What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-03-05 compared with 2023-12-06 · 208 added, 143 removed, 172 unchanged (67% of the section changed)

8 unchanged sentences

Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The following should be read in conjunction with the critical accounting estimates presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

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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 three and six months ended October 28, 2023 and October 29, 2022, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended October 28, 2023 and October 29, 2022, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

During the three and nine months ended January 27, 2024 and January 28, 2023, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended January 27, 2024 and January 28, 2023, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Three Months Ended

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Net favorable adjustments

For the three months ended October 28, 2023, favorable cumulative catch-up adjustments of $4.1 million were primarily due to final cost adjustments on seven contracts.

During the three months ended October 28, 2023, we revised our estimates of the total expected costs to complete an LMS variant contract.

For the three months ended January 27, 2024, favorable cumulative catch-up adjustments of $4.5 million were primarily due to final cost adjustments on three contracts.

During the three months ended January 27, 2024, we revised our estimates to reflect a favorable definitization of an LMS contract.

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 $3.6 million.

For the same period, unfavorable cumulative catch-up adjustments of $0.1 million were primarily related to higher than expected costs on three contracts, which individually were not material.

For the three months ended January 28, 2023, favorable cumulative catch-up adjustments of $1.7 million were primarily due to final cost adjustments on 11 contracts.

For the same period, unfavorable cumulative catch-up adjustments of $0.9 million were primarily related to higher than expected costs on seven contracts, which individually were not material.

For the three months ended October 29, 2022, favorable cumulative catch-up adjustments of $2.6 million were primarily due to final cost adjustments on eight contracts.

During the three months ended October 29, 2022, we revised our estimates of the total expected costs to complete an LMS variant contract.

For the same period, unfavorable cumulative catch-up adjustments of $1.5 million were primarily related to higher than expected costs on six contracts, which individually were not material.

Also during the three months ended October 29, 2022, the Company recognized forward loss reserves on three MUAS ISR contracts totaling $2.3 million related to unfavorable changes in the estimated costs to complete the contracts.

The company recorded the forward loss reserves as the total estimated costs to complete the contracts are in excess of the total remaining consideration of the contracts.

The aggregate impact of the change in estimate decreased net income by $1.5 million and diluted loss per share by $0.06.

For the six months ended October 28, 2023 and October 29, 2022, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Six Months Ended

Also during the three months ended January 28, 2023, we recognized a decrease in the forward loss reserves on two MUAS ISR contracts of $2.4 million and an increase in the forward loss reserve of an MUAS products contract of $1.6 million.

For the nine months ended January 27, 2024 and January 28, 2023, 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 favorable (unfavorable) adjustments

For the six months ended October 28, 2023, favorable cumulative catch-up adjustments of $5.6 million were primarily due to final cost adjustments on 10 contracts.

During the six months ended October 28, 2023, we revised our estimates of the total expected costs to complete an LMS variant contract.

For the nine months ended January 27, 2024, favorable cumulative catch-up adjustments of $6.5 million were primarily due to final cost adjustments on 17 contracts.

During the nine months ended January 27, 2024, we revised our estimates of the total expected costs to complete an LMS contract.

For the same period, unfavorable cumulative catch-up adjustments of $2.0 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.

For the six months ended October 29, 2022, favorable cumulative catch-up adjustments of $2.0 million were primarily due to final cost adjustments on 20 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $3.4 million were primarily related to higher than expected costs on four contracts.

During the six months ended October 29, 2022, we revised our estimates of the total expected costs to complete two LMS variant contracts.

For the same period, unfavorable cumulative catch-up adjustments of $1.5 million were primarily related to higher than expected costs on eight contracts, which individually were not material.

For the nine months ended January 28, 2023, favorable cumulative catch-up adjustments of $2.3 million were primarily due to final cost adjustments on 22 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $3.7 million were primarily related to higher than expected costs on six contracts.

During the nine months ended January 28, 2023, we revised our estimates of the total expected costs to complete two LMS variant contracts.

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 $2.4 million.

Also during the six months ended October 29, 2022, the Company recognized forward loss reserves on three MUAS ISR contracts totaling $2.3 million related to unfavorable changes in the estimated costs to complete the contracts.

The company recorded the forward loss reserves as the total estimated costs to complete the contracts are in excess of the total remaining consideration of the contracts.

The aggregate impact of the change in estimate decreased net income by $1.5 million and diluted loss per share by $0.06.

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

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Specifically, we received notification that we were not down selected for a U.S.

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.

Department of Defense (“D.o.D.”)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 profitability 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 during the fiscal year ended April 30, 2023.

Our MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests as an impairment was recorded during the most recent annual goodwill impairment test performed during the fourth quarter ended April 30, 2023.

As of October 28, 2023, we have not identified any events or circumstances that could trigger an impairment review prior to the Company’s annual impairment test.

The intangibles included in the MUAS reporting unit of $15.7 million as of October 28, 2023 will also be evaluated for potential impairment during the fourth quarter goodwill impairment test.

