Aerovironment Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended August 1, 2009. Aerovironment, Inc. designs, develops, and produces unmanned aircraft systems (UAS) and efficient energy systems (EES) for government and commercial clients. The company operates as an accelerated filer with no material legal proceedings reported.
Key Financial Metrics
| Metric | Q1 2010 (Ended Aug 1, 2009) | Q1 2009 (Ended Aug 2, 2008) |
|---|---|---|
| Total Revenue | $37.9 million | $53.6 million |
| Gross Margin | $10.7 million (28.2%) | $20.6 million (38.4%) |
| Operating Income (Loss) | $(5.5) million | $7.2 million |
| Net Income (Loss) | $(3.6) million | $4.8 million |
| Diluted EPS | $(0.17) | $0.22 |
| Cash and Equivalents | $113.3 million | $104.8 million |
| Operating Cash Flow | $4.5 million | $(3.0) million |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 29% year-over-year. The UAS segment fell 28% due to reduced analog Raven B production and service revenue, partially offset by a $11.2 million increase in customer-funded R&D. The EES segment dropped 39% due to lower deliveries of electric vehicle test systems.
- Margin Compression: Gross margin declined 48% to $10.7 million. UAS gross margin percentage dropped from 36% to 27%, and EES dropped from 52% to 37%, primarily due to lower production volumes resulting in higher unabsorbed overhead costs.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 30% to $10.5 million due to increased bid and proposal activity. R&D expenses increased slightly to $5.7 million.
- Cash Flow Improvement: Despite the net loss, operating cash flow turned positive at $4.5 million, driven by a $21.1 million reduction in working capital needs (specifically a decrease in accounts receivable).
Outlook, Risks, and Contingencies
- Backlog: Funded backlog was $108.7 million as of August 1, 2009, down from $114.8 million at the prior year-end. Unfunded backlog stood at $512.9 million, though management notes this does not obligate the government to purchase goods.
- Investment Liquidity Risk: The company holds $6.95 million in auction rate securities (Level 3 assets) that have experienced failed auctions since late 2008. These securities are in an unrealized loss position of $0.95 million. Management believes the lack of liquidity is temporary and does not expect an other-than-temporary impairment, but notes the inability to liquidate at fair value until a successful auction occurs.
- Government Contract Risks: Revenue is heavily dependent on government contracts subject to audit by the Defense Contract Audit Agency (DCAA). Disallowances of costs could create liabilities. Additionally, contracts may be terminated at the convenience of the U.S. government.
- Market Conditions: Management cites the global credit crisis and recession as factors that could adversely affect liquidity and customer spending, though current cash reserves are deemed sufficient for the next 12 months.
Investor Verification Checklist
- Verify the status of the $6.95 million auction rate securities and any updates on liquidity or impairment charges.
- Monitor the transition from analog Raven B to Digital Data Link systems and its impact on future UAS revenue.
- Review upcoming DCAA audit results for potential cost disallowances on government contracts.
- Assess the conversion rate of the $512.9 million unfunded backlog into firm orders given current economic conditions.
- Track the trend in SG&A expenses relative to revenue as bid and proposal activity continues.