AeroVironment, Inc.
AeroVironment Inc (Form: 10-Q, Received: 11/26/2014 06:02:18)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended November 1, 2014

 

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 x   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 x   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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(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 x

 

As of November 14, 2014, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,321,876.

 

 

 



Table of Contents

 

AeroVironment, Inc.

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

Consolidated Balance Sheets as of November 1, 2014 (Unaudited) and April 30, 2014

 

3

 

Consolidated Statements of Operations for the three and six months ended November 1, 2014 (Unaudited) and October 26, 2013 (Unaudited)

 

4

 

Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended November 1, 2014 (Unaudited) and October 26, 2013 (Unaudited)

 

5

 

Consolidated Statements of Cash Flows for the six months ended November 1, 2014 (Unaudited) and October 26, 2013 (Unaudited)

 

6

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

Item 2.

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

 

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

22

Item 4.

Controls and Procedures

 

22

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

23

Item 1A.

Risk Factors

 

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

Item 3.

Defaults Upon Senior Securities

 

23

Item 4.

Mine Safety Disclosures

 

23

Item 5.

Other Information

 

23

Item 6.

Exhibits

 

23

Signatures

 

24

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)

 

 

 

November 1,
2014

 

April 30,
2014

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

126,339

 

$

126,969

 

Short-term investments

 

81,120

 

70,639

 

Accounts receivable, net of allowance for doubtful accounts of $635 at November 1, 2014 and $791 at April 30, 2014

 

31,096

 

31,739

 

Unbilled receivables and retentions

 

7,103

 

10,929

 

Inventories, net

 

51,804

 

50,699

 

Income tax receivable

 

4,876

 

6,584

 

Deferred income taxes

 

4,996

 

5,038

 

Prepaid expenses and other current assets

 

4,233

 

4,260

 

Total current assets

 

311,567

 

306,857

 

Long-term investments

 

49,718

 

50,505

 

Property and equipment, net

 

16,889

 

19,997

 

Deferred income taxes

 

7,118

 

6,721

 

Other assets

 

837

 

874

 

Total assets

 

$

386,129

 

$

384,954

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

18,988

 

$

13,906

 

Wages and related accruals

 

9,889

 

14,083

 

Customer advances

 

4,655

 

2,984

 

Other current liabilities

 

9,709

 

6,762

 

Total current liabilities

 

43,241

 

37,735

 

Deferred rent

 

1,231

 

1,239

 

Liability for uncertain tax positions

 

3,513

 

3,513

 

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 — 23,324,276 at November 1, 2014 and 23,176,576 at April 30, 2014

 

2

 

2

 

Additional paid-in capital

 

146,431

 

143,648

 

Accumulated other comprehensive loss

 

(859

)

(263

)

Retained earnings

 

192,570

 

199,080

 

Total stockholders’ equity

 

338,144

 

342,467

 

Total liabilities and stockholders’ equity

 

$

386,129

 

$

384,954

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

3



Table of Contents

 

AeroVironment, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

42,874

 

$

51,537

 

$

85,685

 

$

78,711

 

Contract services

 

9,790

 

13,330

 

18,845

 

30,273

 

 

 

52,664

 

64,867

 

104,530

 

108,984

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Product sales

 

27,779

 

32,143

 

58,576

 

52,698

 

Contract services

 

7,014

 

8,846

 

14,029

 

19,863

 

 

 

34,793

 

40,989

 

72,605

 

72,561

 

Gross margin:

 

 

 

 

 

 

 

 

 

Product sales

 

15,095

 

19,394

 

27,109

 

26,013

 

Contract services

 

2,776

 

4,484

 

4,816

 

10,410

 

 

 

17,871

 

23,878

 

31,925

 

36,423

 

Selling, general and administrative

 

13,470

 

13,084

 

26,873

 

25,543

 

Research and development

 

8,531

 

6,861

 

15,655

 

14,051

 

(Loss) income from operations

 

(4,130

)

3,933

 

(10,603

)

(3,171

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

193

 

195

 

405

 

400

 

Other (expense) income

 

(583

)

(2,307

)

8

 

(5,701

)

(Loss) income before income taxes

 

(4,520

)

1,821

 

(10,190

)

(8,472

)

(Benefit) provision for income taxes

 

(1,619

)

166

 

(3,680

)

(2,917

)

Net (loss) income

 

$

(2,901

)

$

1,655

 

$

(6,510

)

$

(5,555

)

(Loss) earnings per share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.13

)

$

0.07

 

$

(0.29

)

$

(0.25

)

Diluted

 

$

(0.13

)

$

0.07

 

$

(0.29

)

$

(0.25

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

22,878,410

 

22,273,629

 

22,840,465

 

22,256,292

 

Diluted

 

22,878,410

 

22,697,590

 

22,840,465

 

22,256,292

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

4



Table of Contents

 

AeroVironment, Inc.

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,901

)

$

1,655

 

$

(6,510

)

$

(5,555

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on investments, net of tax

 

(644

)

77

 

(596

)

29

 

Total comprehensive (loss) income

 

$

(3,545

)

$

1,732

 

$

(7,106

)

$

(5,526

)

 

See accompanying notes to consolidated financial statements (unaudited).

 

5



Table of Contents

 

AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

November 1,
2014

 

October 26,
2013

 

Operating activities

 

 

 

 

 

Net loss

 

$

(6,510

)

$

(5,555

)

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,303

 

4,504

 

Provision for doubtful accounts

 

(105

)

309

 

Deferred income taxes

 

42

 

(233

)

Realized gain on sale of equity securities

 

(347

)

 

Stock-based compensation

 

1,745

 

1,840

 

Foreign currency losses

 

281

 

 

(Increase) decrease in fair value of conversion feature of convertible bonds

 

(73

)

5,711

 

Tax benefit from exercise of stock options

 

11

 

151

 

Excess tax benefit from stock-based compensation

 

(348

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

748

 

(16,777

)

Unbilled receivables and retentions

 

3,826

 

4,048

 

Inventories

 

(1,105

)

1,932

 

Income tax receivable

 

1,708

 

3,657

 

Other assets

 

(61

)

9

 

Accounts payable

 

5,082

 

(4,370

)

Other liabilities

 

764

 

(4,899

)

Net cash provided by (used in) operating activities

 

9,961

 

(9,673

)

Investing activities

 

 

 

 

 

Acquisitions of property and equipment

 

(1,070

)

(6,047

)

Acquisitions of distribution and licensing rights

 

 

(750

)

Net (purchases) redemptions of held-to-maturity investments

 

(19,586

)

6,934

 

Net sales of available-for-sale investments

 

9,038

 

175

 

Net cash (used in) provided by investing activities

 

(11,618

)

312

 

Financing activities

 

 

 

 

 

Excess tax benefit from exercise of stock options

 

348

 

 

Exercise of stock options

 

679

 

155

 

Net cash provided by financing activities

 

1,027

 

155

 

Net decrease in cash and cash equivalents

 

(630

)

(9,206

)

Cash and cash equivalents at beginning of period

 

126,969

 

75,332

 

Cash and cash equivalents at end of period

 

$

126,339

 

$

66,126

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

Unrealized loss (gain) on available-for-sale investments recorded in other comprehensive (loss) income, net of deferred taxes of $397 and $(18), respectively

 

$

596

 

$

(29

)

 

See accompanying notes to consolidated financial statements (unaudited).

 

6



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, support and operation 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 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 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 six months ended November 1, 2014, are not necessarily indicative of the results for the full year ending April 30, 2015. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2014, included in the Company’s Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

 

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 (“R&D”) activities and performance assessment. 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 billing rates, may create an additional receivable or liability for the Company.  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.

 

7



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

As of November 1, 2014 and April 30, 2014, the Company had $4.7 million and $2.1 million, respectively, in contract-related reserves for its estimate of potential refunds to customers for potential cost adjustments on U.S. government cost reimbursable contracts. For the three and six months ended November 1, 2014, the Company recorded $2.6 million of expense in cost of sales for these contract-related reserves.

 

(Loss) Earnings Per Share

 

Basic (loss) 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, shares of unvested restricted stock and restricted stock units.

 

The reconciliation of basic to diluted shares is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 1,
2014

 

October 26,
2013

 

November 1,
2014

 

October 26,
2013

 

Denominator for basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

22,878,410

 

22,273,629

 

22,840,465

 

22,256,292

 

Dilutive effect of employee stock options, unvested restricted stock and restricted stock units

 

 

423,961

 

 

 

Denominator for diluted (loss) earnings per share

 

22,878,410

 

22,697,590

 

22,840,465

 

22,256,292

 

 

Due to the net loss for the three months ended November 1, 2014 and the six months ended November 1, 2014 and October 26, 2013, no shares reserved for issuance upon exercise of stock options, restricted stock units or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. During the three months ended October 26, 2013, certain shares reserved for issuance upon exercise of stock options, shares of unvested restricted stock and restricted stock units were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. The number of shares reserved for issuance upon exercise of stock options, shares of unvested restricted stock and restricted stock units that met this anti-dilutive criterion for the three months ended October 26, 2013 was approximately 29,000.