As of January 27, 2024 our MUAS reporting unit has a goodwill balance of $134.1 million.

The estimated fair value of the MUAS reporting unit does not substantially exceed its carrying value due to the impairment recorded during the most recent annual goodwill impairment test performed during the fourth quarter ended April 30, 2023, resulting in carrying value being equal to estimated fair value.

Fair value determinations utilized in the quantitative goodwill impairment test require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.

Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding future plans, as well as industry, economic, and regulatory conditions.

These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors.

Estimated future annual net cash flows based in part upon our ability to obtain contracts from the U.S.

and foreign allied nations and negotiate the estimated pricing are considered the most significant, sensitive assumptions.

If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to long-term operating plans, then MUAS may become impaired in the future.

Accordingly, the MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests.

The intangibles included in the MUAS reporting unit of $14.6 million as of January 27, 2024 will also be evaluated for potential impairment during the fourth quarter goodwill impairment test.

During the most recent annual impairment test during the fourth quarter of fiscal year 2023, the estimated fair value of all reporting units, other than MUAS, substantially exceeded their carrying value.

As of January 27, 2024, we have not identified any events or circumstances that could trigger an impairment review prior to the Company’s annual impairment test.

The estimates and assumptions used to determine the fair value of our reporting units are highly subjective in nature.

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

Three Months Ended October 28, 2023 Compared to Three Months Ended October 29, 2022

Three Months Ended January 27, 2024 Compared to Three Months Ended January 28, 2023

Three Months Ended

2 unchanged sentences

Research and development

Income (loss) from operations

Other (loss) income:

Income from operations

Other income (loss):

Interest expense, net

Other (expense) income, net

Other income (expense), net

Income (loss) before income taxes

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We have identified three reportable segments, Unmanned Systems (“UMS”), Loitering Munitions Systems (“LMS”) and MacCready Works (“MW”).

The UMS segment consists of our small UAS, including our recent Tomahawk acquisition,

medium UAS and UGV product lines.

The UMS segment consists of our small UAS, including our recent Tomahawk acquisition, medium UAS and UGV product lines.

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

The MW segment consists of our MacCready Works products and services and the development of High Altitude Pseudo-Satellite systems (“HAPS”).

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.

The following tables (in thousands) set forth our segment revenue and segment adjusted income (loss) from operations for the periods indicated.

Segment adjusted income (loss) from operations is defined as income (loss) before income taxes, interest expense, net, other income (expense), net, intangible amortization, amortization of purchase accounting adjustment related to increasing the carrying value of certain assets to fair value, and acquisition related expenses.

All corporate and headquarter expenses are allocated to the reportable segments.

Three Months Ended October 28, 2023

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Three Months Ended October 29, 2022

(Loss) income from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted (loss) income from operations

Three Months Ended January 27, 2024

Product sales

Contract services

Segment adjusted income (loss) from operations

Three Months Ended January 28, 2023

Product sales

Contract services

Segment adjusted income (loss) from operations

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

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of sales:

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Selling, general and administrative

Revenue for the three months ended October 28, 2023 was $180.8 million, as compared to $111.6 million for the three months ended October 29, 2022, representing an increase of $69.2 million, or 62%.

Revenue for the three months ended January 27, 2024 was $186.6 million, as compared to $134.4 million for the three months ended January 28, 2023, representing an increase of $52.2 million, or 39%.

The increase in revenue was due to an increase in product revenue of $64.7 million, partially offset by a decrease in service revenue of $12.5 million.

The increase in product revenue was primarily due to increases in UMS and LMS product revenue.

The decrease in service revenue was due to a decrease in UMS, LMS and MW service revenue.

The increase in product revenue was primarily due to an increase of $35.1 million from the production of our Switchblade products and an increase of $29.6 million of product deliveries of our UMS products, including $5.7 million associated with the recent Tomahawk acquisition.

These increases were primarily driven by increased global demand for our unmanned systems associated with the current global conflicts as well as U.S.

The decrease in service revenue was primarily due to a decrease of $11.5 million largely resulting from the closure of all COCO site locations during fiscal year 2023, a decrease of $4.3 million in customer funded R&D and engineering services due to a decrease in development programs in part due to delays in the establishment of the government fiscal year 2024 budget, partially offset by an increase of $4.3 million associated with the recent Tomahawk acquisition.

We expect the lower levels of UMS service revenues to continue through fiscal 2024 due to the closure of all COCO site locations during fiscal year 2023.

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Cost of Sales.

Cost of sales for the three months ended October 28, 2023 was $105.5 million, as compared to $85.7 million for the three months ended October 29, 2022, representing an increase of $19.8 million, or 23%.

Cost of sales for the three months ended January 27, 2024 was $119.3 million, as compared to $88.9 million for the three months ended January 28, 2023, representing an increase of $30.4 million, or 34%.

The increase in cost of sales was a result of an increase in product cost of sales of $44.6 million, partially offset by a decrease in service costs of sales of $14.2 million.

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

revenue, partially offset by a favorable product mix.

The decrease in service cost of sales was primarily due to a decrease in service revenue.

Cost of sales for the three months ended October 28, 2023 included $3.2 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $4.0 million for the three months ended October 29, 2022.

Cost of services for the three months ended October 29, 2022 also included $7.6 million of depreciation of in-service ISR assets.

As a percentage of revenue, cost of sales decreased from 77% to 58%, primarily due to an increase in the proportion of product revenue to total revenue, a favorable product mix and the prior year COCO operations costs.

The increase in product costs of sales was primarily due to an increase of approximately $39 million associated with the increase in product revenue and approximately $4 million due to a mix shift to a higher proportion of lower margin products driven by the increase in Switchblade production and an increase of $2.4 million in inventory reserve charges primarily due to the introduction of our next generation products.

The decrease in service cost of sales was primarily due to a decrease in service revenue driven by a decrease of $13.1 million due to the closure of all COCO sites in the prior year.

Cost of sales for the three months ended January 27, 2024 included $4.0 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $3.3 million for the three months ended January 28, 2023.

As a percentage of revenue, cost of sales decreased from 66% to 64%, primarily due to an increase in the proportion of product revenue to total revenue and the prior year COCO operations costs, partially offset by a mix shift to lower margin products, resulting in an increase in gross margin from 34% to 36%.

Gross Margin.

Gross margin for the three months ended October 28, 2023 was $75.4 million, as compared to $25.9 million for the three months ended October 29, 2022, representing an increase of $49.5 million, or 191%.

The increase in gross margin was primarily due to an increase in product margin of $43.8 million and an increase in service margin of $5.6 million.

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

The increase in service margin was primarily due to the decrease of $7.6 million of depreciation of in-service ISR assets, partially offset by a decrease in service revenue.

As a percentage of revenue, gross margin increased from 23% to 42%, primarily due to an increase in the proportion of product revenue to total revenue, a favorable product mix and the prior year costs related to COCO operations costs.

Gross margin is equal to revenue minus cost of sales.

Selling, General and Administrative .

SG&A expense for the three months ended October 28, 2023 was $28.1 million, or 16% of revenue, as compared to SG&A expense of $23.6 million, or 21% of revenue, for the three months ended October 29, 2022.

The increase in SG&A expense was primarily due to an increase in employee related expenses, partially offset by a decrease in intangible amortization and other non-cash purchase accounting expenses largely driven by the accelerated amortization of COCO customer relationships recorded during the three months ended April 30, 2023.

SG&A expense for the three months ended January 27, 2024 was $27.8 million, or 15% of revenue, as compared to SG&A expense of $24.7 million, or 18% of revenue, for the three months ended January 28, 2023.

The increase in SG&A expense was primarily due to an increase of $3.1 million in employee related expenses primarily driven by an increase in average headcount to support our growth and expansion of our global business development team and an increase of $1.9 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts, partially offset by a decrease in intangible amortization and other non-cash purchase accounting expenses of $2.3 million.

The decrease in intangible amortization expense was primarily driven by the decrease in COCO customer relationship amortization of $3.1 million due to the accelerated amortization recorded during the three months ended April 30, 2023, partially offset by an increase of $0.7 million resulting from the Tomahawk acquisition.

Research and Development.

R&D expense for the three months ended October 28, 2023 was $22.0 million, or 12% of revenue, as compared to R&D expense of $16.6 million, or 15% of revenue, for the three months ended October 29, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

R&D expense for the three months ended January 27, 2024 was $25.1 million, or 13% of revenue, as compared to R&D expense of $16.2 million, or 12% of revenue, for the three months ended January 28, 2023, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

Interest Expense, net.

Interest expense, net for the three months ended October 28, 2023 was $2.0 million compared to interest expense, net of $2.3 million for the three months ended October 29, 2022.

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

Other Expense, net.

Other expense, net, for the three months ended October 28, 2023 was $2.9 million compared to other income, net of $0.8 million for the three months ended October 29, 2022 primarily due to unrealized losses associated with decreases in the fair market value for equity security investments.

Interest expense, net for the three months ended January 27, 2024 was $0.1 million compared to interest expense, net of $2.8 million for the three months ended January 28, 2023.

The decrease in interest expense, net was primarily due to lower average outstanding balances on our debt facility and an increase of $1.3 million in interest income.

Other Income (Expense), net.

Other income, net, for the three months ended January 27, 2024 was $1.0 million compared to other expense, net of $2.6 million for the three months ended January 28, 2023 primarily due to net unrealized gains associated with increases in the fair market value for equity security investments.

Provision for (Benefit from) Income Taxes.

Our effective income tax rate was 5.6% for the three months ended October 28, 2023, as compared to (66.1)% for the three months ended October 29, 2022.

The increase in our effective income tax rate was primarily due to an increase in income before income taxes combined with an increase in projected full year income before income taxes and increases in expected foreign-derived intangible income deductions and federal R&D tax credits.

The effective income tax rate for the three months ended October 28, 2023 was primarily impacted by expected federal R&D tax credits and foreign-derived intangible income deductions.

