a required prepayment is made or loan amendment is obtained.

On February 4, 2022, the Company entered into a First Amendment to Credit Agreement and Waiver relating to its existing Credit Agreement (the “First Amendment to Credit Agreement”).

The First Amendment to Credit Agreement waives any event of default that may have occurred as a result of the potential failure by the Company to comply with the consolidated leverage ratio covenant set forth in the agreement for the Credit Facilities for the fiscal quarter ended January 29, 2022.

In addition, the parties amended the maximum permitted Consolidated Leverage Ratio, such that such ratio may not exceed 4.00 to 1.00 for the Company’s fiscal quarters ended January 29, 2022 and April 30, 2022;

3.50 to 1.00 for any of the Company’s fiscal quarters ending during the period from May 1, 2022 to October 31, 2022;

and 3.00 to 1.00 for any fiscal quarter ending thereafter, and adjusted various supporting definitions for clarity.

The First Amendment to Credit Agreement also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from LIBOR as a reference interest rate.

We expect to be in compliance with all financial covenants under the terms of our Credit Agreement, including the First Amendment, during the quarter ending April 30, 2022.

We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities, including those provided by our recent acquisitions of Arcturus UAV, ISG and Telerob.

10 unchanged sentences

On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal.

On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.

On fixed-price contracts, we

typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.

To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources.

However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.

In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents and municipal securities.

In December 2021, we agreed in principle subject to formal written documentation with Webasto to settle all existing claims related to the sale of our former EES business for $20 million and allowing Webasto to keep the holdback amount.

Under the terms of the expected settlement agreement, payment of the settlement amount will occur over a 24 month period after the execution of the settlement agreement.

In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents.

Under the terms of the settlement agreement entered into effective December 16, 2021, payment of the settlement amount will occur over a 24 month period from the date of execution of the settlement agreement.

As of January 29, 2022, $5 million of the settlement has been paid.

Although not material in value alone or in aggregate, we made certain commitments outside of the ordinary course of business.

We made commitments for capital contributions to a limited partnership fund.

Under the terms of the limited partnership agreement, we have committed to make capital contributions totaling $10.0 million to the fund of which $0.6 million was remaining at October 30, 2021.

Under the terms of the limited partnership agreement, we have made all of the committed contributions totaling $10.0 million to the fund at January 29, 2022.

We also made commitments to lend HAPSMobile funds to continue the development of Solar HAPS.

The Company committed to and lent 500 million yen ($4.6 million) as of October 30, 2021.

As of October 30, 2021, there are no further lending commitments to HAPSMobile.

Under the terms of the agreement the loans are guaranteed and will be repaid when financing is obtained, or by Softbank.

We currently anticipate repayment of all amounts loaned to HAPS within the fiscal year ended April 30, 2022.

The following table provides our cash flow data for the six months ended October 30, 2021 and October 31, 2020 (in thousands):

Six Months Ended

The Company committed to and lent 500 million yen ($4.6 million) as of January 29, 2022.

As of January 29, 2022, there are no further lending commitments to HAPSMobile.

On March 1, 2022, HAPSMobile repaid the loan in full plus accrued interest in the amount of 503.8 million yen ($4.3 million).

The following table provides our cash flow data for the nine months ended January 29, 2022 and January 30, 2021 (in thousands):

Nine Months Ended

Net cash (used in) provided by operating activities

2 unchanged sentences

Cash (Used in) Provided by Operating Activities.

Net cash used in operating activities for the six months ended October 30, 2021 increased by $61.9 million to $3.3 million, as compared to net cash provided by operating activities of $58.6 million for the six months ended October 31, 2020.

The increase in net cash used in operating activities was primarily due to a decrease in net income of $23.5 million and a decrease in cash as a result of changes in operating assets and liabilities of $55.2 million, largely related to accounts receivable and unbilled retentions and receivables due to year over year timing differences and income taxes receivable, partially offset by an increase in depreciation and amortization of $24.3 million.

Net cash used in operating activities for the nine months ended January 29, 2022 increased by $102.1 million to $23.1 million, as compared to net cash provided by operating activities of $79.0 million for the nine months ended January 30, 2021.

The increase in net cash used in operating activities was primarily due to a decrease in net income of $23.8 million and a decrease in cash as a result of changes in operating assets and liabilities of $112.5 million, largely related to accounts receivable, unbilled retentions and receivables, income taxes receivable and inventories due to year over year timing differences, partially offset by an increase in depreciation and amortization of $39.0 million.

Cash Used in Investing Activities.

Net cash used in investing activities increased by $2.8 million to $34.8 million for the six months ended October 30, 2021, as compared to net cash used by investing activities of $31.9 million for the six months ended October 31, 2020.

Net cash used in investing activities increased by $30.8 million to $37.0 million for the nine months ended January 29, 2022, as compared to net cash used by investing activities of $6.2 million for the nine months ended January 30, 2021.

The increase in net cash used in investing activities was primarily due an increase in cash used for the acquisition of Telerob of $46.2 million and a decrease in redemptions of available-for-sale investments of $94.2 million, partially offset by a decrease in purchases of available-for-sale investments of $122.7 million.

Cash Used in Financing Activities.

Net cash used in financing activities increased by $10.4 million to $12.1 million for the six months ended October 30, 2021, as compared to net cash used by financing activities of $1.7 million for the six months ended October 31, 2020.

The increase in net cash used by financing activities was primarily due to an increase in holdback and retention payments related to a prior business acquisition of $6.0 million and an increase in payments of loan principal of $5.0 million.

Net cash used in financing activities increased by $8.6 million to $11.9 million for the nine months ended January 29, 2022, as compared to net cash used by financing activities of $3.4 million for the nine months ended January 30, 2021.

The increase in net cash used by financing activities was primarily due to an increase in payments of loan principal of $7.5 million and an increase in holdback and retention payments related to business acquisitions of $4.5 million.

Contractual Obligations

During the three and six months ended October 30, 2021, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.

During the three and nine months ended January 29, 2022, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.

Off-Balance Sheet Arrangements

As of October 30, 2021, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

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

As of January 29, 2022, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

Our operations have not been materially affected by inflation.

Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.

As it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we cannot assure you that our results of operations and financial condition will not be materially impacted by inflation in the future.

See Part II, Item 1A “Risk Factors” below – “Significant inflation could adversely affect our business and financial results.”

New Accounting Standards

Please refer to Note 1—Organization and Significant Accounting Policies to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the six months ended October 30, 2021.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

12 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis