AeroVironment, Inc.
AeroVironment Inc (Form: 10-Q, Received: 03/10/2010 06:12:03)

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the quarterly period ended January 30, 2010

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                             to                           

 

Commission File Number: 001-33261

 


 

AEROVIRONMENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2705790

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

181 W. Huntington Drive, Suite 202

 

 

Monrovia, California

 

91016

(Address of principal executive offices)

 

(Zip Code)

 

(626) 357-9983

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ       No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

o    Large accelerated filer

þ    Accelerated filer

o   Non-accelerated filer

o    Smaller reporting company

 

 

(Do not check if smaller
reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o    No þ

 

As of February 26, 2010, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 21,649,826.

 



Table of Contents

 

AeroVironment, Inc.

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

Consolidated Balance Sheets as of January 30, 2010 (Unaudited) and April 30, 2009

3

 

Consolidated Statements of Income for the three and nine months ended January 30, 2010 (Unaudited) and January 31, 2009 (Unaudited)

4

 

Consolidated Statements of Cash Flows for the nine months ended January 30, 2010 (Unaudited) and January 31, 2009 (Unaudited)

5

 

Notes to Consolidated Financial Statements (Unaudited)

6

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.

Controls and Procedures

18

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

19

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 3.

Defaults Upon Senior Securities

19

Item 4.

Submission of Matters to a Vote of Security Holders

19

Item 5.

Other Information

19

Item 6.

Exhibits

19

Signatures

 

20

Exhibit Index

 

 

 

2


 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

January 30,
2010

 

April 30,
2009

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

52,843

 

$

116,501

 

Short-term investments

 

67,072

 

21,523

 

Accounts receivable, net of allowance for doubtful accounts of $389 at January 30, 2010 and $291 at April 30, 2009

 

40,860

 

42,551

 

Unbilled receivables and retentions

 

19,319

 

20,070

 

Inventories, net

 

29,713

 

11,602

 

Income tax receivable

 

3,218

 

3,415

 

Deferred income taxes

 

4,304

 

3,994

 

Prepaid expenses and other current assets

 

3,657

 

1,718

 

Total current assets

 

220,986

 

221,374

 

Long-term investments

 

6,582

 

7,156

 

Property and equipment, net

 

19,302

 

18,218

 

Deferred income taxes

 

6,339

 

6,313

 

Other assets

 

86

 

120

 

Total assets

 

$

253,295

 

$

253,181

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

16,745

 

$

23,990

 

Wages and related accruals

 

8,026

 

10,231

 

Other current liabilities

 

5,110

 

3,686

 

Liability for uncertain tax positions

 

2,590

 

730

 

Total current liabilities

 

32,471

 

38,637

 

Deferred rent

 

1,346

 

1,463

 

Liability for uncertain tax positions

 

3,195

 

5,654

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

Authorized shares — 10,000,000

 

 

 

 

 

None issued or outstanding

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

Authorized shares — 100,000,000

 

 

 

 

 

Issued and outstanding shares — 21,649,826 at January 30, 2010 and 21,470,481 at April 30, 2009

 

2

 

2

 

Additional paid-in capital

 

114,023

 

110,102

 

Accumulated other comprehensive loss

 

(746

)

(537

)

Retained earnings

 

103,004

 

97,860

 

Total stockholders’ equity

 

216,283

 

207,427

 

Total liabilities and stockholders’ equity

 

$

253,295

 

$

253,181

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

3



Table of Contents

 

AeroVironment, Inc.

Consolidated Statements of Income (Unaudited)

(In thousands except share and per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 30,

 

January 31,

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

25,353

 

$

30,160

 

$

52,716

 

$

92,746

 

Contract services

 

35,508

 

22,065

 

97,452

 

78,871

 

 

 

60,861

 

52,225

 

150,168

 

171,617

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Product sales

 

15,156

 

18,682

 

31,796

 

55,485

 

Contract services

 

22,224

 

16,866

 

64,527

 

53,885

 

 

 

37,380

 

35,548

 

96,323

 

109,370

 

Gross margin

 

23,481

 

16,677

 

53,845

 

62,247

 

Selling, general and administrative

 

9,833

 

7,950

 

30,828

 

23,900

 

Research and development

 

5,167

 

4,625

 

16,616

 

14,781

 

Income from operations

 

8,481

 

4,102

 

6,401

 

23,566

 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

38

 

197

 

147

 

1,107

 

Income before income taxes

 

8,519

 

4,299

 

6,548

 

24,673

 

Provision (benefit) for income taxes

 

2,004

 

(242

)

1,404

 

6,264

 

Net income

 

$

6,515

 

$

4,541

 

$

5,144

 

$

18,409

 

Earnings per share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.21

 

$

0.24

 

$

0.88

 

Diluted

 

$

0.30

 

$

0.21

 

$

0.23

 

$

0.84

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

21,394,204

 

21,147,902

 

21,352,838

 

20,937,284

 

Diluted

 

21,991,067

 

22,030,603

 

21,952,140

 

21,940,482

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

4



Table of Contents

 

AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

January 30,
2010

 

January 31,
2009

 

Operating activities

 

 

 

 

 

Net income

 

$

5,144

 

$

18,409

 

Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,465

 

3,622

 

Provision for doubtful accounts

 

98

 

175

 

Deferred income taxes

 

(196

)

(254

)

Stock-based compensation

 

1,258

 

637

 

Tax benefit from exercise of stock options

 

1,855

 

11,237

 

Excess tax benefit from stock-based compensation

 

(46

)

(98

)

Loss (gain) on sale of property and equipment

 

3

 

(5

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,593

 

(465

)

Unbilled receivables and retentions

 

751

 

(2,514

)

Inventories

 

(18,111

)

(4,456

)

Income tax receivable

 

243

 

(5,926

)

Other assets

 

(1,905

)

1,020

 

Accounts payable

 

(7,245

)

1,648

 

Other liabilities

 

(1,497

)

(2,148

)

Net cash and cash equivalents (used in) provided by operating activities

 

(11,590

)

20,882

 

Investing activities

 

 

 

 

 

Acquisitions of property and equipment

 

(7,552

)

(8,905

)

Proceeds from sale of property and equipment

 

 

9

 

Net purchases of held-to-maturity investments

 

(45,549

)

(21,514

)

Net sales of available-for-sale investments

 

225

 

5,325

 

Net cash and cash equivalents used in investing activities

 

(52,876

)

(25,085

)

Financing activities

 

 

 

 

 

Excess tax benefit from stock-based compensation

 

46

 

98

 

Exercise of stock options

 

762

 

979

 

Net cash and cash equivalents provided by financing activities

 

808

 

1,077

 

Net decrease in cash and cash equivalents

 

(63,658

)

(3,126

)

Cash and cash equivalents at beginning of period

 

116,501

 

105,064

 

Cash and cash equivalents at end of period

 

$

52,843

 

$

101,938

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

Unrealized losses on long-term investments recorded in other comprehensive income, net of deferred tax benefit of $140 and $365, respectively

 

$

(209

)

$

(549

)

 

See accompanying notes to consolidated financial statements (unaudited).

