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Item 7. Management’s Discussion and Analysis

2023-06-28 compared with 2022-06-29 · 168 added, 153 removed, 233 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included herein as Item 8.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included herein as Item 8.

This discussion contains forward-looking statements.

Refer to Part I, “Forward-Looking Statements” on page 2 and Part 1A, “Risk Factors” beginning on page 23, for a discussion of the uncertainties, risks and assumptions associated with these statements.

On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us.

We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations.

Therefore, the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.

We design, develop, produce, deliver and support a technologically-advanced portfolio of intelligent, multi-domain robotic systems and related services for government agencies and businesses.

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Additionally, we believe that some of the innovative potential products, services and technologies in our research and development pipeline will emerge as new growth platforms in the future, creating additional market opportunities.

The success of our current products and services stems from our investment in research and development and our ability to invent and deliver advanced solutions, utilizing our proprietary technologies, to help our government and commercial customers operate more effectively and efficiently.

We develop these highly innovative solutions by working closely with our key customers and solving their most important challenges related to our areas of expertise.

Our core technological capabilities, developed through nearly 50 years of innovation, include robotics and robotics systems autonomy;

The success of our current product and service offerings stems from our investments in research and development and to invent and deliver advanced solutions, utilizing proprietary and commercially available technologies, and in acquiring leading businesses that help our customers achieve their desired outcomes.

We develop and acquire these highly innovative solutions by working closely with our key customers to solve their most important challenges related to our areas of expertise.

Our core technological capabilities, developed through more than 50 years of innovation or acquired through acquisitions, include robotics and robotics systems autonomy;

sensor design, development, miniaturization and integration;

embedded software and firmware;

miniature, low power wireless digital communications;

miniature, low power, secure wireless digital communications and networks;

lightweight aerostructures;

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machine vision, machine learning and autonomy;

land, maritime and air deployment of missile and aircraft systems;

design and qualification for robotics in extreme terrestrial and space environments;

miniature internal combustion engine propulsion design and integration;

missile systems warhead integration;

low SWaP (Size, Weight and Power) system design and integration;

manned-unmanned teaming, unmanned-unmanned teaming;

manned-unmanned teaming and unmanned-unmanned teaming;

power electronics and electric propulsion systems;

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human-machine interface development;

and integrated mission solutions for austere environments.

Our business focuses primarily on the design, development, production, marketing, support and operation of innovative UAS and TMS and the delivery of UAS-related services that provide situational awareness, remote sensing, multi-band communications, force protection and other information and mission effects to increase the safety and effectiveness of our customers’ operations.

We generate our revenue primarily from the sale, support, design and operation of our UAS, TMS, HAPS and UGV as well as ISR services by our MUAS.

Support for our small UAS and TMS customers includes training, spare

parts, product repair, product replacement, and the customer-contracted operation of our small UAS by our personnel.

Under ISR services contracts we deliver the information our MUAS produce to our customers, who use that information to support their missions.

We refer to these support activities, in conjunction with customer-funded research and development (“R&D”), as our services operation.

We derive most of our small UAS, MUAS, HAPS and TMS revenue from fixed-price and cost-plus-fee contracts with the U.S.

and integrated mission solutions for austere or extreme environments.

Our business focuses primarily on the design, development, production, marketing, support and operation of innovative UAS, TMS and UGV that provide situational awareness, remote sensing, multi band communications, force protection and other information and mission effects to increase the safety and effectiveness of our customers’ operations.

We generate our revenue primarily from the sale, support, design and operation of our UAS, TMS, HAPS and UGV.

Support for our SUAS and TMS customers includes training, spare parts, product repair, product replacement, and the customer-contracted operation of our MUAS by our personnel.

Under historical ISR services contracts we have delivered the information our MUAS produce to our customers, who use that information to support their missions, however these services are no longer a primary revenue driver.

We refer to these support activities, in conjunction with customer-funded R&D, as our services operation.

We derive most of our SUAS, MUAS, HAPS, and TMS revenue from fixed-price and cost-plus-fee contracts with the U.S.

government and allied foreign governments.

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Direct costs include labor, materials, travel, subcontracts and other costs directly related to the execution of a specific contract.

Indirect costs include overhead expenses, fringe benefits, depreciation of in-service ISR assets, amortization of acquired intangible assets and other costs that are not directly charged to a specific contract.

Indirect costs include overhead expenses, fringe benefits, depreciation of in-service ISR assets, which have been fully depreciated as of April 30, 2023, amortization of acquired intangible assets and other costs that are not directly charged to a specific contract.

Gross margin is equal to revenue minus cost of sales.

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Some SG&A expenses relate to marketing and business development activities that support both ongoing business areas as well as new and emerging market areas.

These activities can be directly associated with developing requirements for and applications of capabilities created in our research and development (“R&D”) activities.

These activities can be directly associated with developing requirements for and applications of capabilities created in our R&D activities.

SG&A is an important financial metric that we analyze to help us evaluate the contribution of our selling, marketing and proposal activities to revenue generation.

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Our R&D activities focus specifically on creating capabilities that support our existing product portfolio as well as new solutions.

Other Income and Expenses

Other income and expenses includes the gain on the sale of our equity interest in HAPSMobile, legal accruals related to our former EES Business, a one-time gain from a litigation settlement, income from transition services performed on behalf of the buyer of the discontinued EES Business, interest income, interest expense, and amortization of capital lease payments.

Income Tax Expense (Benefit)

Our effective tax rates are higher than the statutory rates primarily due to R&D tax credits and excess tax benefit of equity awards.

Equity Method Investment Loss, Net of Tax

Equity method investment loss, net of tax, includes equity method income or loss related to the HAPSMobile joint venture we formed in December 2017 with SoftBank and our investment in a limited partnership fund for which we have concluded we have influence for holding more than a minor interest.

In March 2022, we sold our equity interest in HAPSMobile and will no longer record equity method income (loss) of HAPSMobile.

Loss from Discontinued Operations, Net of Tax

On June 29, 2018, we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us.

We determined that the EES Business met the criteria for classification as an asset held for sale at April 30, 2018 and represented a strategic shift in our operations.

Therefore, the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests includes the 50% interest in the income or losses of our Turkish joint venture, Altoy, as of September 15, 2021 and 15% interest for all prior periods presented.

Impairment of Goodwill

Subsequent to the performance of our annual goodwill impairment test, in May 2023 a trigger event was identified that indicated that the carrying value of the MUAS reporting unit exceeded its fair value.

Specifically, we received notification that we were not down selected for a US DOD program of record which resulted in a significant decrease in the projected future cash flows of the MUAS reporting unit.

As a result we updated our estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations used in the valuation of the MUAS reporting unit.

These changes in estimates, resulted in the recognition of a goodwill impairment charge of $156.0 million.

We determined that it was more likely than not that the fair value of the other reporting units were more than their carrying values as of the annual goodwill impairment test date.

Other (Loss) Income, net

Other expense, net includes unrealized losses associated with decreases in the fair market value for equity security investments, the gain on the sale of our equity interest in HAPSMobile, legal accruals related to our former EES Business, interest income, and interest expense.

(Benefit from) Provision for Income Taxes

Our effective tax rates are lower than the statutory rates primarily due to the R&D tax credits, foreign derived intangible income (FDII) deduction, and excess tax benefit of equity awards in relation to income (loss) before income taxes.

Equity Method Investment (Loss) Income, Net of Tax

Equity method investment (loss) income, net of tax, includes equity method income or loss related to our investment in limited partnership funds for which we have concluded we have influence for holding more than a minor interest.

Beginning October 14, 2022 equity method investment (loss) income, net of tax also includes our proportion of any gains or losses of our Turkish joint venture, Altoy Savunma Sanayi ve Havacilik Anonim Sirketi (“Altoy”), due to our share sale in which we decreased our ownership interest to 15% but concluded we retain significant influence.

As of March 2022, equity method investment (loss) income, net of tax, no longer includes equity method income or loss related the HAPSMobile joint venture we formed in December 2017 with SoftBank as we sold our entire equity interest in HAPSMobile.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests includes the 50% interest in the income or losses of Altoy, between September 15, 2021 and October 14, 2022 and 85% interest for all prior periods presented.

Subsequent to October 14, 2022, Altoy is no longer consolidated, and therefore, noncontrolling interest is no longer recorded.

Critical Accounting Policies and Estimates

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The first of those key factors is that the terms of our contracts are typically less than six months.

The short-term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis of market conditions or other factors.

The short-term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis of market conditions

or other factors.

The second key factor is that we have hundreds of contracts in any given accounting period, which reduces the risk that any one change in an accounting estimate on one or several contracts would have a material impact on our consolidated financial statements.

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A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied.

For contracts with multiple performance obligations, we allocate the contract’s

transaction price to each performance obligation using observable standalone selling prices for similar products and services.

For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using observable standalone selling prices for similar products and services.

When the standalone selling price is not directly observable, we use our best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus reasonable margin approach.

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For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied.

Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts.

Our SUAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of SUAS, MUAS and UGV systems and spare parts, respectively.

Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.

We review cost performance and estimates to complete at least quarterly and in many cases more frequently.

Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur.

The impact of revisions in the estimated costs to complete for contracts using the over time method are recognized on a cumulative catch-up basis in the period in which the revisions are made.

We review cost performance, estimates to complete and variable consideration at least quarterly and in many cases more frequently.

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

Changes in variable consideration associated with the finalization of undefinitized contract actions could result in cumulative catch up adjustments to revenue that could be material.

During the fiscal years ended April 30, 2023, 2022 and 2021, changes in accounting estimates on contracts recognized using the over time method are presented below.

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For the year ended April 30, 2022, favorable cumulative catch up adjustments of $1.3 million were primarily due to final cost adjustments on 19 contracts, which individually were not material.

For the same period, unfavorable

cumulative catch up adjustments of $2.2 million were primarily related to higher than expected costs on nine contracts.

For the same period, unfavorable cumulative catch up adjustments of $2.9 million were primarily related to higher than expected costs on 10 contracts.

During the year ended April 30, 2022, we revised our estimates of the total expected costs to complete a TMS variant contract.

The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.1 million.

For the year ended April 30, 2020, favorable cumulative catch-up adjustments of $2.2 million were primarily due to final cost adjustments on 13 contracts.

During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a design and development agreement.

The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.1 million.

For the same period, unfavorable cumulative catch-up adjustments of $2.0 million were primarily related to higher than expected costs on seven contracts.

During the year ended April 30, 2020, we revised our estimates of the total expected costs to complete a TMS contract.

For the year ended April 30, 2021, favorable cumulative catch up adjustments of $2.0 million were primarily due to final cost adjustments on 12 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 nine contracts.

During the year ended April 30, 2021, we revised our estimates of the total expected costs to complete a TMS variant contract.

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Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits of such assets are consumed.

Due to the closure of all of our MUAS COCO sites during the three months ended April 30, 2023, we revised the estimated useful life for MUAS customer relationships which resulted in accelerated intangible amortization expenses of $34.1 million during the fiscal year ended April 30, 2023.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets.

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Alternatively, we may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test.

If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill

impairment loss to be recognized (if any).

If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).

For the quantitative impairment test we estimate the fair value by weighting the results from the income approach and the market approach.

These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.

Specifically, we received notification that we were not down selected for a US DoD program of record which resulted in a significant decrease in the projected future cash flows of the MUAS reporting unit.

As a result, we updated our estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations used in the valuation of the MUAS reporting unit.

These changes in estimates, resulted in the recognition of a goodwill impairment charge of $156.0 million in the MUAS reporting unit.

Our income tax provision and related income tax assets and liabilities are based on actual and expected future income, U.S.

and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which it operates.

We believe that the accounting estimates related to income taxes are "critical accounting estimates"

because significant judgment is required in interpreting tax regulations in the United States and in foreign jurisdictions, evaluating our worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits.

We believe that the accounting estimates related to income taxes are “critical accounting estimates” because significant judgment is required in interpreting tax regulations in the United States and in foreign jurisdictions, evaluating our worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits.

Actual results could differ materially from those judgments, and changes in judgments could materially affect our consolidated financial statements.

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federal, state, local, and foreign tax positions related primarily to tax credits claimed and tax nexus.

For each reporting period, we apply a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant.

For each reporting period, we apply a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances

Our measurement of our unrecognized tax benefits is based on our assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments.

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Research and development

Impairment of goodwill

(Loss) income from continuing operations

Interest (expense) income, net

Other (expense) income, net

Interest expense, net

Other expense, net

Sale of ownership in HAPSMobile Inc.

joint venture

(Loss) income from continuing operations before income taxes

(Loss) income before income taxes

(Benefit from) provision for income taxes

Equity method investment income (loss), net of tax

Net income from continuing operations

Loss on sale of business, net of tax

Net (income) loss attributable to noncontrolling interest

Net income attributable to AeroVironment, Inc.

The Company operates its business as four reportable segments, small UAS, TMS, MUAS and HAPS.

The small UAS segment consists of our existing small UAS product lines.

Equity method investment (loss) income, net of tax

Net (loss) income

Net income attributable to noncontrolling interest

Net (loss) income attributable to AeroVironment, Inc.

The Company identifies three reportable segments, SUAS, TMS, and MUAS as well as “All other”.

The SUAS segment consists of our existing SUAS product lines.

The TMS segment consists of our existing tactical missile systems product lines.

The MUAS segment consists of our recently acquired Arcturus business.

The HAPS segment consists of our existing development of High Altitude Pseudo-Satellite systems in conjunction with SoftBank.

The segment below entitled “All other” includes MacCready Works, which includes the recently acquired ISG and Telerob businesses.

The MUAS segment consists of the acquired Arcturus business.

“All other” includes HAPS systems, MacCready Works and UGV, the acquired Telerob business.

Effective May 1, 2023, the Company reorganized its product lines into the following segments:

Unmanned Systems segment consisting of SUAS, MUAS and UGV product lines;

Loitering Munition Systems segment, the renamed TMS segment;

and the MacCready Works segment, consisting of the HAPS and the MacCready Works businesses.

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

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

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

Year Ended April 30, 2023

Income (loss) from continuing operations

Income (loss) from operations

Impairment of goodwill and accelerated amortization

Acquisition-related expenses

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Year Ended April 30, 2022

Income (loss) from continuing operations

Income (loss) from operations

Acquisition-related expenses

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Adjusted income (loss) from operations

The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying consolidated statements of operations:

The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying consolidated statements of (loss) income:

Cost of sales:

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Revenue for the fiscal year ended April 30, 2023 was $540.5 million, as compared to $445.7 million for the fiscal year ended April 30, 2022, representing an increase of $94.8 million, or 21%.

The increase in revenue was due to an increase in product revenue of $112.4 million, partially offset by a decrease in service revenue of $17.6 million.

The increase in product revenue was due to increases in SUAS, TMS, MUAS and All other product revenue, primarily driven by increases in UGV product revenue.

The decrease in service revenue was primarily due to a decrease in MUAS service revenue, partially offset by an increase in All other customer-funded R&D, TMS and SUAS service revenue.

We expect the lower levels of MUAS service revenues to continue into fiscal 2024 due to the closure of all of our MUAS COCO operations site locations.

Due to the higher backlog, the increase in the small UAS product revenues as compared to the prior year is expected to continue through the at least first half of the fiscal year ending April 30, 2024.

Cost of Sales.

Cost of sales for the fiscal year ended April 30, 2023 was $367.0 million, as compared to $304.5 million for the fiscal year ended April 30, 2022, representing an increase of $62.5 million, or 21%.

The increase in cost of sales was a result of an increase in product cost of sales of $62.8 million and an increase in service costs of sales of $0.3 million.

The increase in product cost of sales was primarily due to the increase in product revenues.

The increase in service costs of sales was primarily due to accelerated depreciation charges of certain deployed fixed assets related to the closure of all of our MUAS site locations of $11.5 million, largely offset by a decrease in service revenue and a decrease in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the fiscal year ended April 30, 2023 included $14.0 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $18.6 million for the fiscal year ended April 30, 2022.

As a percentage of revenue, cost of sales remained consistent at 68%, with an increase in the proportion of product revenue to total revenues offset by the MUAS accelerated depreciation charges.

Gross Margin.

Gross margin for the fiscal year ended April 30, 2023 was $173.5 million, as compared to $141.2 million for the fiscal year ended April 30, 2022, representing an increase of $32.3 million, or 23%.

The increase in gross margin was due to an increase in product margin of $49.6 million, partially offset by a decrease in service margin of $17.3 million.

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

The decrease in service margin was primarily due to the decrease in service revenue and accelerated depreciation charges of certain deployed fixed assets related to the closure of all of our MUAS site locations of $11.5 million, partially offset by a decrease in intangible amortization expense and other purchase accounting adjustments.

As a percentage of revenue, gross margin remained consistent at 32%, primarily due to an increase in the proportion of product revenue to total revenues offset by the MUAS accelerated depreciation charges.

Selling, General and Administrative.

SG&A expense for the fiscal year ended April 30, 2023 was $131.9 million, or 24% of revenue, as compared to SG&A expense of $96.4 million, or 22% of revenue, for the fiscal year ended April 30, 2022.

The increase in SG&A expense was primarily due to accelerated amortization charges of certain intangibles related to the MUAS segment of $34.1 million and an increase in employee related expenses, partially offset by a decrease in acquisition-related expenses.

SG&A included $50.9 million, inclusive of $34.1 million of MUAS accelerated intangible asset amortization expenses, and $22.9 million of intangible amortization expenses and acquisition-related expenses for the fiscal year ended April 30, 2023 and 2022, respectively.

Research and Development.

R&D expense for the fiscal year ended April 30, 2023 was $64.3 million, or 12% of revenue, as compared to R&D expense of $54.7 million, or 12% of revenue, for the fiscal year ended April 30, 2022.

R&D expense increased by $9.6 million, or 17%, for the fiscal year ended April 30, 2023, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our acquired businesses.

Impairment of Goodwill.

In May 2023 a trigger event was identified that indicated that the carrying value of the MUAS reporting unit exceeded its fair value.

As a result, we updated our estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations used in the valuation of the MUAS reporting unit.

These changes in estimates, resulted in the recognition of a goodwill impairment charge of $156.0 million in the MUAS reporting unit

Interest Expense, net.

Interest expense, net for the fiscal year ended April 30, 2023 was $9.4 million, as compared to interest expense net of $5.4 million for the fiscal year ended April 30, 2022.

The increase in interest expense, net was primarily due to an increase in interest expense resulting from higher interest rates on our debt facility, partially offset by lower average outstanding balances.

Other Expense, net.

Other expense, net for the fiscal year ended April 30, 2023 was $0.3 million, as compared to other expense, net of $10.3 million for the fiscal year ended April 30, 2022.

Other expense, net for the fiscal year ended April 30, 2023 included unrealized losses associated with decreases in the fair market value for equity security investments.

Other expense, net for the fiscal year ended April 30, 2022 included $10.0 million of expense related to the Webasto legal settlement.

Sale of ownership in HAPSMobile Inc.

joint venture.

Sale of ownership in HAPSMobile Inc.

joint venture for the fiscal year ended April 30, 2022 was $6.5 million gain related to the sale of our equity interest in HAPSMobile.

Income Taxes.

Our effective income tax rate was 7.8% for the fiscal year ended April 30, 2023, as compared to 54.2% for the fiscal year ended April 30, 2022.

The decrease in our effective tax rate was primarily due to the loss before income taxes, non-deductible goodwill impairment expense, and foreign-derived intangible income deduction, partially offset by R&D tax credits.

Equity method investment (loss) income, net of tax.

Equity method investment loss, net of tax for the fiscal year ended April 30, 2023 was $(2.5) million, as compared to equity method investment income, net of $4.6 million for the fiscal year ended April 30, 2022.

In March 2022, the Company sold its 7% equity interest in HAPSMobile to SoftBank.

Subsequent to the equity interest sale in HAPSMobile during the three months ended April 30, 2022, equity method investment loss, net of tax relates to activity of the investments in limited partnership funds.

Fiscal Year Ended April 30, 2022 Compared to Fiscal Year Ended April 30, 2021

Revenue for the fiscal year ended April 30, 2022 was $445.7 million, as compared to $394.9 million for the fiscal year ended April 30, 2021, representing an increase of $50.8 million, or 13%.

The increase in revenue was due to an increase in service revenue of $89.0 million, partially offset by a decrease in product revenue of $38.2 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 an increase in customer-funded R&D largely resulting from our acquisition of ISG.

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

The decrease in product revenue was primarily due to decreases in SUAS and TMS product revenue, partially offset by increases in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus.

Cost of Sales.

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The increase in cost of sales was a result of an increase in service cost of sales of $83.3 million, partially offset by a decrease in product costs of sales of $9.1 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 decrease in product costs of sales was primarily due to the decrease in product revenue, unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

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 decrease in product costs of sales was primarily due to the decrease in product

revenue, unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the fiscal year ended April 30, 2022 included $18.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $4.5 million for the fiscal year ended April 30, 2021.

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Selling, General and Administrative.

SG&A expense for the fiscal year ended April 30, 2022 was $96.4 million, or 22% of revenue, compared to SG&A expense of $67.5 million, or 17% of revenue, for the fiscal year ended April 30, 2021.

SG&A expense for the fiscal year ended April 30, 2022 was $96.4 million, or 22% of revenue, as compared to SG&A expense of $67.5 million, or 17% of revenue, for the fiscal year ended April 30, 2021.

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.

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Research and Development.

R&D expense for the fiscal year ended April 30, 2022 was $54.7 million, or 12% of revenue, compared to R&D expense of $53.8 million, or 14% of revenue, for the fiscal year ended April 30, 2021.

R&D expense for the fiscal year ended April 30, 2022 was $54.7 million, or 12% of revenue, as compared to R&D expense of $53.8 million, or 14% of revenue, for the fiscal year ended April 30, 2021.

R&D expense increased by $0.9 million, or 2%, for the fiscal year ended April 30, 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, net.

Interest expense, net for the fiscal year ended April 30, 2022 was $5.4 million, compared to interest expense, net of $0.6 million for the fiscal year ended April 30, 2021.

Interest expense, net for the fiscal year ended April 30, 2022 was $5.4 million, as compared to interest expense, net of $0.6 million for the fiscal year ended April 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.

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Equity method investment income, net of tax for the fiscal year ended April 30, 2022 was $4.6 million, as compared to equity method investment loss, net of $(10.5) million for the fiscal year ended April 30, 2021.

The increase in equity method investment income, net of tax was primarily due to our proportionate share of the income from our limited partnership investment fund for the fiscal year ended April 30, 2022 and a loss of $8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC in the fiscal year ended April 30, 2021.

The increase in equity method investment income, net of tax was primarily due to our

proportionate share of the income from our limited partnership investment fund for the fiscal year ended April 30, 2022 and a loss of $8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC in the fiscal year ended April 30, 2021.

