Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2024, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).
Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.
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, 2024.
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.
Revenue for LMS product deliveries, customization of UGV transport vehicles and customer-funded research and development contracts is recognized over time as costs are incurred. Contract services revenue is for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, which historically included ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include
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labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.
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 Uncrewed Systems product sales revenue is primarily composed of revenue recognized on contracts for the delivery of UxS 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, estimates-to-complete and variable consideration 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, including the finalization of undefinitized contract actions, occur. 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 three months ended July 27, 2024 and July 29, 2023, changes in accounting estimates on contracts recognized using the over time method are presented below. Amounts representing contract change orders or claims are included in revenue if the order or claim meets the criteria of a contract or contract modification in accordance with ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance.
For the three months ended July 27, 2024 and July 29, 2023, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):
Three Months Ended
July 27,
July 29,
2024
2023
Gross favorable adjustments
$
812
$
2,704
Gross unfavorable adjustments
(285)
(1,119)
Net favorable adjustments
$
527
$
1,585
For the three months ended July 27, 2024, favorable cumulative catch-up adjustments of $0.8 million were primarily due to final cost adjustments on 11 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.3 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.
For the three months ended July 29, 2023, favorable cumulative catch-up adjustments of $2.7 million were primarily due to final cost adjustments on 11 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on seven contracts, which individually were not material.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations.
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Our evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, we may bypass the qualitative assessment for some or all of our 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). 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 our business.
Subsequent to the performance of our annual goodwill impairment test for fiscal year 2023, 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 U.S. 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.
As of July 27, 2024, our MUAS reporting unit had a goodwill balance of $135.8 million. The estimated fair value of the MUAS reporting unit does not substantially exceed its carrying value due to the impairment recorded 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. D.o.D. 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 $12.8 million as of July 27, 2024 will also be evaluated for potential impairment during the fourth quarter impairment test. During the most recent annual impairment test during the fourth quarter of fiscal year 2024, the estimated fair value of all reporting units, other than MUAS, substantially exceeded their carrying value. As of July 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. Actual results can be materially different from the estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our indefinite-lived intangible assets below the carrying amounts, we could recognize future impairment charges, the amount of which could be material.
Fiscal Periods
Due to our fixed year end date of April 30, our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday. Our 2025 fiscal year ends on April 30, 2025 and our fiscal quarters end on July 27, 2024, October 26, 2024 and January 25, 2025, respectively.
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Results of Operations
The following tables set forth our results of operations for the periods indicated (in thousands):
Three Months Ended July 27, 2024 Compared to Three Months Ended July 29, 2023
Three Months Ended
July 27,
July 29,
2024
2023
Revenue
$
189,483
$
152,347
Cost of sales
108,016
86,687
Gross margin
81,467
65,660
Selling, general and administrative
33,795
23,827
Research and development
24,613
15,466
Income from operations
23,059
26,367
Other loss:
Interest expense, net
(239)
(2,008)
Other expense, net
(234)
(1,129)
Income before income taxes
22,586
23,230
Provision for income taxes
1,485
1,314
Equity method investment income (loss), net of tax
65
(21)
Net income
$
21,166
$
21,895
We have identified three reportable segments, Uncrewed Systems (“UxS”), Loitering Munitions Systems (“LMS”) and MacCready Works (“MW”). The UxS segment consists of our SUAS, including our Tomahawk acquisition, MUAS 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 tables (in thousands) set forth our segment revenue and segment adjusted gross margin for the periods indicated. Prior period segment information has been revised to align with the new segment measure of profitability. Segment adjusted gross margin is defined as gross margin before intangible amortization expense including amortization of purchase accounting adjustments. All corporate and headquarter expenses are allocated to the reportable segments.