 

5



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

1. Organization and Significant Accounting Policies

 

Organization

 

AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production and support of unmanned aircraft systems and efficient energy systems for various industries and governmental agencies.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and nine months ended January 30, 2010 are not necessarily indicative of the results for the full year ending April 30, 2010. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2009, included in AeroVironment, Inc.’s Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Segments

 

The Company’s products are sold and divided among two reportable segments to reflect the Company’s strategic goals. Operating segments are defined as components of an enterprise from which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer, who reviews the revenue and gross margin results for each of these segments in order to make resource allocation decisions, including the focus of research and development, or R&D, activities and assessing performance. The Company’s reportable segments are business units that offer different products and services and are managed separately.

 

Investments

 

The Company’s investments are accounted for as held-to-maturity and available-for-sale and reported at amortized cost and fair value, respectively.

 

Fair Values of Financial Instruments

 

Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payable approximate cost due to the short period of time to maturity.

 

Government Contracts

 

Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company.

 

6



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

For example, during the course of its audits, the DCAA may question the Company’s incurred project costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. The Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

 

Earnings Per Share

 

Basic earnings per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock. The dilutive effect of potential common shares outstanding is included in diluted earnings per share and excludes any anti-dilutive effects of options and shares of unvested restricted stock.

 

The reconciliation of diluted to basic shares is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 30,
2010

 

January 31,
2009

 

January 30,
2010

 

January 31,
2009

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

21,394,204

 

21,147,902

 

21,352,838

 

20,937,284

 

Dilutive effect of employee stock options and unvested restricted stock

 

596,863

 

882,701

 

599,302

 

1,003,198

 

Denominator for diluted earnings per share

 

21,991,067

 

22,030,603

 

21,952,140

 

21,940,482

 

 

During the three and nine months ended January 30, 2010 and January 31, 2009, certain options and shares of unvested restricted stock were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. The number of options and shares of unvested restricted stock which met this anti-dilutive criterion was approximately 11,000 and 14,000 for the three and nine months ended January 30, 2010, respectively.  The number of options and shares of unvested restricted stock which met this anti-dilutive criterion was approximately 11,000 and 19,000 for the three and nine months ended January 31, 2009, respectively.

 

Recently Issued Accounting Standards

 

In August 2009, the Financial Accounting Standards Board (“FASB”) issued amended standards for the fair value measurement of liabilities. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, the Company is required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, the Company is required to use another valuation technique, such as an income approach or a market approach. These amended standards were adopted by the Company on November 1, 2009, and did not have a significant impact on the Company’s consolidated financial statements.

 

In October 2009, the FASB issued new standards for revenue recognition for arrangements with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for the Company beginning on May 1, 2011, however, early adoption is permitted. The Company does not expect these new standards to significantly impact its consolidated financial statements.

 

In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are effective for the Company beginning on May 1, 2011, however, early adoption is permitted. The Company does not expect these new standards to significantly impact its consolidated financial statements.

 

7



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

2. Investments

 

Investments consist of the following (in thousands):

 

 

 

January 30,
2010

 

April 30,
2009

 

 

 

 

 

Short-term investments:

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

Pre-refunded municipal bond

 

$

 

$

2,029

 

U.S. Treasury bills

 

67,072

 

19,494

 

Total short-term investments

 

$

67,072

 

$

21,523

 

Long-term investments:

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Auction rate securities

 

$

6,582

 

$

7,156

 

Total long-term investments

 

$

6,582

 

$

7,156

 

 

Held-To-Maturity Securities

 

At January 30, 2010, the balance of held-to-maturity securities consisted of U.S. Treasury bills. Interest earned from these investments is recorded in interest income.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of January 30, 2010, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury bills

 

$

67,072

 

$

8

 

$

 

$

67,080

 

Total held-to-maturity investments

 

$

67,072

 

$

8

 

$

 

$

67,080

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2009, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Pre-refunded municipal bond

 

$

2,029

 

$

5

 

$

 

$

2,034

 

U.S. Treasury bills

 

19,494

 

5

 

 

19,499

 

Total held-to-maturity investments

 

$

21,523

 

$

10

 

$

 

$

21,533

 

 

The amortized cost and fair value of the Company’s held-to-maturity securities by contractual maturity at January 30, 2010, were as follows (in thousands):

 

 

 

Cost

 

Fair Value

 

 

 

 

 

Due within one year

 

$

67,072

 

$

67,080

 

Total

 

$

67,072

 

$

67,080

 

 

Available-For-Sale Securities

 

As of January 30, 2010, the entire balance of available-for-sale securities consisted of four investment grade auction rate municipal bonds with maturities ranging from 9 to 25 years. These investments have characteristics similar to short-term investments, because at pre-determined intervals, generally ranging from 30 to 35 days, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, the Company chooses to roll-over its holdings or redeem the investments for cash. A market maker facilitates the redemption of the securities and the underlying issuers are not required to redeem the investment within 365 days. Interest earned from these investments is recorded in interest income.

 

8



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments that failed to settle at auction at the maximum contractual rate until the next auction occurs. In the event the Company needs to access funds invested in these auction rate securities, the Company may not be able to liquidate these securities at the fair value recorded on January 30, 2010, until a future auction of these securities is successful or a buyer is found outside of the auction process.

 

As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of January 30, 2010. The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction.