With the sale of our equity interest in HAPSMobile during the fiscal year ended April 30, 2022, no future joint venture equity income or losses for HAPSMobile will be recorded.

Fiscal Year Ended April 30, 2021 Compared to Fiscal Year Ended April 30, 2020

Revenue for the fiscal year ended April 30, 2021 was $394.9 million, as compared to $367.3 million for the fiscal year ended April 30, 2020, representing an increase of $27.6 million, or 8%.

The increase in revenue was due to an increase in product revenue of $22.1 million and an increase in service revenue of $5.5 million.

The increase in product revenue was primarily due to an increase in product deliveries of TMS and small UAS.

The decrease in service revenue was primarily due to a decrease in customer-funded R&D primarily associated with a design and development agreement, partially offset by an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and customer-funded R&D primarily associated with TMS.

Cost of Sales.

Cost of sales for the fiscal year ended April 30, 2021 was $230.4 million, as compared to $214.2 million for the fiscal year ended April 30, 2020, representing an increase of $16.2 million, or 8%.

The increase in cost of sales was a result of an increase in product cost of sales of $10.6 million and an increase in service costs of sales of $5.6 million.

The increase in product costs of sales was primarily due to an increase in product sales.

The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus in February 2021, partially offset by a decrease in service revenues for the HAPS segment.

Cost of sales for fiscal 2021 included $1.7 million and $2.8 million of intangible amortization expense and other related non-cash purchase accounting expense as compared to $2.4 million for the fiscal year ended April 30, 2020.

As a percentage of revenue, cost of sales remained consistent at 58%.

Gross Margin.

Gross margin for the fiscal year ended April 30, 2021 was $164.6 million, as compared to $153.1 million for the fiscal year ended April 30, 2020, representing an increase of $11.5 million, or 7%.

The increase in gross margin was primarily due to an increase in product margin of $11.5 million.

The increase in product gross margin was primarily due to an increase in product sales, partially offset by a decrease in service revenues and a favorable mix.

As a percentage of revenue, gross margin remained consistent at 42%.

Selling, General and Administrative.

SG&A expense for the fiscal year ended April 30, 2021 was $67.5 million, or 17% of revenue, compared to SG&A expense of $59.5 million, or 16% of revenue, for the fiscal year ended April 30, 2020.

The increase in SG&A expense was primarily due to an increase in acquisition related expenses of $6.5 million primarily related to the acquisition of Arcturus, ISG and Telerob and an increase in intangible amortization expense of $2.8 million.

Research and Development.

R&D expense for the fiscal year ended April 30, 2021 was $53.8 million, or 14% of revenue, compared to R&D expense of $46.5 million, or 13% of revenue, for the fiscal year ended April 30, 2020.

R&D expense increased primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines.

Interest (Expense) Income, net.

Interest expense, net for the fiscal year ended April 30, 2021 was $0.6 million, compared to interest income net of $4.8 million for the fiscal year ended April 30, 2020.

The increase in interest expense is primarily due to a combination of a decrease in the average interest rates earned on our investments portfolio and a decrease in the average investment balances and an increase in interest expense of $0.9 million resulting from the term debt issued concurrent with the acquisition of Arcturus.

Other (Expense) Income, net.

Other expense, net for the fiscal year ended April 30, 2021 was $8.3 million, as compared to other income, net of $0.7 million for the fiscal year ended April 30, 2020.

The increase in other expense, net was primarily due to a legal accrual related to our former EES Business.

Income Taxes.

Our effective income tax rate was 1.6% for the fiscal year ended April 30, 2021, as compared to 11.1% for the fiscal year ended April 30, 2020.

The decrease in our effective tax rate was primarily due to the decrease in income before income taxes and an increase in certain federal income tax credits.

Equity method investment loss, net of tax.

Equity method investment loss, net of tax for the fiscal year ended April 30, 2021 was $10.5 million, as compared to equity method investment loss, net of $5.5 million for the fiscal year ended April 30, 2020.

The increase was primarily due to a loss of $8.4 million for our proportionate share of the HAPSMobile joint venture’s impairment of its investment in Loon LLC.

Loss on sale of business, net of tax.

Loss on sale of business, net of tax for the fiscal year ended April 30, 2021 was $0, as compared to $0.3 million for the fiscal year ended April 30, 2020.

The loss on sale of business, net of tax related to the sale of our former EES Business during the fiscal year ended April 30, 2019.

We recorded an adjustment related to a settled working capital dispute during the fiscal year ended April 30, 2020.

Liquidity and Capital Resources

On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement (as amended February 4, 2022, the “Credit Agreement”) for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and (ii) a five-year amortized $200 million term A loan (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”).