Three Months Ended July 27, 2024
UxS
LMS
MW
Total
Revenue:
Product sales
$
112,301
$
47,180
$
23
$
159,504
Contract services
7,675
4,793
17,511
29,979
$
119,976
$
51,973
$
17,534
$
189,483
Segment adjusted gross margin
$
67,252
$
13,272
$
4,657
Three Months Ended July 29, 2023
UxS
LMS
MW
Total
Revenue:
Product sales
$
93,231
$
25,325
$
915
$
119,471
Contract services
4,976
5,592
22,308
32,876
$
98,207
$
30,917
$
23,223
$
152,347
Segment adjusted gross margin
$
50,426
$
12,323
$
5,308
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We recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying unaudited condensed consolidated statements of operations:
July 27,
July 29,
2024
2023
Cost of sales:
Product sales
$
2,617
$
1,041
Contract services
1,097
1,356
Selling, general and administrative
1,060
769
Total
$
4,774
$
3,166
Revenue. Revenue for the three months ended July 27, 2024 was $189.5 million, as compared to $152.3 million for the three months ended July 29, 2023, representing an increase of $37.2 million, or 24%. The increase in revenue was due to an increase in product revenue of $40.0 million, partially offset by a decrease in service revenue of $2.9 million. The increase in product revenue was primarily due to an increase of $21.9 million from the production of our Switchblade products and an increase of $19.1 million of product deliveries of our UxS products, including $1.1 million associated with the Tomahawk acquisition. These increases were primarily driven by increased global demand for our LMS and uncrewed systems associated with the current global conflicts as well as U.S. D.o.D. resupply. The decrease in service revenue was primarily due to a decrease of $5.9 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 $3.0 million of training and repairs service revenue driven by the increased product sales. The increase in the LMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2025.
Cost of Sales. Cost of sales for the three months ended July 27, 2024 was $108.0 million, as compared to $86.7 million for the three months ended July 29, 2023, representing an increase of $21.3 million, or 25%. The increase in cost of sales was a result of an increase in product cost of sales of $23.9 million, partially offset by a decrease in service costs of sales of $2.6 million. The increase in product costs of sales was primarily due to an increase of approximately $21 million associated with the increase in product revenue and approximately $3 million due to a mix shift to a higher proportion of lower margin products driven by the increase in Switchblade production. The decrease in service cost of sales was primarily due to a decrease of approximately $3 million associated with the decrease in service revenue. Cost of sales for the three months ended July 27, 2024 included $3.7 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $2.4 million for the three months ended July 29, 2023. As a percentage of revenue, cost of sales remained consistent at 57%, resulting in gross margin of 43% in both quarters.
Gross Margin. Gross margin is equal to revenue minus cost of sales.
Selling, General and Administrative . SG&A expense for the three months ended July 27, 2024 was $33.8 million, or 18% of revenue, as compared to SG&A expense of $23.8 million, or 16% of revenue, for the three months ended July 29, 2023. The increase in SG&A expense was primarily due to an increase of $5.8 million of sales and marketing expense primarily driven by an increase in bid and proposal efforts and an increase of $3.3 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. Sales and marketing expense includes commissions on certain direct commercial sales to international customers, and an increase in revenue results in an increase in commission expense.
Research and Development. R&D expense for the three months ended July 27, 2024 was $24.6 million, or 13% of revenue, as compared to R&D expense of $15.5 million, or 10% of revenue, for the three months ended July 29, 2023. The increase was 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 July 27, 2024 was $0.2 million compared to interest expense, net of $2.0 million for the three months ended July 29, 2023. The decrease in interest expense, net was primarily due to lower average outstanding balances on our debt facility.
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Other Expense, net. Other expense, net, for the three months ended July 27, 2024 was $0.2 million compared to $1.1 million for the three months ended July 29, 2023. The decrease was primarily due to lower net unrealized losses associated with the fair market value of our equity security investments.
Provision for Income Taxes. Our effective income tax rate was 6.6% for the three months ended July 27, 2024, as compared to 5.7% for the three months ended July 29, 2023. The increase in our effective income tax rate was primarily due to a decrease in FDII deductions, partially offset by an increase in excess tax benefits from equity awards. The effective income tax rate for the three months ended July 27, 2024 was primarily impacted by expected federal R&D tax credits and FDII deductions and excess tax benefits from equity awards.
Equity Method Investment Income (Loss), net of Tax. Equity method investment income, net of tax for the three months ended July 27, 2024 was $0.1 million as compared to equity method investment loss, net of tax of $21 thousand for the three months ended July 29, 2023.