 

Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate the current lack of liquidity on these investments will affect its ability to operate the business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future.  The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible other-than-temporary impairment. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity, and as of January 30, 2010, it did not consider these investments to be other-than-temporarily impaired.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of January 30, 2010, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

7,825

 

$

 

$

(1,243

)

$

6,582

 

Total available-for-sale investments

 

$

7,825

 

$

 

$

(1,243

)

$

6,582

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of April 30, 2009, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

8,050

 

$

 

$

(894

)

$

7,156

 

Total available-for-sale investments

 

$

8,050

 

$

 

$

(894

)

$

7,156

 

 

The amortized cost and fair value of the Company’s auction rate securities by contractual maturity at January 30, 2010, were as follows (in thousands):

 

 

 

Cost

 

Fair Value

 

 

 

 

 

Due after five through 10 years

 

$

1,500

 

$

1,322

 

Due after 10 years

 

6,325

 

5,260

 

Total

 

$

7,825

 

$

6,582

 

 

9



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

3. Inventories, net

 

Inventories consist of the following (in thousands):

 

 

 

January 30,
2010

 

April 30,
2009

 

Raw materials

 

$

9,484

 

$

6,055

 

Work in process

 

10,265

 

2,351

 

Finished goods

 

11,304

 

4,585

 

Inventories, gross

 

31,053

 

12,991

 

Reserve for inventory obsolescence

 

(1,340

)

(1,389

)

Inventories, net

 

$

29,713

 

$

11,602

 

 

4. Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:

 

·      Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

·      Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

·      Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.

 

The Company’s financial assets measured at fair value on a recurring basis at January 30, 2010, were as follows (in thousands):

 

 

 

Fair Value Measurement Using

 

Description

 

Quoted prices in
active markets
for identical assets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Total

 

Cash and cash equivalents

 

$

52,843

 

$

 

$

 

$

52,843

 

Auction rate securities

 

 

 

6,582

 

6,582

 

Total

 

$

52,843

 

$

 

$

6,582

 

$

59,425

 

 

Due to the auction failures of the Company’s auction rate securities that began in the fourth quarter of fiscal 2008, there are still no quoted prices in active markets for identical assets as of January 30, 2010.  Therefore, the Company has classified its auction rate securities as Level 3 financial assets.  The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands):

 

 

 

Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)

 

Description

 

Auction Rate Securities

 

Balance at April 30, 2009

 

$

7,156

 

Transfers to Level 3

 

 

Total losses (realized or unrealized)

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(349

)

Purchases, issuances and settlements, net

 

(225

)

Balance at January 30, 2010

 

$

6,582

 

The amount of total gains or (losses) for the period included in earnings (or change in net assets) attributable to the change in unrealized gains or losses relating to assets still held at January 30, 2010

 

$

 

 

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The auction rate securities are valued using a discounted cash flow model.  The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction.

 

Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate the current lack of liquidity on these investments will affect its ability to operate the business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future, allowing the Company to recover the original cost of $7.8 million.  The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible other-than-temporary impairment.

 

5. Other Comprehensive Income

 

The components of comprehensive income are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 30,

 

January 31,

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,515

 

$

4,541

 

$

5,144

 

$

18,409

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized losses on long-term investments

 

(140

)

(549

)

(209

)

(549

)

Comprehensive income

 

$

6,375

 

$

3,992

 

$

4,935

 

$

17,860

 

 

6. Warranty Reserves

 

The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred.  The warranty reserve is included in other current liabilities. The related expense is included in cost of sales.  Warranty reserve activity is summarized as follows for the three and nine months ended January 30, 2010 and January 31, 2009 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 30,

 

January 31,

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

586

 

$

399

 

$

523

 

$

344

 

Warranty expense

 

356

 

295

 

1,057

 

772

 

Warranty costs incurred

 

(278

)

(194

)

(916

)

(616

)

Ending balance

 

$

664

 

$

500

 

$

664

 

$

500

 

 

7. Customer-Funded Research & Development

 

Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales when the corresponding revenue is recognized, which is generally as the R&D services are performed. Revenue from customer-funded R&D was approximately $16,299,000 and $64,080,000 for the three and nine months ended January 30, 2010, respectively.  Revenue from customer-funded R&D was approximately $16,844,000 and $45,917,000 for the three and nine months ended January 31, 2009, respectively.

 

8. Income Taxes

 

For the three and nine months ended January 30, 2010, the Company recorded a provision for income taxes of $2,004,000 and $1,404,000, respectively, yielding an effective tax rate of 23.5% and 21.4%, respectively. The variance from statutory rates is primarily due to R&D tax credits.  For the three and nine months ended January 31, 2009, the Company recorded (benefits) provisions for income taxes of ($242,000) and $6,264,000, respectively, yielding an effective tax rate of negative 5.6% and 25.4%, respectively. The variance from statutory rates is primarily due to R&D tax credits.

 

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

9. Segment Data

 

The Company’s product segments are as follows:

 

·

 

Unmanned Aircraft Systems (“UAS”) — The UAS segment consists primarily of the design, development, production and support of unmanned aircraft systems solutions.

 

 

 

·

 

Efficient Energy Systems (“EES”) — The EES segment consists primarily of the design, development, production and support of system solutions for the clean transportation and clean energy markets.

 

The accounting policies of the segments are the same as those described in Note 1, “Organization and Significant Accounting Policies.” The operating segments do not make sales to each other. Depreciation and amortization related to the manufacturing of goods is included in gross margin for the segments. The Company does not discretely allocate assets to its operating segments, nor does the CODM evaluate operating segments using discrete asset information. Consequently, the Company operates its financial systems as a single segment for accounting and control purposes, maintains a single indirect rate structure across all segments, has no inter-segment sales or corporate elimination transactions, and maintains limited financial statement information by segment.

 

The segment results are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 30,

 

January 31,

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

 

 

UAS

 

$

55,089

 

$

43,394

 

$

132,089

 

$

145,926

 

EES

 

5,772

 

8,831

 

18,079

 

25,691

 

Total

 

60,861

 

52,225

 

150,168

 

171,617

 

Gross margin:

 

 

 

 

 

 

 

 

 

UAS

 

21,125

 

13,461

 

45,926

 

50,050

 

EES

 

2,356

 

3,216

 

7,919

 

12,197

 

Total

 

23,481

 

16,677

 

53,845

 

62,247

 

Selling, general and administrative

 

9,833

 

7,950

 

30,828

 

23,900

 

Research and development

 

5,167

 

4,625

 

16,616

 

14,781

 

Income from operations

 

8,481

 

4,102

 

6,401

 

23,566

 

Interest income

 

38

 

197

 

147

 

1,107

 

Income before income taxes

 

$

8,519

 

$

4,299

 

$

6,548

 

$

24,673

 

 

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ITEM 2.  MA NAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 II, Item 1A, “Risk Factors.”

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these 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

 

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revenue recognition, inventories and reserves for excess and obsolescence, long-term investments, self-insured liabilities, accounting for stock-based awards, 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.

 

There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in the Form 10-K for the fiscal year ended April 30, 2009.

 

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 2010 fiscal year ends on April 30, 2010 and our fiscal quarters end on August 1, 2009, October 31, 2009 and January 30, 2010.

 

Results of Operations

 

Our operating segments are Unmanned Aircraft Systems, or UAS, and Efficient Energy Systems, or EES. The accounting policies for each of these segments are the same. In addition, a significant portion of our research and development, or R&D, selling, general and administrative, or SG&A, and general overhead resources are shared across our segments.

 

The following table sets forth our revenue and gross margin generated by each operating segment for the periods indicated (in thousands):

 

Three Months Ended January 30, 2010 Compared to Three Months Ended January 31, 2009

 

 

 

Three Months Ended

 

 

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

UAS

 

$

55,089

 

$

43,394

 

EES

 

5,772

 

8,831

 

Total

 

60,861

 

52,225

 

Gross margin:

 

 

 

 

 

UAS

 

21,125

 

13,461

 

EES

 

2,356

 

3,216

 

Total

 

23,481

 

16,677

 

Selling, general and administrative

 

9,833

 

7,950

 

Research and development

 

5,167

 

4,625

 

Income from operations

 

8,481

 

4,102

 

Interest income

 

38

 

197

 

Income before income taxes

 

$

8,519

 

$

4,299

 

 

Revenue. Revenue for the three months ended January 30, 2010 was $60.9 million, as compared to $52.2 million for the three months ended January 31, 2009, representing an increase of $8.7 million, or 17%.  UAS revenue increased $11.7 million, or 27%, to $55.1 million for the three months ended January 30, 2010, primarily due to increased UAS service revenue of $13.5 million, partially offset by lower product deliveries of $0.6 million and customer-funded R&D work of $1.2 million. The increase in UAS service revenue was primarily due to the retrofitting of our analog Raven B systems with our Digital Data Link technology.  EES revenue decreased by $3.1 million, or 35%, to $5.8 million for the three months ended January 30, 2010.  The decrease in EES revenue was primarily due to decreased product deliveries of electric vehicle test systems and industrial fast charge systems.

 

Cost of Sales. Cost of sales for the three months ended January 30, 2010 was $37.4 million, as compared to $35.5 million for the three months ended January 31, 2009, representing an increase of $1.9 million, or 5%. The increase in cost of sales was caused primarily by higher UAS cost of sales of $4.0 million, partially offset by lower EES cost of sales of $2.1 million.

 

Gross Margin. Gross margin for the three months ended January 30, 2010 was $23.5 million, as compared to $16.7 million for the three months ended January 31, 2009, representing an increase of $6.8 million, or 41%. UAS gross margin increased $7.7 million, or 57%, to $21.1 million for the three months ended January 30, 2010. As a percentage of revenue, gross margin for UAS increased from

 

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31% to 38% primarily due to lower program costs and a higher mix of fixed price contracts versus cost-reimbursable contracts.  During the same period of the prior year, gross margins were impacted by a reduced indirect rate application.  EES gross margin decreased $0.9 million, or 27%, to $2.4 million for the three months ended January 30, 2010.  As a percentage of revenue, EES gross margin increased from 36% to 41% primarily due to product mix.

 

Selling, General and Administrative .   SG&A expense for the three months ended January 30, 2010 was $9.8 million, or 16% of revenue, compared to SG&A expense of $7.9 million, or 15% of revenue, for the three months ended January 31, 2009.  SG&A expense increased $1.9 million primarily due to higher selling and business development costs and increased bid and proposal activity.

 

Research and Development. R&D expense for the three months ended January 30, 2010 was $5.2 million, or 8% of revenue, which was higher than R&D expense of $4.6 million, or 9% of revenue for the three months ended January 31, 2009.  The increase in R&D expense of $0.5 million was primarily due to increased investments in support of electric vehicle charging infrastructure.

 

Interest Income. Interest income for the three months ended January 30, 2010 was $38,000, which was lower than interest income of $197,000 for the three months ended January 31, 2009.  Interest income decreased primarily due to lower yields and lower average investment portfolio balances.

 

Income Tax Expense. Our effective income tax rate was 23.5% for the three months ended January 30, 2010, as compared to negative 5.6% for the three months ended January 31, 2009. This increase was primarily due to lower amounts of tax benefits related to federal R&D tax credits than in the prior year.

 

Nine Months Ended January 30, 2010 Compared to Nine Months Ended January 31, 2009

 

 

 

Nine Months Ended

 

 

 

January 30,

 

January 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

UAS

 

$

132,089

 

$

145,926

 

EES

 

18,079

 

25,691

 

Total

 

150,168

 

171,617

 

Gross margin:

 

 

 

 

 

UAS

 

45,926

 

50,050

 

EES

 

7,919

 

12,197

 

Total

 

53,845

 

62,247

 

Selling, general and administrative

 

30,828

 

23,900

 

Research and development

 

16,616

 

14,781

 

Income from operations

 

6,401

 

23,566

 

Interest income

 

147

 

1,107

 

Income before income taxes

 

$

6,548

 

$

24,673

 

 

Revenue. Revenue for the nine months ended January 30, 2010 was $150.2 million, as compared to $171.6 million for the nine months ended January 31, 2009, representing a decrease of $21.4 million, or 12%.  UAS revenue decreased $13.8 million, or 9%, to $132.1 million for the nine months ended January 30, 2010, primarily due to decreased UAS product deliveries of $30.9 million, partially offset by higher customer-funded R&D work of $16.8 million.  The decrease in UAS product deliveries was primarily due to a reduction in our analog Raven B production as we transitioned into the production of Raven B systems with our new Digital Data Link technology.  The increase in UAS customer-funded R&D revenue was primarily due to increased activity on the Global Observer program.  EES revenue decreased by $7.6 million, or 30%, to $18.1 million for the nine months ended January 30, 2010.  The decrease in EES revenue was primarily due to decreased product deliveries of electric vehicle test systems and industrial fast charge systems.

 

Cost of Sales. Cost of sales for the nine months ended January 30, 2010 was $96.3 million, as compared to $109.4 million for the nine months ended January 31, 2009, representing a decrease of $13.1 million, or 12%. The decrease in cost of sales was caused by lower UAS cost of sales of $9.7 million and EES cost of sales of $3.4 million.

 

Gross Margin. Gross margin for the nine months ended January 30, 2010 was $53.8 million, as compared to $62.2 million for the nine months ended January 31, 2009, representing a decrease of $8.4 million, or 13%. UAS gross margin decreased $4.1 million, or 8%, to $45.9 million for the nine months ended January 30, 2010. As a percentage of revenue, gross margin for UAS increased from 34% to 35%.  EES gross margin decreased $4.3 million, or 35%, to $7.9 million for the nine months ended January 30, 2010.  As a percentage

 

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of revenue, EES gross margin decreased from 47% to 44%.

 

Selling, General and Administrative .   SG&A expense for the nine months ended January 30, 2010 was $30.8 million, or 21% of revenue, compared to SG&A expense of $23.9 million, or 14% of revenue, for the nine months ended January 31, 2009.  SG&A expense increased $6.9 million primarily due to higher selling and business development costs, increased bid and proposal activity and higher administrative infrastructure costs.

 

Research and Development. R&D expense for the nine months ended January 30, 2010 was $16.6 million, or 11% of revenue, which was higher than R&D expense of $14.8 million, or 9% of revenue, for the nine months ended January 31, 2009.  The increase in R&D expense of $1.8 million was primarily due to increased investments in support of electric vehicle charging infrastructure.

 

Interest Income. Interest income for the nine months ended January 30, 2010 was $0.1 million, which was lower than interest income of $1.1 million for the nine months ended January 31, 2009.  Interest income decreased primarily due to lower yields and lower average investment portfolio balances.

 

Income Tax Expense. Our effective income tax rate was 21.4% for the nine months ended January 30, 2010, as compared to 25.4% for the nine months ended January 31, 2009.  The decrease was primarily due to tax benefits related to federal R&D tax credits that were higher as a percentage of taxable income when compared to the prior year, which resulted in a lower effective tax rate.

 

Backlog .   We define funded backlog as unfilled firm orders for products and services for which funding currently is appropriated to us under the contract by the customer. As of January 30, 2010 and April 30, 2009, our funded backlog was approximately $98.7 million and $114.8 million, respectively.

 

In addition to our funded backlog, we also had unfunded backlog of $346.3 million and $510.6 million as of January 30, 2010 and April 30, 2009, respectively.  We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with multiple one-year options, and indefinite delivery indefinite quantity, or IDIQ, contracts. The decline in unfunded backlog from April 30, 2009 to January 30, 2010 resulted primarily from the expiration of an IDIQ-type contract that had been established in 2004.  Unfunded backlog does not obligate the U.S. government 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.

 

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 funded, may be terminated at the convenience of the U.S. government.

 

Liquidity and Capital Resources

 

We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses and ongoing research and development costs, all of which we anticipate funding through our existing working capital and funds provided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. In addition, we do not currently anticipate significant investment in property, plant and equipment, and 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 and debt service requirements, if any, 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 obtain additional financing.  The global credit crisis has imposed exceptional levels of volatility and disruption in the capital markets, severely diminished liquidity and credit availability, and increased counterparty risk. Nevertheless, we anticipate that existing sources of liquidity 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 and services, and marketing acceptance and adoption of our products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from short-term borrowing are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. To the extent we require additional funding, we cannot be certain that such funding will be available to us on acceptable terms, or at all.  Although we are currently not a party to any agreement or letter of intent with respect to potential investment in, or

 

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acquisitions of, businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing.

 

Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in most major economies.  As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads.  Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers.  These factors have led to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending.  Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to access the capital markets to meet liquidity needs. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current instability of financial institutions, we cannot be assured that we will not experience losses on these deposits.

 

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.

 

Cash Flows

 

The following table provides our cash flow data for the nine months ended January 30, 2010 and January 31, 2009 (in thousands):

 

 

 

Nine Months Ended

 

 

 

January 30,
2010

 

January 31,
2009

 

 

 

(Unaudited)

 

Net cash (used in) provided by operating activities

 

$

(11,590

)

$

20,882

 

Net cash used in investing activities

 

$

(52,876

)

$

(25,085

)

Net cash provided by financing activities

 

$

808

 

$

1,077

 

 

Cash Used in Operating Activities. Net cash used in operating activities for the nine months ended January 30, 2010 increased by $32.5 million to $11.6 million, compared to net cash provided by operating activities of $20.9 million for the nine months ended January 31, 2009. This increase in net cash used in operating activities was primarily due to lower income of $13.3 million, a reduction in tax benefits from stock-based compensation of $9.3 million and higher working capital needs of $13.3 million, partially offset by higher depreciation of $2.8 million.

 

Cash Used in Investing Activities. Net cash used in investing activities increased by $27.8 million to $52.9 million for the nine months ended January 30, 2010, compared to net cash used in investing activities of $25.1 million for the nine months ended January 31, 2009. The increase in net cash used in investing activities was primarily due to an increase in net purchases of investments of $29.1 million, partially offset by lower acquisition of property and equipment of $1.4 million.

 

Cash Provided by Financing Activities. Net cash provided by financing activities decreased by $0.3 million to $0.8 million for the nine months ended January 30, 2010, compared to $1.1 million for the nine months ended January 31, 2009.  During the nine months ended January 30, 2010, we received proceeds from stock option exercises of $0.8 million.

 

Off-Balance Sheet Arrangements

 

During the third quarter, there were no material changes in our off balance sheet arrangements or contractual obligations and commercial commitments from those disclosed in the Form 10-K for the fiscal year ended April 30, 2009.

 

Inflation

 

Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.

 

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New Accounting Standards

 

Please refer to Note 1 “Organization and Significant Accounting Policies” to our unaudited consolidated financial statements in Part I, Item 1 of this quarterly report for a discussion of new accounting pronouncements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE 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. Please refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, contained in our Annual Report on Form 10-K for the fiscal year ended April 30, 2009, for further discussion on quantitative and qualitative disclosures about market risk.

 

Interest Rate Risk

 

It is our policy not to enter into interest rate derivative financial instruments. We do not currently have any significant interest rate exposure.

 

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, and do not expect to incur significant foreign exchange gains or losses in the future. We occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Controls and Procedures

 

We maintain disclosure controls and procedures 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.

 

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

 

Internal Control over Financial Reporting

 

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 Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended January 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

18



Table of Contents

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any material legal proceedings. We are, however, subject to lawsuits from time to time in the ordinary course of business.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2009.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit
Number

 

Description

10.1†

 

Award Contract, dated August 15, 2005, between AeroVironment, Inc. and U.S. Army Aviation & Missile Command, as amended as of December 2, 2009.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


†                    Confidential treatment has been requested for portions of this exhibit.

 

19



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: March 10, 2010

 

AEROVIRONMENT, INC.

 

 

 

 

By:

/s/ Timothy E. Conver

 

 

Timothy E. Conver

 

 

Chairman, Chief Executive Officer and President

 

 

(Principal Executive Officer)

 

 

 

 

 

/s/ Stephen C. Wright

 

 

Stephen C. Wright

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

20


Exhibit 10.1

 

CERTAIN MATERIAL (INDICATED BY AN ASTERISK [***]) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

AWARD/CONTRACT

  1.