On September 8, 2022 we filed an S-3 shelf registration statement to offer and sell shares of our common stock, including a prospectus supplement in relation to an Open Market Sale Agreement SM , also dated September 8, 2022, with Jefferies LLC relating to the proposed offer and sale of shares of our common stock having an aggregate offering price of up to $200.0 million from time to time through Jefferies LLC as our sales agent.

As of April 30, 2023, we have sold 1,109,730 of our shares for total gross proceeds of $108.7 million and $105.4 million proceeds received, net of commission expense and $104.6 million net of equity issuance costs.

We have $91.3 million aggregate offering price remaining available under the registration.

On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement (as amended February 4, 2022 and June 6, 2023, the “Credit Agreement”) for (i) a five-year $100 million revolving credit facility, which includes a $25 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 Credit Facility, the “Credit Facilities”).

The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date.

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Refer to Note 11—Debt to our financial statements for further details.

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

In addition, Telerob has a line of credit of €5.5 million (approximately $6.1 million) available for issuing letters of credit of which €2.8 million (approximately $3.0 million) was outstanding as of April 30, 2023.

The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers.

We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months.

We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the acquisitions and obligations under the Credit Facilities during the next twelve months.

There can be no assurance, however, that our business will continue to generate cash flow at current levels.

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We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services.

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, support our credit facility, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services.

Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control.

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Agreement.

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities and ATM shelf registration are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Agreement.

In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.

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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 ongoing COVID-19 pandemic, we continue to hold a significant portion of our investments in U.S.

government and U.S.

government agency securities.

During the fiscal year ended April 30, 2022, we made certain commitments outside of the ordinary course of business, including capital contribution commitments to a second limited partnership fund.

Under the terms of the new limited partnership agreement, we have committed to make capital contributions to such fund totaling $20.0 million, inclusive of the expected reinvestment of distributions from our existing limited partnership fund, of which $14.2 million was remaining at April 30, 2023.

The contributions are anticipated to be paid over the next five fiscal years.

The remaining $15 million obligation under the legal settlement with Webasto will be paid during the fiscal year ending April 30, 2023.

The remaining contributions are anticipated to be paid over the next four fiscal years.

During the fiscal year ended April 30, 2022, the Telerob Seller earned the second year earnout of €2,000,000 (approximately $2,203,000) which we expect to pay during the first half of our fiscal year ending April 30, 2024.

The following table provides our cash flow data from continuing operations for the periods ended:

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(In thousands)

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Cash (Used in) Provided by Operating Activities.

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Cash Provided by (Used in) Operating Activities.

Net cash provided by operating activities for the fiscal year ended April 30, 2023 increased by $21.0 million to $11.4 million, compared to net cash used in operating activities of $9.6 million for the fiscal year ended April 30, 2022.

This increase in net cash provided by operating activities was primarily due to an increase in non-cash expenses of $199.4 million, primarily due to a goodwill impairment of $156.0 million, an increase in depreciation and amortization, largely due to $34.1 million of accelerated MUAS intangible amortization expenses, losses from equity method investments, inventory reserve and stock based compensation, partially offset by a decrease in deferred income taxes and loss on disposal of property and equipment.

The increase in non-cash expenses was partially offset by an increase in net loss of $172.0 million and an increase in the cash used as a result of changes in operating assets and liabilities largely resulting from increases in accounts receivable and inventory primarily due to year over year timing differences, partially offset by decreases in unbilled receivables and retentions and increases in accounts payable due to year over year timing differences.

Net cash used in operating activities for the fiscal year ended April 30, 2022 increased by $96.2 million to $9.6 million, compared to net cash provided by operating activities of $86.5 million for the fiscal year ended April 30, 2021.

This increase in net cash used in operating activities was primarily due to an increase in the cash used as a result of changes in operating assets and liabilities of $98.5 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, increases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and increases in accounts payable due to year over year timing differences, and an increase in net loss of $27.5 million, partially offset by an increase in non-cash expenses of $29.9 million primarily due to an increase in depreciation and amortization, partially offset by gains from equity method investments.

Net cash provided by operating activities for the fiscal year ended April 30, 2021 increased by $61.4 million to $86.5 million, compared to net cash provided by operating activities of $25.1 million for the fiscal year ended April 30, 2020.

This increase in net cash provided by operating activities was primarily due to an increase in the cash provided as a result of changes in operating assets and liabilities of $66.9 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, partially offset by decreases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and decreases in prepaid expenses and other assets due to year over year timing differences, and an increase in non-cash expenses of $12.5 million primarily due to an increase in depreciation and amortization and loss from equity method investments.

Cash (Used in) Provided by Investing Activities.

Cash Used in Investing Activities.