Uncrewed Systems
Three Months Ended
July 27,
July 29,
2024
2023
Revenue:
Product sales
$
112,301
$
93,231
Contract services
7,675
4,976
$
119,976
$
98,207
Segment adjusted gross margin
$
67,252
$
50,426
Revenue. UxS revenue for the three months ended July 27, 2024 was $120.0 million, as compared to $98.2 million for the three months ended July 29, 2023, representing an increase of $21.8 million, or 22%. The increase in revenue was due to an increase in product revenue of $19.1 million and an increase in service revenue of $2.7 million. The increase in product revenue was primarily due to $19.1 million from increased product shipments of our SUAS family of systems and UGV product systems driven by increased global demand for our uncrewed systems associated with the current global conflicts as well as U.S. D.o.D. resupply including $1.1 million associated with the Tomahawk acquisition. The increase in service revenue was primarily due to an increase of $3.1 million of training and repairs service revenue driven by the increased product sales.
UxS Segment adjusted gross margin. UxS segment adjusted gross margin for the three months July 27, 2024 was $67.3 million, as compared to $50.4 million for the three months ended July 29, 2023, representing an increase of $16.8 million, or 33%. The increase in UxS segment adjusted gross margin was primarily due to an increase in revenue of $21.8 million, partially offset by an increase of $5.0 million in adjusted cost of sales. The increase in adjusted cost of sales was due to an increase in sales volume of approximately $10 million, partially offset by a favorable sales mix of approximately $5 million primarily due to a higher proportion of international products sales. Adjusted cost of sales is defined as cost of sales before intangible amortization expense including amortization of purchase accounting adjustments.
Loitering Munitions Systems
Three Months Ended
July 27,
July 29,
2024
2023
Revenue:
Product sales
$
47,180
$
25,325
Contract services
4,793
5,592
$
51,973
$
30,917
Segment adjusted gross margin
$
13,272
$
12,323
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Revenue. LMS revenue for the three months ended July 27, 2024 was $52.0 million, as compared to $30.9 million for the three months ended July 29, 2023, representing an increase of $21.1 million, or 68%. The increase in revenue was due to an increase in product revenue of $21.9 million, partially offset by a decrease in service revenue of $0.8 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. D.o.D. resupply. 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 gross margin. LMS segment adjusted gross margin for the three months July 27, 2024 was $13.3 million, as compared to $12.3 million for the three months ended July 29, 2023, representing an increase of $1.0 million, or 8%. The increase in LMS segment adjusted gross margin was primarily due to an increase in revenue of $21.1 million, partially offset by an increase in adjusted cost of sales of $20.1 million. The increase in adjusted cost of sales was primarily due to an increase in sales volume of approximately $12 million, an unfavorable contract mix primarily due to an increase in revenue earned on undefinitized contracts for the three months ended July 27, 2024 and a decrease in favorable cumulative catch up adjustments. LMS is operating under multiple undefinitized contract actions, or UCA's, which we recognize revenue based upon estimates of the final price negotiations. In the period these contracts are definitized a cumulative catch-up revenue adjustment will be recorded. For the full fiscal year we anticipate LMS adjusted gross margin as a percentage of revenues to trend toward the prior year levels.
MacCready Works
Three Months Ended
July 27,
July 29,
2024
2023
Revenue:
Product sales
$
23
$
915
Contract services
17,511
22,308
$
17,534
$
23,223
Segment adjusted gross margin
$
4,657
$
5,308
Revenue. MW revenue for the three months ended July 27, 2024 was $17.5 million, as compared to $23.2 million for the three months ended July 29, 2023, representing a decrease of $5.7 million, or 24%. The decrease in revenue was due to a decrease in service revenue of $4.8 million and a decrease in product revenue of $0.9 million. The decrease in service revenue was primarily due to a decrease of $5.2 million in customer funded R&D efforts in part due to delays in the establishment of the government fiscal year 2024 budget.
MW Segment adjusted gross margin. MW segment adjusted gross margin for the three months July 27, 2024 was $4.7 million, as compared to $5.3 million for the three months ended July 29, 2023, representing a decrease of $0.6 million. The decrease in MW adjusted gross margin was primarily due to a decrease in revenue of $5.7 million, partially offset by a decrease in adjusted cost of sales. The decrease in adjusted cost of sales was primarily due to a decrease in sales volume of approximately $5 million.