Our effective income tax rate was 8.3% for the three months ended January 27, 2024, as compared to 67.2% for the three months ended January 28, 2023.

The decrease in our effective income tax rate was primarily due to an increase in income before income taxes combined with an increase in projected full year income before income taxes and increases in expected foreign-derived intangible income (“FDII”) deductions and federal R&D tax credits.

The effective income tax rate for the three months ended January 27, 2024 was primarily impacted by expected federal R&D tax credits and FDII deductions.

Equity Method Investment Loss, net of Tax.

Equity method investment loss, net of tax for the three months ended October 28, 2023 was $1.4 million as compared to equity method investment loss, net of tax of $1.3 million for the three months ended October 29, 2022.

Six Months Ended October 28, 2023 Compared to Six Months Ended October 29, 2022

The following tables (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.

All corporate and headquarter expenses are allocated to the reportable segments.

Six Months Ended

Equity method investment loss, net of tax for the three months ended January 27, 2024 was $0.1 million as compared to equity method investment loss, net of tax of $0.4 million for the three months ended January 28, 2023.

Unmanned Systems

Three Months Ended

Product sales

Contract services

Segment adjusted income from operations

UMS revenue for the three months ended January 27, 2024 was $113.3 million, as compared to $92.3 million for the three months ended January 28, 2023, representing an increase of $21.0 million, or 23%.

The increase in revenue was due to an increase in product revenue of $29.6 million, partially offset by a decrease in service revenue of $8.6 million.

The increase in product revenue was primarily due to an increase of $23.9 million largely resulting from increased product shipments of our Jump 20 and UGV product systems driven by increased global demand for our unmanned systems associated with the current global conflicts as well as U.S.

resupply and $5.7 million associated with the recent Tomahawk acquisition.

The decrease in service revenue was primarily due to decreases of $11.5 million from the closure of all COCO site locations during fiscal year 2023, partially offset by an increase of $4.3 million associated with the recent Tomahawk acquisition.

UMS Segment adjusted income from operations.

UMS segment adjusted income from operations for the three months January 27, 2024 was $20.4 million, as compared to $11.8 million for the three months ended January 28, 2023, representing an increase of $8.6 million.

The increase in UMS segment adjusted income from operations was primarily due to an increase of revenue of $21.0 million, partially offset by an increase of $7.9 million in cost of sales driven by increased sales volume of approximately $10 million, partially offset by a favorable sales mix of approximately $2 million primarily due to lower levels of COCO service revenue, partially offset by an increase in SG&A of $3.8 million driven by increased employee related expenses, partially offset by a decrease in intangible amortization of $2.4 million,

and an in increase in R&D of $1.2 million due to development activities regarding enhanced capabilities for our products.

Loitering Munitions Systems

Three Months Ended

Product sales

Contract services

Segment adjusted income (loss) from operations

LMS revenue for the three months ended January 27, 2024 was $57.7 million, as compared to $24.0 million for the three months ended January 28, 2023, representing an increase of $33.6 million, or 140%.

The increase in revenue was due to an increase in product revenue of $35.1 million, partially offset by a decrease in service revenue of $1.5 million.

The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our loitering munitions systems associated with the current global conflicts as well as U.S.

The decrease in service revenue was primarily due to decreases in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

LMS Segment adjusted income (loss) from operations.

LMS segment adjusted income from operations for the three months January 27, 2024 was $7.6 million, as compared to LMS adjusted loss from operations of $(0.1) million for the three months ended January 28, 2023, representing an increase of $7.7 million.

The increase in LMS segment adjusted income from operations was primarily due to an increase of $33.6 million of revenue, partially offset by an increase in cost of sales of $23.5 million primarily driven by increased sales volume, partially offset by an increase in SG&A of $1.5 million driven by increased sales and marketing activity related to higher demand and an in increase in R&D of $1.0 million due to development activities regarding enhanced capabilities for our products.

MacCready Works

Three Months Ended

Product sales

Contract services

Segment adjusted (loss) income from operations

MW revenue for the three months ended January 27, 2024 was $15.6 million, as compared to $18.1 million for the three months ended January 28, 2023, representing a decrease of $2.4 million, or 13%.

The decrease in revenue was due to a decrease in service revenue of $2.4 million.

The decrease in service revenue was primarily due to a decrease of $3.3 million in customer funded R&D efforts in part due to delays in the establishment of the government fiscal year 2024 budget, partially offset by an increase in other engineering services revenue.

MW Segment adjusted (loss) income from operations.

MW segment adjusted loss from operations for the three months January 27, 2024 was $(8.1) million, as compared to MW segment adjusted income from operations of $0.4 million for the three months ended January 28, 2023, representing an increased loss of $8.5 million.

The increase in MW adjusted loss from operations was primarily due to an increase in R&D of $6.8 million due to increased investments largely related to HAPS development efforts to support the decrease in customer funded R&D programs in part due to delays in the establishment of the government fiscal year 2024 budget and a decrease in revenue of $2.4 million, partially offset by

a decrease in cost of sales of $1.1 million driven by approximately $2 million related to unfavorable sales volume, partially offset by approximately $1 million related to favorable sales mix.