This Contract Is A Rated Order

Under DPAS (15 CFR 350)

  Rating         DOA1

  Page 1 of 330 Pages

2. Contract (Proc. Inst. Indent.) No.

  3.

Effective Date

  4. Requisition/Purchase Request/Project No.

 

W58RGZ-05-C-0338

 

2005AUG15

MT 0037 10

5. Issued By

               Code

W58RGZ

  6. Administered By (If Other Than Item 5)

Code

 S0512A

 

 

 

 

 

 

US ARMY CONTRACTING COMMAND
CCAM-AR-A
DEBRA R WOOD (256) 313-4176
AMCOM CONTRACTING CENTER
REDSTONE ARSENAL AL 35898-5280

  DCMA LOS ANGELES
  PO BOX 9608
  MISSION HILLS CA  91346-9608

 

 

 

 

e-mail address:                      DEBRA.WOOD@US.ARMY.MIL

                                    SCD    A      PAS    None                   ADP PT    HQ0339

7. Name And Address Of Contractor (No., Street, City, County, State and Zip Code)

  8. Delivery

 

 

 

AEROVIRONMENT, INC.

 

   x FOB Origin     o Other (See Below)

181 W HUNTINGTON DR STE 202

 

 

MONROVIA, CA  91016-3456

 

  9. Discount For Prompt Payment

 

 

 

 

 

 

 

 

 

 

  10. Submit Invoices

  Item

TYPE BUSINESS:  Other Small Business Performing in U.S.

 

  (4 Copies Unless Otherwise Specified)

          12

Code   60107                                       

   Facility Code

 

  To The Address Shown In:

 

 

 

 

 

11. Ship To/Mark For

 

Code

 

12. Payment Will Be Made By

Code

HQ0339

SEE SCHEDULE

 

 

 

 

DFAS-COLUMBUS CENTER

DFAS CO-WEST ENTITLEMENT OPERATIONS

P.O. BOX 182381

COLUMBUS, OH  43218-2381

PHONE:  1-800-756-4571

 

 

 

 

 

 

13. Authority For Using Other Than Full And Open Competition:

 

14. Accounting And Appropriation Data

 

o   10 U.S.C. 2304(c)(    )             o   41 U.S.C. 253(c)(    )

    SEE SECTION G

15A. Item No.

15B. Supplies/Services

   15C. Quantity

15D. Unit

15E. Unit Price

15F. Amount

SEE SCHEDULE

CONTRACT TYPE:

   Firm-Fixed-Price

   Cost-Plus-Incentive-Fee

     KIND OF CONTRACT:

     System Acquisition  Contracts

     Supply Contracts and Priced Orders



FMS REQUIREMENT

Contract Expiration Date:  2010DEC31

 

15G. Total Amount Of Contract

           $[***]

16. Table Of Contents

(X)

Sec.

Description

Page(s)

(X)

Sec.

Description

Page(s)

 

Part I — The Schedule

 

 

Part II — Contract Clauses

 

X

A

Solicitation/Contract Form

1

X

I

 Contract Clauses

302

X

B

Supplies or Services and Prices/Costs

70

Part III — List Of Documents, Exhibits, And Other Attachments

X

C

Description/Specs./Work Statement

265

X

J

 List of Attachments

329

X

D

Packaging and Marketing

267

Part IV — Representations And Instructions

X

E

Inspection and Acceptance

268

 

K

 Representations, Certifications, and

 

X

F

Deliveries or Performance

269

 

 Other Statements of Offerors

 

X

G

Contract Administration Data

270

 

L

 Instrs., Conds., and Notices to Offerors

 

X

H

Special Contract Requirements

284

 

M

 Evaluation Factors for Award

 

Contacting Officer Will Complete Item 17 Or 18 As Applicable

17. o Contractor’s Negotiated Agreement (Contractor is required to sign this document and return      copies to issuing office.) Contractor agrees to furnish and deliver all item or perform all the services set forth or otherwise identified above and on any continuation sheets for the consideration stated herein. The rights and obligations of the parties to this contract shall be subject to and governed by the following documents: (a) this award/contract, (b) the solicitation, if any, and c) such provisions, representations, certifications, and specifications, as are attached or incorporated by reference herein. (Attachments are listed herein.)

18. x Award (Contractor is not required to sign this document.) Your offer on Solicitation Number W58RGZ05R0382 , including the additions or changes made by you which additions or changes are set forth in full above, is herby accepted as to the items listed above and on any continuation sheets.  This award consummates the contract which consists of the following documents: (a) the Government’s solicitation and your offer, and (b) this award/contract. No further contractual document is necessary.

19A. Name And Title Of Signer (Type Or Print)

20A. Name Of Contracting Officer

 

 

 

 

19B. Name of Contractor

  19c. Date Signed

20B. United States Of America

20C. Date Signed

 

 

 

 

By

 

 

 

By

SIGNED REPRINT

 

2005AUG15

 

(Signature of person authorized to sign)

 

 

(Signature of Contracting Officer)

 

 

AUTHORIZED FOR LOCAL REPRODUCTION

Standard Form 26 (Rev. 12/2002)

Previous edition is usable

Prescribed by GSA — FAR (48 CFR) 53.214(a)

 


[***]

Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.  Confidential treatment has been requested with respect to the omitted portions.

 

1



 

 

 

Reference No. of Document Being Continued

 

 

 

 

 

 

 

 

 

PIIN/SIIN W58RGZ-05-C-O338                       MOD/AMD

 

REPRINT

 

Name of Offeror or Contractor:   AEROVIRONMENT, INC.