 

Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”), No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the threshold for a disposal to qualify as a discontinued operation. To be considered a discontinued operation a disposal now must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This ASU also requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) . This ASU clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This ASU is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. This ASU may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

8



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

2. Investments

 

Investments consist of the following (in thousands):

 

 

 

November 1,
2014

 

April 30,
2014

 

Short-term investments:

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

Municipal securities

 

$

62,480

 

$

69,898

 

U.S. government securities

 

10,555

 

 

Certificates of deposit

 

3,883

 

741

 

Total held-to-maturity investments

 

76,918

 

70,639

 

Available-for-sale securities:

 

 

 

 

 

Equity securities

 

4,202

 

 

Total short-term investments

 

$

81,120

 

$

70,639

 

Long-term investments:

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

Municipal securities

 

$

40,173

 

$

29,759

 

U.S. government securities

 

6,040

 

 

Certificates of deposit

 

744

 

3,889

 

Total held-to-maturity investments

 

46,957

 

33,648

 

Available-for-sale securities:

 

 

 

 

 

Auction rate securities

 

2,761

 

5,683

 

Convertible bond

 

 

5,865

 

Equity securities

 

 

5,309

 

Total available-for-sale investments

 

2,761

 

16,857

 

Total long-term investments

 

$

49,718

 

$

50,505

 

 

Held-To-Maturity Securities

 

As of November 1, 2014 and April 30, 2014, the balance of held-to-maturity securities consisted of state and local government municipal securities, U.S. treasury securities and certificates of deposit. 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 November 1, 2014, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Municipal securities

 

$

102,653

 

$

37

 

$

(30

)

$

102,660

 

U.S. government securities

 

16,595

 

12

 

 

16,607

 

Certificates of deposit

 

4,627

 

 

 

4,627

 

Total held-to-maturity investments

 

$

123,875

 

$

49

 

$

(30

)

$

123,894

 

 

9



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the held-to-maturity investments as of April 30, 2014, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Municipal securities

 

$

99,657

 

$

65

 

$

(9

)

$

99,713

 

Certificates of deposit

 

4,630

 

 

 

4,630

 

Total held-to-maturity investments

 

$

104,287

 

$

65

 

$

(9

)

$

104,343

 

 

The amortized cost and fair value of the held-to-maturity securities by contractual maturity at November 1, 2014, were as follows (in thousands):

 

 

 

Cost

 

Fair Value

 

 

 

 

 

 

 

Due within one year

 

$

76,918

 

$

76,942

 

Due after one year through three years

 

46,957

 

46,952

 

Total

 

$

123,875

 

$

123,894

 

 

Available-For-Sale Securities

 

Auction Rate Securities

 

As of November 1, 2014 and April 30, 2014, the entire balance of available-for-sale, auction rate securities, consisted of two and three investment grade auction rate municipal bonds, respectively, with maturities ranging from 5 to 20 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.

 

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 November 1, 2014, 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 November 1, 2014. 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 of 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 impairment if a further decline in fair value occurs. 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 November 1, 2014, the Company did not consider these investments to be other-than-temporarily impaired.

 

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the auction rate securities as of November 1, 2014, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

3,200

 

$

 

$

(439

)

$

2,761

 

Total available-for-sale investments

 

$

3,200

 

$

 

$

(439

)

$

2,761

 

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of April 30, 2014, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Auction rate securities

 

$

6,575

 

$

 

$

(892

)

$

5,683

 

Total available-for-sale investments

 

$

6,575

 

$

 

$

(892

)

$

5,683

 

 

The amortized cost and fair value of the auction rate securities by contractual maturity at November 1, 2014, were as follows (in thousands):

 

 

 

Cost

 

Fair Value

 

 

 

 

 

 

 

Due after five through 10 years

 

$

1,200

 

$

1,142

 

Due after 10 years

 

2,000

 

1,619

 

Total

 

$

3,200

 

$

2,761

 

 

Convertible Bonds

 

As of November 1, 2014 the Company does not have any convertible bonds outstanding.  On August 11, 2014, the Company exercised its conversion right on its remaining convertible bond and the bond was converted into 1,062,699 CybAero common shares at the conversion price of 9.41 Swedish Kronor (“SEK”). The bond was in the amount of 10 million SEK.  The maturity date of the bond was November 30, 2017.

 

Equity Securities

 

As of November 1, and April 30, 2014, the entire balance of available-for-sale equity securities consisted of CybAero common shares. The shares are classified as available-for-sale. During the three and six months ended November 1, 2014, the Company realized gains of $0.2 million and $4.1 million, respectively, on the sale of CybAero shares.

 

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the equity securities as of November 1, 2014, were as follows (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Equity securities

 

$

5,257

 

$

 

$

(1,055

)

$

4,202

 

Total available-for-sale investments

 

$

5,257

 

$

 

$

(1,055

)

$

4,202

 

 

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

3. 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 November 1, 2014, 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

 

Auction rate securities

 

$

 

$

 

$

2,761

 

$

2,761

 

Equity securities

 

4,202

 

 

 

4,202

 

Total

 

$

4,202

 

$

 

$

2,761

 

$

6,963

 

 

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):

 

Description

 

Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)

 

Balance at May 1, 2014

 

$

7,297

 

Transfers to Level 3

 

 

Total gains (realized or unrealized)

 

 

 

Included in earnings

 

 

Included in other comprehensive loss

 

(1,161

)

Purchases, issuances and settlements, net

 

(3,375

)

Balance at November 1, 2014

 

$

2,761

 

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 November 1, 2014

 

$

 

 

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.  As of November 1, 2014, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 0.08% to 0.09%, estimated redemption periods of 5 to 20 years and discount rates of 4.9% to 19.2%. The discount rates were based on market rates for municipal bond securities, as adjusted for a risk premium to reflect the lack of liquidity of these investments.

 

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Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

4. Inventories, net

 

Inventories consist of the following (in thousands):

 

 

 

November 1,
2014

 

April 30,
2014

 

Raw materials

 

$

14,973

 

$

15,102

 

Work in process

 

5,604

 

7,542

 

Finished goods

 

34,296

 

31,289

 

Inventories, gross

 

54,873

 

53,933

 

Reserve for inventory obsolescence

 

(3,069

)

(3,234

)

Inventories, net

 

$

51,804

 

$

50,699

 

 

5. 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 six months ended November 1, 2014 and October 26, 2013 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,273

 

$

1,691

 

$

1,280

 

$

1,515

 

Warranty expense

 

1,027

 

332

 

1,409

 

818

 

Warranty claims settled

 

(341

)

(383

)

(730

)

(693

)

Ending balance

 

$

1,959

 

$

1,640

 

$

1,959

 

$

1,640

 

 

6. Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive loss are as follows (in thousands):

 

 

 

Available-for-Sale
Securities

 

Accumulated Other
Comprehensive Loss

 

Balance as of April 30, 2014

 

$

(263

)

$

(263

)

Unrealized loss

 

(993

)

(993

)

Income taxes

 

397

 

397

 

Balance as of November 1, 2014

 

$

(859

)

$

(859

)

 

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 $5.6 million and $9.9 million for the three and six months ended November 1, 2014, respectively. Revenue from customer-funded R&D was approximately $6.6 million and $16.9 million for the three and six months ended October 26, 2013, respectively.

 

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Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

8. Restructuring Charges

 

During the three and six months ended October 26, 2013, the Company recorded restructuring charges consisting primarily of severance charges of $0.7 million and $1.8 million, respectively.  During the three months ended October 26, 2013, $0.7 million in restructuring charges were recorded in cost of sales, all of which were related to the Unmanned Aircraft Systems (“UAS”) segment.  During the six months ended October 26, 2013, $1.7 million in restructuring charges were recorded in cost of sales, of which $1.4 million was related to UAS and $0.3 million was related to the Efficient Energy Systems (“EES”) business segment. During the six months ended October 26, 2013, $0.1 million in restructuring charges were recorded in selling, general and administrative costs.  The Company does not report SG&A costs by segment as the CODM only reviews the revenue and gross margin results for each of these segments when making resource allocation decisions.

 

The purpose of the organizational realignment and workforce reduction on May 29, 2013, within the Company’s UAS and EES business segments, was to enhance the Company’s focus on new product introductions and the adoption of new solutions designed to support the Company’s long-term growth plans. The workforce reduction was necessitated by continuing delays in U.S. government procurements from the Company’s UAS business segment and delays in the growth of plug-in electric vehicle adoption and associated recharging solution sales in the Company’s EES business segment.

 

The purpose of the organizational realignment and workforce reduction on September 26, 2013, within the Company’s UAS business segment, was to address shifts in the UAS segment’s business mix and align the skills within the UAS business segment more closely with market requirements to support ongoing programs and emerging growth opportunities.

 

9. Income Taxes

 

For the three and six months ended November 1, 2014, the Company recorded a benefit for income taxes of $1.6 million and $3.7 million, respectively, yielding an effective tax benefit rate of 35.8% and 36.1%, respectively. For the three and six months ended October 26, 2013, the Company recorded a provision (benefit) for income taxes of $0.2 million and $(2.9) million, respectively, yielding an effective tax rate of 9.1% and 34.4%, respectively. The variance from statutory tax rates for the three months ended October 26, 2013 was primarily due to federal research and development tax credits.

 

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Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

10. Segment Data

 

The Company’s product segments are as follows:

 

·                                           Unmanned Aircraft Systems — The UAS segment focuses primarily on the design, development, production, support and operation of innovative UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects to increase the security and effectiveness of the operations of the Company’s customers.

 

·                                           Efficient Energy Systems — The EES segment focuses primarily on the design, development, production, marketing, support and operation of innovative efficient electric energy systems that address the growing demand for electric transportation solutions.

 

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

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

UAS

 

$

43,045

 

$

56,079

 

$

84,231

 

$

91,290

 

EES

 

9,619

 

8,788

 

20,299

 

17,694

 

Total

 

52,664

 

64,867

 

104,530

 

108,984

 

Cost of sales:

 

 

 

 

 

 

 

 

 

UAS

 

27,575

 

35,280

 

58,590

 

59,879

 

EES

 

7,218

 

5,709

 

14,015

 

12,682

 

Total

 

34,793

 

40,989

 

72,605

 

72,561

 

Gross margin:

 

 

 

 

 

 

 

 

 

UAS

 

15,470

 

20,799

 

25,641

 

31,411

 

EES

 

2,401

 

3,079

 

6,284

 

5,012

 

Total

 

17,871

 

23,878

 

31,925

 

36,423

 

Selling, general and administrative

 

13,470

 

13,084

 

26,873

 

25,543

 

Research and development

 

8,531

 

6,861

 

15,655

 

14,051

 

(Loss) income from operations

 

(4,130

)

3,933

 

(10,603

)

(3,171

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

193

 

195

 

405

 

400

 

Other (expense) income

 

(583

)

(2,307

)

8

 

(5,701

)

(Loss) income before income taxes

 

$

(4,520

)

$

1,821

 

$

(10,190

)

$

(8,472

)

 

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Table of Contents

 

ITEM 2.                 MANAGEMENT’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 revenue recognition, inventories and reserves for excess and obsolescence, 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, 2014.

 

We review cost performance and estimates to complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in profit estimates for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the three and six months ended November 1, 2014 and October 26, 2013, changes in accounting estimates on fixed-price contracts recognized using the percentage of completion method of accounting are presented below.

 

For the three months ended November 1, 2014 and October 26, 2013, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Gross favorable adjustments

 

$

710

 

$

382

 

Gross unfavorable adjustments

 

(796

)

(572

)

Net unfavorable adjustments

 

$

(86

)

$

(190

)

 

For the three months ended November 1, 2014, favorable cumulative catch-up adjustments of $0.7 million were primarily due to final cost adjustments on 50 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.8 million were primarily related to higher than expected costs on 164 contracts, which individually were not material.

 

For the three months ended October 26, 2013, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on seven contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.6 million were primarily related to higher than expected costs on 43 contracts, which individually were not material.

 

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Table of Contents

 

For the six months ended November 1, 2014 and October 26, 2013, favorable and unfavorable cumulative catch-up adjustments included in cost of sales were as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Gross favorable adjustments

 

$

991

 

$

587

 

Gross unfavorable adjustments

 

(1,156

)

(1,113

)

Net unfavorable adjustments

 

$

(165

)

$

(526

)

 

For the six months ended November 1, 2014, favorable cumulative catch-up adjustments of $1.0 million were primarily due to final cost adjustments on 24 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.2 million were primarily related to higher than expected costs on 159 contracts, which individually were not material.

 

For the six months ended October 26, 2013, favorable cumulative catch-up adjustments of $0.6 million were primarily due to final cost adjustments on 27 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on 32 contracts, which individually were not 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 2015 fiscal year ends on April 30, 2015 and our fiscal quarters end on August 2, 2014, November 1, 2014 and January 31, 2015.

 

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 November 1, 2014 Compared to Three Months Ended October 26, 2013

 

 

 

Three Months Ended

 

 

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

UAS

 

$

43,045

 

$

56,079

 

EES

 

9,619

 

8,788

 

Total

 

52,664

 

64,867

 

Cost of sales:

 

 

 

 

 

UAS

 

27,575

 

35,280

 

EES

 

7,218

 

5,709

 

Total

 

34,793

 

40,989

 

Gross margin:

 

 

 

 

 

UAS

 

15,470

 

20,799

 

EES

 

2,401

 

3,079

 

Total

 

17,871

 

23,878

 

Selling, general and administrative

 

13,470

 

13,084

 

Research and development

 

8,531

 

6,861

 

(Loss) income from operations

 

(4,130

)

3,933

 

Other income (expense):

 

 

 

 

 

Interest income

 

193

 

195

 

Other expense

 

(583

)

(2,307

)

(Loss) income before income taxes

 

$

(4,520

)

$

1,821

 

 

17



Table of Contents

 

Revenue. Revenue for the three months ended November 1, 2014 was $52.7 million, as compared to $64.9 million for the three months ended October 26, 2013, representing a decrease of $12.2 million, or 19%. The decrease in revenue was due to a decrease in product deliveries of $8.7 million and lower service revenue of $3.6 million. UAS revenue decreased $13.0 million, or 23%, to $43.0 million for the three months ended November 1, 2014, primarily due to lower product deliveries of $10 million, a decrease in service revenue of $2.1 million, and lower customer-funded R&D work of $1.0 million. The decrease in product deliveries was primarily due to lower small UAS product deliveries.  The decrease in service revenue was primarily due to reduced repair activities for our small UAS.  The decrease in customer-funded R&D was primarily due to a decrease in Switchblade-related customer funded R&D work.  EES revenue increased $0.8 million, or 9%, to $9.6 million for the three months ended November 1, 2014, primarily due to increased product deliveries of our passenger electric vehicle charging systems.

 

Cost of Sales. Cost of sales for the three months ended November 1, 2014 was $34.8 million, as compared to $41.0 million for the three months ended October 26, 2013, representing a decrease of $6.2 million, or 15%. Cost of sales was impacted by a government contract accounting reserve of $2.6 million recorded in the quarter for prior year incurred cost audit findings.  As a percentage of revenue, cost of sales increased from 63% to 66%. The decrease in cost of sales was primarily due to lower product costs of $4.4 million due to lower product deliveries and lower cost of services of $1.8 million primarily due to a reduction in repair activities and lower customer-funded R&D work. UAS cost of sales decreased $7.7 million, or 22%, to $27.6 million for the three months ended November 1, 2014, primarily due to a decrease in sales volume. As a percentage of revenue, cost of sales for UAS increased from 63% to 64%.  EES cost of sales increased $1.5 million, or 26%, to $7.2 million for the three months ended November 1, 2014. As a percentage of revenue, cost of sales for EES increased from 65% to 75%, primarily due to unfavorable product mix.

 

Gross Margin. Gross margin for the three months ended November 1, 2014 was $17.9 million, as compared to $23.9 million for the three months ended October 26, 2013, representing a decrease of $6.0 million, or 25%. The decrease in gross margin was due to lower product margins of $4.3 million and lower service margins of $1.7 million. As a percentage of revenue, gross margin decreased from 37% to 34%. UAS gross margin decreased $5.3 million, or 26%, to $15.5 million for the three months ended November 1, 2014.  The decrease was primarily due to lower sales volume.  As a percentage of revenue, gross margin for UAS decreased from 37% to 36%. EES gross margin decreased $0.7 million, or 22%, to $2.4 million for the three months ended November 1, 2014, primarily due to an unfavorable product mix.  As a percentage of revenue, EES gross margin decreased from 35% to 25%, primarily due to an unfavorable product mix.

 

Selling, General and Administrative .   SG&A expense for the three months ended November 1, 2014 was $13.5 million, or 26% of revenue, compared to SG&A expense of $13.1 million, or 20% of revenue, for the three months ended October 26, 2013.

 

Research and Development. R&D expense for the three months ended November 1, 2014 was $8.5 million, or 16% of revenue, compared to R&D expense of $6.9 million, or 11% of revenue, for the three months ended October 26, 2013.  R&D expense increased by $1.6 million for the three months ended November 1, 2014, primarily due to increased development activities in various strategic initiatives.

 

Interest Income. Interest income for the three months ended November 1, 2014 was $0.2 million, reflecting no change from the three months ended October 26, 2013.

 

Other Expense.  Other expense for the three months ended November 1, 2014 was $0.6 million compared to other expense of $2.3 million for the three months ended October 26, 2013. The decrease in other expense reflects the change in fair value of the embedded conversion feature of our convertible bond investment.

 

Income Taxes. Our effective income tax benefit rate was 35.8% for the three months ended November 1, 2014, as compared to an effective income tax expense rate of 9.1% for the three months ended October 26, 2013. The change in the rate is due to lower taxable income and lower federal R&D tax credits.

 

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Table of Contents

 

Six Months Ended November 1, 2014 Compared to Six Months Ended October 26, 2013

 

 

 

Six Months Ended

 

 

 

November 1,

 

October 26,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

UAS

 

$

84,231

 

$

91,290

 

EES

 

20,299

 

17,694

 

Total

 

104,530

 

108,984

 

Cost of sales:

 

 

 

 

 

UAS

 

58,590

 

59,879

 

EES

 

14,015

 

12,682

 

Total

 

72,605

 

72,561

 

Gross margin:

 

 

 

 

 

UAS

 

25,641

 

31,411

 

EES

 

6,284

 

5,012

 

Total

 

31,925

 

36,423

 

Selling, general and administrative

 

26,873

 

25,543

 

Research and development

 

15,655

 

14,051

 

Loss from operations

 

(10,603

)

(3,171

)

Other income (expense):

 

 

 

 

 

Interest income

 

405

 

400

 

Other income (expense)

 

8

 

(5,701

)

Loss before income taxes

 

$

(10,190

)

$

(8,472

)

 

Revenue. Revenue for the six months ended November 1, 2014 was $104.5 million, as compared to $109.0 million for the six months ended October 26, 2013, representing a decrease of $4.5 million, or 4%. The decrease in revenue was due to lower service revenue of $11.5 million, offset by higher product deliveries of $7.0 million. UAS revenue decreased $7.1 million, or 8%, to $84.2 million for the six months ended November 1, 2014, primarily due to decreases in customer-funded R&D work of $7.0 million and service revenue of $3.6 million, offset by higher product deliveries of $3.5 million. The decrease in customer-funded R&D was primarily due to a decrease in development programs related to our small UAS and no revenue related to the Global Observer program termination cost reimbursement. The decrease in service revenue was primarily due to reduced repair activities for our small UAS.  The increase in product deliveries was primarily due to higher product deliveries of Switchblade systems.  EES revenue increased $2.6 million, or 15%, to $20.3 million for the six months ended November 1, 2014, primarily due to increased product deliveries of our industrial fast charge systems partially offset by lower product deliveries of our passenger electric vehicle charging systems as the California Energy Commission program came to an end earlier this year.

 

Cost of Sales. Cost of sales for the six months ended November 1, 2014 and October 26, 2013 remained at $72.6 million.  Cost of sales was impacted by a government contract accounting reserve of $2.6 million recorded in the quarter for prior year incurred cost audit findings.  As a percentage of revenue, cost of sales increased from 67% to 69%. Services cost of sales was lower by $5.8 million primarily due to lower customer-funded R&D work as Switchblade transitioned into low-rate production and a reduction in repair activities, offset by higher product costs of $5.8 million due to higher product deliveries. UAS cost of sales decreased $1.3 million, or 2%, to $58.6 million for the six months ended November 1, 2014, primarily due to a decrease in sales volume. As a percentage of revenue, cost of sales for UAS increased from 66% to 70%.  EES cost of sales increased $1.3 million, or 11%, to $14.0 million for the six months ended November 1, 2014. As a percentage of revenue, cost of sales for EES decreased from 72% to 69% primarily due to a favorable product mix.

 

Gross Margin. Gross margin for the six months ended November 1, 2014 was $31.9 million, as compared to $36.4 million for the six months ended October 26, 2013, representing a decrease of $4.5 million, or 12%. The decrease in gross margin was due to lower service margins of $5.6 million, offset by higher product margins of $1.1 million. As a percentage of revenue, gross margin decreased from 33% to 31%. UAS gross margin decreased $5.8 million, or 18%, to $25.6 million for the six months ended November 1, 2014.  The decrease was primarily due to a termination settlement for our Global Observer Joint Capability Technology Demonstration contract that occurred during the six months ended October 26, 2013 that was not in the six months ended November 1, 2014, and lower margins on service-related contracts.  As a percentage of revenue, gross margin for UAS decreased from 34% to 30%. EES gross margin increased $1.3 million, or 25%, to $6.3 million for the six months ended November 1, 2014, primarily due to higher sales volume and favorable product mix.  As a percentage of revenue, EES gross margin increased from 28% to 31%, primarily due to a favorable product mix.

 

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Table of Contents

 

Selling, General and Administrative .   SG&A expense for the six months ended November 1, 2014 was $26.9 million, or 26% of revenue, compared to SG&A expense of $25.5 million, or 23% of revenue, for the six months ended October 26, 2013. SG&A expense increased by $1.3 million for the six months ended November 1, 2014, primarily due to higher proposal and business development activity.

 

Research and Development. R&D expense for the six months ended November 1, 2014 was $15.7 million, or 15% of revenue, compared to R&D expense of $14.1 million, or 13% of revenue, for the six months ended October 26, 2013.  R&D expense increased by $1.6 million for the six months ended November 1, 2014, primarily due to increased development activities with the Switchblade program and other small UAS initiatives.

 

Interest Income. Interest income for the six months ended November 1, 2014 was $0.4 million, reflecting no change from the six months ended October 26, 2013.

 

Other Income.  Other income for the six months ended November 1, 2014 was $8,000, as compared to other expense of $5.7 million for the six months ended October 26, 2013.   During the six months ended October 26, 2013, the increase in other expense was related to the conversion feature of two convertible bonds that decreased in value. During the six months ended November 1, 2014, there was only one bond outstanding, which was converted into equity securities on August 11, 2014.

 

Income Tax Benefit. Our effective income tax benefit rate was 36.1% for the six months ended November 1, 2014, as compared to an effective income benefit tax rate of 34.4% for the six months ended October 26, 2013.

 

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 November 1, 2014 and April 30, 2014, our funded backlog was approximately $125.2 million and $65.9 million, respectively.

 

In addition to our funded backlog, we also had unfunded backlog of $32.4 million and $22.9 million as of November 1, 2014 and April 30, 2014, 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. 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. Unfunded backlog does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because the contract was awarded to five companies in 2012, including AeroVironment, and we cannot be certain that we will receive 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.

 

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Table of Contents

 

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. 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 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 and electric vehicle industries 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. Although we are currently not a party to any agreement or letter of intent with respect to potential investment in, or 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.

 

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 six months ended November 1, 2014 and October 26, 2013 (in thousands):

 

 

 

Six Months Ended

 

 

 

November 1,
2014

 

October 26,
2013

 

 

 

(Unaudited)

 

Net cash provided by (used in) operating activities

 

$

9,961

 

$

(9,673

)

Net cash (used in) provided by investing activities

 

$

(11,618

)

$

312

 

Net cash provided by financing activities

 

$

1,027

 

$

155

 

 

Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities for the six months ended November 1, 2014, increased by $19.6 million to $10.0 million, compared to net cash used in operating activities of $9.7 million for the six months ended October 26, 2013. The increase in net cash provided by operating activities was primarily due to lower working capital needs of $27.4 million, partially offset by an increase in fair value of the embedded conversion feature of our convertible bond investment of $5.8 million and a higher net loss of $1.0 million.

 

Cash (Used in) Provided by Investing Activities. Net cash used in investing activities increased by $11.9 million to $11.6 million for the six months ended November 1, 2014, compared to net cash provided by investing activities of $0.3 million for the six months ended October 26, 2013. The increase in net cash used in investing activities was primarily due to an increase in net purchases of investments of $17.7 million offset by lower acquisitions of property and equipment of $5.0 million.

 

Cash Provided by Financing Activities. Net cash provided by financing activities was $1.0 million for the six months ended November 1, 2014, compared to net cash provided by financing activities of $0.2 million for the six months ended October 26, 2013.  The increase was due to an increase in cash received from exercises of stock options of $0.5 million and higher excess tax benefits of $0.3 million.

 

Off-Balance Sheet Arrangements

 

During the second 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, 2014.

 

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Table of Contents

 

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.

 

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.

 

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 November 1, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are, from time to time, party to a variety of legal proceedings arising in the ordinary course of business, including lawsuits, investigations and other governmental proceedings, audits and reviews. While the results of legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our financial condition taken as a whole.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2014.  Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit
Number

 

Description

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.

101.INS

 

XBRL Instance Document.

101.SCH

 

XBRL Taxonomy Extension Schema Document.

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document.

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

XBRL Taxonomy Label Linkbase Document.

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document.

 

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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: November 25, 2014

 

AEROVIRONMENT, INC.

 

 

 

 

By:

/s/ Timothy E. Conver

 

 

Timothy E. Conver

 

 

Chairman, Chief Executive Officer and President

 

 

(Principal Executive Officer)

 

 

 

 

 

/s/ Jikun Kim

 

 

Jikun Kim

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

24


Exhibit 31.1

 

Certification of Principal Executive Officer

Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

 

I, Timothy E. Conver, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of AeroVironment, Inc.;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 25, 2014

 

 

 

 

/s/ Timothy E. Conver

 

Timothy E. Conver

 

Chairman, Chief Executive Officer and President

 


Exhibit 31.2

 

Certification of Principal Financial Officer

Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

 

I, Jikun Kim, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of AeroVironment, Inc.;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 25, 2014

 

 

 

 

/s/ Jikun Kim

 

Jikun Kim

 

Senior Vice President and Chief Financial Officer

 


Exhibit 32

 

Certification

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the “Act”), each of the undersigned officers of AeroVironment, Inc., a Delaware corporation (the “Company”), does hereby certify, to each such officer’s knowledge, that:

 

The Quarterly Report on Form 10-Q for the quarter ended November 1, 2014 (the “Periodic Report”) of the Company fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Timothy E. Conver

 

Timothy E. Conver

 

Chairman, Chief Executive Officer and President

 

 

 

/s/ Jikun Kim

 

Jikun Kim

 

Senior Vice President and Chief Financial Officer

 

Dated: November 25, 2014

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.