# AeroVironment Inc: Form 10-Q for the period ended Oct 28, 2023

- Company: [AeroVironment Inc](/companies/avav.md) (CIK 1368622)
- Form: 10-Q
- Filed: 2023-12-06
- Accepted by EDGAR: Dec 5, 2023, 18:20 ET
- Period: 2023-10-28
- Accession: 0001558370-23-019483
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1368622/000155837023019483/avav-20231028x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1368622/000155837023019483/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-28.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-30 to 2023-10-28 | $180.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2023-05-01 to 2023-10-28 | $333.2m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-30 to 2023-10-28 | $105.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-05-01 to 2023-10-28 | $192.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-30 to 2023-10-28 | $75.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-05-01 to 2023-10-28 | $141.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-30 to 2023-10-28 | $22.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-05-01 to 2023-10-28 | $37.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-30 to 2023-10-28 | $28.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-05-01 to 2023-10-28 | $52.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-30 to 2023-10-28 | $25.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-05-01 to 2023-10-28 | $51.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-30 to 2023-10-28 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-05-01 to 2023-10-28 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-30 to 2023-10-28 | $17.8m | us-gaap:ProfitLoss |
| Net income | 6 months, 2023-05-01 to 2023-10-28 | $39.7m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-07-30 to 2023-10-28 | $0.66 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-05-01 to 2023-10-28 | $1.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-30 to 2023-10-28 | $0.66 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-05-01 to 2023-10-28 | $1.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-30 to 2023-10-28 | 26,956,806 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-05-01 to 2023-10-28 | 26,569,267 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-05-01 to 2023-10-28 | −$25.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-05-01 to 2023-10-28 | $10.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-10-28 | $100.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-28 | $524.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-28 | $1.01bn | us-gaap:Assets |
| Current liabilities | at 2023-10-28 | $109.3m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-10-28 | $73.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-10-28 | $5.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-10-28 | $793.7m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 45,969 characters.

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, 2023, 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 Policies and 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.

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, certain Tomahawk product deliveries and customer-funded research and development contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. 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. During the year ended April 30, 2023, all of our MUAS COCO sites were closed. 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 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 Unmanned Systems product sales revenue is composed of revenue recognized on contracts for the delivery of SUAS, MUAS and UGV systems and spare parts, respectively. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.

We review cost performance, 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 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):

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Three Months Ended October 28, 2023 ​ ​ | ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Gross favorable adjustments | ​ | $4,138 | ​ | $2,611 | ​ |
| Gross unfavorable adjustments | ​ | (1,321) | ​ | (1,467) | ​ |
| Net favorable adjustments | ​ | $2,817 | ​ | $1,144 | ​ |

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. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.7 million. For the same period, unfavorable cumulative catch-up adjustments of $1.3 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. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.3 million. 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 October 28, 2023 ​ ​ | ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Gross favorable adjustments | ​ | $5,562 | ​ | $2,034 | ​ |
| Gross unfavorable adjustments | ​ | (2,018) | ​ | (3,419) | ​ |
| Net favorable (unfavorable) adjustments | ​ | $3,544 | ​ | $(1,385) | ​ |

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. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately $1.4 million. 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. 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 $2.6 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

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.

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. DoD program of record which resulted in a significant decrease in the projected future cash flows of the MUAS reporting unit. As a result, we updated our estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations used in the valuation of the MUAS reporting unit. These changes in estimates, resulted in the recognition of a goodwill impairment charge of $156.0 million in the MUAS reporting unit 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.

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 2024 fiscal year ends on April 30, 2024 and our fiscal quarters end on July 29, 2023, October 28, 2023 and January 27, 2024, respectively.

### Results of Operations

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 October 28, 2023 ​ ​ | ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Revenue | ​ | $180,816 | ​ | $111,584 | ​ |
| Cost of sales | ​ | 105,466 | ​ | 85,694 | ​ |
| Gross margin | ​ | 75,350 | ​ | 25,890 | ​ |
| Selling, general and administrative | ​ | 28,147 | ​ | 23,613 | ​ |
| Research and development | ​ | 22,025 | ​ | 16,591 | ​ |
| Income (loss) from operations | ​ | 25,178 | ​ | (14,314) | ​ |
| Other (loss) income: | ​ | ​ ​ | ​ | ​ ​ | ​ |
| Interest expense, net | ​ | (1,950) | ​ | (2,309) | ​ |
| Other (expense) income, net | ​ | (2,858) | ​ | 810 | ​ |
| Income (loss) before income taxes | ​ | ​ 20,370 | ​ | ​ (15,813) | ​ |
| Provision for (benefit from) income taxes | ​ | ​ 1,137 | ​ | ​ (10,457) | ​ |
| Equity method investment loss, net of tax | ​ | ​ (1,393) | ​ | ​ (1,273) | ​ |
| Net income (loss) | ​ | $17,840 | ​ | $(6,629) | ​ |

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

| ​ ​ ​ | ​ ​ | ​ ​ Three Months Ended October 28, 2023 UMS | ​ | ​ ​ LMS | ​ | ​ ​ MW | ​ | ​ ​ Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | ​ | $132,773 | ​ | $30,249 | ​ | $17,794 | ​ | $180,816 |
| Gross margin | ​ | ​ 62,742 | ​ | ​ 9,343 | ​ | ​ 3,265 | ​ | ​ 75,350 |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Income (loss) from operations | ​ | ​ 33,859 | ​ | ​ (1,189) | ​ | ​ (7,492) | ​ | ​ 25,178 |
| Acquisition-related expenses | ​ | ​ 1,000 | ​ | ​ 67 | ​ | ​ 26 | ​ | ​ 1,093 |
| Amortization of acquired intangible assets and other purchase accounting adjustments | ​ | ​ 3,744 | ​ | ​ — | ​ | ​ 669 | ​ | ​ 4,413 |
| Adjusted income (loss) from operations | ​ | $38,603 | ​ | $(1,122) | ​ | $(6,797) | ​ | $30,684 |

| ​ ​ ​ | ​ ​ | ​ ​ Three Months Ended October 29, 2022 UMS | ​ | ​ ​ LMS | ​ | ​ ​ MW | ​ | ​ ​ Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | ​ | $61,634 | ​ | $31,101 | ​ | $18,849 | ​ | $111,584 |
| Gross margin | ​ | ​ 7,903 | ​ | ​ 12,636 | ​ | ​ 5,351 | ​ | ​ 25,890 |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| (Loss) income from operations | ​ | ​ (17,347) | ​ | ​ 2,004 | ​ | ​ 1,029 | ​ | ​ (14,314) |
| Acquisition-related expenses | ​ | ​ 569 | ​ | ​ — | ​ | ​ — | ​ | ​ 569 |
| Amortization of acquired intangible assets and other purchase accounting adjustments | ​ | ​ 7,250 | ​ | ​ — | ​ | ​ 592 | ​ | ​ 7,842 |
| Adjusted (loss) income from operations | ​ | $(9,528) | ​ | $2,004 | ​ | $1,621 | ​ | $(5,903) |

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

| ​ ​ ​ ​ Cost of sales: | ​ ​ ​ ​ | ​ ​ Three Months Ended October 28, 2023 ​ ​ | ​ ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Six Months Ended October 28, 2023 ​ ​ | ​ ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- |
| Product sales | ​ | $1,856 | ​ | $1,009 | ​ | $2,896 | ​ | $2,034 | ​ |
| Contract services | ​ | 1,356 | ​ | 2,975 | ​ | 2,712 | ​ | 5,048 | ​ |
| Selling, general and administrative | ​ | ​ 1,201 | ​ | ​ 3,858 | ​ | ​ 1,970 | ​ | ​ 7,721 | ​ |
| Total | ​ | $4,413 | ​ | $7,842 | ​ | $7,578 | ​ | $14,803 | ​ |

***Revenue.*** 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%. The increase in revenue was due to an increase in product revenue of $83.4 million, partially offset by a decrease in service revenue of $14.2 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. 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.

***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%. The increase in cost of sales was a result of an increase in product cost of sales of $39.6 million, partially offset by a decrease in service costs of sales of $19.8 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.

***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.

***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.

***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.

***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.

***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.

***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 October 28, 2023 ​ ​ | ​ ​ ​ | ​ ​ October 29, 2022 ​ ​ | ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Revenue | ​ | $333,163 | ​ | $220,100 | ​ |
| Cost of sales | ​ | 192,153 | ​ | 160,496 | ​ |
| Gross margin | ​ | 141,010 | ​ | 59,604 | ​ |
| Selling, general and administrative | ​ | ​ 51,974 | ​ | ​ 45,556 | ​ |
| Research and development | ​ | 37,491 | ​ | 31,636 | ​ |
| Income (loss) from operations | ​ | 51,545 | ​ | (17,588) | ​ |
| Other (loss) income: | ​ | ​ | ​ | ​ | ​ |
| Interest expense, net | ​ | ​ (3,958) | ​ | ​ (3,912) | ​ |
| Other (expense) income, net | ​ | (3,987) | ​ | 404 | ​ |
| Income (loss) before income taxes | ​ | 43,600 | ​ | (21,096) | ​ |
| Provision for (benefit from) income taxes | ​ | 2,451 | ​ | (7,851) | ​ |
| Equity method investment loss, net of tax | ​ | (1,414) | ​ | (1,773) | ​ |
| Net income (loss) | ​ | $39,735 | ​ | $(15,018) | ​ |

| ​ ​ ​ | ​ ​ | ​ ​ Six Months Ended October 28, 2023 UMS | ​ | ​ ​ LMS | ​ | ​ ​ MW | ​ | ​ ​ Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | ​ | $230,980 | ​ | $61,166 | ​ | $41,017 | ​ | $333,163 |
| Gross margin | ​ | ​ 111,111 | ​ | ​ 21,666 | ​ | ​ 8,233 | ​ | ​ 141,010 |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Income (loss) from operations | ​ | ​ 55,608 | ​ | ​ 3,721 | ​ | ​ (7,784) | ​ | ​ 51,545 |
| Acquisition-related expenses | ​ | ​ 1,674 | ​ | ​ 67 | ​ | ​ 26 | ​ | ​ 1,767 |
| Amortization of acquired intangible assets and other purchase accounting adjustments | ​ | ​ 6,345 | ​ | ​ — | ​ | ​ 1,233 | ​ | ​ 7,578 |
| Adjusted income (loss) from operations | ​ | $63,627 | ​ | $3,788 | ​ | $(6,525) | ​ | $60,890 |

| ​ ​ ​ | ​ ​ | ​ ​ Six Months Ended October 29, 2022 UMS | ​ | ​ ​ LMS | ​ | ​ ​ MW | ​ | ​ ​ Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | ​ | $129,408 | ​ | $54,113 | ​ | $36,579 | ​ | $220,100 |
| Gross margin | ​ | ​ 29,406 | ​ | ​ 20,383 | ​ | ​ 9,815 | ​ | ​ 59,604 |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| (Loss) income from operations | ​ | ​ (21,045) | ​ | ​ 973 | ​ | ​ 2,484 | ​ | ​ (17,588) |
| Acquisition-related expenses | ​ | ​ 873 | ​ | ​ — | ​ | ​ 31 | ​ | ​ 904 |
| Amortization of acquired intangible assets and other purchase accounting adjustments | ​ | ​ 13,595 | ​ | ​ — | ​ | ​ 1,208 | ​ | ​ 14,803 |
| Adjusted (loss) income from operations | ​ | $(6,577) | ​ | $973 | ​ | $3,723 | ​ | $(1,881) |

***Revenue.*** 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 increase in revenue was due to an increase in product revenue of $144.9 million, partially offset by a decrease in service revenue of $31.9 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. 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.

***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%. The increase in cost of sales was a result of an increase in product cost of sales of $68.3 million, partially offset by a decrease in service costs of sales of $36.6 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.

***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.

***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. 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.

***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.

***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. 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.

***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.

### 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 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. 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. 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.

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 AgreementSM, 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 AgreementSM 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 $11.4 million as of October 28, 2023. As of October 28, 2023, approximately $88.6 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.

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. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months. 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 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 $12.3 million was remaining at October 28, 2023. The contributions are anticipated to be paid over the next four 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 $134.5 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.

### Cash Flows

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

*(Unaudited)*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Six Months Ended October 28, 2023 | ​ ​ | ​ ​ October 29, 2022 | ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- |
| Net cash (used in) provided by operating activities | ​ | $(25,590) | ​ | $31,932 | ​ |
| Net cash (used in) provided by investing activities | ​ | $(37,635) | ​ | $3,418 | ​ |
| Net cash provided by (used in) financing activities | ​ | $31,544 | ​ | $(10,907) | ​ |

***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.

***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. 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.

### 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.

## Market risk

As filed, 1,185 characters.

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 $80.0 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.

## Controls and procedures

As filed, 2,443 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of October 28, 2023, the end of the period covered by this Quarterly Report on Form 10-Q.

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 28, 2023, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

### Changes in Internal Control over Financial Reporting

On September 15, 2023, we acquired Tomahawk, and, as a result, we have begun integrating certain processes, systems and controls relating to Tomahawk into our existing system of internal control over financial reporting in accordance with our integration plans. We do not believe these represent a material change. There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended October 28, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 288 characters.

There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2023. Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

Filed Dec 6, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-019483. Last ingested by Listed: Nov 4, 2026, 09:12 ET. No prices; not investment advice.