Aerovironment Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended November 1, 2008, and the six months ended on that date. Aerovironment, Inc. designs, develops, and produces unmanned aircraft systems (UAS) and efficient energy systems (EES) for government and commercial clients. The company operates two reportable segments: UAS and EES. Effective May 1, 2008, the company consolidated its PosiCharge Systems and Energy Technology Center into the EES segment.
Key Financial Metrics
| Metric | Three Months Ended Nov 1, 2008 | Six Months Ended Nov 1, 2008 |
|---|---|---|
| Total Revenue | $65.8 million | $119.4 million |
| Gross Margin | $25.0 million (38% of revenue) | $45.6 million (38% of revenue) |
| Net Income | $9.1 million | $13.9 million |
| Diluted EPS | $0.41 | $0.64 |
| Cash and Equivalents | $116.6 million | $116.6 million (Balance Sheet) |
| Operating Cash Flow | N/A | $11.4 million |
| Debt | $0 (Line of credit cancelled) | $0 |
Liquidity: The company holds $116.6 million in cash and cash equivalents. It cancelled its $25 million working capital line of credit in June 2008 to avoid unused commitment fees. The company reports no material cash commitments other than normal trade payables and R&D costs.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 22% year-over-year for the quarter ($65.8M vs. $53.7M) and 16% for the six-month period ($119.4M vs. $102.9M). Growth was driven by increased UAS customer-funded R&D (specifically the Global Observer program) and higher EES deliveries of electric vehicle test systems.
- Profitability: Net income rose 75% for the quarter ($9.1M vs. $5.2M) and 54% for the six-month period ($13.9M vs. $9.0M). Gross margin improved significantly in the EES segment, rising from 28% to 54% of revenue for the quarter due to operating improvements and product mix.
- Expenses: SG&A expenses decreased slightly due to lower bid and proposal costs. R&D expenses increased by 29% for the quarter ($4.9M vs. $3.8M) due to increased investment in UAS development initiatives.
- Backlog: Funded backlog increased to $86.6 million from $82.0 million. Unfunded backlog rose to $580.5 million from $384.3 million, though management notes this does not obligate the government to purchase.
Outlook, Risks, and Contingencies
- Auction Rate Securities Liquidity Risk: The company holds $8.0 million in investment-grade auction rate municipal bonds. Due to failed auctions in the broader market, these securities have been reclassified as long-term investments. While the company does not anticipate an immediate impairment or liquidity crisis, it cannot guarantee when these investments will become liquid or if an impairment charge will be required in the future.
- Customer Concentration Risk: A significant trade receivable of approximately $2.9 million is owed by an automotive manufacturing customer that has disclosed potential liquidity issues. As of November 1, 2008, no reserve has been established for this receivable.
- Government Contract Risks: The majority of revenue comes from government contracts. The company notes that unfunded backlog does not guarantee future orders and that contracts may be terminated at the convenience of the U.S. government. Additionally, DCAA audits may result in cost disallowances.
- Financial Market Risks: The company faces risks related to the global financial crisis, including potential deferral of customer orders, supplier insolvency, and the inability of customers to secure financing.
Investor Verification Checklist
- Verify the status of the $2.9 million receivable from the automotive customer facing liquidity issues.
- Monitor the liquidity status of the $8.0 million auction rate securities portfolio for potential impairment charges.
- Assess the sustainability of the EES segment's gross margin expansion (54% for the quarter) and whether it is driven by one-time product mix factors.
- Review the "Global Observer" program progress as a primary driver of UAS revenue growth.
- Confirm the company's ability to maintain operations without the cancelled $25 million line of credit if operating cash flows decline.