Net cash used in investing activities decreased by $45.3 million to $7.0 million for the fiscal year ended April 30, 2023, compared to net cash used in investing activities of $52.3 million for the fiscal year ended April 30, 2022.

The decrease in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021,

partially offset by the acquisition of Telerob, net of cash for $46.2 million, and a decrease in purchases of available-for-sale investments of $101.8 million, partially offset by a decrease in redemptions of available-for-sale investments of $110.6 million and an increase in the acquisition of property and equipment of $11.0 million to support our existing and newly acquired businesses.

The decrease in net cash used in investing activities was primarily due to a decrease in business acquisitions, net of cash acquired of $41.0 million, a decrease in net purchases of available-for-sale investments of $12.8 million and a decrease in the acquisition of property and equipment of $7.4 million, partially offset by an increase in equity security investments of $5.1 million, and a decrease in the proceeds from the sale of ownership in equity method investment and from loan repayment of $6.5 million and $4.3 million, respectively.

During the fiscal years ended April 30, 2023 and 2022, we used cash to purchase property and equipment totaling $14.9 million and $22.3 million, respectively.

Net cash used in investing activities increased by $437.9 million to $378.7 million for the fiscal year ended April 30, 2021, compared to net cash provided by investing activities of $59.2 million for the fiscal year ended April 30, 2020.

The increase in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021 and a decrease in redemptions of available-for-sale investments net of purchases.

Net cash used in investing activities decreased by $326.5 million to $52.3 million for the fiscal year ended April 30, 2022, compared to net cash used in investing activities of $378.8 million for the fiscal year ended April 30, 2021.

The decrease in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for $385.6 million in fiscal year ended April 30, 2021, partially offset by the acquisition of Telerob, net of cash for $46.2 million, and a decrease in purchases of available-for-sale investments of $101.8 million, partially offset by a decrease in redemptions of available-for-sale investments of $110.6 million and an increase in the acquisition of property and equipment of $11.0 million to support our existing and newly acquired businesses.

During the fiscal years ended April 30, 2022 and 2021, we used cash to purchase property and equipment totaling $22.3 million and $11.3 million, respectively.

Cash (Used in) Provided by Financing Activities.

Cash Provided by (Used in) Financing Activities.

Net cash provided by financing activities increased by $67.4 million to $50.8 million for the fiscal year ended April 30, 2022, compared to net cash used in financing activities of $16.6 million for the fiscal year ended April 30, 2022.

The increase in net cash provided by financing activities was primarily due to the proceeds from shares issued, net of issuance costs of $104.6 million in the fiscal year ended April 30, 2022 and a decrease in holdback and retention payments of $7.8 million, partially offset by an increase in the principal payments on the debt facility of $45.0 million.

Net cash used in financing activities increased by $210.8 million to $16.6 million for the fiscal year ended April 30, 2022, compared to net cash provided by financing activities of $194.2 million for the fiscal year ended April 30, 2021.

The increase in net cash provided by financing activities was primarily due to the proceeds of long-term debt of $200.0 million in the fiscal year ended April 30, 2021 and the principal payment of the loan in the fiscal year ended April 30, 2022 of $10.0 million.

Net cash provided by financing activities increased by $196.0 million to $194.2 million for the fiscal year ended April 30, 2021, compared to net cash used in financing activities of $1.8 million for the fiscal year ended April 30, 2020.

The increase in net cash provided by financing activities was primarily due to the proceeds of long-term debt of $200.0 million, partially offset by payment of debt issuance costs of $3.9 million.

Contractual Obligations

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Long-term debt obligations

Webasto legal settlement

(1) Consists of all cancelable and non-cancelable purchase orders as of April 30, 2023.

(2) Not included in the table above is an additional capital contribution of $20.0 million committed under the terms of a limited partnership agreement.

(2) Not included in the table above is additional capital contributions of $14.2 million committed under the terms of a limited partnership agreement.

Recently Adopted Accounting Standards

Effective May 1, 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU 2019-12”).

This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, including removing the requirement to limit income tax expense (benefit) in an interim period to the full year projected amounts.

We adopted ASU 2019-12 using the prospective method, applying the new guidance accounting for income taxes after adoption.

The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

New Accounting Standards

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

In October 2021, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”).

ASU 2021-08 requires an acquirer to

apply the guidance in ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted.

ASU 2021-08 is adopted prospectively and could impact future acquisitions.

ASU 2021-08 requires an acquirer to apply the guidance in ASC 606, to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value.

On May 1, 2022, we early adopted ASU 2021-08.

ASU 2021-08 was adopted prospectively and did not have a material impact on our consolidated financial statements.

New Accounting Standards

No recently issued accounting standards are expected to impact the Company.

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-K

Item 7. Management’s Discussion and Analysis