Nine Months Ended January 27, 2024 Compared to Nine Months Ended January 28, 2023

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

Nine Months Ended

Cost of sales

2 unchanged sentences

Income (loss) from operations

Other (loss) income:

Interest expense, net

Other (expense) income, net

Other expense, net

Income (loss) before income taxes

2 unchanged sentences

Net income (loss)

Six Months Ended October 28, 2023

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Six Months Ended October 29, 2022

(Loss) income from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted (loss) income from operations

Revenue for the six months ended October 28, 2023 was $333.2 million, as compared to $220.1 million for the six months ended October 29, 2022, representing an increase of $113.1 million, or 51%.

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

All corporate and headquarter expenses are allocated to the reportable segments.

Nine Months Ended January 27, 2024

Product sales

Contract services

Segment adjusted income (loss) from operations

Nine Months Ended January 28, 2023

Product sales

Contract services

Segment adjusted income from operations

Revenue for the nine months ended January 27, 2024 was $519.7 million, as compared to $354.5 million for the nine months ended January 28, 2023, representing an increase of $165.2 million, or 47%.

The increase in revenue was due to an increase in product revenue of $209.6 million, partially offset by a decrease in service revenue of $44.4 million.

The increase in product revenue was primarily due to an increase in UMS, LMS and MW product revenue.

The decrease in service revenue was primarily due to a decrease in UMS and LMS service revenue, partially offset by an increase in MW service revenue.

The increase in product revenue was primarily due to an increase of $158.3 million of product deliveries of our UMS products, including $8.3 million associated with the recent Tomahawk acquisition, and an increase of $49.9 million from the production of our Switchblade products.

These increases were primarily driven by increased global

demand for our unmanned systems and loitering munitions associated with the current global conflicts as well as U.S.

The decrease in service revenue was primarily due to a decrease of $45.9 million due to the closure of all COCO site locations during fiscal year 2023 and a decrease of $8.0 million in customer funded R&D and engineering services due to a decrease in development programs in part due to delays in the establishment of the government fiscal year 2024 budget, partially offset by an increase of $5.2 million in training services associated with the increased sales volume and an increase of $4.9 million associated with the recent Tomahawk acquisition.

We expect the lower levels of UMS service revenues to continue through fiscal 2024 due to the closure of all COCO site locations during fiscal year 2023.

With the higher backlog, the increase in the UMS product

revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2024.

With the higher backlog, the increase in the UMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2024.

Cost of Sales.

Cost of sales for the six months ended October 28, 2023 was $192.2 million, as compared to $160.5 million for the six months ended October 29, 2022, representing an increase of $31.7 million, or 20%.

Cost of sales for the nine months ended January 27, 2024 was $311.4 million, as compared to $249.4 million for the nine months ended January 28, 2023, representing an increase of $62.1 million, or 25%.

The increase in cost of sales was a result of an increase in product cost of sales of $112.9 million, partially offset by a decrease in service costs of sales of $50.9 million.

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

The decrease in service cost of sales was primarily due to a decrease in service revenue.

Cost of sales for the six months ended October 28, 2023 included $5.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $7.1 million for the six months ended October 29, 2022.

Cost of services for the six months ended October 29, 2022 also included $11.8 million of depreciation of in-service ISR assets.

As a percentage of revenue, cost of sales decreased from 73% to 58%, primarily due to an increase in the proportion of product revenue to total revenue, a favorable product mix and the prior year COCO operation costs.

The increase in product cost of sales was primarily due to an increase of approximately $126 million associated with the increase in product revenue, partially offset by an increase of $7.9 million in inventory reserve charges primarily related to the introduction of our next generation products and an increase of $2.5 million in intangible amortization expense primarily resulting from the Tomahawk acquisition.

The decrease in service cost of sales was primarily related to a decrease in service revenue driven by a decrease of $52.4 million due to the closure of all COCO site locations in the prior year as well as a decrease of $3.3 million in intangible amortization expense due to intangible assets being fully amortized, partially offset by increases in costs of services for training services and the recent Tomahawk acquisition.

Cost of sales for the nine months ended January 27, 2024 included $9.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $10.4 million for the nine months ended January 28, 2023.

As a percentage of revenue, cost of sales decreased from 70% to 60%, primarily due to an increase in the proportion of product revenue to total revenue and the prior year COCO operation costs resulting in an increase in gross margin from 30% to 40%.

Gross Margin.

Gross margin for the six months ended October 28, 2023 was $141.0 million, as compared to $59.6 million for the six months ended October 29, 2022, representing an increase of $81.4 million, or 137%.

The increase in gross margin was due to an increase in product margin of $76.6 million and an increase in service margin of $4.8 million.

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

The increase in service margin was primarily due to the decrease of $11.8 million of depreciation of in-service ISR assets, partially offset by a decrease in service revenue.