 

SECTION A - SUPPLEMENTAL INFORMATION

 

THE FOLLOWING MODIFICATIONS HAVE BEEN INCORPORATED

 

P00001

P00002

P00003

P00004

P00005

P00006

P00007

P00008

P00009

P00010

P00011

P00012

P00013

P00014

P00015

P00017

P00018

P00019

P00020

P00021

P00022

P00023

P00024

P00025

P00027

P00028

P00029

P00030

P00031

P00032

P00033

P00034

P00035

P00036

P00037

P00038

P00039

P00040

P00041

P00042

P00043

P00044

P00045

P00046

P00047

P00048

P00049

P00050

P00051

P00052

P00053

P00054

P00055

P00056

P00057

P00058

P00059

P00060

P00061

P00062

 

2



 

P00063

P00064

P00065

P00066

P00067

P00068

P00069

P00070

P00071

P00072

P00074

P00075

P00076

P00077

P00078

P00079

P00080

P00081

P00082

P00083

P00084

P00085

P00086

P00087

P00088

P00089

P00090

P00091

P00092

PZ0016

PZ0026

 

3



 

SECTION A - SUPPLEMENTAL INFORMATION

 

 

 

Regulatory Cite

 

Title

 

Date

 

 

 

 

 

 

 

A-1

 

52.217-4700

 

PREAMBLE (LETTER CONTRACT DEFINITIZED) (USAAMCOM)

 

NOV/1999

 

It is understood and mutually agreed between the parties that:

 

1.     This Modification, PZ00026, is entered into pursuant to and supersedes the Letter Contract P00022; and constitutes the definitive contract contemplated by the Letter Contract, which contract is completely set forth in the following pages; except that those documents previously provided to the contractor and not again included are listed in Part III, Section J, of this modification and are incorporated herein by reference.

 

2.     The work performed by the contractor under the Letter Contract is considered to have been performed pursuant to this definitive contract.

 

3.     In the event that this modification contains provisions which may be construed to be inconsistent in any particular way with the provisions of the Letter Contract, then the provisions of this Modification PZ0026 shall be deemed to state the complete agreement and intent of the parties hereto and any rights, duties, and obligations created by the provisions of the Letter Contract which are inconsistent with the terms of this modification are hereby waived, cancelled, and released.

 

Modification P00022 is for [***] each Small Unmanned Aircraft Systems (SUAS) know as Raven. This definitization modification includes an option for [***] additional systems and [***] additional ISPs.

 

A-1. FULL PERFORMANCE ON THIS CONTRACT WILL REQUIRE ACCESS TO INFORMATION AND OR EQUIPMENT THAT IS NOT RELEASEABLE TO FOREIGN PARTICIPANTS.

 

*** END OF NARRATIVE A0001 ***

 

A-1         PURSUANT TO FEDERAL ACQUISITION REGULATION 17.207 AND SPECIAL PROVISION H-8 THIS MODIFICATION HEREBY UNILATERALLY EXERCISES THE OPTIONS AS SHOWN BELOW:

 

CLIN

 

DESCRIPTION

 

VALUE

 

0002

 

LOW RATE INITIAL PRODUCTION (QUANTITY 10 EACH)

 

$

[***]

 

0002AA

 

FUNDING, LRIP QUANTITY OF FIVE EACH

 

 

 

0002AB

 

FUNDING, LRIP QUANTITY OF FIVE EACH

 

 

 

0003AA

 

CONTRACTOR / DT TEST

 

$

[***]

 

0004

 

ENGINEERING SERVICES

 

$

[***]

 

0004AA

 

FUNDING, ENGINEERING SERVICES

 

 

 

0004AB

 

FUNDING, ENGINEERING SERVICES

 

 

 

0005

 

ACCOUNTING FOR CONTRACT SERVICES

 

$

[***]

 

0006AA

 

LOGISTICS SUPPORT

 

$

[***]

 

0007AA

 

TRAINING

 

$

[***]

 

0008

 

INITIAL SPARES (QUANTITY TO SUPPORT 10 LRIP SYSTEMS)

 

$

[***]

 

0008AA

 

FUNDING, INITIAL SPARES

 

 

 

0008AB

 

FUNDING, INITIAL SPARES

 

 

 

0009

 

DATA OPTION FOR CLINs 2-8

 

$

[***]

 

 

 

 

 

 

 

 

 

TOTAL

 

$

[***]

 

 

A-2 ANY EFFORT PERFORMED AS REQUIRED BY CLINS 0003AA, 0004AA, 0004AB, 0005, 0006AA AND 0007AA SHALL ONLY BE IN SUPPORT OF THE FIVE SUAV SYSTEMS PROCURED UNDER SLIN 0002AA SINCE THESE SLINS ARE FUNDED WITH RESEARCH, DEVELOPMENT, TESTING AND ENGINEERING FUNDS (RDT&E).

 

A-3 AS A RESULT OF THIS ACTION THE TOTAL CONTRACT VALUE IS INCREASED BY $ [***] FROM $ [***] TO $ [***] .

 

A-4 ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND IN FULL EFFECT.

 


[***]

Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.  Confidential treatment has been requested with respect to the omitted portions.

 

2



 

*** END OF NARRATIVE A0002 ***

 

A-1 THE PURPOSE OF P0002 IS TO CHANGE THE CAGE CODE AND ADDRESS FOR THE SUPPLIER.

 

A-2 THIS MODIFICATION IS ISSUED AT NO CHANGE IN CONTRACT VALUE.

 

A-3 ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND IN FULL EFFECT

 

*** END OF NARRATIVE A0003 ***

 

A-1                             THE PURPOSE OF P0003 IS TO CORRECT THE ORIGINAL SOW, DSL, AND CDRLs PROVIDED TO THE SUPPLIER AND TO EXTEND THE PERIOD OF PERFORMANCE FOR CLIN 0003AA.

 

A-2                             THE FOLLOWING ATTACHMENTs AND EXHIBITs ARE REPLACED IN THEIR ENTIRETY:

 

ATTACHMENT 12,

 

THE STATEMENT OF WORK;

ATTACHMENT 10,

 

DOCUMENT SUMMARY LIST;

EXHIBIT A,

 

DD FORMs 1423A CONTRACT DATA REQUIEMENTS LIST.

 

A-3                             THE PERIOD OF PERFORMANCE FOR THE FOLLOWING CLINs IS CHANGED AS SHOWN BELOW:

 

CLIN

 

AS READS

 

CHANGED TO READ

0003AA

 

28 DEC 05

 

30 Sep 06.

 

A-4                             THIS MODIFICATION IS ISSUED AT NO CHANGE IN CONTRACT VALUE.

 

A-5                             ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND IN FULL EFFECT

 

*** END OF NARRATIVE A0004 ***

 

A-1                             THE PURPOSE OF P0004 IS TO EXERCISE AND FULLY FUND THE PRICED OPTIONS FOUND AT CLINs: 0012; 0013; 0014; AND 0016.

 

A-2         THE PERIOD OF PERFORMANCE WILL BE FOR ONE YEAR.

 

A-3                             THIS CONTRACT ACTION ADDS $11,471,430 TO THE CONTRACT RAISING THE TOTAL VALUE FROM $ [***] TO $ [***]

 

A-4         ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND IN FULL EFFECT.

 

*** END OF NARRATIVE A0005 ***

 

A - 1       The purpose of P0005 is to add the shipping instructions.

 

A - 2                       The contractor shall ship-in-place and then prepare for shipment to the address shown below, for all deliverables to include, but not limited to: systems, spares, and repaired or reworked systems or spares, for all CLINs; unless otherwise directed in writing by the Contracting Officer:

 

USA AMCOM/UAVS

ATTN: Raven Team (DSN 318 838-1045)

Sapper Ave

LSA Anaconda

Balad, Iraq (W9115T)

 


[***]

Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.  Confidential treatment has been requested with respect to the omitted portions.

 

3



 

A - 3       This contract action is issued at no change in contract value.

 

A - 4       All other terms and conditions remain unchanged and in full effect.

 

*** END OF NARRATIVE A0006 ***

 

A 1                              The purpose of this modification (P0006) it to add revision 001 of the DD Form 254 to the contract as attachment A0015.

 

A 2                              This change is issued at no change in contract value.

 

A 3                              All other terms and conditions remain unchanged.

 

*** END OF NARRATIVE A0007 ***

 

A - 1       The purpose of P0007 is to exercise and fund the priced options found at CLINs: 0010 and 0015.

 

A - 2       The narrative title for CLINs 00010 and 00015 are renamed LRIP II Production Units and LRIP II Initial Spares Packages; respectively.

 

A - 3       SubCLINs 00010AA and 00015AA are renamed LRIP II Production Units and LRIP II Initial Spares Packages; respectively. The quantity and delivery schedule are as shown below:

 

CLIN

 

Release

 

Quantity

 

Ship Date

 

 

 

 

 

 

 

 

 

00010AA

 

1

 

7

 

09SEP06

 

00010AA

 

2

 

7

 

29SEP06

 

00010AA

 

3

 

7

 

13OCT06

 

00010AA

 

4

 

8

 

27OCT06

 

00010AA

 

5

 

8

 

10NOV06

 

00010AA

 

6

 

8

 

24NOV06

 

00010AA

 

7

 

8

 

08DEC06

 

00010AA

 

8

 

8

 

22DEC06

 

00010AA

 

9

 

8

 

12JAN07

 

00010AA

 

10

 

8

 

26JAN07

 

00010AA

 

11

 

8

 

09FEB07

 

00010AA

 

12

 

8

 

23FEB07

 

00010AA

 

13

 

7

 

09MAR07

 

00010AA

 

14

 

6

 

23MAR07

 

 

 

 

 

 

 

 

 

CLIN

 

Release

 

Quantity

 

Ship Date

 

 

 

 

 

 

 

 

 

00015AA

 

1

 

7

 

09SEP06

 

00015AA

 

2

 

7

 

29SEP06

 

00015AA

 

3

 

7

 

13OCT06

 

00015AA

 

4

 

8

 

27OCT06

 

00015AA

 

5

 

8

 

10NOV06

 

00015AA

 

6

 

8

 

24NOV06

 

00015AA

 

7

 

8

 

08DEC06

 

00015AA

 

8

 

8

 

22DEC06

 

00015AA

 

9

 

8

 

12JAN07

 

00015AA

 

10

 

8

 

26JAN07

 

00015AA

 

11

 

8

 

09FEB07

 

00015AA

 

12

 

8

 

23FEB07

 

00015AA

 

13

 

7

 

09MAR07

 

00015AA

 

14

 

6

 

23MAR07

 

 

A - 4                       SubCLINs 00010AB and 00015AB are SOCOM LRIP II Production units and LRIP II Initial Spares Packages. The quantity and delivery

 


[***]

Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.  Confidential treatment has been requested with respect to the omitted portions.

 

4



 

schedule are as shown below:

 

CLIN

 

Release

 

Quantity

 

Ship Date

 

00010AB

 

1

 

5

 

14JUL06

 

00010AB

 

2

 

5

 

28JUL06

 

00010AB

 

3

 

5

 

11AUG06

 

00010AB

 

4

 

5

 

25AUG06

 

00010AB

 

5

 

10

 

09SEP06

 

00010AB

 

6

 

10

 

29SEP06

 

00010AB

 

7

 

10

 

13OCT06

 

00010AB

 

8

 

9

 

27OCT06

 

00010AB

 

9

 

9

 

10NOV06

 

00010AB

 

10

 

9

 

24NOV06

 

00010AB

 

11

 

9

 

08DEC06

 

00010AB

 

12

 

9

 

22DEC06

 

00010AB

 

13

 

9

 

12JAN07

 

00010AB

 

14

 

9

 

26JAN07

 

00010AB

 

15

 

9

 

09FEB07

 

00010AB

 

16

 

9

 

23FEB07

 

00010AB

 

17

 

7

 

09MAR07

 

00010AB

 

18

 

7

 

23MAR07

 

 

 

 

 

 

 

 

 

CLIN

 

Release

 

Quantity

 

Ship Date

 

 

 

 

 

 

 

 

 

00015AB

 

1

 

5

 

14JUL06

 

00015AB

 

2

 

5

 

28JUL06

 

00015AB

 

3

 

5

 

11AUG06

 

00015AB

 

4

 

5

 

25AUG06

 

00015AB

 

5

 

10

 

09SEP06

 

00015AB

 

6

 

10

 

29SEP06

 

00015AB

 

7

 

10

 

13OCT06

 

00015AB

 

8

 

9

 

27OCT06

 

00015AB

 

9

 

9

 

10NOV06

 

00015AB

 

10

 

9

 

24NOV06

 

00015AB

 

11

 

9

 

08DEC06

 

00015AB

 

12

 

9

 

22DEC06

 

00015AB

 

13

 

9

 

12JAN07

 

00015AB

 

14

 

9

 

26JAN07

 

00015AB

 

15

 

9

 

09FEB07

 

00015AB

 

16

 

9

 

23FEB07

 

00015AB

 

17

 

7

 

09MAR07

 

00015AB

 

18

 

7

 

23MAR07

 

 

A - 5       This contract action adds $ [***] to the contract raising the total value from $ [***] to $ [***] .

 

A - 6       All other terms and conditions remain unchanged and in full effect.

 

*** END OF NARRATIVE A0008 ***

 

A - 1       The purpose of P0008 is to change the Procurement Work Directive (PWD/PRON) number (part of the accounting and appropriation data) on SubCLINs 0010AB and 0015AB of this contract. In order to accomplish this change it is necessary to delete the funding from SubCLINs 0010AB and 0015AB and substitute revised SubCLINs 0010AB and 0015 AB as shown below:

 

DELETE :

 

SubCLIN:

 

0010AB

PRON: