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AeroVironment 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

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 31, 2009

 

 

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 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 25, 2009, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 21,328,387.

 



Table of Contents

 

AeroVironment, Inc.

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

Consolidated Balance Sheets as of January 31, 2009 (Unaudited) and April 30, 2008

3

 

Consolidated Statements of Income for the three and nine months ended January 31, 2009 (Unaudited) and January 26, 2008 (Unaudited)

4

 

Consolidated Statements of Cash Flows for the nine months ended January 31, 2009 (Unaudited) and January 26, 2008 (Unaudited)

5

 

Notes to Consolidated Financial Statements (Unaudited)

6

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

20

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

22

Item 4.

Submission of Matters to a Vote of Security Holders

22

Item 5.

Other Information

22

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)

 

 

 

January 31,
2009

 

April 30,
2008

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

101,938

 

$

105,064

 

Short-term investments

 

21,514

 

13,375

 

Accounts receivable, net of allowance for doubtful accounts of $395 at January 31, 2009 and $220 at April 30, 2008

 

30,078

 

29,788

 

Unbilled receivables and retentions

 

23,104

 

20,590

 

Inventories, net

 

20,379

 

15,923

 

Income tax receivable

 

3,043

 

 

Deferred income taxes

 

3,064

 

2,810

 

Prepaid expenses and other current assets

 

1,014

 

2,014

 

Total current assets

 

204,134

 

189,564

 

Long-term investments

 

7,136

 

 

Property and equipment, net

 

15,587

 

10,308

 

Deferred income taxes

 

3,150

 

2,785

 

Other assets

 

102

 

122

 

Total assets

 

$

230,109

 

$

202,779

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,728

 

$

14,080

 

Wages and related accruals

 

8,404

 

10,428

 

Income taxes payable

 

 

3,804

 

Other current liabilities

 

4,040

 

3,786

 

Total current liabilities

 

28,172

 

32,098

 

Deferred rent

 

1,386

 

941

 

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 — 21,295,073 at January 31, 2009 and 20,614,044 at April 30, 2008

 

2

 

2

 

Additional paid-in capital

 

109,074

 

96,123

 

Accumulated other comprehensive loss

 

(549

)

 

Retained earnings

 

92,024

 

73,615

 

Total stockholders’ equity

 

200,551

 

169,740

 

Total liabilities and stockholders’ equity

 

$

230,109

 

$

202,779

 

 

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 31,

 

January 26,

 

January 31,

 

January 26,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

30,160

 

$

19,947

 

$

92,746

 

$

83,673

 

Contract services

 

22,065

 

28,588

 

78,871

 

67,767

 

 

 

52,225

 

48,535

 

171,617

 

151,440

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Product sales

 

18,682

 

9,585

 

55,485

 

48,487

 

Contract services

 

16,866

 

19,117

 

53,885

 

47,356

 

 

 

35,548

 

28,702

 

109,370

 

95,843

 

Gross margin

 

16,677

 

19,833

 

62,247

 

55,597

 

Selling, general and administrative

 

7,950

 

8,216

 

23,900

 

24,515

 

Research and development

 

4,625

 

3,664

 

14,781

 

11,766

 

Income from operations

 

4,102

 

7,953

 

23,566

 

19,316

 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

197

 

1,011

 

1,107

 

3,133

 

Income before income taxes

 

4,299

 

8,964

 

24,673

 

22,449

 

(Benefit) provision for income taxes

 

(242

)

2,999

 

6,264

 

7,476

 

Net income

 

$

4,541

 

$

5,965

 

$

18,409

 

$

14,973

 

Earnings per share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.30

 

$

0.88

 

$

0.77

 

Diluted

 

$

0.21

 

$

0.28

 

$

0.84

 

$

0.70

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

21,147,902

 

20,141,903

 

20,937,284

 

19,568,819

 

Diluted

 

22,030,603

 

21,517,117

 

21,940,482

 

21,320,241

 

 

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 31,
2009

 

January 26,
2008

 

Operating activities

 

 

 

 

 

Net income

 

$

18,409

 

$

14,973

 

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,622

 

2,612

 

Provision for doubtful accounts

 

175

 

(37

)

Deferred income taxes

 

(254

)

(113

)

Stock-based compensation

 

637

 

330

 

Tax benefit from exercise of stock options

 

11,335

 

10,871

 

Gain on sale of property and equipment

 

(5

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(465

)

(17,735

)

Unbilled receivables and retentions

 

(2,514

)

8,076

 

Inventories

 

(4,456

)

(2,955

)

Income tax receivable

 

(3,043

)

(2,623

)

Other assets

 

1,020

 

(115

)

Accounts payable

 

1,648

 

(3,382

)

Other liabilities

 

(5,129

)

(3,075

)

Net cash and cash equivalents provided by operating activities

 

20,980

 

6,827

 

Investing activities

 

 

 

 

 

Acquisitions of property and equipment

 

(8,905

)

(6,639

)

Proceeds from sale of property and equipment

 

9

 

 

Net (purchases) sales of investments

 

(16,189

)

57,545

 

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

 

(25,085

)

50,906

 

Financing activities

 

 

 

 

 

Transfers to restricted cash

 

 

(17

)

Exercise of stock options

 

979

 

929

 

Net cash and cash equivalents provided by financing activities

 

979

 

912

 

Net (decrease) increase in cash and cash equivalents

 

(3,126

)

58,645

 

Cash and cash equivalents at beginning of period

 

105,064

 

20,920

 

Cash and cash equivalents at end of period

 

$

101,938

 

$

79,565

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(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 31, 2009 are not necessarily indicative of the results for the full year ending April 30, 2009. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2008, 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, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), 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.

 

Effective May 1, 2008, the Company consolidated the operations of two of its business segments to reflect the change in the management and organizational structure that was implemented on May 1, 2008.  The change in the management and organizational structure was made to take advantage of operational synergies and optimize management time by focusing on two as opposed to three business segments.   PosiCharge Systems and Energy Technology Center were consolidated into one segment named Efficient Energy Systems.  As required by SFAS No. 131, the Company has restated its historical segment information for the three and nine months ended January 26, 2008, to be consistent with the current reportable segment structure.  The consolidation of the two segments had no effect on the Company’s financial position, results of operations or cash flows for the periods presented.

 

Investments

 

The Company's investments are accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, as held-to-maturity and available-for-sale and reported at amortized cost and fair value, respectively.   As of January 31, 2009, the Company's short-term investments consisted primarily of U.S. treasury bills and are reported at amortized cost.  The long-term investments consist entirely of auction rate securities and are reported at fair value.

 

6



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

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 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 unvested restricted stock.

 

The reconciliation of diluted to basic shares is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,
2009

 

January 26,
2008

 

January 31,
2009

 

January 26,
2008

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, excluding unvested restricted stock

 

21,147,902

 

20,141,903

 

20,937,284

 

19,568,819

 

Dilutive effect of employee stock options and unvested restricted stock

 

882,701

 

1,375,214

 

1,003,198

 

1,751,422

 

Denominator for diluted earnings per share

 

22,030,603

 

21,517,117

 

21,940,482

 

21,320,241

 

 

During the three and nine months ended January 31, 2009 and January 26, 2008 certain options and 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 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.  The number of options which met this anti-dilutive criterion was approximately 76,000 and 194,000 for the three and nine months ended January 26, 2008, respectively.

 

Recently Issued Accounting Standards

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the year beginning May 1, 2008 for the Company.  In February 2008, the FASB issued FASB Staff Position Financial Accounting Standard 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which permits a one-year deferral of the application of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 for financial assets and liabilities effective May 1, 2008. The Company will apply the principles of SFAS No. 157 for non-financial assets and non-financial liabilities on May 1, 2009 and does not expect the provisions to have a material effect on its financial position, results of operations or cash flows.

 

7



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS No. 159 permits companies to choose to measure at fair value certain financial instruments and other items that are not currently required to be measured at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on May 1, 2008 and elected not to measure any additional financial instruments or other items at fair value.

 

In December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations (“SFAS No. 141R”), which is a revision of SFAS No. 141, Business Combinations. In accordance with the new standard, upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. Also, contingent consideration arrangements will be recorded at fair value at the acquisition date and included on that basis in the purchase price consideration. In addition, all transaction costs will be expensed as incurred. SFAS No. 141R is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which is the year beginning May 1, 2009 for the Company. Adoption is prospective and early adoption is not permitted. The Company will apply SFAS No. 141R to any acquisitions occurring after May 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, which is the year beginning May 1, 2009 for the Company. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

2. Inventories, net

 

Inventories consist of the following (in thousands):

 

 

 

January 31,
2009

 

April 30,
2008

 

Raw materials

 

$

8,518

 

$

6,855

 

Work in process

 

6,154

 

4,958

 

Finished goods

 

6,889

 

5,651

 

Inventories, gross

 

21,561

 

17,464

 

Reserve for inventory obsolescence

 

(1,182

)

(1,541

)

Inventories, net

 

$

20,379

 

$

15,923

 

 

8



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

3. Fair Value Measurements

 

As discussed in Note 1, the Company adopted SFAS No. 157, subject to the deferral provisions of FSP FAS 157-2, on May 1, 2008. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair value as 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 prescribed by SFAS No. 157 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 subject to the disclosure requirements of SFAS No. 157 at January 31, 2009, 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

 

$

101,938

 

$

 

$

 

$

101,938

 

Auction rate securities

 

 

 

7,136

 

7,136

 

Total

 

$

101,938

 

$

 

$

7,136

 

$

109,074

 

 

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 31, 2009.  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 May 1, 2008

 

$

13,375

 

Transfers to Level 3

 

 

Total losses (realized or unrealized)

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(914

)

Purchases, issuances and settlements, net

 

(5,325

)

Balance at January 31, 2009

 

$

7,136

 

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 31, 2009

 

$

 

 

9



Table of Contents

 

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 expectation of the next time 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 $8.0 million.  In prior periods, the Company classified its auction rate securities as current assets. However, due to financial market conditions, these investments have been reclassified as long-term investments as of November 1, 2008. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible other than temporary impairment.

 

4. Other Comprehensive Income

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,
2009

 

January 26,
2008

 

January 31,
2009

 

January 26,
2008

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,541

 

$

5,965

 

$

18,409

 

$

14,973

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized loss on long-term investments

 

(549

)

 

(549

)

 

Comprehensive income

 

$

3,992

 

$

5,965

 

$

17,860

 

$

14,973

 

 

5. Warranty Reserves

 

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 31, 2009 and January 26, 2008 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,
2009

 

January 26,
2008

 

January 31,
2009

 

January 26,
2008

 

Beginning balance

 

$

399

 

$

382

 

$

344

 

$

263

 

Warranty expense

 

295

 

123

 

772

 

594

 

Warranty costs incurred

 

(194

)

(218

)

(616

)

(570

)

Ending balance

 

$

500

 

$

287

 

$

500

 

$

287

 

 

10



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

6. Stock-Based Compensation

 

For the three and nine months ended January 31, 2009 the Company recorded stock-based compensation of approximately $233,000 and $637,000, respectively. For the three and nine months ended January 26, 2008, the Company recorded stock-based compensation of approximately $145,000 and $330,000, respectively.

 

The fair value of stock options granted was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the three and nine months ended January 31, 2009 and January 26, 2008:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,
2009

 

January 26,
2008

 

January 31,
2009

 

January 26,
2008

 

Expected term (in years)

 

 

6.5

 

6.5

 

6.5

 

Expected volatility

 

 

18.81

%

18.43

%

19.52

%

Risk-free interest rate

 

 

3.55

%

3.58

%

4.67

%

Expected dividend

 

 

 

 

 

Weighted average fair value at grant date

 

$

 

$

7.01

 

$

9.33

 

$

7.55

 

 

There were no options granted during the three months ended January 31, 2009.

 

The expected term of stock options represents the weighted average period the Company expects the stock options to remain outstanding, using a midpoint model based on the Company’s historical exercise and post-vesting cancellation experience and the remaining contractual life of its outstanding options.

 

The expected volatility is based on peer group volatility in the absence of historical market data for the Company’s stock, as permitted under SFAS No. 123(R), Share Based Payment. The peer group volatility was derived based on historical volatility of a comparable peer group index consisting of companies operating in a similar industry.

 

The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon bond with a remaining term that approximates the expected term of the option.

 

The expected dividend yield of zero reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.

 

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Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Information related to the Company’s stock option plans at January 31, 2009 and for the three and nine months then ended is as follows:

 

 

 

2006 Plan

 

2002 Plan

 

1992 Plan

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Shares

 

Weighted
Average
Exercise
Price

 

Shares

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at April 30, 2008

 

379,310

 

$

21.86

 

1,077,477

 

$

2.20

 

626,895

 

$

0.49

 

Options granted

 

55,000

 

32.19

 

 

 

 

 

Options exercised

 

(3,000

)

20.75

 

(214,796

)

0.79

 

(48,416

)

0.52

 

Options canceled

 

(10,000

)

24.09

 

(11,965

)

6.20

 

 

 

Outstanding at August 2, 2008

 

421,310

 

$

23.17

 

850,716

 

$

2.50

 

578,479

 

$

0.49

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

(4,900

)

20.36

 

(111,202

)

1.64

 

(62,864

)

0.47

 

Options canceled

 

(12,000

)

20.75

 

(1,408

)

0.78

 

 

 

Outstanding at November 1, 2008

 

404,410

 

$

23.27

 

738,106

 

$

2.63

 

515,615

 

$

0.49

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

(12,200

)

21.90

 

(81,610

)

1.17

 

(95,041

)

0.53

 

Options canceled

 

 

 

 

 

 

 

Outstanding at January 31, 2009

 

392,210

 

$

23.31

 

656,496

 

$

2.81

 

420,574

 

$

0.49

 

Options exercisable at January 31, 2009

 

50,362

 

$

21.96

 

385,883

 

$

2.03

 

420,574

 

$

0.49

 

 

Information related to the Company’s restricted stock awards at January 31, 2009 and for the three and nine months then ended is as follows:

 

 

 

2006 Plan

 

 

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

 

 

 

 

 

 

Unvested stock at April 30, 2008

 

 

$

 

Stock granted

 

44,000

 

32.52

 

Stock vested

 

 

 

Stock canceled

 

 

 

Unvested stock at August 2, 2008

 

44,000

 

$

32.52

 

Stock granted

 

 

 

Stock vested

 

 

 

Stock canceled

 

(1,000

)

32.52

 

Unvested stock at November 1, 2008

 

43,000

 

$

32.52

 

Stock granted

 

4,000

 

30.88

 

Stock vested

 

 

 

Stock canceled

 

 

 

Unvested stock at January 31, 2009

 

47,000

 

$

32.38

 

 

12



Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 $16,844,000 and $45,917,000 for the three and nine months ended January 31, 2009, respectively.  Revenue from customer-funded R&D was approximately $6,892,000 and $16,995,000 for the three and nine months ended January 26, 2008, respectively.

 

8. Income Taxes

 

For the three and nine months ended January 31, 2009, the Company recorded provisions for income taxes of ($242,000) and $6,264,000, respectively, yielding an effective tax rate of (5.6%) and 25.4%, respectively. The variance from statutory rates is primarily due to R&D tax credits related to fiscal 2009 and the recognition of previously unrecognized tax benefits of $1,277,000 related to R&D tax credits earned in prior fiscal years.  The unrecognized tax benefits of $1,277,000 were recorded in the current quarter due to the expiration of the applicable statute of limitations, in January of 2009, for the audit period for the tax return containing the unrecognized tax benefits.

 

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.

 

As discussed in Note 1, effective May 1, 2008, the Company consolidated the operations of two of its business segments to reflect the current management and organizational structure that occurred on May 1, 2008.  The change in the management and organizational structure was made to take advantage of operational synergies and optimize management time by focusing on two as opposed to three business segments.  PosiCharge Systems and Energy Technology Center were consolidated into one segment named Efficient Energy Systems.  As required by SFAS No. 131, the Company has restated its historical segment information for the three and nine months ended January 26, 2008, to be consistent with the current reportable segment structure.  The consolidation of the two segments had no effect on the Company’s financial position, results of operations or cash flows for the periods presented.

 

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 only limited financial statement information by segment.

 

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Table of Contents

 

AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The segment results are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,

 

January 26,

 

January 31,

 

January 26,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

Revenue:

 

 

 

 

 

 

 

 

 

UAS

 

$

43,394

 

$

42,162

 

$

145,926

 

$

130,639

 

EES

 

8,831

 

6,373

 

25,691

 

20,801

 

Total

 

52,225

 

48,535

 

171,617

 

151,440

 

Gross margin:

 

 

 

 

 

 

 

 

 

UAS

 

13,461

 

17,489

 

50,050

 

48,490

 

EES

 

3,216

 

2,344

 

12,197

 

7,107

 

Total

 

16,677

 

19,833

 

62,247

 

55,597

 

Selling, general and administrative

 

7,950

 

8,216

 

23,900

 

24,515

 

Research and development

 

4,625

 

3,664

 

14,781

 

11,766

 

Income from operations

 

4,102

 

7,953

 

23,566

 

19,316

 

Interest income

 

197

 

1,011

 

1,107

 

3,133

 

Income before income taxes

 

$

4,299

 

$

8,964

 

$

24,673

 

$

22,449

 

 

14



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, 2008.

 

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 2009 fiscal year ends on April 30, 2009 and our fiscal quarters end on August 2, 2008, November 1, 2008 and January 31, 2009.

 

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Table of Contents

 

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 31, 2009 Compared to Three Months Ended January 26, 2008

 

 

 

Three Months Ended

 

 

 

January 31,

 

January 26,

 

 

 

2009

 

2008

 

 

 

 

 

(Restated)

 

Revenue:

 

 

 

 

 

UAS

 

$

43,394

 

$

42,162

 

EES

 

8,831

 

6,373

 

Total

 

52,225

 

48,535

 

Gross margin:

 

 

 

 

 

UAS

 

13,461

 

17,489

 

EES

 

3,216

 

2,344

 

Total

 

16,677

 

19,833

 

Selling, general and administrative

 

7,950

 

8,216

 

Research and development

 

4,625

 

3,664

 

Income from operations

 

4,102

 

7,953

 

Interest income

 

197

 

1,011

 

Income before income taxes

 

$

4,299

 

$

8,964

 

 

Revenue. Revenue for the three months ended January 31, 2009 was $52.2 million, as compared to $48.5 million for the three months ended January 26, 2008, representing an increase of $3.7 million, or 8%.  UAS revenue increased $1.2 million, or 3%, to $43.4 million for the three months ended January 31, 2009, primarily due to increased UAS customer-funded R&D work of $10.0 million and product deliveries of $7.8 million, partially offset by lower service revenue of $16.5 million. The increase in UAS customer-funded R&D work and product deliveries was primarily due to increased activity on the Global Observer contract and product deliveries to international customers, respectively.  The decrease in service revenue was primarily due to higher revenue in the prior year for the retrofit of Raven A systems to Raven B systems, which did not occur in the current quarter.  EES revenue increased by $2.5 million, or 39%, to $8.8 million for the three months ended January 31, 2009.  The increase in EES revenue was primarily due to increased deliveries of Electric Vehicle (“EV”) test systems.

 

Cost of Sales. Cost of sales for the three months ended January 31, 2009 was $35.5 million, as compared to $28.7 million for the three months ended January 26, 2008, representing an increase of $6.8 million, or 24%. The increase in cost of sales was caused primarily by higher UAS cost of sales of $5.2 million and EES cost of sales of $1.6 million.

 

Gross Margin. Gross margin for the three months ended January 31, 2009 was $16.7 million, as compared to $19.8 million for the three months ended January 26, 2008, representing a decrease of $3.1 million, or 16%. UAS gross margin decreased $4.0 million, or 23%, to $13.5 million for the three months ended January 31, 2009. As a percentage of revenue, gross margin for UAS decreased from 41% to 31% largely due to lower revenue on cost-type government contracts due to reduced indirect rate application; and higher program costs. EES gross margin increased $0.9 million, or 37%, to $3.2 million for the three months ended January 31, 2009.  As a percentage of revenue, EES gross margin decreased from 37% to 36%.

 

Selling, General and Administrative.  SG&A expense for the three months ended January 31, 2009 was $7.9 million, or 15% of revenue, compared to SG&A expense of $8.2 million, or 17% of revenue, for the three months ended January 26, 2008.  SG&A expense decreased $0.3 million primarily due to lower selling costs.

 

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Table of Contents

 

Research and Development. R&D expense for the three months ended January 31, 2009 was $4.6 million, or 9% of revenue, which was higher than R&D expense of $3.7 million, or 8% of revenue, for the three months ended January 26, 2008.  R&D expense increased $0.9 million largely due to increased investment in various development initiatives for UAS.

 

Income Tax Expense. Our effective income tax rate was (5.6%) for the three months ended January 31, 2009, as compared to 33.5% for the three months ended January 26, 2008. The decrease was primarily due to the recognition of previously unrecognized tax benefits of $1.3 million related to R&D tax credits earned in prior fiscal years.  The unrecognized tax benefits of $1.3 million were recorded in the current quarter due to the expiration of the applicable statute of limitations, in January of 2009, for the audit period for the tax return containing the unrecognized tax benefits.

 

Nine Months Ended January 31, 2009 Compared to Nine Months Ended January 26, 2008

 

 

 

Nine Months Ended

 

 

 

January 31,

 

January 26,

 

 

 

2009

 

2008

 

 

 

 

 

(Restated)

 

Revenue:

 

 

 

 

 

UAS

 

$

145,926

 

$

130,639

 

EES

 

25,691

 

20,801

 

Total

 

171,617

 

151,440

 

Gross margin:

 

 

 

 

 

UAS

 

50,050

 

48,490

 

EES

 

12,197

 

7,107

 

Total

 

62,247

 

55,597

 

Selling, general and administrative

 

23,900

 

24,515

 

Research and development

 

14,781

 

11,766

 

Income from operations

 

23,566

 

19,316

 

Interest income

 

1,107

 

3,133

 

Income before income taxes

 

$

24,673

 

$

22,449

 

 

Revenue. Revenue for the nine months ended January 31, 2009 was $171.6 million, as compared to $151.4 million for the nine months ended January 26, 2008, representing an increase of $20.2 million, or 13%.  UAS revenue increased $15.3 million, or 12%, to $145.9 million for the nine months ended January 31, 2009, primarily due to increased UAS customer-funded R&D of $28.7 million and higher product deliveries of $5.0 million, partially offset by lower service revenue of $18.5 million. The increase in UAS customer-funded R&D was primarily due to increased activity on the Global Observer contract.  The decrease in service revenue was primarily due to higher revenue in the prior year for the retrofit of Raven A systems to Raven B systems, which did not occur in the current nine months.  EES revenue increased by $4.9 million, or 24%, to $25.7 million for the nine months ended January 31, 2009.  The increase in EES revenue was primarily due to increased deliveries of EV test systems.

 

Cost of Sales. Cost of sales for the nine months ended January 31, 2009 was $109.4 million, as compared to $95.8 million for the nine months ended January 26, 2008, representing an increase of $13.6 million, or 14%. The increase in cost of sales was caused primarily by higher UAS cost of sales of $13.8 million partially offset by lower EES cost of sales of $0.2 million.

 

Gross Margin. Gross margin for the nine months ended January 31, 2009 was $62.2 million, as compared to $55.6 million for the nine months ended January 26, 2008, representing an increase of $6.6 million, or 12%. UAS gross margin increased $1.6 million, or 3%, to $50.1 million for the nine months ended January 31, 2009. As a percentage of revenue, gross margin for UAS decreased from 37% to 34% primarily due to higher program costs.  EES gross margin increased $5.1 million, or 72% to $12.2 million for the nine months ended January 31, 2009.  As a percentage of revenue, EES gross margin increased from 34% to 47%, primarily due to operating improvements and changes in product mix.

 

Selling, General and Administrative.  SG&A expense for the nine months ended January 31, 2009 was $23.9 million, or 14% of revenue, compared to SG&A expense of $24.5 million, or 16% of revenue, for the nine months ended January 26, 2008.  SG&A expense decreased $0.6 million primarily due to lower bid and proposal costs.

 

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Table of Contents

 

Research and Development. R&D expense for the nine months ended January 31, 2009 was $14.8 million, or 9% of revenue, which was higher than R&D expense of $11.8 million, or 8% of revenue, for the nine months ended January 26, 2008.  R&D expense increased $3.0 million primarily due to increased investment in various development initiatives for UAS.

 

Income Tax Expense. Our effective income tax rate was 25.4% for the nine months ended January 31, 2009, as compared to 33.3% for the nine months ended January 26, 2008. This decrease was caused primarily by the renewal of the federal R&D tax credit, which had expired in December 2007 and recognition of previously unrecognized tax benefits of $1.3 million related to R&D tax credits earned in prior fiscal years.  The renewal of the R&D tax credit allowed us to recapture the unused portion of the credit from January 1, 2008 through April 30, 2008.  The unrecognized tax benefits of $1.3 million were recorded due to the expiration of the applicable statute of limitations, in January of 2009, for the audit period for the tax return containing the unrecognized tax benefits.

 

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 31, 2009 and April 30, 2008, our funded backlog was approximately $139.0 million and $82.0 million, respectively.  Funded backlog as of January 31, 2009 includes a $39.0 million order for Raven systems that was executed on January 30, 2009 with a stated effective date of February 1, 2009.

 

In addition to our funded backlog, we also had unfunded backlog of $513.1 million and $384.3 million as of January 31, 2009 and April 30, 2008, 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. Unfunded backlog does not include the value of options to purchase additional aircraft included in our Global Observer contract. 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.

 

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 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 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.

 

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Table of Contents

 

Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in most major economies continuing into 2009.  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 business 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 31, 2009 and January 26, 2008 (in thousands):

 

 

 

Nine Months Ended

 

 

 

January 31,
 2009

 

January 26,
 2008

 

 

 

(Unaudited)

 

Net cash provided by operating activities

 

$

20,980

 

$

6,827

 

Net cash (used in) provided by investing activities

 

$

(25,085

)

$

50,906

 

Net cash provided by financing activities

 

$

979

 

$

912

 

 

Cash Provided by Operating Activities. Net cash provided by operating activities for the nine months ended January 31, 2009 increased by $14.2 million to $21.0 million, compared to net cash provided by operating activities of $6.8 million for the nine months ended January 26, 2008. This increase in net cash provided by operating activities was primarily due to lower working capital needs of $8.9 million, higher income of $3.4 million, and higher depreciation of $1.0 million.

 

Cash Used in Investing Activities. Net cash used in investing activities increased by $76.0 million to $25.1 million for the nine months ended January 31, 2009, compared to net cash provided by investing activities of $50.9 million for the nine months ended January 26, 2008. The increase in net cash used in investing activities was primarily due to increase in net purchases of investments of $73.7 million and higher capital expenditures of $2.3 million.

 

Cash Provided by Financing Activities. Net cash provided by financing activities increased by $0.1 million to $1.0 million for the nine months ended January 31, 2009, compared to $0.9 million for the nine months ended January 26, 2008.  During the nine months ended January 31, 2009, we received proceeds from stock option exercises of $1.0 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, 2008.

 

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

 

See Note 1 to our unaudited consolidated financial statements included elsewhere in this quarterly report for disclosure on new accounting pronouncements.

 

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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, 2008, 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 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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 under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2008, and our quarterly reports on Form 10-Q for the three month periods ended August 2, 2008 and November 1, 2008, other than with respect to the risk factor set forth below in this Item 1A entitled “Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings,” which has been revised to reflect our current holdings of auction rate securities.  Please refer to that section of our Annual Report on Form 10-K for disclosures regarding the risks and uncertainties related to our business.

 

Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings.

 

As of January 31, 2009, our $7.1 million of long-term investments, recorded at fair value, consisted entirely of auction rate municipal bonds with maturities that range from approximately 10 to 26 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, we choose to roll-over our 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.

 

In 2008 and 2009, we experienced several failed auctions of our auction rate securities and there is no assurance that auctions on the remaining auction rate securities in our investment portfolio will succeed in the future. As a result, our ability to liquidate our investments in the near term may be limited, and our ability to recover the carrying value of our investments may be limited. An auction failure means that the parties wishing to sell securities were not able to do so. As of February 25, 2009, including the securities involved in failed auctions, we held approximately $7.1 million of these auction rate securities, all of which carry investment grade ratings. If the issuers of these securities are unable to successfully close future auctions or their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We currently believe these securities are not permanently impaired, primarily due to the government backing of the underlying securities. However, it could take until the final maturity of the underlying notes (up to 26 years) to realize our investments’ purchase price of $8.0 million. Based on our ability to access our cash and cash equivalents, expected operating cash flows, and our other sources of cash, we do not anticipate that the current lack of liquidity on these investments will affect our ability to continue to operate our business in the ordinary course, however we can provide no assurance as to when these investments will again become liquid or as to whether we may ultimately have to recognize an impairment charge with respect to these investments.

 

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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.

 

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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.

 

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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, 2009

 

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)

 

24


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