Backlog
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 July 27, 2024, our funded backlog was approximately $372.9 million, as compared to $400.2 million as of April 30, 2024. Funded backlog does not include $128 million of initial funding under the recently announced indefinite delivery, indefinite quantity (“IDIQ”) contract to deliver LMS systems for the U.S. Army’s Directed Requirement for Lethal Unmanned Systems with a contract ceiling value of $990 million received in August 2024.
In addition to our funded backlog, we also had unfunded backlog of $141.1 million as of July 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
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options and IDIQ contracts, or (ii) incremental funding. Unfunded backlog does not obligate the customer to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfunded backlog does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for SUAS because values for each of the other domains within the contract have not been disclosed by the customer, and we cannot be certain that we will secure all task orders issued against the contract. Unfunded backlog does not include the IDIQ contract to deliver LMS systems for the U.S. Army’s Directed Requirement for Lethal Unmanned Systems with a contract ceiling value of $990 million less the initial funding of $128 million awarded in August 2024.
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing contracts expire or are renewed or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.
Liquidity and Capital Resources
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 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.
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.” The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $7.5 million as of July 27, 2024. As of July 27, 2024, approximately $92.5 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, the Company has a separate letter of credit of $2.1 million and Telerob has a line of credit of €7.0 million ($7.6 million) available for issuing letters of credit of which €0.1 million ($0.1 million) was outstanding as of July 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 acquisitions. 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 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. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or draw on our Credit Facilities. 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
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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. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Agreement 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 Facility 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.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.
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 $10.0 million was remaining at July 27, 2024. The contributions are anticipated to be paid over the next three fiscal years. The UGV second year earnout of €2.0 million (approximately $2.1 million) was paid in November 2023. 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 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 the elevated levels of cash paid for U.S. federal income taxes to continue during the fiscal year ending April 30, 2025 and future fiscal years.
Cash Flows
The following table provides our cash flow data for the three months ended July 27, 2024 and July 29, 2023 (in thousands):
Three Months Ended
July 27,
July 29,
2024
2023
(Unaudited)
Net cash provided by (used in) operating activities
$
28,351
$
(17,062)
Net cash used in investing activities
$
(6,613)
$
(3,632)
Net cash used in financing activities
$
(13,954)
$
(6,315)
Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities for the three months ended July 27, 2024 increased by $45.4 million to $28.4 million, as compared to net cash used in operating activities of $(17.1) million for the three months ended July 29, 2023. The increase in net cash provided by operating activities was primarily due to an increase in cash as a result of changes in operating assets and liabilities of $43.2 million, largely related to inventories and accounts receivable, partially offset by unbilled receivables and retentions and other liabilities, due to year over year timing differences as well as an increase in non-cash expenses of $2.9 million primarily due to an increase in depreciation and amortization and stock-based compensation.
Cash Used in Investing Activities. Net cash used in investing activities increased by $3.0 million to $6.6 million for the three months ended July 27, 2024, as compared to $3.6 million for the three months ended July 29, 2023. The increase in net cash used in investing activities was due to an increase in acquisition of property and equipment acquisitions of $1.8 million and an increase in equity securities investments of $1.2 million.
Cash Used in Financing Activities. Net cash used in financing activities increased by $7.6 million to $14.0 million for the three months ended July 27, 2024, as compared to $6.3 million for the three months ended July 29, 2023. The
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increase in net cash used in financing activities was primarily due to an increase in the principal payment of the term loan of $5.5 million and tax withholding payments related to net settlement of equity awards.
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 three months ended July 27, 2024.
ITEM 3. QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, and foreign currency exchange rates.
Interest Rate Risk
It is our policy not to enter into interest rate derivative financial instruments. On February 19, 2021 in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Facilities. The current outstanding balance of the Credit Facilities is $17.5 million and bears a variable interest rate. The market interest rate has increased significantly, and if market interest rates continue to increase, interest due on the Credit Facilities would increase.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions. With the acquisition of Telerob, a portion of our cash balance is denominated in Euros which is Telerob’s functional currency.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.