As a percentage of revenue, gross margin increased from 27% to 42%, primarily due to an increase in the proportion of product revenue to total revenue, a favorable product mix and the prior year COCO operations costs.

Gross margin is equal to revenue minus cost of sales.

Selling, General and Administrative .

SG&A expense for the six months ended October 28, 2023 was $52.0 million, or 16% of revenue, as compared to SG&A expense of $45.6 million, or 21% of revenue, for the six months ended October 29, 2022.

SG&A expense for the nine months ended January 27, 2024 was $79.8 million, or 15% of revenue, as compared to SG&A expense of $70.3 million, or 20% of revenue, for the nine months ended January 28, 2023.

The increase in SG&A expense was primarily due to an increase in employee related expenses of $11.0 million driven by an increase in average headcount to support our growth and expansion of our global business development team, an increase in sales and marketing expense of $2.9 million primarily driven by an increase in bid and proposal efforts and an increase in depreciation expense of $1.7 million driven by increased capital to support our growth, partially offset by a decrease of $8.0 million in intangible amortization and other non-cash purchase accounting expenses.

The decrease in intangible amortization expense was primarily driven by a decrease in COCO customer relationship amortization of $9.3 million due to the accelerated amortization of COCO customer relationships recorded during the three months ended April 30, 2023, partially offset by an increase of $1.0 million resulting from the Tomahawk acquisition.

Research and Development.

R&D expense for the six months ended October 28, 2023 was $37.5 million, or 11% of revenue, as compared to R&D expense of $31.6 million, or 14% of revenue, for the six months ended October 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 acquired businesses.

R&D expense for the nine months ended January 27, 2024 was $62.6 million, or 12% of revenue, as compared to R&D expense of $47.8 million, or 13% of revenue, for the nine months ended January 28, 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.

Interest Expense, net.

Interest expense, net for the six months ended October 28, 2023 was $4.0 million compared to interest expense, net of $3.9 million for the six months ended October 29, 2022.

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

Other (Expense) Income, net.

Other expense, net, for the six months ended October 28, 2023 was $(4.0) million compared to other income, net of $0.4 million for the six months ended October 29, 2022.

Interest expense, net for the nine months ended January 27, 2024 was $4.1 million compared to interest expense, net of $6.7 million for the nine months ended January 28, 2023.

The decrease in interest expense, net was primarily due to an increase of $2.1 million in interest income and lower average outstanding balances on debt, partially offset by higher interest rates on our debt facility.

Other Expense, net.

Other expense, net, for the nine months ended January 27, 2024 was $3.0 million compared to other expense, net of $2.2 million for the nine months ended January 28, 2023.

The increase in other expense, net is primarily due to unrealized losses associated with decreases in fair market value for equity security investments.

Provision for (Benefit from) Income Taxes.

Our effective income tax rate was 5.6% for the six months ended October 28, 2023, as compared to (37.2)% for the six months ended October 29, 2022.

The increase in our effective income tax rate was in part due to an increase in year to date actual and projected full year income before income taxes combined with increases in expected foreign-derived intangible income deductions and federal R&D tax credits.

The effective income tax rate for the six months ended October 28, 2023 was primarily impacted by expected federal R&D tax credits and foreign-derived intangible income deductions.

Our effective income tax rate was 6.3% for the nine months ended January 27, 2024, as compared to 38.3% for the nine months ended January 28, 2023.

The decrease in our effective income tax rate was in part due to an increase in year to date actual and projected full year income before income taxes combined with increases in expected FDII deductions and federal R&D tax credits.

The effective income tax rate for the nine months ended January 27, 2024 was primarily impacted by expected federal R&D tax credits and FDII deductions.

Equity Method Investment Loss, net of Tax.

Equity method investment loss, net of tax for the six months ended October 28, 2023 was $1.4 million as compared to $1.8 million for the six months ended October 29, 2022.

Equity method investment loss, net of tax for the nine months ended January 27, 2024 was $1.5 million as compared to $2.2 million for the nine months ended January 28, 2023.

Business Segment Results of Operations

Unmanned Systems

Nine Months Ended

Product sales

Contract services

Segment adjusted income from operations

UMS revenue for the nine months ended January 27, 2024 was $344.3 million, as compared to $221.7 million for the nine months ended January 28, 2023, representing an increase of $122.5 million, or 55%.

The increase in revenue was due to an increase in product revenue of $158.3 million, partially offset by a decrease in service revenue of $35.7 million.

The increase in product revenue was primarily due to an increase of $149.9 million largely resulting from increased product shipments of our SUAS family of systems, Jump 20 and UGV products systems driven by increased global demand for our unmanned systems associated with the current global conflicts as well as U.S.

resupply and $8.3 million associated with the recent Tomahawk acquisition.

The decrease in service revenue was primarily due to decreases of $45.9 million from the closure of all COCO site locations during fiscal year 2023, partially offset by an increase of $4.4 million associated with the recent Tomahawk acquisition and an increase of $3.9 million in training services associated with the increased sales volume.

UMS Segment adjusted income from operations.

UMS segment adjusted income from operations for the nine months January 27, 2024 was $84.0 million, as compared to $5.2 million for the nine months ended January 28, 2023, representing an increase of $78.8 million.

The increase in UMS segment adjusted income from operations was primarily due to an increase of $122.5 million in revenue, partially offset by an increase of $27.9 million in cost of sales driven by increased sales volume of approximately $55 million, partially offset by a favorable sales mix of approximately $27 million due to a mix shift to a higher proportion of international products sales and lower levels of COCO service revenue, partially offset by an increase in SG&A of $10.0 million driven by increased employee related expenses and an in increase in R&D of $4.7 million due to development activities regarding enhanced capabilities for our products, partially offset by a decrease in intangible amortization of $8.1 million.

Loitering Munitions Systems

Nine Months Ended

Product sales

Contract services

Segment adjusted income from operations

LMS revenue for the nine months ended January 27, 2024 was $118.8 million, as compared to $78.1 million for the nine months ended January 28, 2023, representing an increase of $40.7 million, or 52%.

The increase in revenue was due to an increase in product revenue of $49.9 million, partially offset by a decrease in service revenue of $9.2 million.

The increase in product revenue was primarily due to increased production of our LMS systems primarily due to increased global demand for our unmanned systems associated with the current global conflicts as well as U.S.

The decrease in service revenue was primarily due to a decrease of $9.6 million in customer-funded R&D activities primarily associated with the shift from development to production of certain Switchblade products.

LMS Segment adjusted income from operations.

LMS segment adjusted income from operations for the nine months January 27, 2024 was $11.3 million, as compared to $0.8 million for the nine months ended January 28, 2023, representing an increase of $10.5 million.

The increase in LMS segment adjusted income from operations was primarily due to an increase in revenue of $40.7 million and a decrease in R&D of $3.0 million associated with the shift from development to production of certain Switchblade products, partially offset by an increase in cost of sales of $29.3 million driven by increased sales volume of approximately $27 million and an unfavorable sales mix of approximately $2 million due to due to new contract awards with lower estimated margins and an increase in SG&A of $4.0 million driven by increased sales and marketing activity related to higher demand.

MacCready Works

Nine Months Ended

Product sales

Contract services

Segment adjusted (loss) income from operations

MW revenue for the nine months ended January 27, 2024 was $56.6 million, as compared to $54.6 million for the nine months ended January 28, 2023, representing an increase of $2.0 million, or 4%.

The increase in revenue was primarily due to an increase of $1.5 million in product sales.

The increase in product sales is due to an increase in product deliveries as certain development programs begin to shift from development to early production.

MW Segment adjusted (loss) income from operations.

MW segment adjusted loss from operations for the nine months January 27, 2024 was $(14.6) million, as compared to MW segment adjusted income from operations of $4.1 million for the nine months ended January 28, 2023, representing an increased loss of $18.7 million.

The increase in MW adjusted loss from operations was primarily due to an increase in R&D of $13.2 million due to increased investments largely related to HAPS development efforts to support the decrease in customer funded R&D programs in part due to delays in the establishment of the government fiscal year 2024 budget, an increase in costs of sales of $4.9 million driven by approximately $4 million related to unfavorable sales mix and approximately $1 million related to sales volume and an increase in SG&A of $2.9 million driven by increased employee related expenses and sales and marketing activity, partially offset by an increase in revenue of $2.0 million.

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 28, 2023, our funded backlog was approximately $487.0 million, as compared to $424.1 million as of April 30, 2023.

In addition to our funded backlog, we also had unfunded backlog of $173.2 million as of October 28, 2023.

As of January 27, 2024, our funded backlog was approximately $462.8 million, as compared to $424.1 million as of April 30, 2023.

In addition to our funded backlog, we also had unfunded backlog of $132.7 million as of January 27, 2024.

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

We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and indefinite delivery, indefinite quantity (“IDIQ”) contracts, or (ii) incremental funding.

We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year

options and indefinite delivery, indefinite quantity (“IDIQ”) contracts, or (ii) incremental funding.

Unfunded backlog does not obligate the customer to purchase goods or services.

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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.

During the three and six months ended October 28, 2023, we sold 807,370 shares for total gross proceeds of $91.3 million, total proceeds received of $88.6 million, net of commission expense and $88.4 million net of equity issuance costs.

As of October 28, 2023, we have completed the Open Market Sale Agreement SM and sold 1,917,100 of our shares for total gross proceeds of $200.0 million and $194.0 million proceeds received, net of commission expense and $193.1 million net of equity issuance costs.

As of October 28, 2023, we completed the Open Market Sale Agreement SM and sold 1,917,100 of our shares for total gross proceeds of $200.0 million and $194.0 million proceeds received, net of commission expense and $193.1 million net of equity issuance costs.

During the nine months ended January 27, 2024, we sold 807,370 shares for total gross proceeds of $91.3 million, total proceeds received of $88.6 million, net of commission expense and $88.4 million net of equity issuance costs.

On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into the Credit Agreement for (i) the Revolving Facility, and (ii) the Term Loan Facility, and together with the Revolving Credit Facility, the “Credit Facilities”.

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Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition.

Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $11.4 million as of October 28, 2023.

As of October 28, 2023, approximately $88.6 million was available under the Revolving Facility.

Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $13.3 million as of January 27, 2024.

As of January 27, 2024, approximately $86.7 million was available under the Revolving Facility.

Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes.

Refer to Note 9—Debt to our unaudited condensed 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 €7.0 million ($7.4 million) available for issuing letters of credit of which €2.0 million ($2.1 million) was outstanding as of October 28, 2023.

In addition, Telerob has a line of credit of €7.0 million ($7.6 million) available for issuing letters of credit of which €0.7 million ($0.8 million) was outstanding as of January 27, 2024.

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.

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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, and possible acquisition of entities.

our products and services, and possible acquisition of entities.

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.

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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 a 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 $12.3 million was remaining at October 28, 2023.

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

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The Tomahawk acquisition closed on September 15, 2023, and we paid a total purchase price of $134.4 million consisting of $109.8 million in stock and $24.2 million from cash on hand, net of cash acquired.

Due to the new internal revenue service tax capitalization rules, Section 174, we expect an increase in cash paid for U.S.

federal income taxes during the fiscal year ended April 30, 2024 relative to prior periods.

On November 30, 2023, we prepaid $15.5 million of the Term Loan principle.

The following table provides our cash flow data for the six months ended October 28, 2023 and October 29, 2022 (in thousands):

Six Months Ended

Net cash (used in) provided by operating activities

Due to the new internal revenue service tax capitalization rules, Section 174, which requires R&D expenditures to be capitalized and amortized over a 5 year period for tax purposes, we expect an increase in cash paid for U.S.

federal income taxes during the fiscal year ending April 30, 2024 and future fiscal years relative to prior periods.

The following table provides our cash flow data for the nine months ended January 27, 2024 and January 28, 2023 (in thousands):

Nine Months Ended

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Cash (Used in) Provided by Operating Activities.

Net cash used in operating activities for the six months ended October 28, 2023 increased by $57.5 million to $25.6 million, as compared to net cash provided by operating activities of $31.9 million for the six months ended October 29, 2022.

The increase in net cash used in operating activities was primarily

due to a decrease in cash as a result of changes in operating assets and liabilities of $107.9 million, largely related to unbilled receivables and retentions, inventories, accounts payable, and prepaid expenses and other assets due to year over year timing differences as well as a decrease in non-cash expenses of $4.4 million primarily due to a decrease in depreciation and amortization, partially offset by an increase in net income of $54.8 million.

Net cash used in financing activities

Cash Provided by Operating Activities.

Net cash provided by operating activities for the nine months ended January 27, 2024 increased by $18.2 million to $27.0 million, as compared to net cash provided by operating activities of $8.8 million for the nine months ended January 28, 2023.

The increase in net cash provided by operating activities was primarily due to an increase in net income of $69.3 million, partially offset by a decrease in cash as a result of changes in operating assets and liabilities of $40.5 million, largely related to unbilled receivables and retentions, other liabilities, accounts payable, and prepaid expenses and other assets due to year over year timing differences as well as a decrease in non-cash expenses of $10.6 million primarily due to a decrease in depreciation and amortization, partially offset by an increase in inventory reserve.

Cash (Used in) Provided by Investing Activities.

Net cash used in investing activities increased by $41.1 million to $37.6 million for the six months ended October 28, 2023, as compared to net cash provided by investing activities of $3.4 million for the six months ended October 29, 2022.

Net cash used in investing activities increased by $42.3 million to $41.4 million for the nine months ended January 27, 2024, as compared to net cash provided by investing activities of $0.9 million for the nine months ended January 28, 2023.

The increase in net cash used in investing activities was primarily due to a decrease in net redemptions of available-for-sale investments of $24.6 million and an increase in business acquisitions, net of cash acquired of $19.1 million, partially offset by a decrease in equity securities investments of $5.1 million.

Cash Provided by (Used in) Financing Activities.

Net cash provided by financing activities increased by $42.5 million to $31.5 million for the six months ended October 28, 2023, as compared to net cash used in financing activities of $10.9 million for the six months ended October 29, 2022.

The increase in net cash provided by financing activities was primarily due to an increase in proceeds from shares issued of $76.7 million, partially offset by an increase in the principal payment of the term loan of $32.5 million.

Cash Used in Financing Activities.

Net cash used in financing activities increased by $8.2 million to $10.6 million for the nine months ended January 27, 2024, as compared to net cash used in financing activities of $2.4 million for the nine months ended January 28, 2023.

The increase in net cash used in financing activities was primarily due to an increase in the principal payment of the term loan of $72.5 million, partially offset by an increase in proceeds from shares issued of $68.3 million.

New Accounting Standards

Please refer to Note 1—Organization and Significant Accounting Policies to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the conclusion that we did not adopt any accounting standards during the six months ended October 28, 2023.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis