AeroVironment Inc - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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S
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Annual
Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the
fiscal year ended April 30, 2007
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£
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the
transition period from __________________ to
______________________.
Commission
file number 001-33261
AEROVIRONMENT,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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95-2705790
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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181 W. Huntington
Drive, Suite 202
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Monrovia,
CA
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91016
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (626)
357-9983
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.0001 per share
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The
NASDAQ Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
þ
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
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Large
Accelerated Filer o
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Accelerated
Filer o
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Non-accelerated
Filer þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The
initial public offering of the registrant's shares of common stock, par value
$0.0001 per share, took place on January 23, 2007, and its common stock began
trading on The NASDAQ Global Market on that same date. As such, the registrant's
common equity was not publicly traded as of October 27, 2006, the last business
day of its most recently completed second fiscal quarter.
As
of
June 13, 2007, the issuer had 18,875,957 shares of common stock, par value
$0.0001 per share, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days
after
the conclusion of the registrant's fiscal year ended April 30, 2007, are
incorporated by reference into Part III of this
Form 10-K.
AEROVIRONMENT,
INC.
INDEX
TO FORM 10-K
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PART
I
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Page
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2
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16
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30
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30
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30
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30
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PART
II
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31
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32
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33
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41
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42
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64
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64
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64
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PART
III
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65
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65
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65
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65
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65
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PART
IV
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66
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PART
I
Forward-Looking
Statements
This
Annual Report on Form 10-K, or Annual Report, contains forward-looking
statements, which reflect our current views about future events and financial
results. We have made these statements in reliance on the safe harbor created
by
that Private Securities Litigation Reform Act of 1995 (set forth in Section
27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act).
Forward-looking statements include our views on future financial results,
financing sources, product development, capital requirements, market growth
and
the like, and are generally identified by terms such as "may," "will," "should,"
"could," "targets," "projects," "predicts," "contemplates," "anticipates,"
"believes," "estimates," "expects," "intends," "plans" and similar words.
Forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statement. These uncertainties
and
other factors include, among other things:
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unexpected
technical and marketing difficulties inherent in major research and
product development efforts;
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availability
of U.S. government funding for defense procurement and research and
development programs;
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the
potential need for changes in our long-term strategy in response
to future
developments;
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unexpected
changes in significant operating expenses, including components and
raw
materials;
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changes
in the supply, demand and/or prices for our
products;
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changes
in the regulatory environment; and
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general
economic and business conditions in the U.S. and elsewhere in the
world.
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Set
forth
below in Item 1A. Risk Factors are additional significant uncertainties and
other factors affecting forward-looking statements. The reader should understand
that the uncertainties and other factors identified in this Annual Report are
not a comprehensive list of all the uncertainties and other factors that may
affect forward-looking statements. We do not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other
factors that could affect those statements.
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Business.
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Overview
We
design, develop, produce and support a technologically-advanced portfolio of
small unmanned aircraft systems, or UAS, that we supply primarily to
organizations within the U.S. Department of Defense, or DoD, and fast charge
systems for electric industrial vehicle batteries that we supply to commercial
customers. We derive the majority of our revenue from these two business areas
and we believe that both the small UAS and fast charge markets are in the early
stages of development and have significant growth potential. Additionally,
we
believe that some of the innovative potential products in our research and
development pipeline will emerge as new growth platforms in the future, creating
market opportunities.
The
success we have achieved with our current products stems from our investment
in
research and development and our ability to invent and deliver advanced
solutions, utilizing our proprietary technologies, to help our government and
commercial customers operate more effectively and efficiently. Our core
technological capabilities, developed through over 35 years of innovation,
include lightweight aerostructures and electric propulsion systems, efficient
electric energy systems and storage, high-density energy packaging,
miniaturization, controls integration and systems engineering
optimization.
We
are
organized into three segments based on our business operations; UAS, PosiCharge
Systems, and Energy Technology Center, which focuses primarily on the
development of innovative, efficient electric energy technologies for internal
and external customers, and also develops, produces and supports a line of
electronic test equipment used for research and development
activities.
Our
Strategy
We
intend
to grow our business by maintaining leadership in the growing markets for small
UAS and fast charge systems and by creating new products that enable us to
enter
and lead new markets. Key components of this strategy include the
following:
Expand
our current solutions to existing and new
customers. Our small UAS and PosiCharge Systems
products and services are leaders in their respective North American markets.
We
intend to increase the penetration of our small UAS products within the
U.S. military, the military forces of allied nations and non-military
U.S. customers. We believe that the increased use of our small UAS in the
U.S. military will be a catalyst for increased demand by allied countries,
and that our efforts to pursue new applications will help to create non-military
opportunities. We similarly intend to increase the penetration of PosiCharge
fast charge systems into existing and new customers in North America and
globally.
Deliver
innovative solutions. Innovation is the primary driver
of our growth. We plan to continue research and development efforts to enable
us
to satisfy our customers through better, more capable products and services,
both in response to and in anticipation of their needs. We believe that by
continuing to invest in research and development, we will continue to deliver
innovative, new products that address market needs within and outside of our
current target markets, enabling us to create new opportunities for
growth.
Foster
our entrepreneurial culture and continue to attract, develop and retain
highly-skilled personnel. We have created a corporate
culture that encourages innovation and an entrepreneurial spirit, which helps
to
attract highly-skilled professionals. We intend to nurture this culture to
encourage the development of the innovative, highly technical solutions that
give us our competitive advantage. A core component of our culture is the
demonstration of trust and integrity in all of our interactions, contributing
to
a positive work environment and engendering trust among our
customers.
Preserve
our agility and flexibility. We are able to respond
rapidly to evolving markets and deliver new products and system capabilities
quickly, efficiently and affordably. We believe that this ability helps us
to
strengthen our relationships with customers. We intend to maintain our agility
and flexibility, which we believe to be important sources of differentiation
when we compete against larger companies and competitors with more extensive
resources.
Our
Customers
We
sell
the majority of our small UAS to organizations within the DoD, and the majority
of our PosiCharge Systems products to commercial customers. The
Energy Technology Center generates revenue from both government and commercial
customers. We act as a prime contractor for all of our small UAS
sales to the DoD.
During
our fiscal year ending April 30, 2007, approximately 56% of our sales were
made
to the U.S. Army pursuant to orders made under contract by the U.S. Army on
behalf of itself as well as several other services of the U.S.
Military. Other U.S. government agencies accounted for 27% of our
sales revenue, while purchases by foreign and commercial customers
accounted for the remaining 17% of sales revenue during our fiscal year ended
April 30, 2007.
Industry
Background
Small
UAS
The
market for our small UAS has grown significantly over the last several years
due
to the U.S. military's post-Cold War transformation, the demands of the global
war on terrorism. Following the end of the Cold War, the U.S. military began
its
transformation into a smaller, more agile force that fights through a network
of
observation, communication and precision targeting technologies. This
transformation accelerated following the terrorist attacks of September 11,
2001, as the U.S. military required improved observation and targeting of combat
enemies who operate in small groups, often embedded in dense population centers
or dispersed in remote locations. We believe that UAS, which range from large
systems, such as Northrop Grumman's Global Hawk and General Atomics' Predator,
to small systems, such as our Raven, are an integral part of this transforming
military force because they provide critical observation and communications
capabilities. Because our small UAS can provide real-time observation and
communication capabilities to these small units who directly control them,
the
market for our small UAS continues to expand. As we explore opportunities to
develop new markets for our small UAS such as border
surveillance
and petrochemical industry infrastructure monitoring, we expect further growth
through the introduction of UAS technology to non-military
applications.
PosiCharge
Systems
Our
PosiCharge Systems products, including our PosiCharge fast charge systems.
accessories, and installation and post-sale services, are designed to improve
productivity and safety for operators of electric industrial vehicles, such
as
forklifts and airport ground support equipment, by improving battery and fleet
management. Electric industrial vehicles, over 100,000 of which were
shipped in North America during 2006, are powered by large onboard batteries
that can consume up to 17 cubic feet and weigh up to 3,500 pounds. In
multi-shift fleet operations, traditional charging systems require users to
exchange vehicle batteries throughout the day because these batteries discharge
their energy through vehicle usage and there is insufficient vehicle downtime
to
recharge them during a shift. As a result, drivers must leave the
work area when the battery reaches a low state of charge and drive to a
dedicated battery changing room, which often occupies valuable floor space
and is frequently located far from a driver's work area. The driver or dedicated
battery attendant must then remove the battery from the vehicle, place it on
a
storage rack, connect it to a conventional battery charger, identify a
fully-charged battery, move it into the vehicle's battery compartment and
reconnect the battery to the motor before the driver may return to the work
area. These battery changes, which take place every day in thousands of
facilities around the world, result in reduced material movement and increased
operating costs. Furthermore, depending on the type of battery, conventional
battery chargers can require up to eight hours to recharge the battery, which
then must cool for up to an additional eight hours before it is ready to be
used again. Consequently, depending on vehicle usage and the number of shifts
in
an operation, a fleet may require more than one battery per vehicle, which
necessitates additional storage space, chargers and maintenance time. Moreover,
the high levels of heat generated by conventional battery chargers during their
normal use can cause excessive evaporation of the water contained in the battery
and damage to the battery's components. Over time, this evaporation of fluid
and
damage to components result in battery degradation and negatively affect the
battery's life.
Fast
charge technology, which charges a battery with a high electrical current while
the battery remains in the vehicle, eliminates the need for frequent battery
changing and a dedicated battery room. This approach increases productivity,
reduces operating costs and improves facility safety. The earliest
adopters of fast charge technology include the automotive and air transportation
industries. Large food and retail industry customers have more recently begun
to
utilize fast charge technology.
Our
Solutions
Small
UAS
Our
small
UAS, including Raven, Dragon Eye, Swift, Wasp
and Puma, are designed to provide
valuable Intelligence,
Surveillance and Reconnaissance, or ISR, including real-time tactical
reconnaissance, tracking, combat assessment and geographic data, directly to
the
small tactical unit or individual "warfighter," thereby increasing flexibility
in mission planning and execution. Our small unmanned aircraft wirelessly
transmit critical live video and other information generated by their payload
of
electro-optical or infrared sensors, enabling the operator to view and capture
images, during the day or at night, on a hand-held ground control unit. All
of
our ground control units allow the operator to control the aircraft by
programming it for GPS-based autonomous navigation using operator-designated
way-points and, with the exception of Dragon Eye's ground control unit,
also provide for manual flight operation. These ground control units are
designed for durability and ease of use in harsh environments and incorporate
a
user-friendly, intuitive graphical user interface. With the exception of
Dragon Eye, all of our small unmanned aircraft operate from a common
ground control unit.
All
of
our small UAS are designed to be man-portable, assembled without tools in less
than five minutes and launched and operated by one person with limited training
required. The efficient and reliable electric motors used in all of our small
UAS are powered by replaceable modular battery packs that can be changed in
seconds, enabling rapid return to flight. All of our small UAS can be recovered
through an autonomous landing feature that enables a controlled descent to
a
designated location.
In
military applications, our systems enable tactical leaders to observe the next
corner, intersection or ridgeline in real-time. This information facilitates
faster, safer movement through urban and mountainous environments and can enable
troops to act on intelligence rather than react to an attack. Moreover, by
providing this information, our small UAS reduce the risk to warfighters and
to
the surrounding population by providing the ability to tailor the military
response to the threat. U.S. military personnel regularly use our small
UAS, such as Raven, for force protection, combat enemy observation and
damage assessment missions. These reusable systems are easy to
transport,
assemble and operate and are relatively quiet when flying at typical operational
altitudes of 200 to 300 feet due to our efficient electric propulsion
systems. Furthermore, their small size makes them difficult to see from the
ground. In addition, the low cost of our small UAS makes it practical for
warfighters to deploy these assets directly.
Our
small
UAS solutions also include spare equipment, alternative payload modules,
batteries, chargers, repairs and Internet-enabled customer support. We provide
training by our highly-skilled instructors, who typically have extensive
military experience, and continuous refurbishment and repair services for our
products. We currently maintain a forward operating depot in Iraq to support
the
large fleet of our small UAS deployed there. By maintaining close contact with
our customers and users in the field, we gather critical feedback on our
products and incorporate that information into ongoing product development
and
research and development efforts. This approach enables us to improve our
solutions in response to, and in anticipation of, evolving customer
needs.
The
U.S.
Army projects its total demand for our Raven small UAS at approximately
1,900 new systems, of which we had delivered approximately 31% as of April
30,
2007. For the fiscal years ended April 30, 2007, 2006 and 2005, sales of
our UAS products and services accounted for 84%, 80% and 78%, respectively,
of
our revenue. Our UAS sales experienced annual growth rates of 32% and 35% for
the fiscal years ended April 30, 2007 and 2006, respectively, and a 33%
compounded annual growth rate for the three-year period ended April 30,
2007.
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Products
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Each
system in our small UAS portfolio typically includes three aircraft, a ground
control unit and an array of spare parts and accessories. Our small
UAS portfolio consists of the following products:
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Small
UAS Product
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Wingspan
(ft.)
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Weight
(lbs.)
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Recovery
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Standard
Sensors
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Range
(mi.)(1)
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Flight
Time
(min.)(1)
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Raven
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4.5
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4.2
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Vertical
autonomous landing capable
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Electro-optical
or infrared
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6.0
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90
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Dragon
Eye
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3.8
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5.9
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Horizontal
autonomous landing capable
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Electro-optical
or infrared
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3.0
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60
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Swift
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3.8
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5.9
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Horizontal
autonomous landing capable
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Electro-optical
or infrared
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3.0
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60
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Wasp
II
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1.3
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0.6
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Horizontal
autonomous landing capable (ground or water)
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Electro-optical
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2.4
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30
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Wasp
III
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2.4
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1.0
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Horizontal
autonomous landing capable (ground or water)
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Electro-optical
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5.0
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45
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Puma
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8.5
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12.5
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Vertical
autonomous landing capable (ground or water)
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Dual
electro-optical and infrared
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6.0
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150
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(1)
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Represents
minimum customer-mandated specifications for all operating conditions.
In
optimal conditions, the performance of our products may significantly
exceed these specifications.
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Maintenance
and Operations (Logistics)
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We
provide spare parts as well as repair, refurbishment and replacement services
for damaged small UAS through our logistics operation. We designed our logistics
operation to minimize supply chain delays and provide our customers with spare
parts, replacement aircraft and support whenever and wherever they need them.
We
developed an Internet-accessible logistics system that provides our customers
with the status of their returned products and their inventory that we help
manage. This secure system also provides recent parts and repairs history and
tracks usage data to enable inventory optimization forecasting. Our Simi Valley,
California facility, which also serves as the primary depot for repairs and
spare parts, is currently supplemented by a forward supply depot in Iraq. This
support portion of our business continues to grow rapidly as the total number
of
hours that our small UAS are utilized increases. For the fiscal year ended
April 30, 2007, our logistics operations accounted for 25% of our UAS
segment revenue.
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Training
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We
provide complete training services to support all of our small UAS. Our
highly-skilled instructors typically have extensive military experience. We
deploy training teams throughout the continental United States and abroad to
support our customers' wide variety of training needs on both production and
development stage systems.
PosiCharge
Systems
Developed
from our work on electric and hybrid electric vehicles and advanced battery
systems in the 1990s, PosiCharge Systems products include advanced fast charge
systems that eliminates frequent battery changing. PosiCharge fast charge
systems quickly and safely recharge industrial vehicle batteries while they
are
in the vehicle during regularly scheduled breaks and other times when the
vehicle is not in use, thereby maintaining a sufficient level of energy
throughout the workday. By eliminating battery changing, PosiCharge fast charge
systems improve supply chain productivity by returning time to the vehicle
operator to complete more work. Furthermore, because of their advanced efficient
energy capabilities, PosiCharge fast charge systems can reduce the amount of
electricity required to support electric industrial vehicles by several hundred
dollars per year per vehicle as compared to conventional battery chargers.
Many
customers who implement our fast charge systems in their facilities are able
to
re-purpose the battery changing room floor space for more productive activities
and create a safer working environment, as drivers or battery attendants no
longer need to exchange large, lead-acid batteries.
Developed
over years of advanced battery testing and usage, the proprietary battery
charging algorithms built into Posicharge fast charge systems, which are
tailored to battery type, brand and size, maximize the rate at which energy
is
sent into the battery while minimizing heat generation and its damaging effects.
We believe our work to develop these algorithms contributed to the major battery
manufacturers offering battery warranties for fast charge, which provided a
critical assurance to customers that fast charge systems would not harm their
batteries. In combination with a weekly equalization charge that balances all
the cells within the battery pack, our "intelligent" charging process enhances
the performance of batteries and helps them to achieve improved operation.
We
believe that competetive fast charge and conventional charge systems, which
lack
our current and voltage regulating tailored charge algorithms and monitoring
capabilities, may actually contribute to lower battery performance and lifespan
over time, ultimately resulting in higher battery costs and degraded vehicle
performance.
Our
complete line of fast charge products enables us to design customized system
solutions for each facility based on its shift schedule, workload, truck type
and battery type. By customizing the system to unique customer requirements,
we
can help to reduce the cost of implementing and operating fast charge systems
while maximizing the benefit of PosiCharge fast charge systems to our customers.
Our complete solution consists of system configuration, installation, training,
asset management and performance monitoring. Moreover, while fast charge
technology itself provides significant operational and financial benefits to
our
customers, we believe that our ability to integrate the system effectively
into
customer operations through installation services, asset management capabilities
and post-sale support increases the value proposition. We believe that this
"turnkey" approach to the fast charge market represents a potential source
of
competitive advantage.
We
project that PosiCharge Systems customers typically begin to realize cost
savings when compared to battery changing within the first twelve months of
operation. Operators of large fleets of electric industrial vehicles who use
PosiCharge fast charge systems in multiple settings, including factories,
distribution centers, cold storage facilities and airport tarmacs, include
Ford
Motor Company, SYSCO Corporation, Southwest Airlines and IKEA. For the fiscal
years ended April 30, 2007, 2006 and 2005, sales of PosiCharge Systems
products accounted for 10%, 14% and 15%, respectively, of our revenue. While
our
PosiCharge Systems sales experienced an annual growth rate of 27% for our fiscal
year ended April 30, 2006, revenue from PosiCharge Systems sales declined
approximately 12% during our fiscal year ended April 30, 2007, due
primarily to weakness in the U.S. automotive industry, an early adopter of
fast
charge technology. We continue to believe that the market for
PosiCharge fast charge systems is young and that continued diversification
of
our customer base will support increased penetration of this technology into
target markets.
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Products
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Our
PosiCharge fast charge systems and support products consist of the following:
PosiCharge
ELT. ELT, our original fast charge product, is designed
to safely deliver the highest current (up to 600 amps) to electric forklifts,
such as counterbalance or "sit-down" trucks, used in heavy-duty
applications.
PosiCharge
DVS. Capable of charging either one vehicle at a time
at up to 500 amps or two vehicles simultaneously at up to 320 amps each, DVS
is
designed to deliver lower up-front installation and ongoing utility costs when
compared to other single vehicle fast chargers. Because DVS is a high-current,
stand-alone system, it is capable of supporting a variety of specific charging
needs, including isolated vehicles in remote areas, smaller fleets requiring
smaller systems and heavy-duty applications with variable usage
patterns.
PosiCharge
MVS. MVS, a multiple-port, multi-vehicle fast charge
system, is designed for charging low-to-medium-duty electric industrial
vehicles, such as pallet jacks, reach trucks and tow motors, in distribution,
warehousing, and general manufacturing settings. Each system is capable of
charging up to 16 vehicles at the same time and is designed to deliver greater
cost-savings as the number of vehicles simultaneously charged increases, as
compared to competitive charging systems, which are currently capable of
charging only up to eight vehicles at the same time.
PosiCharge
SVS. A cost-effective, flexible fast charge solution
for single vehicle applications, the SVS lin of fast change systems has a
compact footprint and provides up to 500 amps of current through its single
port.
PosiCharge
GSE. Ruggedized for outdoor use in extreme weather
conditions, GSE is designed to deliver all the benefits of our MVS product
to
the airport ground support equipment market.
Accessories. In
addition to fast charge systems, we offer a variety of accessories to help
our
customers integrate PosiCharge into their operations. Single point, automatic
watering systems ensure that battery electrolyte is maintained at an optimal
level and that watering occurs at the optimal time, thereby contributing to
battery health and reducing labor costs associated with manual watering. Charge
indicator lights provide fleet supervisors with color codes visible from a
distance that indicate the status of the battery's charge. Battery-mounted
fans
for use with the heaviest-duty types of vehicles keep these batteries cool
to
improve battery performance. Cable management options and charger stands provide
customers the flexibility to install PosiCharge in the best
location.
Installation
and Post-Sale Services. We offer our customers
installation services for all of our PosiCharge fast charge systems. In
addition, we also offer service contracts, which we typically outsource to
authorized service providers located in close proximity to our customers, and
we
provide 24-hour technical telephone support, technician dispatch and service
coordination.
Energy
Technology Center
Our
Energy Technology Center produces and sells a line of advanced
electric load and sink systems used to test batteries, electric motors and
fuel
cell systems, and provides contract engineering services to internal and
external customers. In addition to generating revenue, these contract services
enhance our technical skills and capabilities, enabling us to conduct internal
research and development to support existing products and to create new products
to satisfy new market needs.
Contract
Engineering Services. We actively pursue internal and
externally funded projects that help us to strengthen our technological
capabilities. We submit bids to large research customers such as Lockheed
Martin, the U.S. Air Force and the U.S. Army for projects that we
believe have future commercial application. Contract engineering services
conducted through our Energy Technology Center represent a strategic source
of
innovation for us. Providing these services contributes to the development
and
enhancement of our technical competencies. In an effort to manage the ability
of
our key technical personnel to support multiple, high-value research and
development initiatives, we attempt to limit the volume of contract engineering
projects that we accept. This process enables us to focus these personnel on
projects we believe offer the greatest current and future value to our business.
Consequently, while these projects typically add to our operating margin, we
are
not seeking to grow this service offering at this time. A research and
development program that results in a revenue-generating product is typically
removed from the Energy Technology Center and organized into an existing or
new
product line. As a result, the revenue associated with such a product line
is reported in its own segment or as part of another segment, and not as a
part
of the Energy Technology Center segment.
Power
Processing Systems. Our Power Processing Systems
represent a mature product line of advanced electric load and sink systems
that
are used mainly by research and development organizations in the public and
private sectors to test batteries, electric motors and fuel cell systems.
Power
Processing Systems customers include many of the world's largest automotive
manufacturers, including General Motors, as well as departments of the
U.S. government.
For
the
fiscal years ended April 30, 2007, 2006 and 2005, sales by our Energy
Technology Group accounted for 6%, 6% and 7%, respectively, of our revenue.
Our
Energy Technology Group's sales experienced an annual growth rate of 15% for
each of our fiscal years ended April 30, 2007 and 2006, and a 15%
compounded annual growth rate for the three-year period ended April 30,
2007.
Backlog
Our
historical funded backlog at the dates shown consisted of the
following:
|
As
of April 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Funded
|
|
$
|
60,889
|
|
|
$
|
79,699
|
|
Our
total
backlog is comprised of funded and unfunded amounts provided in our contracts.
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. We expect that one hundred percent of our funded backlog will be
filled during our fiscal year ending April 30, 2008.
Our
unfunded backlog at April 30, 2007 and 2006 was approximately $478 million
and
$555 million, 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.
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. As described under "Government
Contracting Process," a majority of our contracts do not currently obligate
the
U.S. government to purchase goods or services.
Financial
and Other Business Information
See
the
Segment Data at Note 13 of our Financial Statements for additional financial
information, including revenues and gross margin for each of our major business
segments.
Technology,
Research and Development
Technological
Competence and Intellectual Property
Our
company was founded by Dr. Paul B. MacCready, the Chairman of our board of
directors and an internationally renowned innovator who was instrumental in
creating our culture. This culture has enabled us to attract and
retain highly-motivated, talented employees and has established our reputation
as an innovator. This reputation for innovation has been acknowledged through
a
variety of awards and special citations, including Oak Ridge National
Laboratory's Small Business Innovator award in 2002, a "Cool Companies" award
from Fortune Magazine in 2004, the World Technology Award for Energy in 2004,
DARPA's Sustained Excellence by a Performer award in 2005 and Automotive News's
PACE award in 2006.
The
innovations of our company and our founder include, among others: the world's
first effective human-powered and manned solar-powered airplanes; the first
modern consumer electric car (the EV1 prototype for General Motors); the world's
highest flying airplane in level flight, Helios, a solar-powered UAS that
reached over 96,000 feet in 2001; and, more recently, the world's first
liquid hydrogen-powered UAS. The Smithsonian Institution has selected four
vehicles developed by us for its permanent collection. Our history of innovation
excellence is the result of our creative and skilled employees whom we encourage
to innovate and develop new technologies.
Our
primary areas of technological competence, UAS and efficient electric energy,
represent the sum of numerous technical skills and capabilities that help to
differentiate our approach and product offerings. The following table highlights
a number of our key technological capabilities:
|
UAS
Technology
|
|
Efficient
Electric Energy Technology
|
|
|
||
|
• Lightweight,
low speed aerostructures and propeller design
|
|
• Battery
management and chemistries
|
|
• Miniaturized
avionics and micro/nano unmanned aircraft systems
|
|
• Power
electronics and controls
|
|
• Image
stabilization and target tracking
|
|
• Lightweight
electric propulsion
|
|
• Unmanned
autonomous control systems
|
|
• Thermal
management
|
|
• Payload
integration
|
|
• High-density
energy packaging
|
|
• Hydrogen
propulsion systems and high-pressure-ratio
turbochargers
|
|
• Electric
power generation, storage and management
|
|
• Stratospheric
flight operations
|
|
• Charging
algorithms
|
|
• Fluid
dynamics
|
|
• On/off
grid controls
|
|
• System
integration and optimization
|
|
• Controls
integration and systems engineering
|
|
|
|
• System
integration and
optimization
|
We
follow
a formal process to evaluate new ideas and inventions that ultimately includes
review by our intellectual property and commercialization committees to
determine if a technology, product or solution is commercially feasible. The
committee members are selected by our Chief Executive Officer. Currently our
intellectual property committee consists of our Chief Executive Officer and
Chief Financial Officer. Our commercialization committee also consists of our
Chief Executive Officer and Chief Financial Officer. In addition, each of our
operating segments has its own internal evaluators who determine whether
potential commercialization opportunities and intellectual property
developments merit review by our intellectual property or commercialization
committee. A fundamental part of this process of innovation is a well-defined
screening process that helps business managers identify commercial opportunities
that support current or desired technological capabilities. Similarly, we manage
new product and business concepts through a rigorous commercialization process
that governs spending, resources, time and intellectual property considerations.
An important element of our commercialization process is ensuring that our
technology and business development activities are strongly linked to customer
needs in attractive growth markets. Throughout the process we revalidate our
customer requirement assumptions to ensure that the products and services we
ultimately deliver are of high value.
As
a
result of our commitment to research and development, we possess an extensive
portfolio of intellectual property in the form of patents, trade secrets,
copyrights and trademarks across a broad range of unmanned aircraft system
and
advanced energy technologies. As of April 30, 2007, we
had 73 issued patents, 38 in-process patents and
approximately 36 patents pending disclosure. In many cases, we opt to
protect our intellectual property through trade secrets as opposed to filing
for
patent protection in order to preserve the confidentiality of such intellectual
property.
The
U.S.
Government has licenses to our patented technology that was specifically
developed in performance of government contracts, and it may use or authorize
others to use the inventions covered by such patents for government
purposes.
While
our
intellectual property rights in the aggregate are important to the operation
of
our business segments, we do not believe that any existing patent, license
or
other intellectual property right is of such importance that its loss or
termination would have a material adverse effect on our business taken as a
whole.
Research,
Development and Commercialization Projects
One
important aspect of our technology research and development activity is the
development and commercialization of innovative solutions that we believe can
become new products and open opportunities for us to enter large new markets
or
accelerate the growth of our current products. We invest in an active pipeline
of these commercialization projects that range in maturity from technology
validation to early market adoption. We cannot predict when, if ever, these
projects will be successfully commercialized, or the level of capital
expenditures they could require, which could be substantial. Four new products
that we have been developing are described below.
Global
Observer is a high-altitude, long-endurance UAS under
development to address the critical need for affordable, 24-hour,
365-days-a-year persistent communications and ISR. The continuation of years
of
research with both our own and U.S. government sponsored developments funding,
the configuration now under development is being designed to operate at
65,000 feet for a week between landings. We expect the efficiency and
endurance (three to four times the longest flight time of existing fixed-wing
aerial options) of this UAS to provide for dramatically
lower
operating and total life cycle costs for missions where persistent
communications or surveillance is critical. The Global Observer
platform is intended to be the equivalent of a twelve-mile-high, low-cost,
redeployable satellite, providing a footprint of coverage of up to
600 miles in diameter and capable of providing a broad array of services,
including high-speed broadband data, video and voice relay and ISR. We expect
these capabilities to provide the foundation for multiple high-value
applications including communications relay and ISR missions for defense and
homeland security, storm tracking, telecommunications infrastructure, wildfire
detection/tracking and disaster recovery services. We continue to
develop and test key systems for this platform with a high degree of
success.
Switchblade. We
are developing a packaged UAS offering that is designed to deliver different
payloads in different sizes and configurations based on mission
requirements. One example of this offering is a single-use,
hand-held, small UAS with the ability to eliminate a target with minimal
collateral damage through the detonation of an onboard explosive upon impact.
This system would be launched by a single individual and operated through our
standard ground control unit. This version of Switchblade is being
designed to allow the operator to identify a threat using the ground control
unit, lock-on to the target via visual information on the screen, and neutralize
it by triggering an autonomous terminal guidance phase. We believe that recent
combat experience indicates that such a capability would be of great value
and could significant improve the ability to neutralize hostile elements, such
as snipers, machine guns and mortar launchers. Continued development
of this system has achieved desired milestones including demonstrating dynamic
target tracking and real-time aircraft course correction.
Digital
Data Link. We are developing a robust, packet-switched,
digital network module designed for extremely small size, weight, power and
latency requirements that would enable it to operate on our small UAS. By
switching to digital technology from the current analog technology employed
in
our small UAS, each small UAS will be enabled to operate as an IP-addressable
node on a broad, wireless network facilitating the transmission of information
between and among multiple small UAS, their operators and other remote parties.
Other advantages of the switch to digital technology include reduced bandwidth
usage for transmissions relative to analog transmissions, resulting in the
ability to simultaneously operate more small UAS in closer proximity than was
previously possible. Flight testing has successfully demonstrated
this capability using our small UAS to route data, voice and video.
Architectural
Wind. Recognizing the limited options available for
renewable energy generation in urban environments, our engineers and scientists
are utilizing our high-efficiency electric powertrain and propeller design
capabilities to create a new type of wind energy system that can be installed
on
buildings. The result is Architectural Wind, a small, modular wind
turbine designed to take advantage of wind over buildings to provide renewable
electricity in a more cost-effective manner. Initial market exploration has
revealed significant interest in this product, which has a visually compelling
design. A 4.8kW, early technology demonstrator system was installed on the
Adventure Aquarium in Camden, New Jersey in 2007.
For
the
fiscal years ended April 30, 2007, 2006 and 2005, our internal research and
development spending amounted to 8%, 12% and 9%, respectively, of our revenue,
and customer-funded research and development spending amounted to an additional
11%, 8% and 10%, respectively, of our revenue.
Sales
and Marketing
Our
marketing strategy is to increase awareness of our brand among key target market
segments and to associate AeroVironment with innovation, flexibility, agility
and the ability to deliver reliable new technology solutions that improve
operational effectiveness. Our reputation for innovation is a key component
of our brand and has been acknowledged through a variety of awards and
recognized in numerous articles in domestic and international publications.
We
have registered the trademarks AeroVironment® and
PosiCharge®
and have submitted several other applications for trademark registration,
including for AV, Global Observer and Architectural
Wind.
Small
UAS
We
organize our U.S. small UAS business development team members by customer
and product and have team members located in California, Colorado, Florida
and
Virginia, where they are in close proximity to customers they support.
Supporting our business development team members are our program managers,
who
are organized by product and focus on designing optimal solutions and contract
fulfillment, as well as internalizing feedback from customers and users. By
maintaining assigned points of contact with our customers, we believe that
we
are able to enhance our relationships, service existing contracts effectively
and gain vital feedback to improve our responsiveness and product
offerings.
PosiCharge
Systems
We
primarily sell our PosiCharge Systems products through a dedicated, direct
sales
force whose members are located in Arizona, California, Georgia, Illinois,
Michigan, Missouri. New York, North Carolina, Tennessee, Texas, the United
Kingdom and Germany, to address their respective regions or industries
efficiently. The sales team targets large entities with the potential for
domestic and international enterprise adoption of our solutions. In addition
to
our direct customer sales, we also employ a regional sales team that coordinates
distribution of PosiCharge fast charge systems through numerous battery dealers.
These dealers' relationships with, and proximity to, our customers' facilities
enable them to sell our solutions and provide post-sale service to our
customers. We believe that these dealers are well suited to address the large
number of smaller and geographically dispersed customers with industrial vehicle
fleets. When evaluating a facility for its ability to benefit from PosiCharge
fast charge systems, we perform a detailed analysis of the customer's
operations. This analysis allows us to quantify the benefit projected for a
PosiCharge system implementation, helping customers to determine for themselves
if the business case is sufficiently compelling.
International
Sales
We
are
increasing our sales efforts abroad and have employees in country or have
contracted with international sales representatives for our various segments
in
a variety of foreign markets, including Australia, Canada, East Asia, Europe
and
the Middle East. Our international sales accounted for approximately 5% of
our
revenue for the fiscal year ended April 30, 2007.
Manufacturing
and Operations
We
pursue
a common manufacturing strategy across our product lines, focusing on rapid
prototyping, supply chain management, final assembly, quality systems and
testing. Using concurrent engineering techniques within an integrated product
team structure, we rapidly prototype design concepts and products to produce
products at reduced cost and optimize our designs for manufacturing
requirements, mission capabilities and customer specifications. Within this
framework, we develop our products with feedback and input from manufacturing,
supply chain management, key suppliers, logistics personnel and customers.
We
rapidly incorporate this feedback and input into the design before tooling
is
finalized and full-rate production begins. As a result, we believe that we
can
significantly reduce the time required to move a product from its design phase
to full-rate production deliveries with high reliability, quality and
yields.
We
outsource certain production activities, such as the fabrication of structures
and the manufacture of subassemblies and payloads, to qualified suppliers with
whom we have long-term relationships. This outsourcing enables us to focus
on
final assembly and test processes for our products, ensuring high levels of
quality and reliability. We believe that our efficient supply chain is a
significant strength of our manufacturing strategy. We have forged strong
relationships with our key suppliers that we believe will allow us to continue
to grow our manufacturing capabilities and execute on our growth plans. We
continue to expand upon our suppliers' expertise to improve our existing
products and develop new solutions. We rely on both single and multiple
suppliers for certain components and subassemblies. See "Risk Factors — If
critical components of our products that we currently purchase from a small
number of suppliers or raw materials used to manufacture our products become
scarce or unavailable then we may incur delays in manufacturing and delivery
of
our products, which could damage our business" for more information. All of
our
manufacturing operations incorporate quality programs and processes to increase
acceptance rates, reduce lead times and lower cost.
UAS
Manufacturing and Operations
We
have
successfully developed the manufacturing infrastructure to execute production
of
both new small UAS products at low initial rates and high-volume, full-rate
production small UAS programs. For example, in 2003, we invested in the
infrastructure necessary to transition from low-rate prototype small UAS
production to full-rate production, successfully increasing production from
15
aircraft per month to 200 per month in only six months to meet customer
demand. By drawing upon experienced personnel from our PosiCharge and Energy
Technology Center groups and levering our prior ISO certification, integrated
supply chain strategy, document control systems, and process control
methodologies into this new manufacturing effort, we laid the groundwork for
a
high volume, efficient production environment. Presently, our small UAS
manufacturing is performed at our 85,000 square foot manufacturing facility
established in 2005 in Simi Valley, California. This ISO 9001:2000 certified
manufacturing facility is currently producing approximately 200 aircraft per
month and is designed to accommodate demand up to 1,000 aircraft per month.
ISO 9001:2000 refers to a set of voluntary standards for quality management
systems. These standards are established by the International Organization
for
Standardization, or ISO, to govern quality
management
systems used worldwide. Companies that receive ISO certification have passed
audits performed by a Registrar Accreditation Board-certified auditing company.
These audits evaluate the effectiveness of companies' quality management systems
and their compliance with ISO standards. Some companies and government agencies
view ISO certification as a positive factor in supplier
assessments.
PosiCharge
Systems Manufacturing and Operations
We
perform final assembly and testing of our PosiCharge fast charge systems at
a
20,000 square foot, ISO 9001:2000 certified facility located in Monrovia,
California. We designed this facility for flexibility, using a work cell model
for final assembly, and have included fixtures optimized for final
testing.
Competition
We
believe that the principal competitive factors in the markets for our products
and services include product performance, features, acquisition cost, lifetime
operating cost, including maintenance and support, ease of use, integration
with
existing equipment, quality, reliability, customer support, brand and
reputation.
The
market for small UAS is evolving rapidly and subject to changing technologies,
shifting customer needs and expectations and the potential introduction of
new
products. We believe that a number of established domestic and international
defense contractors have developed or are developing small UAS that have and
will continue to compete directly with our products. Some of these contractors
have significantly more financial and other resources than we possess. Our
current principal small UAS competitors include Advanced Ceramics Research,
Inc., Applied Research Associates, Inc., Elbit Systems Ltd., L-3 Communications
Holdings Inc. and Lockheed Martin Corporation. We do not view large UAS such
as
Northrop Grumman Corporation's Global Hawk, General Atomics, Inc.'s
Predator, The Boeing Company's ScanEagle and AAI Corporation's
Shadow as direct competitors because they
perform different missions
and are not hand launched and controlled, although we cannot be certain that
these platforms will not become direct competitors in the future.
The
primary direct competitors to PosiCharge Systems are other fast charge
suppliers, including Aker Wade Power Technologies LLC, Minit-Charger, a
subsidiary of Edison International, and PowerDesigners, LLC. Some of the major
industrial battery suppliers have begun to align themselves with fast charge
suppliers, creating a potentially more significant source of
competition.
In
addition, PosiCharge Systems competes against the traditional method of battery
changing. Competitors in this area include suppliers of battery changing
equipment and infrastructure, designers of battery changing rooms, battery
manufacturers and dealers who may experience reduced sales volume because
PosiCharge fast charge systems reduces or eliminate the need for extra
batteries.
Regulation
Due
to
the fact that we contract with the DoD and other agencies of the
U.S. government, we are subject to extensive federal regulations, including
the Federal Acquisition Regulations, Defense Federal Acquisitions Regulations,
Truth in Negotiations Act, Foreign Corrupt Practices Act, False Claims Act
and
the regulations promulgated under the DoD Industrial Security Manual, which
establishes the security guidelines for classified programs and facilities
as
well as individual security clearances.
In
addition, due to the nature of the products and services we provide, we are
subject to further U.S. government regulation, including by the Federal
Aviation Administration, or FAA, which regulates airspace for all air vehicles,
by the National Telecommunications and Information Administration and Federal
Communications Commission, which regulate the wireless communications upon
which
our small UAS depend, and under the International Traffic in Arms Regulations,
which regulate the export of controlled technical data, defense articles and
defense services. The FAA recently issued a clarification of its
existing policies stating that, in order to engage in public use of small
UAS in the U.S. National Airspace System, a public (government) operator must
obtain a Certificate of Authorization, or COA, from the FAA or fly in restricted
airspace. The FAA's COA approval process requires that the public
operator certify the airworthiness of the aircraft for its intended purpose,
that a collision with another aircraft or other airspace user is extremely
improbable, that the small UAS complies with appropriate cloud and terrain
clearances and that the operator or spotter of the small UAS is generally within
one half-mile laterally and 400 feet vertically of the small UAS while in
operation. Furthermore, the FAA's clarification of existing policy states that
the rules for radio-controlled hobby aircraft do not apply to public or
commercial use of small UAS. The FAA is in the process of drafting updated
regulations specifically for small UAS operations. We have engaged in
discussions with the FAA to help ensure that these new regulations allow for
the
maximum safe utilization of our small UAS.
In
2006,
the Defense Contract Management Agency, or DCMA, informed us that, under the
terms of our DoD contracts, the government parties with whom we are contracting
are required to obtain a COA for flight tests of our small UAS outside of
military restricted airspace. If our DoD customers are unable to obtain such
a
COA, we may not be able to perform our flight tests without incurring the
additional costs of transporting our small UAS products to military
installations where restricted airspace is available for testing.
Certain
of these regulations carry substantial penalty provisions, including suspension
or debarment from government contracting or subcontracting for a period of
time
if we are found to be in violation. We carefully monitor all of our contracts
and contractual efforts to minimize the possibility of any violation of these
regulations.
Furthermore,
our non-U.S. operations are subject to the laws and regulations of foreign
jurisdictions, which may include regulations that are more stringent than those
imposed by the U.S. government on our U.S. operations.
Also
in
2006, we were audited by the DCMA with respect to our system for the care,
control and accountability of government property. The DCMA identified certain
corrective actions to be taken with respect to our current system, which we
successfully implemented.
Government
Contracting Process
We
sell
the significant majority of our small UAS products and services as the prime
contractor under contracts with the U.S. government. Certain important
aspects of our government contracts are described below.
|
|
Bidding
Process
|
We
are
awarded government contracts either on a sole-source basis or through a
competitive bidding process. Most of our current government contracts were
awarded through a competitive bidding process. The U.S. government awards
competitive-bid contracts based on proposal evaluation criteria established
by
the procuring agency. Competitive-bid contracts are awarded after a formal
bid
and proposal competition among providers. Interested contractors prepare a
bid
and proposal in response to the agency's request for proposal or request for
information. A bid and proposal is usually prepared in a short time period
in
response to a deadline and requires the extensive involvement of numerous
technical and administrative personnel. Following award, competitive-bid
contracts may be challenged by unsuccessful bidders.
|
|
Funding
|
The
funding of U.S. government programs is subject to congressional
appropriations. Although multi-year contracts may be authorized in connection
with major procurements, Congress generally appropriates funds on a fiscal
year
basis, even though a program may continue for many years. Consequently, programs
are often only partially funded initially, and additional funds are committed
only as Congress makes further appropriations.
The
contracts for our full-rate production UAS are funded either through operational
needs statements or as programs of record. Operational needs statements
represent allocations of discretionary spending or reallocations of funding
from
other government programs. Funding for our production of initial Raven
deliveries was provided through operational needs statements, as
is the
case currently with our initial Puma deliveries. We define a program of
record as a program which, after undergoing extensive DoD review and product
testing, is included in the five-year government budget cycle, meaning that
funding will be allocated for purchases under these contracts during the
five-year cycle, absent affirmative action by the customer or Congress
to change the budgeted amount. Funding for these programs is approved
annually.
We
are
currently the sole provider and prime contractor under the only three programs
of record established by the DoD for small UAS. Each of the following
contracts was awarded under a program of record through a competitive bidding
process:
|
|
Ÿ
|
Our
2005 contract for Raven B, our next generation Raven
product, awarded under a U.S. Army/U.S. Special Operations
Command, or SOCOM, program of record known as the Small Unmanned
Aerial
System program, provides for purchases of up to $333.3 million
through 2010 and also allows for contract additions from the
U.S. Army/SOCOM or other U.S. military services. As of April 30,
2007, orders in the amount of approximately $123.4 million had been
placed with us.
|
|
|
Ÿ
|
Our
2003 contract for Dragon Eye, awarded under a U.S. Marine
Corps program of record known as the Small Unit Remote Scouting System,
or
SURSS, program, provides for purchases of up to $50.0 million through
2008. As of April 30, 2007, orders in the amount of approximately
$47.8 million had been placed with
us.
|
|
|
Ÿ
|
Our
2006 contract for Block III Wasp or BATMAV, awarded under a U.S.
Air Force
program of record known as the Beyond Line of Site, program, provides
for
purchases of up to $45 million over a period of five years. As
of April 30, 2007, orders in the amount of approximately $800,000
had been
placed with us.
|
|
|
Material
Government Contract
Provisions
|
All
contracts with the U.S. government contain provisions, and are subject to
laws and regulations, that give the government rights and remedies not typically
found in commercial contracts, including rights that allow the government
to:
|
|
Ÿ
|
terminate
existing contracts for convenience, which affords the U.S. government
the right to terminate the contract in whole or in part anytime it
wants
for any reason or no reason, as well as for
default;
|
|
|
Ÿ
|
reduce
or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
|
|
|
Ÿ
|
cancel
multi-year contracts and related orders, if funds for contract performance
for any subsequent year become
unavailable;
|
|
|
Ÿ
|
claim
rights in products and systems produced by its contractors if the
contract
is cost reimbursable and the contractor produces the products or
systems
during the performance of the
contract;
|
|
|
Ÿ
|
adjust
contract costs and fees on the basis of audits completed by its
agencies;
|
|
|
Ÿ
|
suspend
or debar a contractor from doing business with the
U.S. government; and
|
|
|
Ÿ
|
control
or prohibit the export of products.
|
Generally,
government contracts are subject to oversight audits by government
representatives. Provisions in these contracts permit termination, in whole
or
in part, without prior notice, at the government's convenience or upon
contractor default under the contract. Compensation in the event of a
termination, if any, is limited to work completed at the time of termination.
In
the event of termination for convenience, the contractor may receive a certain
allowance for profit on the work performed.
|
|
Government
Contract Categories
|
We
have
three types of government contracts, each of which involves a different payment
methodology and level of risk related to the cost of performance. These basic
types of contracts are typically referred to as fixed-price contracts, cost
reimbursable contracts (including cost-plus-fixed fee, cost-plus-award fee,
and
cost-plus-incentive fee) and time-and-materials contracts.
In
some
cases, depending on the urgency of the project and the complexity of the
contract negotiation, we will enter into a Letter Contract prior to finalizing
the terms of a definitive fixed-price, cost reimbursable or time-and-materials
definitive contract. A Letter Contract is a written preliminary contractual
instrument that provides limited initial funding and authorizes us to begin
immediately manufacturing supplies or performing services while negotiating
the
definitive terms of the procurement.
Fixed-Price. These
contracts are not subject to adjustment by reason of costs incurred in the
performance of the contract. With this type of contract, we assume the risk
that
we will not be able to perform at a cost below the fixed-price, except for
costs
incurred because of contract changes ordered by the customer. Upon the
U.S. government's termination of a fixed-price contract, generally we would
be entitled to payment for items delivered to and accepted by the
U.S. government and, if the termination is at the U.S. government's
convenience, for payment of fair compensation for work performed plus the costs
of settling and paying claims by any terminated subcontractors, other settlement
expenses and a reasonable allowance for profit on the costs
incurred.
Cost
Reimbursable. Cost reimbursable contracts include cost-plus-fixed
fee contracts, cost-plus-award fee contracts and cost-plus-incentive fee
contracts. Under each type of contract, we assume the risk that we may not
be
able to recover costs if they are not allowable under the contract terms or
applicable regulations, or if the costs exceed the contract
funding.
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|
Ÿ
|
Cost-plus-fixed
fee contracts are cost reimbursable contracts that provide for payment
of
a negotiated fee that is fixed at the inception of the contract.
This
fixed fee does not vary with actual cost of the contract, but may
be
adjusted as a result of changes in the work to be performed under
the
contract. This contract type poses less risk of loss than a fixed-price
contract, but our ability to win future contracts from the procuring
agency may be adversely affected if we fail to perform within the
maximum
cost set forth in the contract.
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|
|
Ÿ
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A
cost-plus-award fee contract is a cost reimbursable contract that
provides
for a fee consisting of a base amount (which may be zero) fixed at
inception of the contract and an award amount, based upon the government's
satisfaction with the performance under the contract. With this type
of
contract, we assume the risk that we may not receive the award fee,
or
only a portion of it, if we do not perform
satisfactorily.
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|
|
Ÿ
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A
cost-plus-incentive fee contract is a cost reimbursable contract
that
provides for an initially negotiated fee to be adjusted later by
a formula
based on the relationship of total allowable costs to total target
costs.
|
We
typically experience lower profit margins and lower risk under cost reimbursable
contracts than under fixed-price contracts. Upon the termination of a cost
reimbursable contract, generally we would be entitled to reimbursement of our
allowable costs and, if the termination is at the U.S. government's convenience,
a total fee proportionate to the percentage of work completed under the
contract.
Time-and-Materials.
Under
a
time-and-materials contract, our compensation is based on a fixed hourly rate
established for specified labor or skill categories. We are paid at the
established hourly rates for the hours we expend performing the work specified
in the contract. Labor costs, overhead, general and administrative costs and
profit are included in the fixed hourly rate. Materials, subcontractors, travel
and other direct costs are reimbursed at actual costs plus an amount for
material handling. We make critical pricing assumptions and decisions when
developing and proposing time-and-materials labor rates. We risk reduced
profitability if our actual costs exceed the costs incorporated into the
fixed hourly labor rate. One variation of a standard time-and-materials contract
is a time-and-materials, award fee contract. Under this type of contract, a
positive or negative incentive can be earned based on achievement against
specific performance metrics.
