Business Context and Reporting Period
Company: AeroVironment, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended October 31, 2009
Business Overview: The Company designs, develops, produces, and supports unmanned aircraft systems (UAS) and efficient energy systems (EES) for various industries and governmental agencies. Operations are divided into two reportable segments: UAS and EES.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2009 | Six Months Ended Oct 31, 2009 |
|---|---|---|
| Total Revenue | $51,367 | $89,307 |
| Gross Margin | $19,649 (38.2%) | $30,364 (34.0%) |
| Operating Income (Loss) | $3,373 | $(2,080) |
| Net Income (Loss) | $2,216 | $(1,371) |
| Diluted EPS | $0.10 | $(0.06) |
| Cash and Cash Equivalents | $98,176 (as of Oct 31, 2009) | |
| Working Capital | $181,738 (Current Assets $212,547 - Current Liabilities $30,809) | |
| Long-Term Debt | None reported |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 22% ($14.4 million) for the three months and 25% ($30.1 million) for the six months compared to the prior year periods.
- UAS Segment: Revenue dropped due to lower product deliveries and service revenue, primarily driven by a reduction in analog Raven B production as the Company transitioned to Digital Data Link technology. This was partially offset by a $17.9 million increase in customer-funded R&D revenue (six months) related to the Global Observer program.
- EES Segment: Revenue declined due to lower deliveries of electric vehicle test systems and industrial charging systems.
- Profitability: The Company reported a net loss of $1.4 million for the six months ended October 31, 2009, compared to a net income of $13.9 million in the prior year period. Operating loss for the six months was $2.1 million versus operating income of $19.5 million previously.
- Expenses: Selling, General, and Administrative (SG&A) expenses increased significantly ($5.1 million for six months) due to higher selling costs, bid/proposal activity, and administrative infrastructure. R&D expenses also increased ($1.3 million) due to development initiatives.
- Cash Flow: Net cash used in operating activities was $8.4 million for the six months ended October 31, 2009, a reversal from $11.3 million provided by operations in the prior year. This was driven by lower net income and reduced tax benefits from stock-based compensation, partially offset by lower working capital needs.
Outlook, Risks, and Contingencies
- Backlog: Funded backlog was $107.1 million as of October 31, 2009, down from $114.8 million at the end of the prior fiscal year. Unfunded backlog decreased significantly to $303.5 million from $510.6 million, primarily due to the expiration of an IDIQ contract established in 2004. Management notes that unfunded backlog does not obligate the government to purchase goods.
- Liquidity and Investments: The Company holds $6.8 million in auction rate securities (Level 3 assets) which have experienced failed auctions since late 2008. These securities are in an unrealized loss position ($1.0 million loss). Management believes the lack of liquidity is temporary and does not expect it to affect operations, but notes the risk of not being able to liquidate at fair value until a successful auction occurs.
- Government Contract Risks: Payments on cost-reimbursable contracts are based on provisional rates subject to annual audit by the Defense Contract Audit Agency (DCAA). Future audits could result in material disallowances of incurred costs.
- Market Conditions: The Company cites the global credit crisis and economic recession as factors that may adversely affect liquidity, customer spending, and the ability to access capital markets.
Investor Verification Checklist
- Transition Impact: Verify the timeline and revenue impact of the transition from analog Raven B systems to Digital Data Link technology.
- Auction Rate Securities: Monitor the status of the $6.8 million in auction rate securities for potential other-than-temporary impairment or liquidity constraints.
- Backlog Conversion: Assess the likelihood of converting the $303.5 million unfunded backlog into funded orders, given the expiration of the major IDIQ contract.
- Expense Management: Review the sustainability of increased SG&A and R&D expenses in the context of declining revenue volumes.
- Government Audits: Track DCAA audit outcomes regarding provisional indirect cost rates and potential cost disallowances.