The
table
below shows our revenue for the periods indicated by government contract
type:
|
|
|
Fiscal
Year Ended
|
|
|||||||||
|
|
|
April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
||||||||||||
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Fixed-price
contracts
|
|
|
65
|
%
|
|
|
69
|
%
|
|
|
87
|
%
|
|
Cost
reimbursable contracts
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
12
|
%
|
|
Time-and-materials
contracts
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
1
|
%
|
|
|
|
|
Indefinite
Delivery Indefinite Quantity Contract
Form
|
The
U.S.
government frequently uses indefinite delivery, indefinite quantity contracts,
known as IDIQ contracts, and IDIQ-type contract forms such as cost reimbursable
and fixed price contracts with multiple one-year options, to obtain fixed-price,
cost reimbursable and time-and-materials contractual commitments to provide
products or services over a period of time pursuant to established general
terms
and conditions. At the time of the award of an IDIQ contract or IDIQ-type
contract, the U.S. Government generally commits to purchase only a minimal
amount of products or services from the contractor to whom such contract is
awarded.
After
award of an IDIQ contract, the U.S. Government may issue task orders for
specific services or products it needs. The competitive process to
obtain task orders under an award contract is limited to the pre-selected
contractors. If such contract has a single prime contractor, then the
award of task orders is limited to that contractor.
If
the
contract has multiple prime contractors, then the award of the task order is
competitively determined among only those prime contractors.
IDIQ
and
IDIQ-type contracts typically have multi-year terms and unfunded ceiling amounts
which enable, but do not commit, the U.S. government to purchase substantial
amounts of products and services from one or more contractors.
Employees
As
of
April 30, 2007, we had 495 full-time employees, of whom 149 were in
research and development, and engineering, 44 were in sales and marketing,
203
were in operations and 99 were general and administrative
personnel. We believe that we have a good relationship with our
employees.
Other
Information
AeroVironment,
Inc. was originally incorporated in the State of California in July 1971 and
reincorporated in Delaware in 2006. In January 2007, we
completed an initial public offering which resulted in the issuance of 5,252,285
shares of our common stock at a price of $17.00 per share, resulting in net
proceeds to the Company of approximately $80.5 million, after deducting
payment of underwriters' discounts and commissions and offering
expenses.
Our
principal executive offices are located at 181 W. Huntington Dr., Suite 202,
Monrovia, California 91016. Our telephone number is
(626) 357-9983. Our website home page on the Internet is
http://www.avinc.com. We make our website content available for
information purposes only. It should not be relied upon for investment purposes,
nor is it incorporated by reference into this Form 10-K.
We
make
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statement for our annual
stockholders' meeting, as well as any amendments to those reports, available
free of charge through our website as soon as reasonably practical after we
electronically file that material with, or furnish it to, the SEC. You can
learn
more about us by reviewing our SEC filings. Our SEC reports can be accessed
through the investor relations page of our web site at
http://investor.avinc.com. These reports may also be obtained at the
SEC's public reference room at 100 F. Street, N.E., Washington, DC 20549. The
SEC also maintains a web site at www.sec.gov that contains reports, proxy
statements and other information regarding the Company.
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Risk
Factors.
|
We
rely heavily on sales to the U.S. government, particularly to agencies of the
Department of Defense.
Historically,
a significant portion of our total sales and substantially all of our small
UAS
sales have been to the U.S. government and its agencies. Sales to the U.S.
government, either as a prime contractor or subcontractor, represented
approximately 83% of our revenue for the fiscal year ended April 30, 2007.
The DoD, our principal U.S. government customer, accounted for approximately
80%
of our revenue for the fiscal year ended April 30, 2007. We believe that
the success and growth of our business for the foreseeable future will continue
to depend on our ability to win government contracts, in particular from the
DoD. Many of our government customers are subject to budgetary constraints
and
our continued performance under these contracts, or award of additional
contracts from these agencies, could be jeopardized by spending reductions
or
budget cutbacks at these agencies. The funding of U.S. government programs
is
uncertain and dependent on continued congressional appropriations and
administrative allotment of funds based on an annual budgeting process. We
cannot assure you that current levels of congressional funding for our products
and services will continue. Furthermore, all of our contracts with the U.S.
government are terminable by the U.S. government at will. A significant decline
in government expenditures generally, or with respect to programs for which
we
provide products, could adversely affect our business and prospects. Our
operating results may also be negatively impacted by other developments that
affect these government programs generally, including the
following:
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changes
in government programs that are related to our products and
services;
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adoption
of new laws or regulations relating to government contracting or
changes
to existing laws or regulations;
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Ÿ
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changes
in political or public support for security and defense
programs;
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Ÿ
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delays
or changes in the government appropriations
process;
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Ÿ
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uncertainties
associated with the war on terror and other geo-political matters;
and
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delays
in the payment of our invoices by government payment
offices.
|
These
developments and other factors could cause governmental agencies to reduce
their
purchases under existing contracts, to exercise their rights to terminate
contracts at-will or to abstain from renewing contracts, any of which would
cause our revenue to decline and could otherwise harm our business, financial
condition and results of operations
Military
transformation and operational levels in Afghanistan and Iraq may affect future
procurement priorities and existing programs, which could limit demand for
our
UAS.
Following
the end of the Cold War, the U.S. military began a transformation of its
operational concepts, organizational structure and technologies in an effort
to
improve warfighting capabilities. The resulting shift in procurement priorities
toward achieving these capabilities, together with the current high level of
operational activity in Afghanistan and Iraq, have led to an increase in demand
for our small UAS. We cannot predict whether current or future changes in
priorities due to defense transformation or continuation of the current
nature and magnitude of operations in Afghanistan and Iraq will afford new
opportunities for our small UAS business in terms of existing, additional or
replacement programs. Furthermore, we cannot predict whether or to what extent
this defense transformation or current operational levels in Afghanistan or
Iraq
will continue. If defense transformation or operations in Afghanistan and Iraq
cease or slow down, then our business, financial condition and results of
operations could be impacted.
We
operate in evolving markets, which makes it difficult to evaluate our business
and future prospects.
UAS,
fast
charge systems and other energy technologies that we offer are sold in new
and
rapidly evolving markets. Accordingly, our business and future prospects are
difficult to evaluate. We cannot accurately predict the extent to which demand
for our products will increase, if at all. The challenges, risks and
uncertainties frequently encountered by companies in rapidly evolving markets
could impact our ability to do the following:
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generate
sufficient revenue to maintain
profitability;
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acquire
and maintain market share;
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manage
growth in our operations;
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develop
and renew contracts;
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Ÿ
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attract
and retain additional engineers and other highly-qualified
personnel;
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Ÿ
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successfully
develop and commercially market new
products;
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adapt
to new or changing policies and spending priorities of governments
and
government agencies; and
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access
additional capital when required and on reasonable
terms.
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If
we
fail to address these and other challenges, risks and uncertainties
successfully, our business, results of operations and financial condition would
be materially harmed.
We
face competition from other firms, many of which have substantially greater
resources.
The
defense industry is highly competitive and generally characterized by intense
competition to win contracts. Our current principal small UAS competitors
include Advanced Ceramics Research, Inc., Applied Research Associates, Inc.,
Elbit Systems Ltd., L-3 Communications Holdings Inc. and Lockheed Martin
Corporation. We do not view large UAS such as Northrop Grumman Corporation's
Global Hawk, General Atomics, Inc.'s Predator, The Boeing
Company's ScanEagle and AAI Corporation's Shadow as direct
competitors because they perform different missions and are not hand launched
and controlled, although we cannot be certain that these platforms will not
become
direct competitors in the future. Some of these firms have substantially greater
financial, management, research and marketing resources than we have. The
primary direct competitors to our PosiCharge business are other fast charge
suppliers, including Aker Wade Power Technologies LLC, Minit-Charger, a
subsidiary of Edison International, and PowerDesigners, LLC, as well as
industrial battery manufacturers who distribute fast charge systems from these
suppliers. Our competitors may be able to provide customers with different
or
greater capabilities or benefits than we can provide in areas such as technical
qualifications, past contract performance, geographic presence, price and the
availability of key professional personnel, including those with security
clearances. Furthermore, many of our competitors may be able to utilize their
substantially greater resources and economies of scale to develop competing
products and technologies, divert sales away from us by winning broader
contracts or hire away our employees by offering more lucrative compensation
packages. In the event that the market for small UAS, expands, we expect that
competition will intensify as additional competitors enter the market and
current competitors expand their product lines. In order to secure contracts
successfully when competing with larger, well-financed companies, we may be
forced to agree to contractual terms that provide for lower aggregate payments
to us over the life of the contract, which could adversely affect our margins.
In addition, larger diversified competitors serving as prime contractors may
be
able to supply underlying products and services from affiliated entities, which
would prevent us from competing for subcontracting opportunities on these
contracts. Our failure to compete effectively with respect to any of these
or
other factors could have a material adverse effect on our business,
prospects, financial condition or operating results.
If
the UAS and fast charge systems markets do not experience significant growth,
if
we cannot expand our customer base or if our products do not achieve broad
acceptance, then we will not be able to achieve our anticipated level of
growth.
For
the
fiscal year ended April 30, 2007, UAS and PosiCharge fast charge systems
accounted for 84% and 10% of our total revenue, respectively. We cannot
accurately predict the future growth rates or sizes of these markets. Demand
for
our products may not increase, or may decrease, either generally or in specific
markets, for particular types of products or during particular time periods.
We
believe the market for fast charge systems is young and has not yet matured
or
diversified. Moreover, there are only a limited number of major
programs under which the U.S. military, our primary customer, is currently
funding the development or purchase of UAS. Although we are seeking to expand
our customer base to include foreign governments, domestic non-military agencies
and commercial customers, we cannot assure you that our efforts will be
successful. The expansion of the UAS and fast charge systems markets in general,
and the market for our products in particular, depends on a number of factors,
including the following:
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customer
satisfaction with these types of systems as
solutions;
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Ÿ
|
the
cost, performance and reliability of our products and products offered
by
our competitors;
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Ÿ
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customer
perceptions regarding the effectiveness and value of these types
of
systems;
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Ÿ
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limitations
on our ability to market our small UAS products outside the United
States
due to U.S. government regulations;
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obtaining
timely regulatory approvals, including, with respect to our small
UAS
business, access to airspace and wireless spectrum;
and
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marketing
efforts and publicity regarding these types of
systems.
|
Even
if
UAS and fast charge systems gain wide market acceptance, our products may not
adequately address market requirements and may not continue to gain market
acceptance. If these types of systems generally, or our products specifically,
do not gain wide market acceptance, then we may not be able to achieve our
anticipated level of growth and our revenue and results of operations would
suffer.
If
critical components of our products that we currently purchase from a small
number of suppliers or raw materials used to manufacture our products become
scarce or unavailable, then we may incur delays in manufacturing and delivery
of
our products, which could damage our business.
We
obtain
hardware components and various subsystems from a limited group of suppliers.
We
do not have long-term agreements with any of these suppliers that obligate
them
to continue to sell components or products to us. For example, L-3
Communications Holdings, which is one of our competitors, and Rockwell Collins,
are
currently
the sole supplier of our downlink transmitters/receivers and GPS modules,
respectively, of several of our small UAS provides, including
Raven. We also have several sole suppliers of PosiCharge Systems
product components and subsystems. Our reliance on these suppliers involves
significant risks and uncertainties, including whether our suppliers will
provide an adequate supply of required components of sufficient quality, will
increase prices for the components and will perform their obligations on a
timely basis.
In
addition, certain raw materials and components used in the manufacture of our
products are periodically subject to supply shortages, and our business is
subject to the risk of price increases and periodic delays in delivery. For
example, the airframes for our small UAS are made from certain nylon composites,
which experienced restrictions in available supply in 2005 due to increased
worldwide demand. Similarly, the market for electronic components is subject
to
cyclical reductions in supply. If we are unable to obtain components from
third-party suppliers in the quantities and of the quality that we require,
on a
timely basis and at acceptable prices, then we may not be able to deliver our
products on a timely or cost-effective basis to our customers, which could
cause
customers to terminate their contracts with us, increase our costs and seriously
harm our business, results of operations and financial condition. Moreover,
if
any of our suppliers become financially unstable, then we may have to find
new
suppliers. It may take several months to locate alternative suppliers, if
required, or to redesign our products to accommodate components from different
suppliers. We may experience significant delays in manufacturing and shipping
our products to customers and incur additional development, manufacturing and
other costs to establish alternative sources of supply if we lose any of these
sources or are required to redesign our products. We cannot predict if we will
be able to obtain replacement components within the time frames that we require
at an affordable cost, if at all.
Any
efforts to expand our product offerings beyond our current markets may not
succeed, which could negatively impact our operating
results.
We
have
focused on selling our small UAS to the U.S. military and our fast charge
systems to large industrial electric vehicle fleet operators primarily in North
America. We plan, however, to seek to expand our UAS sales into other government
and commercial markets and our fast charge systems sales into international
markets. Efforts to expand our product offerings beyond the markets that we
currently serve may divert management resources from existing operations and
require us to commit significant financial resources to unproven businesses
that
may not generate additional sales, either of which could significantly impair
our operating results.
Our
failure to obtain necessary regulatory approvals from the FAA or other
appropriate governmental agency may prevent us from expanding the sales of
our
small UAS to non-military customers in the United States and require us to
incur
additional costs in the testing of our products.
The
FAA
recently issued a clarification of its existing policies stating that, in order
to engage in public use of small UAS in the U.S. National Airspace
System, a public (government) operator must obtain a Certificate of
Authorization, or COA, from the FAA or fly in restricted airspace. The
FAA's COA approval process requires that the public operator certify
the airworthiness of the aircraft for its intended purpose, that a collision
with another aircraft or other airspace user is extremely improbable, that
the
small UAS complies with appropriate cloud and terrain clearances and that the
operator or spotter of the small UAS is generally within one half-mile laterally
and 400 feet vertically of the small UAS while in operation. Furthermore, the
FAA's clarification of existing policy states that the rules for
radio-controlled hobby aircraft do not apply to public or commercial use of
small UAS. The FAA is in the process of drafting updated regulations
specifically for small UAS operations, but we cannot assure you that these
regulations will allow the use of our small UAS by potential non-military
government and commercial customers. If the FAA does not modify its
regulations, we will experience increased costs to develop and test our small
UAS and may not be able to expand our sales of UAS beyond our military customers
and commercial users, which could harm our business prospects.
Recently,
the DCMA informed us that, under the terms of our DoD contracts, the government
parties with whom we are contracting are required to obtain a COA for flight
tests of our small UAS outside of restricted airspace. If our DoD customers
are
unable to obtain such a COA, we may not be able to perform our flight tests
without incurring the additional costs of transporting our small UAS products
to
military installations, when restricted airspace is available for testing,
which
could impair our operating results.
The
markets in which we compete are characterized by rapid technological change,
which requires us to develop new products and product enhancements, and could
render our existing products obsolete.
Continuing
technological changes in the market for our products could make our products
less competitive or obsolete, either generally or for particular applications.
Our future success will depend upon our ability to develop and introduce
a
variety of new capabilities and enhancements to our existing product offerings,
as well as introduce a variety of new product offerings, to address the changing
needs of the markets in which we offer our products. Delays in introducing
new
products and enhancements, the failure to choose correctly among technical
alternatives or the failure to offer innovative products or enhancements
at
competitive prices may cause existing and potential customers to purchase
our
competitors' products.
If
we are
unable to devote adequate resources to develop new products or cannot otherwise
successfully develop new products or enhancements that meet customer
requirements on a timely basis, our products could lose market share, our
revenue and profits could decline, and we could experience operating
losses.
We
expect to incur substantial research and development costs and devote
significant resources to identifying and commercializing new products, which
could significantly reduce our profitability and may never result in revenue
to
us.
Our
future growth depends on penetrating new markets, adapting existing products
to
new applications, and introducing new products that achieve market acceptance.
We plan to incur substantial research and development costs as part of our
efforts to design, develop and commercialize new products and enhance existing
products. We spent $13.9 million, or 8% of our revenue, in our fiscal year
ended April 30, 2007 on research and development activities and expect to
continue to spend significant funds on research and development in the future.
Because we account for research and development as an operating expense, these
expenditures will adversely affect our earnings in the future. Further, our
research and development program may not produce successful results, and our
new
products may not achieve market acceptance, create additional revenue or become
profitable, which could materially harm our business, prospects, financial
results and liquidity.
If
we are unable to manage our growth, our business could be adversely
affected.
Our
headcount and operations have grown rapidly. This rapid growth has placed,
and
will continue to place, a significant strain on our management and our
administrative, operational and financial infrastructure. From January 2004
through April 2007, we more than doubled the number of our employees. We
anticipate further growth of headcount and facilities will be required to
address increases in our product offerings and the geographic scope of our
customer base. Our success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must continue to
hire, train, manage and integrate a significant number of qualified managers
and
engineers. If our new employees perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees, or retaining
these or our existing employees, then our business may suffer.
For
us to
continue our growth, we must continue to improve our operational, financial
and
management information systems. If we are unable to manage our growth while
maintaining our quality of service, or if new systems that we implement to
assist in managing our growth do not produce the expected benefits, then our
business, prospects, financial condition or operating results could be adversely
affected.
Our
earnings and profit margins may decrease based on the mix of our contracts
and
programs and other factors related to our contracts.
In
general, we perform our production work under fixed-price contracts and our
repair and customer-funded research and development work under cost-plus-fee
contracts. Under fixed-price contracts, we perform services under a contract
at
a stipulated price. Under cost-plus-fee contracts, which are subject to a
contract ceiling amount, we are reimbursed for allowable costs and paid a fee,
which may be fixed or performance based. We typically experience lower profit
margins under cost-plus-fee contracts than under fixed-price contracts, though
fixed-price contracts have higher risks. In general, if the volume of services
we perform under cost-plus-fee contracts increases relative to the volume of
services we perform under fixed-price contracts, we expect that our operating
margin will suffer. In addition, our earnings and margins may decrease depending
on the costs we incur in contract performance, our achievement of other contract
performance objectives and the stage of our performance at which our right
to
receive fees, particularly under incentive and award fee contracts, is
finally determined.
Our
senior management and key employees are important to our customer relationships
and overall business.
We
believe that our success depends in part on the continued contributions of
our
senior management and key employees. We rely on our executive officers, senior
management and key employees to generate business and execute programs
successfully. In addition, the relationships and reputation that members
of our
management team and key employees have established and maintain with government
defense personnel contribute to our ability to maintain good customer relations
and to identify new business opportunities. We do not have employment agreements
with any of our executive officers or key employees, and these individuals
could
terminate their employment with us at any time. The loss of any of our executive
officers, members of our senior management team or key employees could
significantly delay or prevent the achievement of our business objectives
and
could materially harm our business and customer relationships and impair
our
ability to identify and secure new contracts and otherwise manage our
business.
We
must recruit and retain highly-skilled employees to succeed in our competitive
business.
We
depend
on our ability to recruit and retain employees who have advanced engineering
and
technical services skills and who work well with our customers. These employees
are in great demand and are likely to remain a limited resource in the
foreseeable future. If we are unable to recruit and retain a sufficient number
of these employees, then our ability to maintain our competitiveness and grow
our business could be negatively affected. In addition, because of the highly
technical nature of our products, the loss of any significant number of our
existing engineering personnel could have a material adverse effect on our
business and operating results. Moreover, some of our U.S. government contracts
contain provisions requiring us to staff a program with certain personnel the
customer considers key to our successful performance under the contract. In
the
event we are unable to provide these key personnel or acceptable substitutes,
the customer may terminate the contract.
Our
business may be dependent upon our employees obtaining and maintaining required
security clearances.
Certain
of our U.S. government contracts require our employees to maintain various
levels of security clearances, and we are required to maintain certain facility
security clearances complying with DoD requirements. The DoD has strict security
clearance requirements for personnel who work on classified programs. Obtaining
and maintaining security clearances for employees involves a lengthy process,
and it is difficult to identify, recruit and retain employees who already hold
security clearances. If our employees are unable to obtain security clearances
in a timely manner, or at all, or if our employees who hold security clearances
are unable to maintain the clearances or terminate employment with us, then
a
customer requiring classified work could terminate the contract or decide
not to renew it upon its expiration. In addition, we expect that many of the
contracts on which we will bid will require us to demonstrate our ability to
obtain facility security clearances and employ personnel with specified types
of
security clearances. To the extent we are not able to obtain facility security
clearances or engage employees with the required security clearances for a
particular contract, we may not be able to bid on or win new contracts, or
effectively rebid on expiring contracts.
Cost
overruns on our contracts could subject us to losses, decrease our operating
margins and adversely affect our future business.
Fixed-price
contracts represented approximately 65% of our revenue for the fiscal year
ended
April 30, 2007. If we fail to anticipate technical problems, estimate costs
accurately or control costs during our performance of fixed-price contracts,
then we may incur losses on these contracts because we absorb any costs in
excess of the fixed price. Under cost-plus-fee contracts, if costs exceed the
contract ceiling or are not allowable under the provisions of the contract
or
applicable regulations, then we may not be able to obtain reimbursement for
all
such costs. Under time and materials contracts, we are paid for labor at
negotiated hourly billing rates and for certain expenses. Under each type of
contract, if we are unable to control the costs we incur in performing under
the
contract, then our financial condition and results of operations could be
materially adversely affected. Cost overruns also may adversely affect our
ability to sustain existing programs and obtain future contract
awards.
Our
products are complex and could have unknown defects or errors, which may give
rise to claims against us, diminish our brand or divert our resources from
other
purposes.
Our
UAS
rely on complex avionics, sensors, user-friendly interfaces and
tightly-integrated, electromechanical designs to accomplish their missions,
and
our fast charge systems and energy systems often rely upon the application
of
intellectual property for which there may have been little or no prior
commercial application. Despite testing, our products have contained defects
and
errors and may in the future contain defects, errors or performance problems
when first introduced, when new versions or enhancements are released, or even
after these products have
been
used
by our customers for a period of time. These problems could result in expensive
and time-consuming design modifications or warranty charges, delays in the
introduction of new products or enhancements, significant increases in our
service and maintenance costs, exposure to liability for damages, damaged
customer relationships and harm to our reputation, any of which could materially
harm our results of operations and ability to achieve market acceptance. In
addition, increased development and warranty costs could be substantial and
could reduce our operating margins.
The
existence of any defects, errors, or failures in our products or the misuse
of
our products could also lead to product liability claims or lawsuits against
us.
A defect, error or failure in one of our UAS could result in injury, death
or
property damage and significantly damage our reputation and support for UAS
in
general. While our fast charge systems include certain safety mechanisms, these
systems can deliver up to 600 amps of current in their application, and the
failure, malfunction or misuse of these systems could result in injury or death.
Although we maintain insurance policies, we cannot assure you that this
insurance will be adequate to protect us from all material judgments and
expenses related to potential future claims or that these levels of insurance
will be available in the future at economical prices or at all. A successful
product liability claim could result in substantial cost to us. Even if we
are
fully insured as it relates to a claim, the claim could nevertheless diminish
our brand and divert management's attention and resources, which could have
a
negative impact on our business, financial condition and results of
operations.
The
operation of UAS in urban environments may be subject to risks, such as
accidental collisions and transmission interference, which may limit demand
for
our UAS in such environments and harm our business and operating
results.
Urban
environments may present certain challenges to the operators of UAS. UAS may
accidentally collide with other aircraft, persons or property, which could
result in injury, death or property damage and significantly damage the
reputation of and support for UAS in general. While we are aware of only one
instance of an accidental collision involving an UAS to date, as the usage
of
UAS has increased, particularly by military customers in urban areas of
Afghanistan and Iraq, the danger of such collisions has increased. Furthermore,
the number of UAS that can operate simultaneously in a given geographic area
is
limited by the allocated frequency spectrum available. In addition, obstructions
to effective transmissions in urban environments, such as large buildings,
may
limit the ability of the operator to utilize the aircraft for its intended
purpose. The risks or limitations of operating UAS in urban environments may
limit their value in such environments, which may limit demand for our UAS
and
consequently materially harm our business and operating results.
Our
quarterly operating results may vary widely.
Our
quarterly revenue, cash flow and operating results have and may continue to
fluctuate significantly in the future due to a number of factors, including
the
following:
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fluctuations
in revenue derived from government contracts, including cost-plus-fee
contracts and contracts with a performance-based fee
structure;
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the
size and timing of orders from military and other governmental agencies,
including increased purchase requests from government customers for
equipment and materials in connection with the U.S. government's
fiscal
year end, which may affect our quarterly operating
results;
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the
mix of products that we sell in the
period;
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seasonal
fluctuations in customer demand for some of our products or
services;
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unanticipated
costs incurred in the introduction of new
products;
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fluctuations
in the adoption of our products in new
markets;
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changes
in the level of tax credits available for research and development
spending;
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cancellations,
delays or contract amendments by our governmental agency customers;
and
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changes
in policy or budgetary measures that adversely affect our governmental
agency customers.
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Changes
in the volume of products and services provided under existing contracts
and the
number of contracts commenced, completed or terminated during any quarter
may
cause significant variations in our cash flow from operations because a
relatively large amount of our expenses are fixed. We incur significant
operating expenses during the start-up and early stages of large contracts
and
typically do not receive corresponding payments in that same quarter. We
may also incur significant or unanticipated expenses when contracts expire
or
are terminated or are not renewed. In addition, payments due to us from
government agencies may be delayed due to billing cycles or as a result of
failures of governmental budgets to gain congressional and presidential
administration approval in a timely manner.
Shortfalls
in available external research and development funding could adversely affect
us.
We
depend
on our research and development activities to develop the core technologies
used
in our small UAS and PosiCharge products and for the development of our future
products. A portion of our research and development activities depends on
funding by commercial companies and the U.S. government. U.S. government and
commercial spending levels can be impacted by a number of variables, including
general economic conditions, specific companies' financial performance and
competition for U.S. government funding with other U.S. government-sponsored
programs in the budget formulation and appropriation processes. Moreover, the
U.S., state and local governments provide energy rebates and incentives to
commercial companies, which directly impact the amount of research and
development that companies appropriate for energy systems. To the extent
that these energy rebates and incentives are reduced or eliminated, company
funding for research and development could be reduced. Any reductions in
available research and development funding could harm our business, financial
condition and operating results.
Volatility
and cyclicality in the market for electric industrial vehicles could adversely
affect us.
Our
PosiCharge Systems products, which accounted for 10% of our revenue during
the
fiscal year ended April 30, 2007, are purchased primarily by operators of
fleets of electric industrial vehicles, such as forklift trucks and airport
ground support equipment. Consequently, our ability to remain profitable depends
in part on the varying conditions in the market for electric industrial
vehicles. This market is subject to volatility as it moves in response to cycles
in the overall business environment and it is also particularly sensitive to
the
industrial, food and beverage, retail and air travel sectors, which generate
a
significant portion of the demand for such vehicles. Sales of electric
industrial vehicles have historically been cyclical, with demand affected by
such economic factors as industrial production, construction levels, demand
for
consumer and durable goods, interest rates and fuel costs. A significant decline
in demand for electric industrial vehicles could adversely affect our revenue
and prospects, which would harm our business, financial condition and operating
results.
Our
fast charge business is dependent upon our relationships with battery dealers
and other third parties with whom we do not have exclusive
arrangements.
To
remain
competitive in the market for fast charge systems, we must maintain our access
to potential customers and ensure that the service needs of our customers are
met adequately. In many cases, we rely on battery dealers for access to
potential PosiCharge Systems customers. Currently, several of our fast charge
system competitors are working with battery manufacturers to sell fast charge
systems and batteries together. Cooperative agreements between our competitors
and battery manufacturers could restrict our access to battery dealers and
potential PosiCharge Systems customers, adversely affecting our revenue and
prospects. Additionally, we rely on outside service providers to perform
post-sale services for our PosiCharge customers. If these service providers
fail
to perform these services as required or discontinue their business with us,
then we could lose customers to competitors, which would harm our business,
financial condition and operating results.
We
work in international locations where there are high security risks, which
could
result in harm to our employees and contractors or substantial
costs.
Some
of
our services are performed in high-risk locations, such as Iraq and Kuwait,
where the country or location is suffering from political, social or economic
issues, or war or civil unrest. For example, we currently maintain a forward
operating depot in Iraq, located in a U.S. government installation and typically
staffed by three of our employees. In addition, we have occasionally had
trainers temporarily assigned in Kuwait. During the last fiscal year, we had
five trainers assigned in Kuwait for a period of 30 days. In those locations
where we have employees or operations, we may incur substantial costs to
maintain the safety of our personnel. Despite these precautions, the safety
of
our personnel in these locations may continue to be at risk, and we may in
the
future suffer the loss of employees and contractors, which could harm our
business and operating results.
We
may not be able to obtain capital when desired on favorable terms, if at
all, or
without dilution to our stockholders.
We
operate in emerging and rapidly evolving markets, which makes our prospects
difficult to evaluate. It is possible that we may not generate sufficient
cash
flow from operations or otherwise have the capital resources to meet our
future
capital needs. If this occurs, then we may need additional financing to pursue
our business strategies, including to:
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hire
additional engineers and other
personnel;
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develop
new or enhance existing products;
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enhance
our operating infrastructure;
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fund
working capital requirements;
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acquire
complementary businesses or technologies;
or
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otherwise
respond to competitive pressures.
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If
we
raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders could be significantly
diluted, and these newly-issued securities may have rights, preferences or
privileges senior to those of existing stockholders. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
Our
existing line of credit contains, and future debt financing may contain,
covenants or other provisions that limit our operational or financial
flexibility. In addition, certain of our customers require that we obtain
letters of credit to support our obligations under some of our
contracts.
Our
existing letter-of-credit provider requires that we hold cash in an amount
equal
to the amount of our outstanding letters of credit as collateral. Continued
access to letters of credit may be important to our ability to regain and win
contracts in the future. If adequate funds are not available or are not
available on acceptable terms, if and when needed, then our ability to fund
our
operations, take advantage of unanticipated opportunities, develop or enhance
our products, or otherwise respond to competitive pressures would be
significantly limited.
Our
international business poses potentially greater risks than our domestic
business.
We
derived approximately 5% of our revenue from international sales during the
three fiscal years ended April 30, 2007. We expect to derive an
increasing portion of our revenue from international sales. Our international
revenue and operations are subject to a number of material risks, including
the
following:
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the
unavailability of, or difficulties in obtaining any, necessary
governmental authorizations for the export of our UAS products to
certain
foreign jurisdictions;
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changes
in regulatory requirements that may adversely affect our ability
to sell
certain products or repatriate profits to the
U.S.;
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the
complexity and necessity of using foreign representatives and
consultants;
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difficulties
in enforcing agreements and collecting receivables through foreign
legal
systems and other relevant legal issues, including fewer legal protections
for intellectual property;
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potential
fluctuations in foreign economies and in the value of foreign currencies
and interest rates;
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potential
preferences by prospective customers to purchase from local (non-U.S.)
sources;
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general
economic and political conditions in the markets in which we
operate;
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laws
or regulations relating to non-U.S. military contracts that favor
purchases from non-U.S. manufacturers over U.S.
manufacturers;
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the
imposition of tariffs, embargoes, export controls and other trade
restrictions; and
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different
and changing legal and regulatory requirements in the jurisdictions
in
which we currently operate or may operate in the
future.
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Negative
developments in any of these areas in one or more countries could result in
a
reduction in demand for our products, the cancellation or delay of orders
already placed, threats to our intellectual property, difficulty in collecting
receivables and a higher cost of doing business, any of which could negatively
impact our business, financial condition or results of operations. Moreover,
our
sales, including sales to customers outside the U.S., are denominated in
dollars, and downward fluctuations in the value of foreign currencies relative
to the U.S. dollar may make our products more expensive than other products,
which could harm our business.
Potential
future acquisitions could be difficult to integrate, divert the attention of
key
personnel, disrupt our business, dilute stockholder value and impair our
financial results.
We
intend
to consider strategic acquisitions that would add to our customer base,
technological capabilities or system offerings. Acquisitions involve numerous
risks, any of which could harm our business, including the
following:
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difficulties
in integrating the operations, technologies, products, existing contracts,
accounting and personnel of the target company and realizing the
anticipated synergies of the combined
businesses;
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difficulties
in supporting and transitioning customers, if any, of the target
company;
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diversion
of financial and management resources from existing
operations;
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the
price we pay or other resources that we devote may exceed the value
we
realize, or the value we could have realized if we had allocated
the
purchase price or other resources to another
opportunity;
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risks
of entering new markets in which we have limited or no
experience;
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potential
loss of key employees, customers and strategic alliances from either
our
current business or the target company's
business;
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assumption
of unanticipated problems or latent liabilities, such as problems
with the
quality of the target company's products;
and
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inability
to generate sufficient revenue to offset acquisition
costs.
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Acquisitions
also frequently result in the recording of goodwill and other intangible assets
which are subject to potential impairments in the future that could harm our
financial results. In addition, if we finance acquisitions by issuing equity,
or
securities convertible into equity, then our existing stockholders may be
diluted, which could lower the market price of our common stock. If we finance
acquisitions through debt, then such future debt financing may contain covenants
or other provisions that limit our operational or financial flexibility. As
a
result, if we fail to properly evaluate acquisitions or investments, then we
may
not achieve the anticipated benefits of any such acquisitions, and we may incur
costs in excess of what we anticipate. The failure to successfully evaluate
and
execute acquisitions or investments or otherwise adequately address these risks
could materially harm our business and financial results.
Environmental
laws and regulations and unforeseen costs could impact our future
earnings.
The
manufacture and sale of our products in certain states and countries may subject
us to environmental and other regulations. For example, we obtain a significant
number of our electronics components from companies located in East Asia, where
environmental rules may be less stringent than in the United States. Over time,
the countries where these companies are located may adopt more stringent
environmental regulations, resulting in an increase in our manufacturing costs.
Furthermore, certain environmental laws, including the U.S. Comprehensive,
Environmental Response, Compensation and Liability Act of 1980, impose strict,
joint and several liability on current and previous owners or operators of
real
property for the cost of removal or remediation of hazardous substances and
impose liability for damages to natural resources. These laws often impose
liability even if the owner or operator did not know of, or was not responsible
for, the release of such hazardous substances. These
environmental
laws also assess liability on persons who arrange for hazardous substances
to be
sent to disposal or treatment facilities when such facilities are found to
be
contaminated. Such persons can be responsible for cleanup costs even if they
never owned or operated the contaminated facility. Although we have not yet
been
named a responsible party at a contaminated site, we could be named a
potentially responsible party in the future. We cannot assure you that such
existing laws or future laws will not have a material adverse effect on our
future earnings or results of operations.
Our
business and operations are subject to the risks of earthquakes and other
natural catastrophic events.
Our
corporate headquarters, research and development and manufacturing operations
are located in Southern California, a region known for seismic activity and
wild
fires. A significant natural disaster, such as an earthquake, fire or other
catastrophic event, could severely affect our ability to conduct normal business
operations, and as a result, our future operating results could be
materially and adversely affected.
Risks
Related to Our U.S. Government Contracts
We
are subject to extensive government regulation, and our failure to comply with
applicable regulations could subject us to penalties that may restrict our
ability to conduct our business.
As
a
contractor to the U.S. government, we are subject to and must comply with
various government regulations that impact our revenue, operating costs, profit
margins and the internal organization and operation of our business. The most
significant regulations and regulatory authorities affecting our business
include the following:
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the
Federal Acquisition Regulations and supplemental agency regulations,
which
comprehensively regulate the formation and administration of, and
performance under, U.S. government
contracts;
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the
Truth in Negotiations Act, which requires certification and disclosure
of
all factual cost and pricing data in connection with contract
negotiations;
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the
False Claims Act and the False Statements Act, which impose penalties
for
payments made on the basis of false facts provided to the government
and
on the basis of false statements made to the government,
respectively;
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the
Foreign Corrupt Practices Act, which prohibits U.S. companies from
providing anything of value to a foreign official to help obtain,
retain
or direct business, or obtain any unfair
advantage;
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the
National Telecommunications and Information Administration and the
Federal
Communications Commission, which regulate the wireless spectrum
allocations upon which UAS depend for operation and data transmission
in
the U.S.;
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the
Federal Aviation Administration, which is in the process of drafting
regulations specifically for small UAS operation in the
U.S.;
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the
International Traffic in Arms Regulations, which regulate the export
of
controlled technical data, defense articles and defense services
and
restrict from which countries we may purchase materials and services
used
in the production of certain of our products;
and
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laws,
regulations and executive orders restricting the use and dissemination
of
information classified for national security purposes and the exportation
of certain products and technical
data.
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Also,
we
need special security clearances and regulatory approvals to continue working
on
certain of our projects with the U.S. government. Classified programs generally
will require that we comply with various executive orders, federal laws and
regulations and customer security requirements that may include restrictions
on
how we develop, store, protect and share information, and may require our
employees to obtain government security clearances. Our failure to comply with
applicable regulations, rules and approvals or misconduct by any of our
employees could result in the imposition of fines and penalties, the loss of
security clearances, the loss of our government contracts or our suspension
or
debarment from contracting with the U.S. government generally, any of which
would harm our business, financial condition and results of operations. We
are
also subject to certain regulations of comparable government agencies in other
countries, and our failure to comply with these non-U.S. regulations could
also
harm our business, financial condition or results of operations.
Our
business could be adversely affected by a negative audit by the U.S.
government.
U.S.
government agencies, primarily the Defense Contract Audit Agency, or DCAA,
and
the DCMA, routinely audit and investigate government contractors. These agencies
review a contractor's performance under its contracts, cost structure and
compliance with applicable laws, regulations and standards. These agencies
also
may review the adequacy of, and a contractor's compliance with, its internal
control systems and policies, including the contractor's purchasing, property,
estimating, compensation and management information systems. Any costs found
to
be improperly allocated to a specific contract will not be reimbursed, while
such costs already reimbursed must be refunded. If an audit of our business
were
to uncover improper or illegal activities, then we could be subject to civil
and
criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines and
suspension or prohibition from doing business with the U.S. government. In
addition, we could suffer serious harm to our reputation if allegations of
impropriety or illegal acts were made against us, even if the allegations were
inaccurate. If any of the foregoing were to occur, our financial condition
and
operating results could be materially adversely affected.
During
our fiscal year ended April 30, 2007, we were audited by the DCMA with respect
to our system for the care, control and accountability of government property.
The DCMA identified certain corrective actions to be taken with respect to
our
system, which we have implemented. Although we successfully implemented these
corrective actions, we cannot assure you that the DCMA will not require
additional corrective actions in the future. The failure to comply with
requirements for government contractors in the future would adversely affect
our
ability to do business with the U.S. government and could harm our business
and
operating results.
Some
of our contracts with the U.S. government allow it to use inventions developed
under the contracts and to disclose technical data to third parties, which
could
harm our ability to compete.
Some
of
our contracts allow the U.S. government to use, royalty-free, or have others
use, inventions developed under those contracts on behalf of the government.
Some of the contracts allow the federal government to disclose technical data
without constraining the recipient on how those data are used. The ability
of
third parties to use patents and technical data for government purposes creates
the possibility that the government could attempt to establish alternative
suppliers or to negotiate with us to reduce our prices. The potential that
the
government may release some of the technical data without constraint creates
the
possibility that third parties may be able to use this data to compete with
us,
which could have a material adverse effect on our business, results of
operations or financial condition.
U.S.
government contracts are generally not fully funded at inception and contain
certain provisions that may be unfavorable to us, which could prevent us from
realizing our contract backlog and materially harm our business and results
of
operations.
DoD
contracts typically involve long lead times for design and development, and
are
subject to significant changes in contract scheduling. Congress generally
appropriates funds on a fiscal year basis even though a program may continue
for
several years. Consequently, programs are often only partially funded initially,
and additional funds are committed only as Congress makes further
appropriations. The termination or reduction of funding for a government program
would result in a loss of anticipated future revenue attributable to that
program.
As
of
April 30, 2007, we had funded U.S. government contract backlog of
$60.9 million and estimated unfunded U.S. government contract backlog of
$478 million. The actual receipt of revenue on awards included in backlog
may never occur or may change because a program schedule could change or the
program could be canceled, or a contract could be reduced, modified or
terminated early.
In
addition, U.S. government contracts generally contain provisions permitting
termination, in whole or in part, at the government's convenience or for
contractor default. Since a substantial majority of our revenue is dependent
on
the procurement, performance and payment under our U.S. government contracts,
the termination of one or more critical government contracts could have a
negative impact on our results of operations and financial condition.
Termination arising out of our default could expose us to liability and have
a
material adverse effect on our ability to re-compete for future contracts and
orders. Moreover, several of our contracts with the U.S. government do not
contain a limitation of liability provision, creating a risk of responsibility
for indirect, incidental damages and consequential damages. These provisions
could cause substantial liability for us, especially given the use to which
our
products may be put.
U.S.
government contracts are subject to a competitive bidding process that can
consume significant resources without generating any
revenue.
U.S.
government contracts are frequently awarded only after formal, protracted
competitive bidding processes and, in many cases, unsuccessful bidders for
U.S.
government contracts are provided the opportunity to protest contract awards
through various agency, administrative and judicial channels. We derive
significant revenue from U.S. government contracts that were awarded through
a
competitive bidding process. Much of the UAS business that we expect to seek
in
the foreseeable future likely will be awarded through competitive bidding.
Competitive bidding presents a number of risks, including the
following:
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the
need to bid on programs in advance of the completion of their design,
which may result in unforeseen technological difficulties and cost
overruns;
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the
substantial cost and managerial time and effort that must be spent
to
prepare bids and proposals for contracts that may not be awarded
to
us;
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the
need to estimate accurately the resources and cost structure that
will be
required to service any contract we are awarded;
and
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the
expense and delay that may arise if our competitors protest or challenge
contract awards made to us pursuant to competitive bidding, and the
risk
that any such protest or challenge could result in the delay of our
contract performance, the distraction of management, the resubmission
of
bids on modified specifications, or in termination, reduction or
modification of the awarded
contract.
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We
may
not be provided the opportunity to bid on contracts that are held by other
companies and are scheduled to expire if the government extends the existing
contract. If we are unable to win particular contracts that are awarded through
a competitive bidding process, then we may not be able to operate in the market
for goods and services that are provided under those contracts for a number
of
years. If we are unable to win new contract awards over any extended period
consistently, then our business and prospects will be adversely
affected.
Risks
Related to Our Intellectual Property
If
we fail to protect, or incur significant costs in defending, our intellectual
property and other proprietary rights, our business, financial condition, and
results of operations could be materially harmed.
Our
success depends, in large part, on our ability to protect our intellectual
property and other proprietary rights. We rely primarily on patents, trademarks,
copyrights, trade secrets and unfair competition laws, as well as license
agreements and other contractual provisions, to protect our intellectual
property and other proprietary rights. However, a significant portion of
our technology is not patented, and we may be unable or may not seek to obtain
patent protection for this technology. Moreover, existing U.S. legal standards
relating to the validity, enforceability and scope of protection of intellectual
property rights offer only limited protection, may not provide us with any
competitive advantages, and may be challenged by third parties. The laws of
countries other than the United States may be even less protective of
intellectual property rights. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or misappropriating our
intellectual property or otherwise gaining access to our technology.
Unauthorized third parties may try to copy or reverse engineer our products
or
portions of our products or otherwise obtain and use our intellectual property.
Moreover, many of our employees have access to our trade secrets and other
intellectual property. If one or more of these employees leave us to work for
one of our competitors, then they may disseminate this proprietary information,
which may as a result damage our competitive position. If we fail to protect
our
intellectual property and other proprietary rights, then our business, results
of operations or financial condition could be materially harmed.
In
addition, affirmatively defending our intellectual property rights and
investigating whether we are pursuing a product or service development that
may
violate the rights of others may entail significant expense. We have not found
it necessary to resort to legal proceedings to protect our intellectual
property, but may find it necessary to do so in the future. Any of our
intellectual property rights may be challenged by others or invalidated through
administrative processes or litigation. If we resort to legal proceedings to
enforce our intellectual property rights or to determine the validity and scope
of the intellectual property or other proprietary rights of others, then the
proceedings could result in significant expense to us and divert the attention
and efforts of our management and technical employees, even if we
prevail.
We
may be sued by third parties for alleged infringement of their proprietary
rights, which could be costly, time-consuming and limit our ability to use
certain technologies in the future.
We
may
become subject to claims that our technologies infringe upon the intellectual
property or other proprietary rights of third parties. Any claims, with or
without merit, could be time-consuming and expensive, and could divert our
management's attention away from the execution of our business plan. Moreover,
any settlement or adverse judgment resulting from these claims could require
us
to pay substantial amounts or obtain a license to continue to use the disputed
technology, or otherwise restrict or prohibit our use of the technology. We
cannot assure you that we would be able to obtain a license from the third
party
asserting the claim on commercially reasonable terms, if at all, that we would
be able to develop alternative technology on a timely basis, if at all, or
that
we would be able to obtain a license to use a suitable alternative technology
to
permit us to continue offering, and our customers to continue using, our
affected product. An adverse determination also could prevent us from offering
our products to others. Infringement claims asserted against us may have a
material adverse effect on our business, results of operations or financial
condition.
Risks
Relating to Securities Markets and Investment in Our Stock
Our
common stock has only been publicly traded since January 23, 2007 and the
price of our common stock may fluctuate
significantly.
There
has
only been a public market for our common stock since January 23, 2007. The
market prices for securities of emerging technology companies have historically
been highly volatile, and the market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of which we
cannot control, including the following:
|
|
Ÿ
|
U.S.
government spending levels, both generally and by our particular
customers;
|
|
|
Ÿ
|
The
volume of operational activity by the U.S.
military;
|
|
|
Ÿ
|
delays
in the payment of our invoices by government payment offices, resulting
in
potentially reduced earnings during a particular fiscal
quarter;
|
|
|
Ÿ
|
announcements
of new products or technologies, commercial relationships or other
events
relating to us or our industry or our
competitors;
|
|
|
Ÿ
|
failure
of any of our key products to gain market
acceptance;
|
|
|
Ÿ
|
variations
in our quarterly operating results;
|
|
|
Ÿ
|
perceptions
of the prospects for the markets in which we
compete;
|
|
|
Ÿ
|
changes
in general economic conditions;
|
|
|
Ÿ
|
changes
in securities analysts' estimates of our financial
performance;
|
|
|
Ÿ
|
regulatory
developments in the U.S. and foreign
countries;
|
|
|
Ÿ
|
fluctuations
in stock market prices and trading volumes of similar
companies;
|
|
|
Ÿ
|
news
about the markets in which we compete or regarding our
competitors;
|
|
|
Ÿ
|
terrorist
acts or military action related to international conflicts, wars
or
otherwise;
|
|
|
Ÿ
|
sales
of large blocks of our common stock, including sales by our executive
officers, directors and significant stockholders;
and
|
|
|
Ÿ
|
additions
or departures of key personnel.
|
In
addition, the equity markets in general, and Nasdaq in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of those companies. Further,
the market prices of securities of emerging technology companies have been
particularly volatile. These broad market and industry factors may affect
the market price of our common stock adversely, regardless of our operating
performance. In the past, following periods of volatility in the market price
of
a company's securities, securities class action litigation often has been
instituted against that company. This type of litigation, if instituted against
us, could result in substantial costs and a diversion of management's attention
and resources.
Our
management, whose interests may not be aligned with yours, is able to control
the vote on all matters requiring stockholder
approval.
As
of
June 15, 2007, our directors, executive officers and their affiliates
collectively beneficially owned 10,294,190 shares, or approximately 52%, of
our
total outstanding shares of common stock. Accordingly, our directors and
executive officers as a group may control the vote on all matters requiring
stockholder approval, including the election of directors. The interests of
our
directors and executive officers may not be fully aligned with yours. Although
there is no agreement among our directors and executive officers with respect
to
the voting of their shares, this concentration of ownership may delay, defer
or
even prevent a change in control of our company, and make transactions more
difficult or impossible without the support of all or some of our directors
and
executive officers. These transactions might include proxy contests, tender
offers, mergers or other purchases of common stock that could give you the
opportunity to realize a premium over the then-prevailing market price for
shares of our common stock.
|
Unresolved
Staff Comments.
|
Not
Applicable.
|
Properties.
|
All
of
our facilities are leased. Our corporate headquarters are located in Monrovia,
California where we lease approximately 13,000 square feet under an
agreement expiring in September 2010. We have several other leased facilities
in
Monrovia that house our PosiCharge and Energy Technology Center businesses.
These facilities have total square footage of approximately 64,000 square
feet and leases that expire between the end of 2007 and 2010.
Our
principal UAS facilities are located in Simi Valley, California. They currently
consist of an 85,000 square foot research and development, manufacturing
and logistics facility, the lease for which expires in 2009, a 26,000 square
foot dedicated research and development facility, the lease for which expires
in
October 2007, and a new 105,000 square foot manufacturing, research and
development facility, the lease for which expires in 2012. We expect
to move much of our UAS research and development and administrative operations
to the new facility by late 2007.
We
additionally have small leased offices in Arizona, Florida, Hawaii and Virginia
for training, business development and sales, and lease arrangements with
several test flight fields in California. We believe that our current leased
facilities and additional or alternative space available to us will be adequate
to meet our needs for the foreseeable future.
|
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.
|
Submission
of Matters to a Vote of Securities
Holders.
|
No
matters were submitted during the fourth quarter of our fiscal year ending
April
30, 2007 to a vote of security holders through solicitation of proxies or
otherwise.
Part
II
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
Common
Stock
On
January 23, 2007, our common stock was listed on The NASDAQ Global Market under
the symbol "AVAV." Prior to January 23, 2007, there was no
established trading market for our common stock. The following table
sets forth, for the periods indicated, the high and low sales prices for our
common stock from January 23, 2007 through April 30, 2007. The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended April 30, 2007
|
||||||||
|
January
23, 2007 – January 27, 2007
|
$ |
26.22
|
$ |
22.60
|
||||
|
Fourth
Quarter
|
24.50
|
20.50
|
||||||
On
June
13, 2007, the closing sales price of our common stock as reported on the NASDAQ
Global Market was $22.01 per share. As of June 13 2007, there were
approximately 52 holders of record of our common stock.
Dividends
We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in
the foreseeable future. Our debt agreement prohibits us from paying any
dividends to our stockholders. Any future determination related to dividend
policy will be made at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements, contractual restrictions and such other factors as our
board of directors deems relevant.
Stock
Price Performance Graph
The
following graph sets forth the total cumulative stockholder return on our common
stock since our initial public offering beginning on January 23, 2007 as
compared to the Russell 2000 Index and the SPADES Index. This graph assumes
a
$100 investment in the Company's common stock at our initial public offering
price of $17.00 per share. Historical stock performance is not necessarily
indicative of future price performance.
The
following table shows the value of $100 invested on January 23, 2007 in
AeroVironment Inc., the Russell 2000 Index, and the SPADES Index.
|
Performance
Graph Table ($)
|
||||||||||
|
January
23, 2007
|
January
31, 2007
|
February
28, 2007
|
March
30, 2007
|
April
30, 2007
|
||||||
|
AeroVironment,
Inc.
|
100
|
135
|
125
|
134
|
126
|
|||||
|
Russell
2000 Index
|
100
|
103
|
102
|
103
|
105
|
|||||
|
SPADES
Index
|
100
|
103
|
103
|
104
|
108
|
|||||
The
stock
price performance shown on the graph above is not necessarily indicative of
future price performance. Factual material was obtained from sources believed
to
be reliable, but the Company is not responsible for any errors or omissions
contained therein. No portions of this graph shall be deemed incorporated by
reference into any filing under the Securities Act, or the Exchange Act through
any general statement incorporating by reference in its entirety the report
in
which this graph appears, except to the extent that we specifically incorporate
this graph or a portion of it by reference. In addition, this graph shall not
be
deemed filed under either the Securities Act or the Exchange Act.
Use
of Proceeds from Initial Public Offering
The
Securities & Exchange Commission, or SEC, declared our Registration
Statement on Form S-1 effective on January 22, 2007. The underwriters were
Goldman, Sachs & Co., Friedman, Billings, Ramsey & Co., Inc., Jefferies
Quarterdeck, a division of Jefferies & Company, Inc., Raymond James &
Associates, Inc., Stifel, Nicolaus & Company, Incorporated and Thomas Weisel
Partners LLC.
We
completed our initial public offering on January 26, 2007. All 7,705,000
shares of common stock registered under the Registration Statement, which
consisted of 5,252,285 shares of common stock offered by us and 2,452,715 shares
offered by certain of our stockholders, were sold at a price to the public
of
$17.00 per share.
The
aggregate estimated net proceeds to us were $80.5 million, after deducting
payment of underwriters' discounts and commissions and offering expenses. The
use of proceeds have been consistent with the use of proceeds described in
the
final prospectus we filed with the SEC pursuant to Rule 424(b) of the Securities
Act of 1933, as amended, on January 23, 2007.
|
Selected
Consolidated Financial
Data
|
The
following selected financial data should be read in conjunction with our
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read
in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included in Item 8, "Financial Statements and
Supplementary Data" of this Form 10-K in order to understand fully factors
that
may affect the comparability of the financial data presented below.
|
|
Year
Ended April 30,
|
|||||||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
|
(In
thousands, except per share data)
|
|||||||||||||||||||
|
Consolidated
Income Statement Data:
|
|
|
|
|
|
|||||||||||||||
|
Revenue
|
$ |
173,721
|
$ |
139,357
|
$ |
105,155
|
$ |
47,680
|
$ |
45,817
|
||||||||||
|
Net
income
|
$ |
20,718
|
$ |
11,208
|
$ |
14,570
|
$ |
2,171
|
$ |
541
|
||||||||||
|
|
||||||||||||||||||||
|
Earnings
per common share:
|
||||||||||||||||||||
|
Basic
|
$ |
1.39
|
$ |
0.86
|
$ |
1.15
|
$ |
0.19
|
$ |
0.05
|
||||||||||
|
Diluted
|
$ |
1.22
|
$ |
0.75
|
$ |
1.05
|
$ |
0.18
|
$ |
0.04
|
||||||||||
|
Weighted
average common shares outstanding (basic):
|
$ |
14,947
|
$ |
13,012
|
$ |
12,675
|
$ |
11,539
|
$ |
11,583
|
||||||||||
|
Weighted
average common shares outstanding (diluted):
|
$ |
16,992
|
$ |
14,874
|
$ |
13,847
|
$ |
12,094
|
$ |
12,040
|
||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Total
assets
|
$ |
168,177
|
$ |
64,950
|
$ |
50,440
|
$ |
26,464
|
$ |
14,385
|
||||||||||
|
Long-term
obligations
|
$ |
541
|
$ |
2,617
|
$ |
1,500
|
$ |
1,000
|
$ |
422
|
||||||||||
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Introduction
The
following discussion of our financial condition and results of operations should
be read in conjunction with the our "Selected Consolidated Financial Data"
and
our consolidated financial statements and notes thereto included herein as
Item
8. This discussion contains forward-looking statements. Refer to
"Forward-Looking Statements" on page 2 and "Risk Factors" beginning on page
16, for a discussion of the uncertainties, risks, and assumptions associated
with these statements.
Overview
We
design, develop, produce and support a technologically-advanced portfolio of
small unmanned aircraft systems, or UAS, that we supply primarily to
organizations within the U.S. Department of Defense, or DoD, and fast charge
systems for electric industrial vehicle batteries that we supply to commercial
customers. We derive the majority of our revenue from these two business areas
and we believe that both the small unmanned aircraft systems, or UAS, and
fast charge markets are in the early stages of development and have significant
growth potential. Additionally, we believe that some of the innovative potential
products in our research and development pipeline will emerge as new growth
platforms in the future, creating market opportunities.
The
success we have achieved with our current products stems from our investment
in
research and development and our ability to invent and deliver advanced
solutions, utilizing our proprietary technologies, to help our government and
commercial customers operate more effectively and efficiently. Our core
technological capabilities, developed through over 35 years of innovation,
include lightweight aerostructures and electric propulsion systems, efficient
electric energy systems and storage, high-density energy packaging,
miniaturization, controls integration and systems engineering
optimization.
We
are
organized into three segments based on our business operations; UAS, PosiCharge
Systems, and Energy Technology Center, which focuses primarily on the
development of innovative, efficient electric energy technologies for internal
and external customers, and also markets a line of electronic test equipment
used for research and development activities.
Revenue
We
generate our revenue primarily from the sale and support of our small UAS and
PosiCharge solutions. Support for our small UAS customers includes training,
customer support and product repair and replacement work, which we refer to
collectively as our logistics operation. We derive most of our small UAS revenue
from fixed-price and cost-plus-fee contracts with the U.S. government and most
of our PosiCharge revenue from sales and service to commercial customers. We
also generate revenue from our Energy Technology Center through the provision
of
contract development and engineering services, the sale of our power processing
systems and license fees.
Cost
of Sales
Cost
of
sales consists of direct costs and allocated indirect costs. Direct costs
include labor, materials, travel, subcontracts and other costs directly related
to the execution of a specific contract. Indirect costs include overhead
expenses, fringe benefits and other costs that are not directly related to
the
execution of a specific contract.
Gross
Margin
Gross
margin is equal to revenue minus cost of sales. We use gross margin as a
financial metric to help us understand trends in our direct costs and allocated
indirect costs when compared to the revenue we generate.
Research
and Development Expense
Research
and development, or R&D, is an integral part of our business model. We
conduct significant internally funded research and development and anticipate
that research and development expense will continue to increase in absolute
dollars for the foreseeable future. Our UAS research and development activities
focus specifically on creating capabilities that support our existing small
UAS
product portfolio as well as new UAS platforms. These activities are funded
both
externally by customers and internally. In addition, we currently have a number
of potential products in various stages of development and commercialization
within our research and development program.
Selling,
General and Administrative
Our
selling, general and administrative expenses, or SG&A, include salaries and
other expenses related to selling, marketing and proposal activities, and other
administrative costs. SG&A is an important financial metric that we
analyze to help us evaluate the contribution of our selling, marketing and
proposal activities to revenue generation.
Other
Income and Expenses
Other
income and expenses includes interest income and interest expense.
Income
Tax Expense
Beginning
in the fiscal year ended April 30, 2005, our effective tax rates were
substantially lower than the statutory rates primarily due to research and
development tax credits. The federal research and development tax credit expired
in December 2005, but was reinstated for two years beginning retroactively
on January 1, 2006.
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 U.S.. 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,
our
supplemental executive retirement plan, 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.
We
believe the following critical accounting estimates affect our more significant
judgments and estimates used in preparing our consolidated financial statements.
See Note 1 of the Notes to Consolidated Financial Statements for our
Organization and Significant Accounting Policies. There have been no material
changes made to the critical accounting estimates during the periods presented
in the consolidated financial statements.
Revenue
Recognition
Significant
management judgments and estimates must be made and used in connection with
the
recognition of revenue in any accounting period. Material differences in the
amount of revenue in any given period may result if these judgments or estimates
prove to be incorrect or if management's estimates change on the basis of
development of the business or market conditions.
The
substantial majority of our revenue is generated pursuant to written contractual
arrangements to design, develop, manufacture and/or modify complex products,
and
to provide related engineering, technical and other services according to
customer specifications. These contracts may be fixed-price or
cost-reimbursable. We consider all contracts for treatment in accordance with
Financial Accounting Standards Board Emerging Issues Task Force No. 00-21,
"Revenue Arrangements with Multiple Deliverables," or EITF 00-21. EITF 00-21
provides for deferral to
higher
authoritative guidance, including American Institute of Certified Public
Accountants Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, " or SOP 81-1,
under which the majority of our contracts are properly accounted for. Contracts
which provide for multiple deliverables to which SOP 81-1 does not apply
are accounted for in accordance with the provisions of EITF 00-21.
Revenue
from product sales not under contractual arrangement is recognized at the
time
title and the risk and rewards of ownership pass, which typically occurs
when
the products are shipped and collection is reasonably
assured.
Revenue
and profits on fixed-price contracts are recognized using
percentage-of-completion methods of accounting. Revenue and profits on
fixed-price production contracts, whose units are produced and delivered in
a
continuous or sequential process, are recorded as units are delivered based
on
their selling prices, or the units-of-delivery method. Revenue and profits
on
other fixed-price contracts with significant engineering as well as production
requirements are recorded based on the ratio of total actual incurred costs
to
date to the total estimated costs for each contract, or the cost-to-cost method.
Under percentage-of-completion methods of accounting, a single estimated total
profit margin is used to recognize profit for each contract over its entire
period of performance, which can exceed one year. Accounting for revenue and
profits on a fixed-price contract requires the preparation of estimates of
(1) the total contract revenue, (2) the total costs at completion,
which is equal to the sum of the actual incurred costs to date on the contract
and the estimated costs to complete the contract's statement of work and
(3) the measurement of progress towards completion. The estimated profit or
loss at completion on a contract is equal to the difference between the total
estimated contract revenue and the total estimated cost at completion. Under
the
units-of-delivery method, sales on a fixed-price type contract are recorded
as
the units are delivered during the period based on their contractual selling
prices. Under the cost-to-cost method, sales on a fixed-price type contract
are
recorded at amounts equal to the ratio of actual cumulative costs incurred
divided by total estimated costs at completion, multiplied by (A) the total
estimated contract revenue, less (B) the cumulative sales recognized in
prior periods. The profit recorded on a contract in any period using either
the
units-of-delivery method or cost-to-cost method is equal to (X) the current
estimated total profit margin multiplied by the cumulative sales recognized,
less (Y) the amount of cumulative profit previously recorded for the
contract. In the case of a contract for which the total estimated costs exceed
the total estimated revenue, a loss arises, and a provision for the entire
loss
is recorded in the period that it becomes evident. The unrecoverable costs
on a
loss contract that are expected to be incurred in future periods are recorded
in
the program cost.
Revenue
and profits on
cost-reimbursable type contracts are recognized as costs are incurred on the
contract, at an amount equal to the costs plus the estimated profit on those
costs. The estimated profit on a cost-reimbursable contract is generally fixed
or variable based on the contractual fee arrangement.
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. Amounts
representing contract change orders or claims are included in revenue only
when
they can be reliably estimated and their realization is probable. Incentives
or
penalties and awards applicable to performance on contracts are considered
in
estimating revenue and profit rates, and are recorded when there is sufficient
information to assess anticipated contract performance. Revenue on arrangements
that are not within the scope of SOP 81-1 are recognized in accordance with
the SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements."
Inventories
and Reserve for Excess and Obsolescence
Our
policy for valuation of inventory, including the determination of obsolete
or
excess inventory, requires us to perform a detailed assessment of inventory
at
each balance sheet date, which includes a review of, among other factors, an
estimate of future demand for products within specific time horizons, valuation
of existing inventory, as well as product lifecycle and product development
plans. Inventory reserves are also provided to cover risks arising from
slow-moving items. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and
the estimated market value based on assumptions about future demand and market
conditions. We may be required to record additional inventory write-downs
if actual market conditions are less favorable than those projected by our
management.
Supplemental
Executive Retirement Plan Obligation
We
maintained a supplemental executive retirement plan, or SERP, which is a
non-qualified defined benefit plan for Dr. MacCready, our founder and
Chairman of our board of directors until January 23, 2007. The plan was
non-contributory and non-funded. Pension expense was determined using various
actuarial cost methods to estimate the total benefits ultimately payable to
the plan beneficiary, and this amount was accrued as a liability on our balance
sheet until termination of the SERP. We reviewed the actuarial assumptions
used
to calculate pension costs annually. In January, the SERP terminated without
any
payment or promise of future payment to Dr. MacCready, which resulted in a
reversal of the related accrued expense of approximately $2.2 million for
the fiscal year ended April 30, 2007.
Self-Insured
Liability
We
are
self-insured for employee medical claims, subject to individual and aggregate
stop-loss policies. We estimate a liability for claims filed and incurred but
not reported claims based upon recent claims experience and an analysis of
the
average period of time between the occurrence of a claim and the time it is
reported to and paid by us. We perform an annual evaluation of this policy
and
have determined that for all prior years during which this policy has been
in
effect there have been cost advantages to this policy, as compared to obtaining
commercially available employee medical insurance. However, actual results
may
differ materially from those estimated and could have a material impact on
our
consolidated financial statements.
Income
Taxes
We
are
required to estimate our income taxes, which includes estimating our current
income taxes as well as measuring the temporary differences resulting from
different treatment of items for tax and accounting purposes. We currently
have
significant deferred assets, which are subject to periodic recoverability
assessments. Realizing our deferred tax assets principally depends on our
achieving projected future taxable income. We may change our judgments regarding
future profitability due to future market conditions and other factors, which
may result in recording a valuation allowance against those deferred tax
assets.
Fiscal
Periods
Our
fiscal year ends on April 30 and our fiscal quarters end on the last Saturday
of
July, October and January.
Results
of Operations
The
following table sets forth certain historical consolidated income statement
data
expressed in dollars (in thousands) and as a percentage of revenue for the
periods indicated. Certain amounts may not calculate due to
rounding.
|
|
|
Fiscal
Year Ended April 30,
|
|
|||||||||||||||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
||||||||||||||||||||||||
|
Revenue
|
|
$
|
173,721
|
|
|
|
100%
|
|
|
$
|
139,357
|
|
|
|
100%
|
|
|
$
|
105,155
|
|
|
|
100%
|
|
|
Cost
of sales
|
|
|
105,239
|
|
|
|
61%
|
|
|
|
82,598
|
|
|
|
59%
|
|
|
|
58,549
|
|
|
|
56%
|
|
|
Gross
margin
|
|
|
68,482
|
|
|
|
39%
|
|
|
|
56,759
|
|
|
|
41%
|
|
|
|
46,606
|
|
|
|
44%
|
|
|
Research
and development
|
|
|
13,940
|
|
|
|
8%
|
|
|
|
16,098
|
|
|
|
12%
|
|
|
|
9,799
|
|
|
|
9%
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
|
14%
|
|
|
|
24,810
|
|
|
|
18%
|
|
|
|
16,733
|
|
|
|
16%
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
|
18%
|
|
|
|
15,851
|
|
|
|
12%
|
|
|
|
20,074
|
|
|
|
19%
|
|
|
Interest
income
|
|
|
1,707
|
|
|
|
1%
|
|
|
|
333
|
|
|
|
0%
|
|
|
|
61
|
|
|
|
0%
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
0%
|
|
|
|
(127
|
)
|
|
|
0%
|
|
|
|
(110
|
)
|
|
|
0%
|
|
|
Income
before income taxes
|
|
|
32,202
|
|
|
|
19%
|
|
|
|
16,057
|
|
|
|
12%
|
|
|
|
20,025
|
|
|
|
19%
|
|
|
Income
tax expense
|
|
|
11,484
|
|
|
|
7%
|
|
|
|
4,849
|
|
|
|
3%
|
|
|
|
5,455
|
|
|
|
5%
|
|
|
Net
income
|
|
$
|
20,718
|
|
|
|
12%
|
|
|
$
|
11,208
|
|
|
|
8%
|
|
|
$
|
14,570
|
|
|
|
14%
|
|
Our
operating segments are UAS, PosiCharge Systems and our Energy Technology Center.
The accounting policies for each of these segments are the same. In addition,
a
significant portion of our research and development, selling, general and
administrative, 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:
|
|
|
Fiscal
Year Ended April 30,
|
|
||||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
|
(In
thousands)
|
|||||||||||
|
|
|||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
146,538
|
|
|
$
|
111,104
|
|
|
$
|
82,249
|
|
|
|
PosiCharge
Systems
|
|
|
17,575
|
|
|
|
19,928
|
|
|
|
15,642
|
|
|
|
Energy
Technology Center
|
|
|
9,608
|
|
|
|
8,325
|
|
|
|
7,264
|
|
|
|
Total
|
|
$
|
173,721
|
|
|
$
|
139,357
|
|
|
$
|
105,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
57,591
|
|
|
$
|
44,558
|
|
|
$
|
37,235
|
|
|
|
PosiCharge Systems
|
|
|
6,096
|
|
|
|
8,062
|
|
|
|
5,846
|
|
|
|
Energy
Technology Center
|
|
|
4,795
|
|
|
|
4,139
|
|
|
|
3,525
|
|
|
|
Total
|
|
$
|
68,482
|
|
|
$
|
56,759
|
|
|
$
|
46,606
|
|
|
Fiscal
Year Ended April 30, 2007 Compared to Fiscal Year Ended April 30,
2006
Revenue.
Revenue for the fiscal year ended April 30, 2007 was $173.7 million, as
compared to $139.4 million for the fiscal year ended April 30, 2006,
representing an increase of $34.3 million, or 25%. UAS revenue increased
$35.4 million to $146.5 million for the fiscal year ended April 30,
2007, largely due to increases in UAS product sales, services and
customer-funded R&D. The increase in product
sales resulted from higher manufacturing volume associated with our progression
to full-rate production resulting from the completion of customer testing and
evaluation of our Raven B product. PosiCharge Systems revenue decreased
by $2.3 million to $17.6 million for the fiscal year ended April 30,
2007, primarily due to a reduction in installations of our PosiCharge Systems
products among automotive customers. Energy Technology Center revenue
increased by $1.3 million to $9.6 million in the fiscal year ended
April 30, 2007, primarily due to higher sales of power processing test
equipment.
Cost
of Sales. Cost of sales for the fiscal year ended April 30, 2007
was $105.2 million, as compared to $82.6 million for the fiscal year ended
April 30, 2006, representing an increase of $22.6 million, or 27%. The
increase in cost of sales was caused primarily by higher UAS cost of sales
of
$22.4 million and higher Energy Technology Center cost of sales of $0.6
million, partially offset by lower PosiCharge Systems cost of sales of
$0.4 million. The increase in UAS cost of sales was largely due to growth
in our UAS product deliveries, increased logistics services, and an increase
in
customer-funded Research and Development. The increase in Energy
Technology Center cost of sales primarily reflects an increase in sales of
our
power processing test equipment.
Gross
Margin. Gross margin for the fiscal year ended April 30, 2007 was
$68.5 million, as compared to $56.7 million for the fiscal year ended
April 30, 2006, representing an increase of $11.8 million, or 21%. As a
percentage of revenue, gross margin decreased from 41% to
39%. UAS gross margin increased $13.0 million to $57.6 million
for the fiscal year ended April 30, 2007. As a percentage of revenue, gross
margin for UAS decreased from 40% to 39%. PosiCharge Systems gross
margin decreased $2.0 million to $6.1 million for the fiscal year
ended April 30, 2007, due to lower sales volume and higher manufacturing support
costs. As a percentage of revenue, PosiCharge Systems
gross margin decreased from 41% to 35%. Energy Technology Center gross
margin increased $0.7 million to $4.8 million for the fiscal year
ended April 30, 2007, primarily due to higher sales of power processing test
equipment. As a percentage of revenue, Energy Technology Center gross margin
was
50% for the fiscal years ended April 30, 2007 and April 30, 2006.
Research
and Development. R&D expense for the fiscal year ended April
30, 2007 was $13.9 million, or 8% of revenue, which was lower than R&D
expense of $16.1 million, or 12% of revenue, for the fiscal year ended
April 30, 2006 primarily due to a shift of engineering resources to
customer-funded R&D work. Customer-funded R&D work for the
fiscal year ended April 30, 2007 increased $7.7 million, or 66%, to $19.4
million.
Selling,
General and Administrative. SG&A expense for the fiscal year
ended April
30,
2007 was $24.0 million,
or 14% of revenue, which included the reversal of expenses associated with
the
SERP of $2.2 million. Excluding the effect of the SERP on SG&A for
both fiscal years, SG&A expense increased to $26.2 million, or 15%
of
revenue for our fiscal year ended April 30, 2007, compared to SG&A expense
of $22.6 million, or 16% of revenue, in the fiscal year ended April 30,
2006. The increase in SG&A expense of $3.7 million was caused primarily
by the addition of administrative and marketing infrastructure necessary to
continue to grow our business.
Income
Tax Expense. Our effective income tax rate was 35.7% for the
fiscal year ended April 30, 2007, as compared to 30.2% for the fiscal year
ended
April 30, 2006. This increase was largely due to lower federal research and
development tax credits as a percentage of revenue.
Fiscal
Year Ended April 30, 2006 Compared to Fiscal Year Ended April 30,
2005
Revenue. Revenue
for the fiscal year ended April 30, 2006 was $139.4 million, as
compared to $105.2 million for the fiscal year ended April 30, 2005,
representing an increase of $34.2 million, or 33%. UAS revenue increased
$28.9 million to $111.1 million for the fiscal year ended
April 30, 2006, largely due to the continued growth of our logistics
operations, which were launched in the fiscal year ended April 30, 2005 and
accounted for $20.1 million of the increase in UAS revenue. The remaining
increase in UAS revenue of $8.8 million was due to an increase in product
sales. PosiCharge Systems revenue increased by $4.3 million to
$19.9 million for the fiscal year ended April 30, 2006 primarily due
to acceptance of PosiCharge into multiple facilities operated by one of our
existing customers. Energy Technology Center revenue increased by
$1.1 million to $8.3 million in the fiscal year ended April 30,
2006, primarily due to an increase in sales of power processing test
equipment.
Cost
of Sales. Cost of sales for the fiscal year ended
April 30, 2006 was $82.6 million, as compared to $58.5 million
for the fiscal year ended April 30, 2005, representing an increase of
$24.1 million, or 41%. The increase in cost of sales was caused by higher
UAS cost of sales of $21.5 million, higher PosiCharge Systems cost of sales
of $2.1 million, and higher Energy Technology Center cost of sales of
$0.4 million. The increase in UAS cost of sales was largely due to a full
year of our logistics activities. The increase in PosiCharge Systems cost of
sales was primarily due to the continued adoption of our fast charge
systems.
Gross
Margin. Gross margin for the fiscal year ended
April 30, 2006 was $56.8 million, as compared to $46.6 million
for the fiscal year ended April 30, 2005, representing an increase of
$10.2 million, or 22%. UAS gross margin increased $7.3 million to
$44.6 million for the fiscal year ended April 30, 2006. As a
percentage of revenue, gross margin for UAS decreased from 45% to 40%, largely
due to a reduction in pricing on UAS production orders in the fiscal year ended
April 30, 2006 and an increase in cost-plus-fee contracts relative to
fixed-price contracts, the former of which tend to have lower gross margins,
as
described more fully in "Government Contracting Process." The lower pricing
also
reflected the pass-through of manufacturing cost efficiencies to our customers.
PosiCharge Systems gross margin increased $2.2 million to $8.1 million
for the fiscal year ended April 30, 2006, due to the increase in sales
volume. As a percentage of revenue, PosiCharge Systems gross margin increased
from 37% to 40% for the fiscal year ended April 30, 2006, due to the
achievement of direct and indirect cost efficiencies coincident with higher
sales volume. Energy Technology Center gross margin increased $0.6 million
to $4.1 million for the fiscal year ended April 30, 2006, primarily
due to increased sales of power processing test equipment. As a percentage
of
revenue, Energy Technology Center gross margin increased from 49% to 50% for
the
fiscal year ended April 30, 2006, primarily due to the higher sales mix of
equipment sales compared to customer-funded research and development
work.
Research
and Development. R&D expense for the fiscal year
ended April 30, 2006 was $16.1 million (or 12% of revenue), compared
to R&D expense of $9.8 million (or 9% of revenue) for the fiscal year
ended April 30, 2005. The increase in R&D expense reflected our
investment in improvement and expansion of existing product lines and
development of new product opportunities.
Selling,
General and
Administrative. SG&A
expense for the fiscal year ended April 30, 2006 was $24.8 million (or
18% of revenue), compared to SG&A expense of $16.7 million (or 16% of
revenue) in the fiscal year ended April 30, 2005. The increase in SG&A
expense of $8.1 million was caused primarily by the added administrative
and marketing infrastructure necessary to support the growth in our business
volume and to enhance the documentation of our internal controls. Further,
the
increase in SG&A expense partially reflects the lag in SG&A
infrastructure growth relative to the revenue growth we experienced in the
fiscal year ended April 30, 2005. As a percentage of revenue, SG&A
expense increased to 18% in the fiscal year ended April 30, 2006, primarily
due to the establishment of a supplemental executive retirement plan for
Dr. MacCready, our founder and Chairman of our board of directors. The
expense associated with this plan was $2.2 million (or 2% of revenue) in
2006.
Income
Tax Expense. Our effective income tax rate was 30.2%
for the fiscal year ended April 30, 2006, as compared to 27.2% for the
fiscal year ended April 30, 2005. The increase was due to a reduction in
the federal research and development tax credit computed based on the expiration
of the tax credit on December 31, 2005. The
tax
credit was reinstated for two years beginning retroactively on January 1,
2006. Consequently, we made an adjustment to our effective tax rate in the
fiscal period during which the tax credit was reinstated, the quarter ended
January 27, 2007.
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, funds provided
by operating activities and our working capital line of credit. 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,
funds available through our working capital line of credit 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. 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 as of:
|
|
|
Fiscal
Year Ended April 30,
|
|
|||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
|
(In
thousands)
|
||||||||||
|
Net
cash provided by operating activities
|
|
$
|
15,022
|
|
|
$
|
13,353
|
|
|
$
|
8,644
|
|
|
Net
cash used in investing activities
|
|
$
|
91,348
|
|
$
|
4,190
|
|
$
|
3,533
|
|||
|
Net
cash provided by (used in) financing activities
|
|
$
|
81,858
|
|
|
$
|
(3,835
|
)
|
|
$
|
1,639
|
|
Cash
Provided by Operating Activities. Net cash provided by operating
activities for the fiscal year ended April 30, 2007 increased by
$1.6 million to $15.0 million, compared to net cash provided by
operating activities of $13.4 million for the fiscal year ended April 30,
2006. This increase in net cash provided by operating activities was primarily
due to higher net income of $9.5 million, lower deferred taxes of $2.3 million,
and higher depreciation costs of $0.9 million partially offset by increased
working capital needs of $6.8 million and the reversal of the prior year SERP
of
$4.4 million.
Net
cash
provided by operating activities for the fiscal year ended April 30, 2006
increased by $4.8 million to $13.4 million, compared to
$8.6 million for the fiscal year ended April 30, 2005. The increase in
net cash provided by operating activities was primarily due to improved working
capital of $9.2 million, an accrual for long-term retirement costs of
$2.2 million and increased depreciation and amortization of
$0.9 million, partially offset by lower net income of $3.3 million.
Accounts receivable was higher at April 30, 2006 than at April 30,
2005, primarily due to overall higher sales volume for the fiscal year ended
April 30, 2006. Inventories were roughly the same at April 30, 2006
and at April 30, 2005.
Cash
Used in Investing Activities. Net cash used in investing
activities was $91.3 million for the fiscal year ended April 30, 2007, compared
to $4.2 million for the fiscal year ended April 30, 2006. During the fiscal
year ended April 30, 2007, we invested cash in tax-exempt municipal securities
totaling $88.3 million. In addition, during the fiscal year ended
April 30, 2007 and April 30, 2006, we used cash to purchase property and
equipment totaling $3.0 million and $4.2 million, respectively.
Net
cash
used in investing activities increased $0.7 million to $4.2 million
for the fiscal year ended April 30, 2006, compared to $3.5 million for
the fiscal year ended April 30, 2005. The increase in net cash used in
investing activities was primarily due to increased purchases of property and
equipment of $0.6 million, primarily for the expansion of our UAS
business.
Cash
Provided by Financing Activities. Net
cash provided by financing activities increased $85.7 million to
$81.9 million for the fiscal year ended April 30, 2007, compared to net
cash used by financing activities of $3.8 million for the fiscal year ended
April 30, 2006. During the fiscal year ended April 30, 2007, we
received net proceeds from our initial public offering of $80.5 million.
Long-term debt payments, net of borrowings, during the fiscal year ended April
30, 2007 decreased by $2.5 million, compared to the fiscal year ended April
30, 2006. In addition, we fulfilled the delivery terms outlined in a standby
letter of credit that allowed us to release $1.1 million of restricted
cash.
Net
cash
used in financing activities increased $5.4 million to $3.8 million
for the fiscal year ended April 30, 2006, compared to net cash provided by
financing activities of $1.6 million for the fiscal year ended
April 30, 2005. The increase in net cash used in financing activities was
primarily due to paying down our long term debt of $2.0 million and the
transfer of $1.5 million to restricted cash to secure standby letters of
credit established for the benefit of our customers, partially offset by no
debt
borrowings and a decrease of $0.6 million received from stock option
exercises. At April 30, 2006, as a result of our strategy to pay down debt,
we had no long term debt.
Line
of Credit and Term Loan Facilities
We
have a
revolving line of credit with a bank, under which we may borrow up to
$16.5 million. Borrowings bear interest at the bank's prime commercial
lending rate, which was 8.25% as of April 30, 2007. The line of credit is
secured by substantially all of our assets. All principal plus accrued but
unpaid interest on the line of credit is due August 31, 2007. We had no
outstanding balance on the line of credit as of April 30, 2007.
Contractual
Obligations
The
following table describes our commitments to settle contractual obligations
as
of April 30, 2007:
|
|
|
Payments
Due By Period
|
|
|||||||||||||||||
|
|
Total
|
|
|
Less
Than
1 Year
|
|
|
1
to 3 Years
|
|
|
3
to 5 Years
|
|
|
More
Than
5 Years
|
|||||||
|
|
|
(In
thousands)
|
|
|||||||||||||||||
|
|
||||||||||||||||||||
|
Operating
lease obligations
|
|
$
|
9,016
|
|
|
$
|
2,646
|
|
|
$
|
4,268
|
|
|
$
|
1,961
|
|
|
$
|
141
|
|
|
Purchase
obligations(1)
|
|
|
24,288
|
|
|
|
24,288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,304
|
|
|
$
|
26,934
|
|
|
$
|
4,268
|
|
|
$
|
1,961
|
|
|
$
|
141
|
|
|
(1)
|
Consists
of all non-cancelable purchase orders as of April 30,
2007.
|
We
have
entered into standby letter-of-credit agreements and bank guarantee agreements
with financial institutions and customers primarily relating to the guarantee
of
our future performance on certain contracts to provide products and services
and
to secure advance payments we have received from certain international
customers. As of April 30, 2007, we had standby letters of credit totaling
$389,000 without any claims against such letters of credit. These letters of
credit expire upon release by the customer.
Off-Balance
Sheet Arrangements
As
of
April 30, 2007, we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of the SEC's Regulation S-K.
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
In
February 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 155, Accounting for
Certain Hybrid Financial Instruments, or SFAS 155. SFAS 155
establishes, among other things, the accounting for certain derivatives embedded
in other financial instruments. This statement permits fair value remeasurement
for any hybrid financial instrument containing an embedded derivative that
would
otherwise require bifurcation. It also requires that beneficial interests in
securitized financial assets be accounted for in accordance with SFAS 133.
SFAS
155 is effective for fiscal years beginning after September 15, 2006, and
is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.
In
July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109, or FIN 48, which clarifies what criteria must be
met prior to recognition of the financial statement benefit of a position taken
in a tax return. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Also, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition. The adoption of FIN 48 will be
effective for years beginning after December 15, 2006, and we will be
required to adopt FIN 48 on May 1, 2007. We do not anticipate the adoption
of
FIN 48 will have a material effect on our consolidated financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS 157, which provides enhanced guidance for using fair
value to measure assets and liabilities. The standard also expands the amount
of
disclosure regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new circumstances. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We do not anticipate the adoption of SFAS 157 will have a
material effect on our consolidated financial position, results of
operations and cash flows.
In
February 2007, the FASB issued, SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS 159, which is effective
as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of SFAS 157. We do not anticipate
the adoption of SFAS 159 will have a material effect on our consolidated
financial position, results of operations or cash flows
|
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.
|
Financial
Statements and Supplementary
Data.
|
AeroVironment,
Inc.
Audited
Consolidated Financial Statements
Index
to Consolidated Financial Statements and Supplementary
Data
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
43
|
|
Consolidated
Balance Sheets at April 30, 2007 and 2006
|
44
|
|
Consolidated
Statements of Income for the Years Ended April 30, 2007, 2006
and
2005
|
45
|
|
Consolidated
Statements of Stockholders' Equity for the Years Ended April
30, 2007,
2006 and 2005
|
46
|
|
Consolidated
Statements of Cash Flows for the Years Ended April 30, 2007,
2006, and
2005
|
47
|
|
Notes
to Consolidated Financial Statements
|
48
|
|
Quarterly
Results of Operations (Unaudited)
|
62
|
Supplementary
Data
|
Financial
Statement Schedule: Schedule II – Valuation and Qualifying
Accounts
|
63
|
All
other schedules are omitted because they are not applicable, not required or
the
information required is included in the Consolidated Financial Statements,
including the notes thereto.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders of
AeroVironment,
Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of AeroVironment, Inc.
and
subsidiaries as of April 30, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended April 30, 2007. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AeroVironment,
Inc. and subsidiaries at April 30, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years
in
the period ended April 30, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, AeroVironment,
Inc. and subsidiaries changed their method of accounting for Share-Based
Payment in accordance with Statement of Financial Accounting Standards No.
123
(revised 2004) on May 1, 2006.
| /s/ Ernst & Young LLP | |
| Los Angeles, California | |
| June 27, 2007 | |
AEROVIRONMENT,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands except share data)
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
20,920
|
|
|
$
|
15,388
|
|
|
Restricted
cash
|
|
|
389
|
|
|
|
1,532
|
|
|
Short-term
investments
|
88,325
|
—
|
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $149
at April 30,
2007 and $86 at April 30, 2006
|
|
|
7,691
|
|
|
|
21,582
|
|
|
Unbilled
receivables and retentions
|
|
|
26,494
|
|
|
|
4,843
|
|
|
Inventories,
net
|
|
|
14,015
|
|
|
|
11,453
|
|
|
Deferred
income taxes
|
|
|
1,730
|
|
|
|
1,261
|
|
|
Prepaid
expenses and other current assets
|
|
|
1,504
|
|
|
|
621
|
|
|
Total
current assets
|
|
|
161,068
|
|
|
|
56,680
|
|
|
Property
and equipment, net
|
|
|
6,229
|
|
|
|
6,098
|
|
|
Deferred
income taxes
|
|
|
761
|
|
|
|
2,053
|
|
|
Other
assets
|
|
|
119
|
|
|
|
119
|
|
|
Total
assets
|
|
$
|
168,177
|
|
|
$
|
64,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
||||||||
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
16,024
|
|
|
$
|
8,521
|
|
|
Wages
and related accruals
|
|
|
8,942
|
|
|
|
8,450
|
|
|
Customer
advances
|
|
|
139
|
|
|
|
9,031
|
|
|
Income
taxes payable
|
4,564
|
—
|
||||||
|
Other
current liabilities
|
|
|
1,544
|
|
|
|
2,028
|
|
|
Total
current liabilities
|
|
|
31,213
|
|
|
|
28,030
|
|
|
Deferred
rent
|
|
|
541
|
|
|
|
408
|
|
|
Long-term
retirement costs
|
|
|
—
|
|
|
|
2,209
|
|
|
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 — 18,875,957 shares at April 30, 2007 and
13,283,770 at April 30, 2006
|
|
|
2
|
|
|
|
—
|
|
|
Additional
paid-in capital
|
83,611
|
2,211
|
||||||
|
Retained
earnings
|
|
|
52,810
|
|
|
|
32,092
|
|
|
Total
stockholders' equity
|
|
|
136,423
|
|
|
|
34,303
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
168,177
|
|
|
$
|
64,950
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands except share and per share data)
|
|
Year
Ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
116,361
|
|
|
$
|
98,664
|
|
|
$
|
85,291
|
|
|
Contract
services
|
|
|
57,360
|
|
|
|
40,693
|
|
|
|
19,864
|
|
|
|
|
|
173,721
|
|
|
|
139,357
|
|
|
|
105,155
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
|
67,410
|
|
|
|
55,483
|
|
|
|
39,123
|
|
|
Contract
services
|
|
|
37,829
|
|
|
|
27,115
|
|
|
|
19,426
|
|
|
|
|
|
105,239
|
|
|
|
82,598
|
|
|
|
58,549
|
|
|
Gross
margin
|
|
|
68,482
|
|
|
|
56,759
|
|
|
|
46,606
|
|
|
Research
and development
|
|
|
13,940
|
|
|
|
16,098
|
|
|
|
9,799
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
|
24,810
|
|
|
|
16,733
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
|
15,851
|
|
|
|
20,074
|
|
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
|
|
1,707
|
|
|
|
333
|
|
|
|
61
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
(127
|
)
|
|
|
(110
|
)
|
|
Income
before income taxes
|
|
|
32,202
|
|
|
|
16,057
|
|
|
|
20,025
|
|
|
Provision
for income taxes
|
|
|
11,484
|
|
|
|
4,849
|
|
|
|
5,455
|
|
|
Net
income
|
|
$
|
20,718
|
|
|
$
|
11,208
|
|
|
$
|
14,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.39
|
|
|
$
|
0.86
|
|
|
$
|
1.15
|
|
|
Diluted
|
|
$
|
1.22
|
|
|
$
|
0.75
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,946,502
|
|
|
|
13,011,639
|
|
|
|
12,674,585
|
|
|
Diluted
|
|
|
16,992,012
|
|
|
|
14,873,651
|
|
|
|
13,847,223
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands except share data)
|
|
|
Common
Stock
|
Additional
|
Retained
|
|
|
||||||||||||||
|
|
|
Shares
|
|
|
Amount
|
Paid-In
Capital
|
Earnings
|
|
|
Total
|
|
|||||||||
|
|
||||||||||||||||||||
|
Balance
at April 30, 2004
|
|
|
11,554,301
|
|
|
|
—
|
|
$
|
1,200
|
$
|
6,314
|
|
$
|
7,514
|
|
||||
|
Stock
options exercised
|
|
|
1,568,303
|
|
|
|
—
|
|
780
|
—
|
|
|
780
|
|
||||||
|
Stock
repurchased
|
|
|
(184,742
|
)
|
|
|
—
|
(141
|
)
|
—
|
|
|
(141
|
)
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
14,570
|
|
|
14,570
|
|
||||||
|
Balance
at April 30, 2005
|
|
|
12,937,862
|
|
|
|
—
|
|
1,839
|
20,884
|
|
|
22,723
|
|
||||||
|
Stock
options exercised
|
|
|
345,908
|
|
|
|
—
|
|
197
|
—
|
|
|
197
|
|
||||||
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
175
|
—
|
|
|
175
|
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
11,208
|
|
|
11,208
|
|
||||||
|
Balance
at April 30, 2006
|
|
|
13,283,770
|
|
|
|
—
|
|
2,211
|
32,092
|
|
|
34,303
|
|
||||||
|
Stock
options exercised
|
|
|
346,939
|
|
|
|
—
|
|
220
|
—
|
|
|
220
|
|
||||||
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
629
|
—
|
|
|
629
|
|
||||||
|
Stock
repurchased
|
|
|
(7,037
|
)
|
|
|
—
|
|
—
|
—
|
|
|
—
|
|
||||||
|
Stock
based compensation
|
|
|
—
|
|
|
|
—
|
|
58
|
—
|
|
|
58
|
|
||||||
|
Issuance
of stock in initial public offering, net
of offering costs
|
|
|
5,252,285
|
|
|
|
2
|
|
80,493
|
—
|
|
|
80,495
|
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
20,718
|
|
|
20,718
|
|
||||||
|
Balance
at April 30, 2007
|
|
|
18,875,957
|
|
|
2
|
|
$
|
83,611
|
$
|
52,810
|
|
$
|
136,423
|
|
|||||
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,718
|
|
$
|
11,208
|
|
|
$
|
14,570
|
|
|
|
Adjustments
to reconcile net income to net cash and cash equivalents provided
by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation
and amortization
|
|
|
2,897
|
|
|
1,999
|
|
|
|
1,053
|
|
|
|
Long-term
retirement costs
|
|
|
(2,209
|
)
|
|
|
2,209
|
|
|
|
—
|
|
|
Provision
for doubtful accounts
|
|
|
63
|
|
|
|
(2
|
)
|
|
|
53
|
|
|
Deferred
income taxes
|
823
|
(1,457
|
)
|
(754
|
)
|
|||||||
|
Stock-based
compensation
|
58
|
—
|
—
|
|||||||||
|
Tax
benefit from exercise of stock options
|
|
|
629
|
|
|
175
|
|
|
|
—
|
|
|
|
(Gain)
loss on disposition of property and equipment
|
|
|
(5
|
)
|
|
|
268
|
|
|
|
(4
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Accounts
receivable
|
|
|
13,828
|
|
|
(2,202
|
)
|
|
|
(9,139
|
)
|
|
|
Unbilled
receivables and retentions
|
|
|
(21,651
|
)
|
|
|
(4,055
|
)
|
|
|
4,118
|
|
|
Inventories
|
|
|
(2,562
|
)
|
|
|
52
|
|
|
|
(6,824
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(883
|
)
|
|
|
1,937
|
|
|
|
(2,220
|
)
|
|
Accounts
payable
|
|
|
7,503
|
|
|
(752
|
)
|
|
|
3,828
|
|
|
|
Customer
advances
|
|
|
(8,892
|
)
|
|
|
(701
|
)
|
|
|
4,614
|
|
|
Other
liabilities
|
|
|
4,705
|
|
|
4,674
|
|
|
|
(651
|
)
|
|
|
Net
cash and cash equivalents provided by operating activities
|
|
|
15,022
|
|
|
13,353
|
|
|
|
8,644
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
||
|
Acquisition
of property and equipment
|
|
|
(3,038
|
)
|
|
|
(4,190
|
)
|
|
|
(3,541
|
)
|
|
Purchase
of short-term investments
|
(249,450
|
)
|
—
|
—
|
||||||||
|
Sale
of short-term investments
|
161,125
|
—
|
—
|
|||||||||
|
Proceeds
from sale of property and equipment
|
|
|
15
|
|
|
—
|
|
|
|
8
|
|
|
|
Net
cash and cash equivalents used in investing activities
|
|
|
(91,348
|
)
|
|
|
(4,190
|
)
|
|
|
(3,533
|
)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
||
|
Transfer
from (to) restricted cash
|
|
|
1,143
|
|
|
(1,532
|
)
|
|
|
—
|
|
|
|
Repayments
of line of credit
|
(6,232
|
)
|
—
|
—
|
||||||||
|
Proceeds
from line of credit
|
6,232
|
—
|
—
|
|||||||||
|
Payment
of long-term debt
|
|
|
—
|
|
|
(2,500
|
)
|
|
|
(500
|
)
|
|
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
—
|
|
|
|
1,500
|
|
|
|
Exercise
of stock options
|
|
|
220
|
|
|
197
|
|
|
|
780
|
|
|
|
Repurchase
of common stock
|
—
|
—
|
(141
|
)
|
||||||||
|
Net
proceeds from initial public offering
|
|
|
80,495
|
|
|
—
|
|
|
|
—
|
||
|
Net
cash and cash equivalents provided by (used in) financing
activities
|
|
|
81,858
|
|
|
(3,835
|
)
|
|
|
1,639
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
5,532
|
|
|
5,328
|
|
|
|
6,750
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
15,388
|
|
|
10,060
|
|
|
|
3,310
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
20,920
|
|
$
|
15,388
|
|
|
$
|
10,060
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6
|
|
|
$
|
139
|
|
|
$
|
93
|
|
|
Income
taxes
|
|
$
|
6,211
|
|
|
$
|
3,229
|
|
|
$
|
8,040
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization
and Significant Accounting
Policies
|
Organization
AeroVironment,
Inc., a Delaware corporation, is engaged in design, development and production
of unmanned aircraft systems and energy technologies for various industries
and
governmental agencies.
Significant
Accounting Policies
|
|
Principles
of Consolidation
|
The
accompanying consolidated financial statements include the accounts of
AeroVironment, Inc. and its wholly-owned subsidiaries: AV S.r.l., Skytower,
LLC,
Skytower Inc., AILC, Inc. and Regenerative Fuel Cell Systems, LLC (collectively
referred to herein as the "Company"). All intercompany balances and transactions
have been eliminated in consolidation.
|
|
Segments
|
The
Company's products are sold and divided among three reportable segments, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments of an Enterprise and Related Information, to
reflect the Company's strategic goals. Operating segments are defined as
components of an enterprise about 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 making decisions about allocating
resources, including the focus of research and development activities, and
assessing performance. The Company's reportable segments are business units
that
offer different products and services and are managed separately.
|
|
Use
of Estimates
|
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and 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. Significant
estimates made by management include, but are not limited to, valuation of:
inventory, deferred tax assets and liabilities, useful lives of property, plant
and equipment, and estimates of anticipated contract costs and revenue utilized
in the revenue recognition process. Actual results could differ
from those estimates.
|
|
Cash
Equivalents
|
The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents. The
Company's cash equivalents are comprised of money market funds and certificates
of deposit of major financial institutions.
Investments
The
Company’s short-term investments are accounted for under Statement of Financial
Accounting Standard No. 115, Accounting for Certain Investments in Debt
and Equity Securities (“SFAS 115”) as available-for-sale and reported at
fair value which approximates cost.
As
of
April 30, 2007, the Company’s short-term investments consisted entirely of
investment grade auction rate municipal notes and bonds with maturities that
could range from 16 to 40 years. These investments have characteristics similar
to short-term investments, because at pre-determined intervals, generally
ranging from 7 to 35 days, there is a new auction process at which the interest
rates for these securities are reset to current interest rates.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Due
to
the frequent nature of the reset feature, the investment’s market price
approximates its fair value; there are no realized or unrealized gains or
losses
associated with these investments. Interest earned from short-term
investments is recorded in interest income.
Management
determines the appropriate classification of securities at the time of purchase
and re-evaluates such designation as of each balance sheet date.
|
|
Restricted
Cash
|
Restricted
cash of approximately $389,000 and $1,532,000, as of April 30, 2007 and
2006, respectively, represents deposits with a bank to secure standby letters
of
credit aggregating approximately $389,000 and $1,652,000, as of April 30,
2007 and 2006, respectively, established for the benefit of the Company's
customers. The restriction on cash will be released upon expiration of the
standby letters of credit. The standby letters of credit will expire when the
Company's customers provide product acceptance and release their interest in
the
letters of credit. As of April 30, 2007 and 2006, there were no
claims relevant to the letters of credit.
|
|
Fair
Values of Financial
Instruments
|
Fair
values of cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, unbilled receivables and retentions approximate cost due
to
the short period of time to maturity.
|
|
Concentration
of Credit Risk
|
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist primarily of accounts receivable. The Company's revenue and accounts
receivable are with a limited number of corporations and governmental entities.
In the aggregate, 80%, 77% and 74% of the Company's revenue came from agencies
of the U.S. government for the years ended April 30, 2007, 2006 and
2005, respectively. These agencies accounted for 52% and 77% of the accounts
receivable balances at April 30, 2007 and 2006, respectively. One such
agency, the U.S. Army, accounted for 56%, 54% and 43% of the Company's
consolidated revenue for the years ended April 30, 2007, 2006 and 2005
respectively. The U.S. Army accounted for approximately 66%, 66% and 55% of
UAS reportable segment sales in fiscal year 2007, 2006 and 2005 respectively.
The Company performs ongoing credit evaluations of its commercial customers
and
maintains an allowance for potential losses.
|
|
Accounts
Receivable, Unbilled Receivables and
Retentions
|
Accounts
receivable represents primarily U.S. government, and to a lesser extent
commercial receivables, net of allowances for doubtful accounts. Unbilled
receivables represent costs in excess of billings on incomplete contracts and,
where applicable, accrued profit related to government long-term contracts
on
which revenue has been recognized, but for which the customer has not yet
been billed. Retentions represent amounts withheld by customers until contract
completion. The Company determines the allowance for doubtful accounts based
on
historical customer experience and other currently available evidence. When
a specific account is deemed uncollectible, the account is written off against
the allowance. The allowance for doubtful accounts reflects the Company's best
estimate of probable losses inherent in the accounts receivable balance; such
losses have been within management's expectations. An account is deemed past
due
based on contractual terms rather than on how recently payments have been
received.
|
|
Inventories
|
Inventories
are stated at the lower of cost (using the weighted average costing method)
or
market value. Inventory write-offs and write-down provisions are provided to
cover risks arising from slow-moving items or technological obsolescence and
for
market prices lower than cost. The Company periodically evaluates the quantities
on hand relative to current and historical selling prices and historical and
projected sales volume. Based on this evaluation, provisions are made to write
inventory down to its market value.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Long-Lived
Assets
|
Property
and equipment are carried at cost. Depreciation of property and equipment,
including amortization of leasehold improvements, are provided using the
straight-line method over the following estimated useful lives:
|
|
|
|
Assets
held for lease
|
2
to 5 years
|
|
Machinery
and equipment
|
3 years
|
|
Computer
equipment and software
|
2
to 3 years
|
|
Furniture
and fixtures
|
3 years
|
|
Leasehold
improvements
|
Lesser
of useful life or term of
lease
|
Maintenance,
repairs and minor renewals are charged directly to expense as incurred.
Additions and betterments to property, plant and equipment are capitalized
at
cost. When the Company disposes of assets, the applicable costs and accumulated
depreciation and amortization thereon are removed from the accounts and any
resulting gain or loss is included in selling, general and administrative
expense in the period incurred. Depreciation and amortization expense on
property, plant and equipment was approximately $2,897,000, $1,999,000 and
$1,053,000 for the years ended April 30, 2007, 2006 and 2005,
respectively.
The
Company reviews the recoverability of its long-lived assets as required by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, ("SFAS 144") whenever events
or changes in circumstances indicate that the carrying amount of such assets
may
not be recoverable. The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance, and may differ
from actual cash flows. If the sum of the projected undiscounted cash flows
(excluding interest) is less than the carrying value of the assets, the assets
will be written down to the estimated fair value in the period in which the
determination is made. At April 30, 2007 and 2006, and during the years
ended April 30, 2007, 2006 and 2005, no indicators of impairment were
identified and no impairment reserve was recorded.
|
|
Product
Warranty
|
The
Company accrues an estimate of its exposure to warranty claims based upon both
current and historical product sales data and warranty costs incurred. Product
warranty reserves were recorded in other current liabilities.
|
|
Self-Insurance
Liability
|
The
Company is self-insured for employee medical claims, subject to individual
and
aggregate stop-loss policies. The Company estimates a liability for claims
filed
and incurred but not reported claims based upon recent claims experience and
an
analysis of the average period of time between the occurrence of a claim and
the
time it is reported to and paid by the Company. As of April 30, 2007 and
2006, the Company estimated and recorded a self insurance liability in wages
and
related accruals of approximately $200,000 and $238,000
respectively.
|
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with Financial Accounting
Standard Board ("FASB") Statement No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets
and
liabilities that will result in taxable or deductible amounts in the future.
The
provision for income taxes reflects the taxes to be paid for the period and
the
change during the period in the deferred income tax assets and liabilities.
The
Company records a valuation allowance to reduce the deferred tax assets to
the
amount of future tax benefit that is more likely then not to be
realized.
|
|
Customer
Advances and Amounts in Excess of Cost
Incurred
|
The
Company receives advances, performance-based payments and progress payments
from
customers that may exceed costs incurred on certain contracts, including
contracts with agencies of the U.S. government. These advances are
classified as advances from customers and will be offset against
billings.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Revenue
Recognition
|
The
substantial majority of the Company's revenue is generated pursuant to written
contractual arrangements to design, develop, manufacture and/or modify complex
products, and to provide related engineering, technical and other services
according to the specifications of the buyers (customers). These contracts
may
be fixed price or cost-reimbursable. The Company considers all contracts for
treatment in accordance with FASB Emerging Issues Task Force No. 00-21,
Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 provides for deferral to higher authoritative guidance, including American
Institute of Certified Public Accountants Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts ("SOP 81-1"), under which the majority of the Company's
contracts are properly accounted for. Contracts which provide for multiple
deliverables to which SOP 81-1 does not apply are accounted for in
accordance with the provisions of EITF 00-21.
EITF
00-21 addresses accounting for arrangements under which a vendor will perform
multiple revenue-generating activities. Under EITF 00-21, revenue arrangements
with multiple deliverables should be divided into separate units of accounting
if the deliverables have value to the customer on a stand-alone basis; there
is
objective and reliable evidence of the fair value of the undelivered item(s);
and, if the arrangement includes a general right of return, delivery or
performance of the undelivered item(s) is considered probable and substantially
in the control of the vendor. The Company occasionally enters into arrangements
that consist of installation and repair contracts associated with hardware
sold
by the Company.
Such
arrangements consist of separate contractual arrangements and are divided into
separate units of accounting where the delivered item has value to the customer
on a stand-alone basis and there is objective and reasonable evidence of the
fair value of the installation contract. Consideration is allocated among the
separate units of accounting based on their relative fair values.
Product
sales revenue is composed of revenue recognized on contracts for the delivery
of
production hardware and related activities. Contract services revenue is
composed of revenue recognized on contracts for the provision of services,
including repairs, training, engineering design, development and prototyping
activities.
Revenue
from cost-plus-fee contracts are recognized on the basis of costs incurred
during the period plus the fee earned. Revenue from fixed-price contracts are
recognized on the percentage-of-completion method. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Unbilled receivables represent costs incurred and related profit
on
contracts not yet billed to customers, and are invoiced in subsequent
periods.
Product
sales revenue are recognized on the percentage-of-completion method or upon
transfer of title to the customer, which is generally upon shipment. Shipping
and handling costs incurred are included in cost of sales.
Revenue
and profits on fixed-price production contracts, where units are produced and
delivered in a continuous or sequential process, are recorded as units are
delivered based on their selling prices (the "units-of-delivery method").
Revenue and profits on other fixed-price contracts with significant engineering
as well as production requirements are recorded based on the ratio of total
actual incurred costs to date to the total estimated costs for each contract
("the cost-to-cost method"). Accounting for revenue and profits on a fixed-price
contract requires the preparation of estimates of (1) the total contract
revenue, (2) the total costs at completion, which is equal to the sum of
the actual incurred costs to date on the contract and the estimated costs to
complete the contract's statement of work and (3) the measurement of
progress towards completion. The estimated profit or loss at completion on
a
contract is equal to the difference between the total estimated contract revenue
and the total estimated cost at completion. Under the units-of-delivery method,
sales on a fixed-price type contract are recorded as the units are delivered
during the period based on their contractual selling prices. Under the
cost-to-cost method, sales on a fixed-price type contract are recorded at
amounts equal to the ratio of actual cumulative costs incurred divided by total
estimated costs at completion, multiplied by (i) the total estimated
contract revenue, less (ii) the cumulative sales recognized in prior
periods. The profit recorded on a contract in any period using either the
units-of-delivery method or cost-to-cost method is equal to (i) the current
estimated total profit margin multiplied by the cumulative sales recognized,
less (ii) the amount of cumulative profit previously recorded for the
contract. In the case of a contract for which the total estimated costs exceed
the total estimated revenue, a loss arises, and a provision for the entire
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss
is
recorded in the period that it becomes evident. The unrecoverable costs on
a loss contract that are expected to be incurred in future periods are
recorded
in the program cost.
Significant
management judgments and estimates must be made and used in connection with
the
recognition of revenue in any accounting period. Material differences in the
amount of revenue in any given period may result if these judgments or estimates
prove to be incorrect or if management's estimates change on the basis of
development of the business, market conditions or other factors. Management
judgments and estimates have been applied consistently and have been reliable
historically.
|
|
Stock-Based
Compensation
|
Prior
to
May 1, 2006, the Company accounted for incentive stock plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related Interpretations, as permitted
by FASB Statement No. 123, Accounting for Stock Based
Compensation. No stock based employee compensation was reflected in net
income, as all options granted under those plans had an exercise price equal
to
the fair value of the underlying common stock on the date of grant. Effective
May 1, 2006 the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share-Based Payment, using the
modified prospective-transition.
The
following table illustrates the impact on net earnings and earnings per common
share if the fair value method had been applied for all periods
presented.
|
Year
ended April 30,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
thousands except share
|
||||||||
|
and
per share data)
|
||||||||
|
Pro
forma:
|
|
|
||||||
|
Net
income — as reported
|
$ |
11,208
|
$ |
14,570
|
||||
|
Stock
based compensation, net of tax
|
(114 | ) | (42 | ) | ||||
|
|
||||||||
|
Net
income — pro forma
|
$ |
11,094
|
$ |
14,528
|
||||
|
|
||||||||
|
Earnings
per share data
|
||||||||
|
Basic —
reported
|
$ |
0.86
|
$ |
1.15
|
||||
|
Basic —
pro forma
|
$ |
0.85
|
$ |
1.15
|
||||
|
Diluted —
reported
|
$ |
0.75
|
$ |
1.05
|
||||
|
Diluted —
pro forma
|
$ |
0.75
|
$ |
1.05
|
||||
|
Weighted
average shares outstanding used in computation:
|
||||||||
|
Basic
|
13,011,639
|
12,674,585
|
||||||
|
Diluted
|
14,873,651
|
13,847,223
|
||||||
The
fair
value of each option grant is estimated on the date of grant using the minimum
value option pricing model, with the following assumptions
used: risk-free interest rate of 6.75% and 4.0% for the years ended
April 30, 2006 and 2005, respectively, an expected options life of five and
five
years after vesting for the years ended April 30, 2006 and 2005, respectively,
and no expected dividends.
|
|
Share
Repurchases
|
The
Company repurchased shares in accordance with various repurchase agreements
prior to the termination of such agreements upon the consummation of the
Company's initial public offering on January 26, 2007. Such agreements gave
the
Company the right to repurchase shares from employees upon their separation
from
the Company and specified the terms of such repurchase. These repurchase
agreements, which were entered into by employees in connection with grants
of
options by the Company pursuant to its stock-based compensation plans,
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provided
that the Company had the option to repurchase shares from such employees
at a
price that was equal to either (i) the price paid for shares of the Company's
common stock in a substantial transaction that occurred in the last year
or (ii)
in the event that no such substantial transaction had occurred in the last
year,
at a price based upon a multiple of the Company's pre-tax profits. This
repurchase price was intended to approximate the fair market value of the
repurchased shares. In the event that shares were repurchased within six
months
of exercise, compensation expense was recorded in accordance with FASB
interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation ("FIN 44"). The Company recognized
compensation expense related to shares repurchased within six months of
exercise
of approximately $12,000, $234,000 and $188,000 for the years ended April
30, 2007, 2006 and 2005, respectively.
Repurchased
shares are restored to the status of authorized but unissued
shares.
|
|
Research
and Development
|
Internally
funded research and development costs ("IRAD") sponsored by the Company relate
to both U.S. government products and services and those for commercial and
foreign customers. IRAD costs for the Company's businesses that are
U.S. government contractors are recoverable indirect contract costs that
are allocated to the U.S. government contracts in accordance with
U.S. government procurement regulations.
Customer-funded
research and development costs are incurred pursuant to contracts (revenue
arrangements) to perform research and development 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 research and development services are performed. Revenues
from
customer-funded research and development were approximately $19,438,000,
$11,568,000 and $10,641,000 for the years ended April 30, 2007,
2006 and 2005, respectively. The related costs of sales for customer-funded
research and development totaled approximately $13,460,000, $8,184,000
and $5,390,000 for the years ended April 30, 2007, 2006 and
2005, respectively.
|
|
Lease
Accounting
|
The
Company accounts for its leases under the provisions of SFAS No. 13,
Accounting for Leases, and subsequent amendments, which require that
leases be evaluated and classified as operating leases or capital leases for
financial reporting purposes. Certain operating leases contain rent escalation
clauses, which are recorded on a straight-line basis over the initial term
of
the lease with the difference between the rent paid and the straight-line rent
recorded as a deferred rent liability. Lease incentives received from landlords
are recorded as deferred rent liabilities and are amortized on a straight-line
basis over the lease term as a reduction to rent expense. Deferred rent
liabilities were approximately $541,000 and $408,000 as of April 30, 2007
and 2006, respectively.
|
|
Advertising
Costs
|
Advertising
costs consist of tradeshows and other marketing activities, and are expensed
as
incurred. Advertising expenses included in selling, general and administrative
expenses were approximately $338,000, $266,000, and $423,000 for the years
ended
April 30, 2007, 2006 and 2005, respectively.
|
|
Earnings
Per Share
|
Basic
earnings per share are computed using the weighted-average number of common
shares outstanding and excludes any anti-dilutive effects of options, warrants
and convertible securities. The dilutive effect of potential common shares
outstanding is included in diluted earnings per share.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
reconciliation of diluted
to basic
shares is as follows:
|
|
Year
Ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,718,000
|
|
|
$
|
11,208,000
|
|
|
$
|
14,570,000
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
14,946,502
|
|
|
|
13,011,639
|
|
|
|
12,674,585
|
|
|
Dilutive
effect of employee stock options
|
|
|
2,045,510
|
|
|
|
1,862,012
|
|
|
|
1,172,638
|
|
|
Denominator
for diluted earnings per share
|
|
|
16,992,012
|
|
|
|
14,873,651
|
|
|
|
13,847,223
|
|
During
the years ended April 30, 2007, 2006 and 2005, there were no stock options
that were anti-dilutive to earnings per share.
Recently
Issued Accounting Standards
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial Instruments
("SFAS 155"). SFAS 155 establishes, among other things, the accounting for
certain derivatives embedded in other financial instruments. This statement
permits fair value remeasurement for any hybrid financial instrument containing
an embedded derivative that would otherwise require bifurcation. It also
requires that beneficial interests in securitized financial assets be accounted
for in accordance with SFAS 133. SFAS 155 is effective for fiscal years
beginning after September 15, 2006, and is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In
July 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109 ("FIN 48"), which clarifies what criteria
must be met prior to recognition of the financial statement benefit of a
position taken in a tax return. The Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
Also, the Interpretation provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The adoption of FIN 48 will be effective for years beginning after
December 15, 2006, and the Company will be required to adopt this
Interpretation on May 1, 2007. The Company does not anticipate the adoption
of FIN 48 will have a material effect on its consolidated financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157") which provides enhanced guidance for using fair
value to measure assets and liabilities. The standard also expands the amount
of
disclosure regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new circumstances. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not anticipate the adoption of SFAS 157 will have a
material effect on its consolidated financial position, results of operations
and cash flows.
In
February 2007, the FASB issued, SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which is effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to
apply the provisions of SFAS 157. The Company does not anticipate the adoption
of SFAS 159 will have a material effect on its consolidated financial position,
results of operations or cash flows.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
2.
|
Inventories,
net
|
Inventories
consist of the following:
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(In
thousands)
|
|
|||||
|
|
||||||||
|
Raw
materials
|
|
$
|
5,418
|
|
|
$
|
4,750
|
|
|
Work
in process
|
|
|
3,514
|
|
|
|
2,413
|
|
|
Finished
goods
|
|
|
6,221
|
|
|
|
5,103
|
|
|
Inventories,
gross
|
|
|
15,153
|
|
|
|
12,266
|
|
|
Reserve
for inventory obsolescence
|
|
|
(1,138
|
)
|
|
|
(813
|
)
|
|
Inventories,
net
|
|
$
|
14,015
|
|
|
$
|
11,453
|
|
|
3.
|
Property
and Equipment, net
|
Property
and equipment consist of the following:
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(In
thousands)
|
|
|||||
|
|
||||||||
|
Assets
held for lease
|
|
$
|
998
|
|
|
$
|
998
|
|
|
Leasehold
improvements
|
|
|
1,742
|
|
|
|
1,556
|
|
|
Machinery
and equipment
|
|
|
6,982
|
|
|
|
5,163
|
|
|
Furniture
and fixtures
|
|
|
1,549
|
|
|
|
1,347
|
|
|
Computer
equipment and software
|
|
|
5,568
|
|
|
|
5,387
|
|
|
Construction
in process
|
|
|
707
|
|
|
|
560
|
|
|
|
|
|
17,546
|
|
|
|
15,011
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(11,317
|
)
|
|
|
(8,913
|
)
|
|
Property
and equipment, net
|
|
$
|
6,229
|
|
|
$
|
6,098
|
|
|
4.
|
Warranty
Reserves
|
Warranty
reserve activity is summarized as follows:
|
|
April 30,
|
|
||||||
|
|
2007
|
|
|
2006
|
|
|||
|
|
(In
thousands)
|
|
||||||
|
|
||||||||
|
Beginning
balance
|
|
$
|
344
|
|
|
$
|
282
|
|
|
Warranty
expense
|
|
|
646
|
|
|
|
589
|
|
|
Warranty
costs incurred
|
|
|
(727
|
)
|
|
|
(527
|
)
|
|
Ending
balance
|
|
$
|
263
|
|
|
$
|
344
|
|
|
5.
|
Bank
Borrowings
|
The
Company has a working capital line of credit with a bank, which was amended
on
June 16, 2006 to increase the borrowing limit from $10,000,000 to $16,500,000.
Borrowings bear interest at the bank's prime commercial lending rate, which
was
8.25% and 7.75% as of April 30, 2007 and 2006, respectively. The line of
credit is secured by substantially all of the Company's assets. Payment of
amounts outstanding is made at the Company's discretion. All
principal plus accrued interest is due August 31, 2007. The Company had no
outstanding balance on the line of credit as of April 30, 2007 and
2006.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
credit agreement contains certain financial covenants and conditions
which
require, among other things, that the Company maintain certain tangible
net
worth and cash flow ratios. The credit agreement also restricts the Company
from
paying any dividends to stockholders. The Company was in compliance with
these
covenants as of April 30, 2007 and 2006.
|
6.
|
Employee
Savings Plan
|
The
Company has an employee 401(k) savings plan covering all eligible employees.
The
Company expensed approximately $1,140,000, $918,000 and $724,000 in
contributions to the plan for the years ended April 30, 2007, 2006 and
2005, respectively. Annual contributions are at the discretion of
management.
|
7.
|
Supplemental
Executive Retirement Plan
|
On
May 19, 2005, the Company implemented a Supplemental Executive Retirement
Plan ("SERP"), which is a non-qualified executive benefit plan in which the
Company agreed to pay the Chairman of the Board (the "Chairman") additional
benefits at retirement. The SERP is an unfunded plan, which means that there
are
no specific assets set aside by the Company. The Chairman had no rights under
the agreement beyond those of a general creditor of the Company. During the
year
ended April 30, 2006, the Company recognized approximately $2,209,000 of
selling, general and administrative expense charged to operations and recorded
such expense as a long-term liability in connection with this plan. The SERP
was
fully vested on May 19, 2006, the first anniversary of the Chairman's
participation. Pursuant to the terms of the agreement, upon the completion
of
the Company's initial public offering of equity securities, all benefits to
be
paid under the SERP were forfeited. Accordingly, the long-term liability of
$2,209,000 was reversed in January 2007 and recorded as a reduction to
selling, general, and administrative expense.
|
8.
|
Equity
|
On
January 26, 2007, the Company completed its initial public offering, consisting
of 5,252,285 shares of common stock. As part of the offering, an additional
2,452,715 shares were sold by selling stockholders. A total of 7,705,000 shares
were sold at a public offering price of $17.00, resulting in net proceeds to
the
Company of approximately $80.5 million, after deducting payment of underwriters'
discounts and commissions and offering expenses.
In
connection with the initial public offering, the Company reincorporated in
Delaware, effective on December 6, 2006, and effected a 7.0378-to-one stock
split on January 18, 2007. All share and per share data, including prior period
data as appropriate, have been adjusted to reflect this split.
|
9.
|
Stock-Based
Compensation
|
The
Company adopted SFAS 123R effective May 1, 2006. Because the Company
historically used the minimum value method of measuring stock options,
implementation of SFAS 123R applies prospectively to new awards after adoption.
No expense is recognized for options granted prior to adoption. For the year
ended April 30, 2007, the Company recorded stock-based compensation expense
for
options that vested of approximately $58,000.
On
January 14, 2007, the stockholders of the Company approved the 2006 Equity
Incentive Plan (the "2006 Plan"), effective January 21, 2007, for officers,
directors, key employees and consultants. Under the 2006 Plan, incentive stock
options, nonqualified stock options, restricted stock awards, stock appreciation
right awards, performance share awards, performance stock unit awards, dividend
equivalents awards, stock payment awards, deferred stock awards, restricted
stock unit awards, other stock-based awards, performance bonus awards or
performance-based awards may be granted at the discretion of a committee, which
consists of outside directors. A maximum of 3,684,157 shares of stock may be
issued pursuant to awards under the 2006 Plan. The maximum number of shares
of
common stock with respect to one or more awards that may be granted to any
one
participant during any twelve month period is 950,000. A maximum of $9,500,000
may be paid in cash as a performance-based award. The exercise price for any
incentive stock option shall not be less than 100% of the fair market value
on
the date of grant. At April 30, 2007, no awards had been issued under the 2006
Plan. Vesting of awards is established at the time of grant.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
Company had an equity incentive plan (the "2002 Plan") for officers, directors
and key employees. Under the 2002 Plan, incentive stock options or nonqualified
stock options were granted, as determined by the administrator at the time
of
grant. Stock purchase rights were also granted under the 2002 Plan. Options
under the 2002 Plan were granted at their fair market value (as determined
by
the board of directors). The options become exercisable at various times over
a
five-year period from the grant date. The 2002 Plan was terminated on the
effective date of the 2006 Plan. Awards outstanding under the 2002 Plan remain
outstanding and exercisable; no additional awards may be made under the 2002
Plan.
The
Company had a 1992 nonqualified stock option plan (the "1992 Plan") for certain
officers and key employees. Options under the 1992 Plan were granted at their
fair market value (as determined by the board of directors) at the date of
grant
and became exercisable at various times over a five-year period from the grant
date. The 1992 Plan expired in August 2002.
The
Company had a 1994 nonqualified stock option plan (the "1994 Directors' Plan")
for the directors of the Company. Options under the 1994 Directors' Plan were
granted at their fair market value (as determined by the board of directors)
at
the date of grant and became exercisable on the date of grant. The 1994
Directors' Plan expired in June 2004.
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 year ended April 30, 2007:
|
Year Ended
April
30, 2007
|
||||
|
Expected
term (in years)
|
6.5
|
|||
|
Expected
volatility
|
22.41 | % | ||
|
Risk-free
interest rate
|
4.56 | % | ||
|
Expected
dividend
|
—
|
|||
|
Weighted
average fair value at grant date
|
$ |
4.12
|
||
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 123R.
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.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information
related to the stock option plans at April 30, 2007,
2006 and 2005, and for the years then ended is as follows:
|
|
2002
Plan
|
|
|
1994 Directors'
Plan
|
|
|
1992
Plan
|
|
||||||||||||||||
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|||||||
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|||||||
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|||||||
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|||||||
|
|
||||||||||||||||||||||||
|
Outstanding
at April 30, 2004
|
|
|
943,066
|
|
|
|
0.65
|
|
|
|
1,338,167
|
|
|
|
0.51
|
|
|
|
2,955,876
|
|
|
|
0.53
|
|
|
Options
granted
|
|
|
429,306
|
|
|
|
0.78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(74,601
|
)
|
|
|
0.68
|
|
|
|
(1,267,789
|
)
|
|
|
0.51
|
|
|
|
(466,606
|
)
|
|
|
0.41
|
|
|
Options
canceled
|
|
|
(7,038
|
)
|
|
|
0.64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,668
|
)
|
|
|
0.59
|
|
|
Outstanding
at April 30, 2005
|
|
|
1,290,733
|
|
|
|
0.69
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,476,602
|
|
|
|
0.55
|
|
|
Options
granted
|
|
|
443,381
|
|
|
|
2.13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(64,396
|
)
|
|
|
0.67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(427,898
|
)
|
|
|
0.54
|
|
|
Options
canceled
|
|
|
(33,078
|
)
|
|
|
0.78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at April 30, 2006
|
|
|
1,636,640
|
|
|
|
1.08
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,048,704
|
|
|
|
0.56
|
|
|
Options
granted
|
|
|
123,162
|
|
|
|
11.79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(204,858
|
)
|
|
|
0.69
|
|
|
|
(35,189
|
)
|
|
|
0.59
|
|
|
|
(106,998
|
)
|
|
|
0.59
|
|
|
Options
canceled
|
|
|
(22,521
|
)
|
|
|
4.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at April 30, 2007
|
|
|
1,532,423
|
|
|
|
1.95
|
|
|
|
35,189
|
|
|
|
0.59
|
|
|
|
1,941,706
|
|
|
|
0.55
|
|
|
Options
exercisable at April 30, 2005
|
|
|
323,739
|
|
|
|
0.65
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,371,035
|
|
|
|
0.55
|
|
|
Options
exercisable at April 30, 2006
|
|
|
519,038
|
|
|
|
0.67
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,048,704
|
|
|
|
0.56
|
|
|
Options
exercisable at April 30, 2007
|
|
|
649,894
|
|
|
|
0.87
|
|
|
|
35,189
|
|
|
|
0.59
|
|
|
|
1,941,706
|
|
|
|
0.55
|
|
(1)
Options exercised as presented in the table above include same day repurchase
transactions which have no impact on share amounts and are therefore excluded
from stock options exercised in the Consolidated Statements of Stockholders'
Equity.
The
total
intrinsic value of all options exercised during the years ended April 30, 2007,
2006 and 2005 were approximately $589,000, $807,000, and $639,000.
A
summary
of the status of the Company's non-vested stock options as of April 30, 2007
and
the year then ended is as follows:
|
Non-vested
Options
|
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
||||||
|
Non-vested
at April 30, 2006
|
1,107,730
|
$ |
-
|
|||||
|
Granted
|
123,149
|
$ |
4.12
|
|||||
|
Cancelled
|
(18,296 | ) | $ |
1.58
|
||||
|
Vested
|
(330,052 | ) | $ |
-
|
||||
|
Non-vested
at April 30, 2007
|
882,531
|
$ |
0.54
|
|||||
As
of
April 30, 2007, there was approximately $420,000 of total unrecognized
compensation cost related to non-vested share-based compensation awards granted
under the stock option plans. That cost is expected to be recognized
over a approximately a 4-year period or a weighted average period of
approximately 4 years.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds
from all option exercises under all stock option plans for the years ended
April
30, 2007, 2006 and 2005 were approximately $220,000, $197,000 and $780,000,
respectively. The tax benefit realized from option exercises during
the years ended April 30, 2007, 2006 and 2005 was approximately $629,000,
$175,000, and $0 respectively.
The
following tabulation summarizes certain information concerning outstanding
and
exercisable options
at
April 30, 2007:
|
|
Options
Outstanding
|
|
|
|||||||||||||||||||
|
|
|
Weighted
|
|
|
|
|||||||||||||||||
|
|
|
Average
|
|
Options
Exercisable
|
||||||||||||||||||
|
|
|
Remaining
|
Weighted
|
|
Weighted
|
|||||||||||||||||
|
Range
of
|
As
of
|
Contractual
|
Average
|
As
of
|
Average
|
|||||||||||||||||
|
Exercise
|
April 30,
|
Life
In
|
Exercise
|
April 30,
|
Exercise
|
|||||||||||||||||
|
Prices
|
2007
|
Years
|
Price
|
2007
|
Price
|
|||||||||||||||||
| $ |
0.37
|
344,849
|
6.15
|
$ |
0.37
|
344,849
|
$ |
0.37
|
||||||||||||||
|
0.59
|
1,632,046
|
4.89
|
0.59
|
1,632,046
|
0.59
|
|||||||||||||||||
|
0.64-0.78
|
977,169
|
6.13
|
0.70
|
562,637
|
0.68
|
|||||||||||||||||
|
2.13
|
439,142
|
8.48
|
2.13
|
87,257
|
2.13
|
|||||||||||||||||
|
11.79
|
116,112
|
9.40
|
11.79
|
—
|
—
|
|||||||||||||||||
| $ |
0.37-11.79
|
3,509,318
|
5.96
|
$ |
1.16
|
2,626,789
|
$ |
0.63
|
||||||||||||||
The
remaining weighted average contractual life of exercisable options at April
30,
2007 was 5.39 years.
|
10.
|
Income
Taxes
|
A
reconciliation of income tax expense computed using the U.S. federal
statutory rates to actual income tax expense is as follows:
|
|
|
Year
Ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
||||||||||||
|
U.S. federal
statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State
and local income taxes, net of federal benefit
|
|
|
5.4
|
|
|
|
5.5
|
|
|
|
5.7
|
|
|
R&D
credit
|
|
|
(3.9
|
)
|
|
|
(11.8
|
)
|
|
|
(14.1
|
)
|
|
Other
|
|
|
(0.8
|
)
|
|
|
1.4
|
|
|
|
0.6
|
|
|
Effective
income tax rate
|
|
|
35.7
|
%
|
|
|
30.2
|
%
|
|
|
27.2
|
%
|
The
components of the provision for income taxes are as follows:
|
|
|
Year
ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||||
|
|
||||||||||||
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,066
|
|
|
$
|
5,375
|
|
|
$
|
5,724
|
|
|
State
|
|
|
3,595
|
|
|
|
931
|
|
|
|
478
|
|
|
|
|
|
10,661
|
|
|
|
6,306
|
|
|
|
6,202
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
18
|
|
|
|
979
|
|
|
|
(209
|
)
|
|
State
|
|
|
923
|
|
|
|
476
|
|
|
|
(626
|
)
|
|
|
|
|
941
|
|
|
(1,455
|
)
|
|
|
(835
|
)
|
|
|
Change
in valuation allowance
|
|
|
(118
|
)
|
|
|
(2
|
)
|
|
|
88
|
|
|
Total
income tax expense
|
|
$
|
11,484
|
|
|
$
|
4,849
|
|
|
$
|
5,455
|
|
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant
components of the Company's deferred income tax assets are as
follows:
|
|
April 30,
|
|
||||||
|
|
2007
|
|
|
2006
|
|
|||
|
|
(In
thousands)
|
|
||||||
|
|
||||||||
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
|
Book
over tax depreciation
|
|
$
|
755
|
|
|
$
|
411
|
|
|
Accrued
expenses
|
|
|
1084
|
|
|
|
1,672
|
|
|
Exercise
of nonqualified stock options
|
|
|
—
|
|
|
|
171
|
|
|
Allowances,
reserves, and other
|
|
|
646
|
|
|
|
391
|
|
|
Research
and development credit carryforwards
|
|
|
—
|
|
|
|
663
|
|
|
Net
operating loss and other
|
|
|
89
|
|
|
|
207
|
|
|
|
|
2,574
|
|
|
|
3,515
|
|
|
|
Less:
valuation allowance
|
|
|
(83
|
)
|
|
|
(201
|
)
|
|
Total
deferred income tax assets
|
|
$
|
2,491
|
|
|
$
|
3,314
|
|
The
Company's California net operating loss carryforwards of approximately $77,000
expire in 2007 and 2008. The Company has established a valuation allowance
against its California capital loss carryforward, as it is unlikely that such
assets will be fully utilized.
|
11.
|
Related
Party Transactions
|
Pursuant
to a consulting agreement, the Company paid a board member approximately
$245,000, $258,000 and $242,000 during the years ended April 30, 2007, 2006
and
2005, respectively, for consulting services independent of his board service.
The agreement stipulates the payment of approximately $16,000 plus expenses
per
month, in exchange for consulting services.
During
the year ended April 30, 2006, the Company employed the services of Summit
Selling Systems, Inc. ("Summit"), and accordingly paid Summit approximately
$35,000. One of the Company's board members has a beneficial interest in Summit.
The Company did not employ the services of Summit during the fiscal years ended
April 30, 2007 or 2005.
|
12.
|
Commitments
and Contingencies
|
Commitments
The
Company's operations are conducted in leased facilities. Following is a summary
of non-cancelable operating lease commitments:
|
|
Year
ending
|
|
||
|
|
April 30
|
|
||
|
|
(In
thousands)
|
|
||
|
|
||||
|
2008
|
|
$
|
2,646
|
|
|
2009
|
|
|
2,419
|
|
|
2010
|
|
|
1,849
|
|
|
2011
|
|
|
1,116
|
|
|
2012
|
|
|
845
|
|
|
Thereafter
|
|
|
141
|
|
|
|
$
|
9,016
|
|
|
Rental
expense under operating leases was approximately $2,331,000, $1,723,000 and
$1,428,000 for the years ended April 30, 2007, 2006 and 2005,
respectively.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contingencies
The
Company is subject to legal proceedings and claims which arise out of
the
ordinary course of its business. Although occasional adverse decisions
or
settlements may occur, the Company, in consultation with legal counsel,
believes
that the final disposition of such matters will not have a material adverse
effect on the consolidated financial position, results of operations
or cash
flows of the Company.
Contract
Cost Audits
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. The Company's revenue recognition policy calls for revenue recognized
on all cost reimbursable government contracts to be recorded at actual rates
unless collectibility is not reasonably assured.
|
13.
|
Segment
Data
|
The
Company's product segments are as follows:
|
|
Ÿ
|
Unmanned
Aircraft Systems ("UAS") — The UAS segment consists primarily of the
design and manufacture of small unmanned aircraft systems
solutions.
|
|
|
Ÿ
|
PosiCharge
Systems ("PosiCharge") — The PosiCharge segment supplies fast charge
systems for users of electric industrial vehicle
batteries.
|
|
|
Ÿ
|
Energy
Technology Center — The Energy Technology Center segment
consists of energy development projects and power processing test
equipment product sales.
|
The
accounting policies of the segments are the same as those described in
Note 1, "Summary of Significant Accounting Policies." Because the products
they design and sell generally define the operating segments, they 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.
The
segment results are as follows:
|
|
|
Year
Ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||||
|
|
||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
146,538
|
|
$
|
111,104
|
|
|
$
|
82,249
|
|
|
|
PosiCharge
|
|
|
17,575
|
|
|
19,928
|
|
|
|
15,642
|
|
|
|
Energy
Technology Center
|
|
|
9,608
|
|
|
8,325
|
|
|
|
7,264
|
|
|
|
Total
|
|
|
173,721
|
|
|
139,357
|
|
|
|
105,155
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
||
|
UAS
|
|
|
57,591
|
|
|
44,558
|
|
|
|
37,235
|
|
|
|
PosiCharge
|
|
|
6,096
|
|
|
8,062
|
|
|
|
5,846
|
|
|
|
Energy
Technology Center
|
|
|
4,795
|
|
|
4,139
|
|
|
|
3,525
|
|
|
|
Total
|
|
|
68,482
|
|
|
56,759
|
|
|
|
46,606
|
|
|
|
Research
and development
|
|
|
13,940
|
|
|
16,098
|
|
|
|
9,799
|
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
24,810
|
|
|
|
16,733
|
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
15,851
|
|
|
|
20,074
|
|
|
|
Interest
income
|
|
|
1,707
|
|
|
333
|
|
|
|
61
|
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
(127
|
)
|
|
|
(110
|
)
|
|
Income
before income taxes
|
|
$
|
32,202
|
|
$
|
16,057
|
|
|
$
|
20,025
|
|
|
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Geographic
Information
Sales
to
non-U.S. customers accounted for 4.6%, 1.5% and 4.5% of revenue for the fiscal
years ended April 30, 2007, 2006 and 2005, respectively.
Quarterly
Results of Operations (Unaudited)
The
following tables present selected unaudited consolidated financial data for
each
of the eight quarters in the two-year period ended April 30, 2007. In the
Company's opinion, this unaudited information has been prepared on the same
basis as the audited information and includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair statement of the
financial information for the period presented.
|
|
|
Three
Months Ended
|
|
|||||||||||||
|
|
|
July 29,
|
|
|
October 28,
|
|
|
January 27,
|
|
|
April 30,
|
|
||||
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
||||
|
|
|
(In
thousands except per share data)
|
|
|||||||||||||
|
|
||||||||||||||||
|
Year
ended April 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
31,557
|
|
|
$
|
45,189
|
|
|
$
|
46,275
|
|
|
$
|
50,700
|
|
|
Gross
margin
|
|
$
|
11,986
|
|
|
$
|
17,770
|
|
|
$
|
19,636
|
|
|
$
|
19,090
|
|
|
Net
income
|
|
$
|
1,365
|
|
|
$
|
4,894
|
|
|
$
|
8,889
|
|
|
$
|
5,570
|
|
|
Net
income per share — Basic (1)
|
|
$
|
0.10
|
|
|
$
|
0.36
|
|
|
$
|
0.65
|
|
|
$
|
0.30
|
|
|
Net
income per share — Diluted (1)
|
|
$
|
0.09
|
|
|
$
|
0.31
|
|
|
$
|
0.57
|
|
|
$
|
0.27
|
|
|
|
|
Three
Months Ended
|
|
|||||||||||||
|
|
|
July 30,
|
|
|
October 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
||||
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
||||
|
|
|
(In
thousands except per share data)
|
|
|||||||||||||
|
|
||||||||||||||||
|
Year
ended April 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
30,751
|
|
|
$
|
42,550
|
|
|
$
|
35,468
|
|
|
$
|
30,588
|
|
|
Gross
margin
|
|
$
|
11,156
|
|
|
$
|
17,661
|
|
|
$
|
15,528
|
|
|
$
|
12,414
|
|
|
Net
income (loss)
|
|
$
|
1,293
|
|
|
$
|
6,054
|
|
|
$
|
4,393
|
|
|
$
|
(532
|
)
|
|
Net
income (loss) per share — Basic (1)
|
|
$
|
0.10
|
|
|
$
|
0.47
|
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
Net
income (loss) per share — Diluted (1)
|
|
$
|
0.09
|
|
|
$
|
0.41
|
|
|
$
|
0.30
|
|
|
$
|
(0.04
|
)
|
(1)
Earnings per share is computed independently for each of the quarters presented.
The sums of the quarterly earnings per share in fiscal 2007 and 2006 do not
equal the total earnings per share computed for the year due to
rounding.
SUPPLEMENTARY
DATA
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
||||||||
|
Description
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to
Costs
and
Expenses
|
|
|
Charged
to
Other
Accounts
|
|
|
Deductions
|
|
|
Balance
at
End
of
Period
|
|
|||||
|
|
||||||||||||||||||||
|
Allowance
for doubtful accounts for the year ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
35
|
|
|
$
|
159
|
|
|
$
|
—
|
|
|
$
|
(106
|
)
|
|
$
|
88
|
|
|
2006
|
|
$
|
88
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
86
|
|
|
2007
|
|
$
|
86
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
149
|
|
|
Warranty
reserve for the year ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
160
|
|
|
$
|
315
|
|
|
$
|
—
|
|
|
$
|
(193
|
)
|
|
$
|
282
|
|
|
2006
|
|
$
|
282
|
|
|
$
|
589
|
|
|
$
|
—
|
|
|
$
|
(527
|
)
|
|
$
|
344
|
|
|
2007
|
|
$
|
344
|
|
|
$
|
646
|
|
|
$
|
—
|
|
|
$
|
(727
|
)
|
|
$
|
263
|
|
|
Reserve
for inventory excess and obsolescence for the year ended
April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
593
|
|
|
$
|
2,355
|
|
|
$
|
1,537
|
|
|
$
|
(3,353
|
)
|
|
$
|
1,132
|
|
|
2006
|
|
$
|
1,132
|
|
|
$
|
—
|
|
|
$
|
505
|
|
|
$
|
(824
|
)
|
|
$
|
813
|
|
|
2007
|
|
$
|
813
|
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
1,138
|
|
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Not
applicable.
|
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.
Management's
Report on Internal Control Over Financial Reporting
This
annual report does not include a report of management's assessment regarding
internal control over financial reporting or an attestation report of our
independent registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly
public companies.
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
April 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
Other
Information.
|
None.
PART
III
|
Directors,
Executive Officers, and Corporate
Governance.
|
Certain
information required by Item 401 of Regulation S-K will be included in the
Proxy Statement for our 2007 Annual Meeting of Stockholders, and that
information is incorporated by reference herein.
Codes
of Ethics
We
have
adopted a Code of Business Conduct and Ethics (a "Code of Conduct"). The Code
of
Conduct is posted on our website, www.avinc.com. We intend to disclose on our
website any amendments to, or waivers of, the Code of Conduct covering our
Chief
Executive Officer, Chief Financial Officer and/or Controller promptly following
the date of such amendments or waivers. A copy of the Code of Conduct may be
obtained upon request, without charge, by contacting our Secretary at (626)
357-9983 or by writing to us at AeroVironment, Inc., Attn: Secretary, 181 W.
Huntington Dr., Suite 202, Monrovia, CA 91016. The information contained or
connected to our website is not incorporated by reference into this annual
report on Form 10-K and should not be considered part of this or any reported
filed with the SEC.
No
family
relationships exist among any of the executive officers, directors or director
nominees.
There
have been no material changes to the procedures by which security holders may
recommend nominees to our board of directors.
The
information required by Item 407(d)(4) and (d)(5) of Regulation S-K will be
included in the Proxy Statement for our 2007 Annual Meeting of Stockholders,
and
that information is incorporated by reference herein.
|
Executive
Compensation.
|
The
information required by Item 402 and Item 407(e)(4) amd (5) of Regulation
S-K will be included in the Proxy Statement for our 2007 Annual Meeting of
Stockholders, and that information is incorporated by reference
herein.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by Item 403 of Regulation S-K will be included in the
Proxy Statement for our 2007 Annual Meeting of Stockholders, and that
information is incorporated by reference herein.
|
Item13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by Item 404 and Item 407(a) of Regulation S-K will be
included in the Proxy Statement for our 2007 Annual Meeting of Stockholders,
and
that information is incorporated by reference herein.
|
Principal
Accounting Fees and
Services.
|
The
information required by Item 14 will be included in the Proxy Statement for
our 2007 Annual Meeting of Stockholders, and that information is incorporated
by
reference herein.
PART
IV
|
Exhibits,
Financial Statement
Schedules
|
|
(a)
|
The
following are filed as part of this Annual Report on Form 10-K:
|
|
1.
|
Financial
Statements
|
The
following consolidated financial statements are included in
Item 8:
|
|
Ÿ
|
Report
of Independent Registered Public Accounting
Firm
|
|
|
Ÿ
|
Consolidated
Balance Sheets at April 30, 2007
and 2006
|
|
|
Ÿ
|
Consolidated
Statements of Income for the Years ended April 30, 2007, 2006 and
2005
|
|
|
Ÿ
|
Consolidated
Statements of Stockholders' Equity for the Years ended April 30,
2007,
2006 and 2005
|
|
|
Ÿ
|
Consolidated
Statements of Cash Flows for the Years ended April 30, 2007, 2006
and
2005
|
|
|
Ÿ
|
Notes
to Consolidated Financial
Statements
|
|
2.
|
Financial
Statement Schedules
|
The
following Schedule is included in Item 8:
|
|
Ÿ
|
Schedule
II – Valuation and Qualifying
Accounts
|
All
other
schedules have been omitted since the required information is not present,
or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the Notes thereto.
Exhibits
– See Item 15(b) of this report below.
|
(b)
|
Exhibits
|
|
Exhibit
Number
|
Exhibit
|
||
|
3.1
|
(1)
|
Amended
and Restated Certificate of Incorporation of AeroVironment,
Inc.
|
|
|
3.3
|
(1)
|
Amended
and Restated Bylaws of AeroVironment, Inc.
|
|
|
4.1
|
(2)
|
Form
of AeroVironment, Inc.'s Common Stock Certificate
|
|
|
4.2
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 8, 1993,
between Marshall MacCready and Paul B. MacCready
|
|
|
4.3
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 14, 1993,
between Tyler MacCready and Paul B. MacCready
|
|
|
4.4
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 14, 1993,
between Parker MacCready and Paul B. MacCready
|
|
|
10.1
|
#(2)
|
Form
of Director and Executive Officer Indemnification
Agreement
|
|
|
10.2
|
#(2)
|
AeroVironment,
Inc. Nonqualified Stock Option Plan
|
|
|
10.3
|
#(2)
|
Form
of Nonqualified Stock Option Agreement pursuant to the AeroVironment,
Inc.
Nonqualified Stock Option Plan
|
|
|
10.4
|
#(2)
|
AeroVironment,
Inc. Directors' Nonqualified Stock Option Plan
|
|
|
10.5
|
#(2)
|
Form
of Directors' Nonqualified Stock Option Agreement pursuant
to the
AeroVironment, Inc. Directors' Nonqualified Stock Option
Plan
|
|
|
10.6
|
#(2)
|
AeroVironment,
Inc. 2002 Equity Incentive Plan
|
|
|
10.7
|
#(2)
|
Form
of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option
Agreement
|
|
|
10.8
|
#(2)
|
AeroVironment,
Inc. 2006 Equity Incentive Plan
|
|
|
10.9
|
#(2)
|
Form
of Stock Option Agreement pursuant to the AeroVironment,
Inc. 2006 Equity
Incentive Plan
|
|
|
10.10
|
*#(2)
|
Form
of Performance Based Bonus Award pursuant to the AeroVironment,
Inc. 2006
Equity Incentive Plan
|
|
|
10.11
|
#(2)
|
AeroVironment,
Inc. Supplemental Executive Retirement Plan, dated May 19,
2005
|
|
|
10.12
|
(2)
|
Sublease
Agreement, dated February 17, 2005, among AeroVironment, Inc., L-3
Communications Corporation and Thermotrex Corporation, for
the property
located at 900 Enchanted Way, Simi Valley, California
93065
|
|
|
10.13
|
(2)
|
Standard
Industrial/Commercial Single-Tenant Lease, dated August 8, 2005,
between AeroVironment, Inc. and FKT Associates, for the property
located
at 1960 Walker Ave., Monrovia, California 91016
|
|
|
Standard
Industrial/Commercial Single-Tenant Lease, dated February
12, 2007,
between AeroVironment, Inc. and OMP Industrial Moreland,
LLC, for the
property located at 85 Moreland Road, Simi Valley, California,
including
the addendum thereto.
|
|||
|
10.15
|
(2)
|
Business
Loan Agreement, dated June 16, 2005, between AeroVironment, Inc. and
California Bank & Trust
|
|
|
10.16
|
†(2)
|
AV
Direct Project Request, dated July 7, 2005, between AeroVironment,
Inc. and Marine Corps System Command
|
|
|
10.17
|
†(2)
|
Award
Contract, dated December 22, 2005, between AeroVironment, Inc. and
Marine Corps System Command
|
|
|
10.18
|
†(2)
|
Award
Contract, dated August 15, 2005, between AeroVironment, Inc. and
U.S. Army Aviation & Missile Command
|
|
|
10.19
|
†(2)
|
Award
Contract, dated September 21, 2004, between AeroVironment, Inc. and
Natick Contracting Division
|
|
|
10.20
|
†(2)
|
Award
Contract, dated January 2, 2004, between AeroVironment, Inc. and
U.S. Army Aviation & Missile Command
|
|
|
10.21
|
#(2)
|
Standard
Consulting Agreement, dated February 1, 2004, between AeroVironment,
Inc. and Charles R. Holland
|
|
|
10.22
|
*#(2)
|
Standard
Consulting Agreement, dated November 1, 2005, between AeroVironment,
Inc. and Charles R. Holland
|
|
|
10.23
|
#(2)
|
Promissory
Note, dated June 30, 2004, between AeroVironment, Inc. and Timothy E.
Conver
|
|
|
10.24
|
#(2)
|
Retiree
Medical Plan
|
|
|
21.1
|
(2)
|
Subsidiaries
of AeroVironment, Inc.
|
|
|
Consent
of Ernst & Young LLP, independent registered public accounting
firm
|
|||
|
24.1
|
Power
of Attorney (incorporated by reference to the signature page
of this
report on Form 10-K)
|
||
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
|
|||
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
|
|||
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
(1)
Incorporated
by
reference herein to the exhibits to the Company's Quarterly Report on Form
10-Q
filed March 9, 2007 (File No. 001-33261)
(2)
Incorporated
by
reference herein to the exhibits to the Company's Registration Statement on
Form S-1 (File No. 333-137658)
†Confidential
treatment has been requested for portions of this exhibit.
#Indicates
management contract or compensatory plan.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
AEROVIRONMENT,
INC.
|
||
|
Date:
June 29, 2007
|
/s/ Timothy E. Conver | |
|
By:
|
Timothy
E. Conver
|
|
|
Its:
|
Chief
Executive Officer and President
|
|
|
(Principal
Executive
Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
||
|
/s/
Timothy E. Conver
|
||||
|
Timothy
E. Conver
|
President
and Chief Executive Officer and Director (Principal Executive
Officer)
|
June
29, 2007
|
||
|
/s/
Stephen C. Wright
|
||||
|
Stephen
C. Wright
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
June
29, 2007
|
||
|
/s/
Paul B. MacCready
|
||||
|
Paul
B. MacCready
|
Chairman
of the Board of Directors
|
June
29, 2007
|
||
|
/s/
Joseph F. Alibrandi
|
||||
|
Joseph
F. Alibrandi
|
Director
|
June
29, 2007
|
||
|
/s/
Kenneth R. Baker
|
||||
|
Kenneth
R. Baker
|
Director
|
June
29, 2007
|
||
|
/s/
Arnold L. Fishman
|
||||
|
Arnold
L. Fishman
|
Director
|
June
29, 2007
|
||
|
/s/
Murray Gell-Mann
|
||||
|
Murray
Gell-Mann
|
Director
|
June
29, 2007
|
||
|
/s/
Charles R. Holland
|
||||
|
Charles
R. Holland
|
Director
|
June
29, 2007
|
68